[Federal Register Volume 69, Number 48 (Thursday, March 11, 2004)]
[Notices]
[Pages 11687-11689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5551]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49368; File No. SR-MSRB-2004-01]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Municipal Securities 
Rulemaking Board Relating to Interpretation of Rules G-37, on Political 
Contributions and Prohibitions on Municipal Securities Business, and G-
38, on Consultants

March 5, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 25, 2004, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the MSRB. 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 has filed with the SEC a proposed rule change consisting 
of a notice of interpretation concerning Rules G-37, on political 
contributions and prohibitions on municipal securities business, and G-
38, on consultants. The text of the proposed rule change is set forth 
below.
* * * * *

Questions and Answers: Rule G-37

    1.
    Q. Are dealers required to identify the type of contributor (i.e. 
dealer, dealer controlled PAC, MFP, MFP controlled PAC, or non-MFP 
executive officer) when completing Form G-37/G-38?
    A. Yes. Rule G-37 (e)(i)(2) requires dealers to report to the Board 
on its Form G-37/G-38 the contribution or payment amount made and the 
contributor category of each of the following persons and entities 
making such contributions or payments during each calendar quarter: the 
broker, dealer or municipal securities dealer; each municipal finance 
professional; each non-MFP executive officer; and each political action 
committee controlled by the broker, dealer or municipal securities 
dealer or by any municipal finance professional. It is not sufficient 
to list contributors as ``employee'' or ``registered representative.'' 
For each contribution listed on the Form G-37/G-38, one of the 
specified contributor categories must be identified.
    2.
    Q. How should contributions to officials of issuers who are seeking 
federal office be reported on Form G-37/G-38?
    A. Under Rule G-37, contributions given to officials of issuers who 
are seeking election to federal office, such as the U.S. House of 
Representatives, Senate or the Presidency, must be reported on the 
dealer's quarterly Form G-37/G-38 unless they meet the de minimis 
exception. When reporting these contributions, dealers must report 
information identifying the issuer official. Firms may additionally 
report information identifying the federal office sought. For example, 
if a sitting Governor of a state were running for a seat in the U.S. 
House of Representatives, and the Governor is an ``official of an 
issuer,'' the form must list the state where the official is serving as 
Governor, and the Governor's complete name and title. Dealers may also 
report the federal office sought by the issuer official.

Questions and Answers: Rule G-38

    1.
    Q: Pursuant to Rule G-38, what information is a dealer required to 
disclose regarding money paid to its consultants?
    A: Rule G-38 requires that dealers disclose information relating to 
money paid to consultants in three separate areas on Form G-37/G-38. 
These disclosures relate to the consultant's compensation arrangement, 
dollar amounts paid to the consultant in connection with specific 
municipal securities business, and the total dollar amount paid to the 
consultant during the reporting period.
    Dealers should describe their consultants' ``compensation 
arrangements'' clearly and with as much specificity as possible. The 
arrangement should correlate with the information reported on the form 
concerning the ``total dollar amount paid'' to the consultant during 
the reporting period. It is not sufficient to disclose a compensation 
arrangement in vague or generalized terms, such as ``a monthly retainer 
not related to any specific transaction,'' ``a percentage of net 
revenues received for transactions with xyz issuer,'' or ``a percentage 
of management fees and takedown from specified transactions.'' Dealers 
must report information on their consultants' compensation arrangements 
with specificity, for example, by providing the dollar amount of the 
monthly retainer or the numeric formulations used to calculate 
compensation. Dealers should also provide the dollar amount or numeric 
formulations used to calculate success fees, discretionary bonuses, and 
similar payments made or to be made to consultants. For example, it is 
not sufficient to report that a discretionary bonus or success fee will 
be ``equal to a percentage of the net investment banking fees received 
on certain transactions.'' Rather, the dealer should disclose the fee 
or payment as a specific (numeric) percentage of profits.
    Dealers also are required to disclose on Form G-37/G-38 information 
relating to ``municipal securities business obtained or retained'' by 
the consultant. This section of the form requires the dealer to list 
each item of business separately and, if applicable, to indicate the 
dollar amount paid to the consultant in connection with each item of 
municipal securities business listed. Dealers are reminded to list the 
relevant municipal securities business obtained or retained in this 
section of Form G-37/G-38 even if payments were not paid to the 
consultant in connection with the listed municipal securities business 
during that quarter.
    Finally, dealers are required to disclose on Form G-37/G-38 
information relating to ``total dollar amounts paid to the consultant 
during the reporting period.'' The dealer must report the cumulative 
total of all payments made to its consultant during the particular 
quarter. Such payments include compensation paid for that quarter 
(including reimbursed expenses)

[[Page 11688]]

and the total dollar amounts paid, if any, in connection with 
particular municipal securities business (including discretionary 
bonuses, success fees or similar payments). The dealer also should 
report any payments made to its consultant even if such payments were 
not made in connection with a particular item of municipal securities 
business.
    For additional guidance in this area, please review Q&A number 2 
(dated November 18, 1996) in the MSRB Rule Book following Rule G-38; 
this Q&A can also be found on the MSRB's Web site at http://www.msrb.org/msrb1/rules/notg38.htm.
    2.
    Q: If a consultant obtains municipal securities business in one 
quarter, and the dealer pays the consultant in connection with that 
business during a subsequent quarter, how should the dealer disclose 
this information on its Form G-37/G-38?
    A: The dealer should disclose on its Form G-37/G-38 in the 
``municipal securities business obtained or retained'' section the 
municipal securities business obtained or retained by its consultant 
during the relevant quarter whether or not payments connected with that 
business were made during that quarter. If the dealer subsequently 
makes a payment to the consultant in connection with that particular 
business, the dealer should disclose that payment in the ``municipal 
securities business obtained or retained'' section for the quarter in 
which such payment was made and should indicate in this section that 
the business was previously disclosed and the quarter for which it was 
disclosed (e.g., second quarter 2003). For additional guidance, please 
review Q&A number 14 (dated February 28, 1996) in the MSRB Rule Book 
following Rule G-38; this Q&A can also be found on the MSRB's website 
at http://www.msrb.org/msrb1/rules/notg38.htm.
    3.
    Q: If a dealer has a continuing relationship with a consultant, is 
the dealer required to list the consultant on its Form G-37/G-38 for 
each quarterly reporting period even if the dealer did not pay the 
consultant any compensation and/or the consultant did not undertake any 
affirmative efforts on behalf of the dealer to obtain or retain 
municipal securities business during that quarter?
    A: Yes, the dealer must continue to list the consultant and 
disclose the required consultant information for each quarterly 
reporting period during which there is a continuing relationship even 
if the consultant received no compensation or other payment from the 
dealer, and even if the consultant did not undertake any affirmative 
efforts on behalf of the dealer to obtain or retain municipal 
securities business.
    4.
    Q: Under the section of Form G-37/G-38 entitled ``Role to be 
Performed by Consultant,'' is a dealer required to list the geographic 
area or areas where the consultant is working on the dealer's behalf?
    A: Yes, the dealer must specifically list each state or geographic 
area where the consultant is working on behalf of the dealer. For 
additional guidance in this area, please review Q&A number 1 (dated 
November 18, 1996) in the MSRB Rule Book following Rule G-38; this Q&A 
can also be found on the MSRB's Web site at http://www.msrb.org/msrb1/rules/notg38.htm.
* * * * *

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
    In reviewing the Forms G-37/G-38 submitted by brokers, dealers and 
municipal securities dealers (collectively ``dealers''), the MSRB has 
found that some dealers are not providing the level of detail in the 
information they disclose as required by Rules G-37 and G-38.
    With respect to Rule G-37, some dealers are not correctly 
identifying the category of contributor on Form G-37/G-38. For example, 
some dealers will note that an ``employee'' made a contribution instead 
of a municipal finance professional (``MFP'') or non-MFP executive 
officer. Also, in some instances where an issuer official is running 
for federal office (e.g., a state governor running for a seat in the 
U.S. House of Representatives), firms sometimes note the federal race 
but not the fact that the candidate currently is an issuer official. 
The proposed rule change reminds dealers that Rule G-37 requires 
identification of the contributor category when listing contributions 
and clarifies how to correctly identify to whom the contribution is 
made when contributing to issuer officials running for Federal office.
    With respect to Rule G-38, the MSRB believes that dealers should be 
describing their consultants' compensation arrangements and other 
payments in clear and unequivocal terms, with as much specificity as 
possible; providing vague or generalized descriptions is not sufficient 
and does not provide any means to ascertain the dollar amounts paid to 
consultants. Dealers must provide specific dollar amounts or the 
specific percentage of formulations used to calculate success fees, 
discretionary bonuses, and similar payments made or to be made to 
consultants. In addition, Rule G-38 requires that dealers disclose the 
state or geographic area where the consultant is working on behalf of 
the dealer. The proposed rule change clarifies dealers' disclosure 
obligations concerning, among other things, compensation arrangements 
with consultants, payments made to consultants that are connected to 
specific municipal securities business, total quarterly payments made 
to consultants, and specific geographic areas where a consultant is 
working on behalf of a dealer.
2. Statutory Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(C) of the Act,\3\ which authorizes the MSRB to adopt rules 
that shall:
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    \3\ 15 U.S.C. 78o-4(b)(2)(C).

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 
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the public interest.

    The MSRB believes that the proposed rule change is consistent with 
the Act in that it provides guidance to dealers that will facilitate 
their understanding of, and compliance with, existing MSRB rules.

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

    The MSRB does not believe that the proposed rule change will impose 
any

[[Page 11689]]

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

    Written comments were neither solicited nor received.

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

    The MSRB has designated this proposed rule change as constituting a 
stated policy, practice or interpretation with respect to the meaning, 
administration or enforcement of an existing MSRB rule under Section 
19(b)(3)(A) of the Act,\4\ which renders the proposed rule change 
effective upon filing with the Commission.
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    \4\ 15 U.S.C. 78s(b)(3)(A).
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal 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.\5\
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    \5\ See 15 U.S.C. 78s(b)(3)(C).
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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 proposal 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. Comments 
may also be submitted electronically at the following e-mail address: 
[email protected]. All comment letters should refer to File No. SR-
MSRB-2004-01. This file number should be included on the subject line 
if e-mail is used. To help the Commission process and review your 
comments more efficiently, comments should be sent in hardcopy or by e-
mail but not by both methods. 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 such filing will also be available for 
inspection and copying at the MSRB's offices. All submissions should 
refer to file number SR-MSRB-2004-01 and should be submitted by April 
1, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-5551 Filed 3-10-04; 8:45 am]
BILLING CODE 8010-01-P