Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Consultants

Federal RegisterDec 5, 1995

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[[Page 62275]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36522; File No. SR-MSRB-95-15]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Municipal Securities Rulemaking Board Relating to

Consultants

November 28, 1995.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on

September 28, 1995,\1\ the Municipal Securities Rulemaking Board

(MSRB'' or ``Board'') filed with the Securities and Exchange Commission

(``Commission'') the proposed rule change as described in Items I, II

and III below, which Items have been prepared by the MSRB. The Board

has requested that the Commission delay the effective date of the

proposed rule change until sixty (60) days after the Commission's

approval thereof. The Commission is publishing this notice to solicit

comments on the proposed rule change from interested persons.

\1\ On November 15, 1995, the MSRB filed Amendment No. 1 with

the Commission. Amendment No. 1 was a minor technical amendment, the

text of which may be examined in the Commission's Public Reference

Room, See Letter from Jill C. Finder, Assistant General Counsel,

MSRB, to Ethan D. Corey, Senior Counsel, Division of Market

Regulation, Commission, dated November 15, 1995.

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I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The Board proposes to amend rules G-8 \2\ and G-9,\3\ on

recordkeeping and record retention, rule G-27,\4\ on political

contributions and prohibitions on municipal securities business, and

add a new rule G-38 regarding consultants. The Board also proposes to

amend its Form G-37, and redesignate it as Form G-37/G-38.

\2\ MSRB Manual, General Rules, G-8 (CCH) para. 3536.

\3\ MSRB Manual, General Rules, G-9 (CCH) para. 3541.

\4\ MSRB Manual, General Rules, G-37 (CCH) para. 3681.

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Below is the text of the proposed rule change. Proposed new

language is italicized; proposed deletions are in brackets.

Rule G-8. Books and Records To Be Made by Brokers, Dealers and

Municipal Securities Dealers

(a) Description of Books and Records Required to be Made.

* * * * *

(xvi) Records Concerning Political Contributions and Prohibitions

on Municipal Securities Business Pursuant to Rule G-37, Records

reflecting: * * *

(D) a listing of the issuers with which the broker, dealer or

municipal securities dealer has engaged in municipal securities

business, along with the type of municipal securities business engaged

in, during the current year and separate listings for each of the

previous two calendar years[. Where applicable, a listing of the name,

company, role and compensation arrangement of any person employed by

the broker, dealer or municipal securities dealer to obtain or detain

municipal securities business with such issuers also shall be made]; *

* *

(xvii) Records Concerning Consultants Pursuant to Rule G-38. Each

broker, dealer and municipal securities dealer shall maintain: (i) A

listing of the name, company, role and compensation arrangement of each

consultant; (ii) a copy of each Consultant Agreement referred to in

rule G-38(b); (iii) a listing of the compensation paid in connection

with each such Consultant Agreement; (iv) where applicable, a listing

of the municipal securities business obtained or retained through the

activities of each consultant; (v) a listing of issuers and a record of

disclosures made to such issuers, pursuant to rule G-38(c), concerning

each consultant used by the broker, dealer or municipal securities

dealer to obtain or retain municipal securities business with each such

issuer; and (vi) the date of termination of any consultant arrangement

* * * * *

(f) Compliance with Rule 17a-3. Brokers, dealers and municipal

securities dealers other than bank dealers which are in compliance with

rule 17a-3 of the Commission will be deemed to be in compliance with

the requirements of this rule, provided that the information required

by subparagraph (a)(iv)(D) of this rule as it relates to uncompleted

transactions involving customers; paragraph (a)(viii); paragraph

(a)(xi); paragraph (a)(xii); paragraph (a)(xiii); paragraph (a)(xiv);

paragraph (a)(xv); paragraph (a)(xvi); [and] paragraph (a)(xvii); and

paragraph (a)(xviii) shall in any event be maintained.

Rule G-9. Preservation of Records

(a) Records to be Preserved for Six Years. Every broker, dealer and

municipal securities dealer shall preserve the following records for a

period of not less than six years. * * *

(x) the records required to be maintained pursuant to rule G-

8(a)(xviii).

* * * * *

Rule G-37. Political Contributions and Prohibitions on Municipal

Securities Business

* * * * *

(e)(i) Each broker, dealer or municipal securities dealer shall

submit to the Board, by certified or registered mail, or some other

equally prompt means that provides a record of sending, and the Board

shall make public, reports on contributions to officials of issuers and

on payments to political parties of states and political subdivisions

that are required to be recorded pursuant to rule G-8(a)(xvi). Such

reports shall include information concerning the amount of

contributions to officials of issuers and payments to political parties

of states and political subdivisions and an indication of the

contributor category of each contribution or payment made by: * * *

Such reports also shall include information on municipal securities

business engaged in and certain other information specified in this

section (e), as well as other identifying information as may be

determined by the Board from time to time [in accordance with Board

rule G-37 filing procedures].

(ii) Two copies of the [R]reports referred to in paragraph (i) of

this section (e) must be submitted to the Board on Form G-37/G-38 [in

accordance with Board rule G-37 filing procedures, quarterly with due

dates determined by the Board,] within thirty (30) calendar days after

the end of each calendar quarter (these dates correspond to January 31,

April 30, July 31 and October 31), and must include, in the prescribed

format, by state, the following information on contributions to each

official of an issuer and payments to each political party of a state

or political subdivision made and municipal securities business engaged

in during the reporting period: (A) name and title (including any city/

county/state or political subdivision) of each official of an issuer

and political party receiving contributions or payments; (B) [total

number and dollar amount of contributions or payments made by]

contribution or payment amount made and the contributor category of the

persons and entities described in paragraph (i) of this section (e);

and (C) such other identifying information required by Form G-37/G-38.

Such reports also must include a list of issuers with which the broker,

dealer or municipal securities dealer has engaged in municipal

securities business, along with the type of municipal securities

business [and the name, company, role and compensation arrangement of

any person, other than a municipal finance

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professional, employed by the broker, dealer or municipal securities

dealer to obtain or retain municipal securities business with such

issuers].

(f) The Board will accept additional information related to

contributions made to officials of issuers and payments to political

parties of states and political subdivisions voluntarily submitted by

brokers, dealers, or municipal securities dealers or others provided

that such information is submitted in accordance with [Board rule G-37

filing procedures] section (e) of this rule.

* * * * *

[Rule G-37 Filing Procedures. Each dealer is required to file two

copies of Form G-37. Each dealer is required to file Form G-37 within

thirty (30) calendar days after the end of each calendar quarter.

(These dates correspond to January 31, April 30, July 31, and October

31).]

Rule G-38. Consultants

(a) Definitions.

(i) The term ``consultant'' means any person used by a broker,

dealer or municipal securities dealer to obtain or retain municipal

securities business through direct or indirect communication by such

person with an issuer on behalf of such broker, dealer or municipal

securities dealer where the communication is undertaken by such person

in exchange for, or with the understanding of receiving, payment from

the broker, dealer or municipal securities dealer or any other person;

provided, however, that the following persons shall not be considered

consultants for purposes of this rule: (A) a municipal finance

professional of the broker, dealer or municipal securities dealer; and

(B) any person whose sole basis of compensation from the broker, dealer

or municipal securities dealer is the actual provision of legal,

accounting or engineering advice, services or assistance in connection

with the municipal securities business that the broker, dealer or

municipal securities dealer is seeking to obtain or retain.

(ii) The term ``issuer'' shall have the same meaning as in rule G-

37(g)(ii).

(iii) The term ``municipal finance professional'' shall have the

same meaning as in rule G-37(g)(iv).

(iv) The term ``municipal securities business'' shall have the same

meaning as in rule G-37(g)(vii).

(v) The term ``payment'' shall have the same meaning as in rule G-

37(g)(viii).

(b) Written Agreement. Each broker, dealer or municipal securities

dealer that uses a consultant shall evidence the consulting arrangement

by a writing setting forth, at a minimum, the name, company, role and

compensation arrangement of each such consultant (``Consultant

Agreement''). Such Consultant Agreement must be entered into before the

consultant engages in any direct or indirect communication with an

issuer on behalf of the broker, dealer or municipal securities dealer.

securities dealer shall submit in writing to each issuer with which the

broker, dealer or municipal securities dealer is engaging or is 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 prior to the selection of any broker, dealer or municipal

securities dealer in connection with such municipal securities

business.

(d) Disclosure to Board. Each broker, dealer or municipal

securities dealer shall submit to the Board by certified or registered

mail, or some other equally prompt means that provides a record of

sending, and the Board shall make public, reports of all consultants

used by the broker, dealer or municipal securities dealer during each

calendar quarter. Two copies of the reports must be submitted to the

Board on Form G-37/G-38 within thirty (30) calendar days after the end

of each calendar quarter (these dates correspond to January 31, April

30, July 31, and October 31). Such reports shall include, for each

consultant, in the prescribed format, the consultant's name, company,

role and compensation arrangement. In addition, such reports shall

indicate the dollar amount of payments made to each consultant during

the report period and, if any such payments are related to the

consultant's efforts on behalf of the broker, dealer or municipal

securities dealer which resulted in particular municipal securities

business, then that business and the related dollar amount of the

payment must be separately identified.

* * * * *

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

Over the last few years, the Board has been concerned about abuses

associated with the awarding of municipal securities business. Rule G-

37, which became effective in April 1994, prohibits a dealer from

engaging in municipal securities business with an issuer within two

years after any contribution to an official of such issuer made by the

dealer, any municipal finance professional associated with the dealer,

or any political action committee controlled by the dealer or any

municipal finance professional.\5\ The rule also prohibits a dealer

from doing anything indirectly which would result in a violation of the

rule if done directly by the dealer. For example, a violation would

result if a dealer engages in municipal securities business with an

issuer after directing third parties (such as consultants) to make

contributions to that issuer. In addition to recording and disclosing

political contributions, rule G-37 currently requires dealers to record

and disclose on Form G-37 those issuers with which the dealer has

engaged in municipal securities business and, where applicable, the

name, company, role and compensation arrangement of any person employed

by the dealer to obtain or retain business with such issuers.

\5\ Rule G-37(b) contains de minimis exception for certain

contributions made by municipal finance professionals.

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Rule G-20, on gifts and gratuities, prohibits dealers from,

directly or indirectly, giving or permitting to be given any thing or

service of value in excess of $100 per year to any person, other than

an employee or partner of the dealer, in relation to the municipal

securities activities of the person's employer. All gifts given by the

dealer and its associated persons, or by consultants at the direction

of the dealer, are used to compute the $100 limitation and this

limitation applies to gifts and gratuities to customers, individuals

associated with issuers, and employees of other dealers.\6\

\6\ Rule G-20(b) exempts ``normal business dealings'' from the

$100 annual limit. These payments are defined as occasional gifts of

meals or tickets to theatrical, sporting, and other entertainments,

as well as the sponsoring of legitimate business functions that are

recognized by the IRS as deductible business expenses, and gifts of

reminder advertising. However, the rule also provides that such

gifts can not be so frequent or so expensive as to raise a

suggestion of unethical conduct.

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The Board believes that rules G-37 and G-20, along with rule G-17,

on fair dealing,\7\ set appropriate standards for dealer conduct in the

municipal securities industry. However, the Board is concerned about

dealers' increasing use of consultants to obtain or retain municipal

securities business. While the Board believes that in many instances

the use of consultants is appropriate, it also believes that, in a

number of instances, the use of consultants may be in response to

limitations placed on dealer activities by rule G-37 and rule G-20.\8\

While both of these rules prohibit dealers from doing indirectly what

they are precluded from doing directly, indirect activities often are

difficult to prove. The Board recognizes that vigorous enforcement of

its rules, as well as the antifraud provisions of the federal

securities laws, will be effective in uncovering improper conduct, as

well as deterring further violations, in connection with municipal

securities business. Notwithstanding such efforts, or the current rule

G-37 requirement that dealers disclose certain information about

consultant arrangements, the Board believes that additional information

about such arrangements should be made available to issuers and the

public. Currently, the limited amount of information regarding

consulting arrangements and the role of consultants in helping dealers

obtain or retain municipal securities business makes it difficult to

determine the extent to which payments to consultants influence the

issuer's selection process in connection with municipal securities

business, as well as the extent to which such payments increase the

cost of bringing municipal securities issues to market. The Board

believes that disclosure of consulting arrangements (even those that

would not result in any rule violations) is necessary. Furthermore, the

Board believes that disclosure requirements regarding consultants

should be embodied in a separate rule in order to highlight the

importance of this information and to facilitate its disclosure to, and

accessibility by, the municipal securities market and the public.

Accordingly, the Board is proposing new rule G-38, on consultants. At

this time, the board is not proposing any substantive restrictions on

arrangements between dealers and consultants. If, at a later date, the

Board learns of specific dealer practices regarding the use of

consultants that it believes should be addressed, then the Board may

proceed with additional rulemaking in this area.

\7\ Rule G-17 provides that, in the conduct of its municipal

securities business, each broker, dealer, and municipal securities

dealer shall deal fairly with all persons and shall not engage in

any deceptive, dishonest, or unfair practice.

\8\ For example, the Commission has charged that kickbacks and

conflicts of interest have occurred in connection with municipal

securities offerings. In one instance, the Commission alleged that

dealer personnel paid a large kickback to the issuer's financial

advisor and inflated the underwriters' discount to fund the

kickback. See SEC Litigation Release No. 14421 (February 23, 1995)

regarding SEC v. Nicholas A. Rudi, Joseph C. Salema, Public Capital

Advisors, Inc. (formerly known as Consolidated Financial Management,

Inc.), George L. Tuttle, Jr. and Alexander S. Williams. In another

instance, the SEC alleged that dealer personnel provided loans and

direct payments to an employee of an issuer that had an important

role in selecting the underwriter. See SEC Litigation Release No.

14397 (January 23, 1995) regarding SEC v. Terry D. Busbee and

Preston C. Bynum.

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Background

In April 1995, the Board published for comment draft rule G-38

(``April 1995 Draft Rule'').\9\ The April 1995 Draft Rule would have

required dealers to have written agreements with consultants and to

disclose such arrangements to issuers and to the public through

disclosure to the Board. It defined the term ``consultant'' very

broadly, and included, among others, persons that acted as ``finders''

for municipal securities business or that lobbied state and local

government officials. The term also included persons who engaged in

legal, accounting or financial advisory services if such persons were

engaged, even in part, because they could assist a dealer in efforts to

obtain or retain municipal securities business with an issuer, and

included persons engaged by a dealer at the request or direction of the

issuer (e.g., underwriter's counsel).

\9\ MSRB Reports, Vol. 15, No. 1 (April 1995) at 3-10.

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While most of the commenters responding to the April 1995 Draft

Rule supported the Board's goal of making additional information on

consultants available to the market, many expressed concern that the

definition of consultant was too broad and included a number of

categories of persons who did not perform ``traditional'' consulting

roles or services.\10\ The Board carefully considered these and other

concerns and suggestions expressed by the commenters, and adopted the

proposed rule change. Proposed rule G-38 differs in certain respects

from the April 1995 Draft Rule, particularly with regard to the

definition of consultant. By making such changes, the Board believes

that the proposed rule effectively addresses concerns raised by the

commenters without sacrificing the Board's goal of making information

about consultants available to issuers and the public.

\10\ A summary of these comments is discussed infra Section

II.C.

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Summary of Proposed Rule G-38

Definition of Consultant

Proposed rule G-38 defines 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 the dealer's

behalf where the communication is undertaken by such person in exchange

for, or with the understanding of receiving, payment from the dealer or

any other person.\11\ The definition specifically excludes ``municipal

finance professionals,'' as that term is defined in rule G-37(g)(iv),

because such individuals are covered by the requirements of rule G-37.

The definition also excludes any person whose sold basis of

compensation from the dealer is the actual provision of legal advice,

accounting or engineering assistance in connection with the municipal

securities business that the dealer is seeking to obtain or retain. The

exclusion would apply, for example, to a lawyer retained to conduct a

legal analysis on a particular transaction contemplated by the dealer,

or to review local regulations; an accountant retained to conduct a tax

analysis or to scrutinize financial reports; or an engineer retained to

perform a technical review or feasibility study. The exemption is

intended to ensure that professionals who are engaged by the dealer

solely to perform substantive work in connection with municipal

securities business are not brought within the definition of consultant

as long as their compensation is in consideration of only those

professional services actually

[[Page 62278]]

provided in connection with such municipal securities business.

However, any attorney or other professional used by the dealer as a

``finder'' for municipal securities business would be considered a

consultant under the proposed rule.

\11\ ``Person'' is defined in Section 3(a)(9) of the Securities

Exchange Act of 1934 as ``a natural person, company, government, or

political subdivision, agency, or instrumentality of a government.''

``Municipal securities business'' has the same meaning as in

rule G-37(g)(vii), i.e., (A) the purchase of a primary offering (as

defined in rule A-13(d)) of municipal securities from the issuer on

other than a competitive bid basis (i.e., negotiated underwriting);

(B) the offer or sale of a primary offering of municipal securities

on behalf of any issuer (i.e., private placement); (C) the provision

of financial advisory or consultant services to or on behalf of an

issuer with respect to a primary offering of municipal securities on

other than a competitive basis; or (D) the provision of remarketing

agent services to or on behalf of an issuer with respect to a

primary offering of municipal securities on other than a competitive

bid basis.

``Payment'' has the same meaning as in rule G-37(g)(viii), i.e.,

any gift, subscription, loan, advance, or deposit of money or

anything of value.

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Written Agreement

Proposed rule G-38 requires dealers who use consultants to evidence

the consulting arrangement in writing (referred to as a ``Consultant

Agreement''), and that, at a minimum, the writing must include the

name, company, role and compensation arrangement of each consultant

used by the dealer. Such written agreements must be entered into before

the consultant engages in any direct or indirect communication with an

issuer on the dealer's behalf.

Disclosure to Issuers

Proposed rule G-38 requires each dealer to disclose to an issuer

with which it is engaging or seeking to engage in municipal securities

business, in writing, information on consulting arrangements relating

to that issuer. The written disclosure must include, at a minimum, the

name, company, role and compensation arrangements with the consultant

or consultants. Dealers are required to make such written disclosures

prior to the issuer's selection of any dealer in connection with the

municipal securities business sought, regardless of whether the dealer

making the disclosure ultimately is the one to obtain or retain that

business. Thus, while dealers have an obligation to disclose their

consulting arrangements to all issuers from which they are seeking

municipal securities business, they have more leeway in the timing of

their disclosures as long as the disclosure is made before the issuer

selects a dealer for the municipal securities business sought.

Disclosure to the Board

Proposed rule G-38 requires dealers to submit to the Board, on a

quarterly basis, reports of all consultants used by the dealer. For

each consultant, dealers must report, in the prescribed format, the

consultant's name, company, role and compensation arrangement, as well

as the dollar amount of any payment made to the consultant during the

quarterly reporting period. If any payment made during the reporting

period is related to the consultant's efforts on the dealer's behalf

which resulted in particular municipal securities business, whether the

municipal securities business was completed during that or a prior

reporting period, then the dealer must separately identify that

business and the dollar amount of the payment. In addition, as long as

the dealer continues to use the consultant to obtain or retain

municipal securities business (i.e., has a continuing arrangement with

the consultant), the dealer must report information concerning such

consultant every quarter, whether or not compensation is paid to the

consultant during the reporting period. The Board believes that the

reporting of these continuing consulting arrangements each quarter will

assist enforcement agencies and the public in their review of such

arrangements.

For ease of compliance and reporting, the Board has determined to

delete the current reporting requirements regarding consultants from

rule G-37. It also has determined to merge the reporting requirements

for both rules into a single form--Form G-37/G-38. Dealers must submit

two copies of such reports on proposed Form G-37/G-38.\12\ The

quarterly due dates are the same as the due dates currently required

under the rule G-37 (i.e., within 30 calendar days after the end of

each calendar quarter, which corresponds to each January 31, April 30,

July 31, and October 31). Finally, consistent with current rule G-37,

dealers are required to submit these reports to the Board by certified

or registered mail, or some other equally prompt means that provides a

record of sending.\13\ The Board will then make these documents

available to the public for inspection and photocopying at its Public

Access Facility in Alexandria, Virginia, and for review by agencies

charged with enforcement of Board rules.

\12\ Proposed Form G-37/G-38 is included in Exhibit 3 to the

proposed rule change, along with instructions for filing the Form.

In addition to the new rule G-38 consultant reporting requirements,

Form G-37/G-38 includes revisions to the rule G-37 political

contribution reporting requirements. Such revisions include, for

each contribution, a required notation of the category of the

contributor (e.g., municipal finance professional or executive

officer) and the amount of the contribution, as well as a separate

section for the reporting of ``payments'' to political parties

distinct from ``contributions'' to issuer officials.

\13\ For ease of compliance, the Board has included the Rule G-

37 Filing Procedures within the language of rule G-37, and has

included the Rule G-38 Filing Procedures within the language of new

rule G-38.

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Recordkeeping Requirements

To facilitate compliance with, and enforcement of, proposed rule G-

38, the Board also proposes to amend existing rules G-8 and G-9,

concerning recordkeeping and record retention, respectively. The

proposed amendments to rule G-8 require dealers to maintain: (i) A

listing of the name, company, role and compensation arrangement of each

consultant; (ii) a copy of each Consultant Agreement; (iii) a listing

of the compensation paid in connection with each Consultant Agreement;

(iv) where applicable, a listing of the municipal securities business

obtained or retained through the activities of each consultant; (v) a

listing of the issuers and a record of disclosures made to such issuers

concerning each consultant used by the dealer to obtain or retain

municipal securities business with each such issuer; and (vi) the date

of termination of any consultant arrangement. The amendment to rule G-9

requires dealers to maintain these records for a six-year period.

The Board believes the proposed rule change is consistent with

Section 15B(b)(2)(C) of the Act, which provides 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, setting, 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.

The proposed rule change serves a number of the Board's enumerated

purposes, including promoting just and equitable principles of trade,

by ensuring that dealers compete for, and are awarded, municipal

securities business on the basis of merit, and not political or

financial influence. Such healthy competition will act to lower

artificial barriers to those dealers not willing or able to hire

consultants to obtain or retain municipal securities business, thereby

maintaining the integrity of the municipal securities market, as well

as the public trust and confidence that is essential to the long-term

health and liquidity of the market.

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 since the proposed rule change

would apply equally to all brokers, dealers and municipal securities

dealers. The Board believes that the proposed rule change will improve

competition in the awarding of municipal securities business by

ensuring that dealers compete for, and are awarded, such business on

the basis of merit, not political or financial influence.

[[Page 62279]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants, or Others

The Board received 17 comment letters in response to its April 1995

Draft Rule from the following commenters.\14\

\14\ MSRB Reports, Vol. 15, No. 1 (April 1995) at 3-10. Copies

of the Notice Requesting Comment and the comment letters received

are included in Exhibit 2.

A.G. Edwards & Sons, Inc.

American Government Financial Services Company

American Institute of Certified Public Accounts

Artemis Capital Group

Broward County, FL Finance and Administrative Services Dept.

Chapman and Cutler

Chemical Securities, Inc.

Gilmore & Bell

Goldman Sachs & Co.

Government Finance Officers Association

JP Morgan Securities Inc.

Morgan Stanley & Co., Inc.

National Association of Bond Lawyers

Public Securities Association

Seattle-Northwest Securities Corporation

Smith Barney Inc.

Willkie Farr & Gallagher

Summary and Discussion of Comments

The April 1995 Draft Rule would have required dealers (1) to have

written agreements with persons who are used by a dealer for the

purpose of seeking to obtain or retain municipal securities business,

and (2) to disclose such arrangements with consultants directly to

issuers and to the public through disclosure to the Board.

Necessity of a New Rule

Certain commenters believe that the April 1995 Draft Rule is

unnecessary and should not be adopted.\15\ The majority of commenters

believe that the Board's goals in proposing the rule can more readily

be accomplished by amending existing rule G-37, on political

contributions and prohibitions on municipal securities business.\16\

One commenter states that ``duplicative regulation should be avoided''

noting that rules G-37 and G-20 already address the use of consultants

by dealers for impermissible purposes.\17\ This commenter states that:

\15\ Gilmore & Bell; Goldman Sachs.

\16\ A.G. Edwards; Artemis; Broward County; Chemical; GFOA;

Gilmore & Bell; JP Morgan; PSA; and Smith Barney.

\17\ Gilmore & Bell.

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To the extent the market sees Rule G-38 as a rule without a

needed purpose and as increasing compliance costs without any

corresponding benefit, it will erode overall market support for the

more important efforts to reform and improve the municipal

securities markets * * *. Changes are occurring rapidly in the

regulation of municipal securities, and there may be considerable

merit in allowing the market to respond to Rule G-37, the [SEC's]

1994 Interpretive Release and similar efforts to see if they are

effective in limiting influence peddling in the industry before

additional rules are adopted.\18\

\18\ Id.

Another commenter believes that in attempting to address concerns

about the possible circumvention of rules G-37 and G-20, the April 1995

Draft Rule ``is overly broad, mandating disclosure about a host of

professionals whose activities and terms of engagement raise no

legitimate specter of `pay-to-play' abuses and often constitute

proprietary and confidential business arrangements.'' \19\

\19\ Goldman Sachs.

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One commenter ``strongly believes that proposed rule G-38 is not

necessary'' and argues that the rule ``would seriously impair and

discourage the traditional business relationships among professionals

in the industry which have made the municipal securities market

uniquely efficient in raising capital for states and localities.'' \20\

This commenter believes that ``[i]n lieu of an additional and

duplicative regulatory reporting regime'' the Board should amend rule

G-37 to ``target those consulting relationships that are used for the

exclusive purpose of retaining or obtaining municipal securities

business.'' \21\ In this regard, the commenter recommends that the

Board provide a focused definition of consultant, as more fully

discussed below.

\20\ PSA.

\21\ Id.

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One of the commenters states that, pursuant to the requirements of

rule G-37, basic information is filed with the MSRB about consultants

with whom a dealer has a business relationship.\22\ Thus, this

commenter questions the need for the April 1995 Draft Rule, ``which

will impose significant new compliance burdens that will increase

issuer borrower costs.'' \23\ The commenter suggests that the Board

review rule G-37 and Form G-37 ``to determine whether they might be

modified to capture additional information.'' \24\ Instead of a new

rule, the commenter favors vigorous enforcement of existing Board rules

for deterring improper conduct in the municipal securities industry.

\22\ GFOA.

\23\ Id.

\24\ Id.

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One commenter believes that the April 1995 Draft Rule will create

confusion with existing disclosure requirements under rule G-37, and

that any required disclosures relating to consultant activity should be

embodied in the same rule.\25\ Thus, this commenter suggests amending

rule G-37 or, in the alternative, removing the consultant disclosure

requirements currently under rule G-37 and incorporating them into a

modified version of the April 1995 Draft Rule.

\25\ A.G. Edwards.

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Board Response

In response to commenters' concerns, the Board has modified the

April 1995 Draft Rule, particularly with regard to the definition of

consultant, as more fully discussed below. In addition, the Board is

proposing to delete from rule G-37 the current disclosure requirements

regarding consultants and to include all such requirements under new

rule G-38. The Board also is proposing to replace Form G-37 with a new

Form G-37/G-38, to consolidate dealers' reporting requirements under

both rules G-37 and G-38. The Board believes that, by modifying the

definition of consultant and including all disclosure requirements

within a single rule, the proposed rule effectively addresses concerns

raised by the commenters, including those relating to the need for a

new rule, without sacrificing the Board's goal of making information

about consultants available to issuers and the public in order to

ensure the integrity of the municipal securities market.

Definition of ``Consultant''

The April 1995 Draft Rule defined ``consultant'' as any person,

other than an employee or partner of a dealer, who is used by a dealer

for the purpose of seeking to obtain or retain municipal securities

business, including any person performing services for such dealer at

the request or direction of an issuer. Fifteen of the 17 commenters

expressed concern over this definition.\26\ In general, the commenters

are opposed to extending the definition to the following:

\26\ A.G. Edwards; AICPA; Artemis; Broward County; Chapman &

Cutler; Chemical; GFOA; Gilmore & Bell; Goldman Sachs; JP Morgan;

Morgan Stanley; NABL; PSA; Seattle-Northwest; and Smith Barney.

Professional service providers who are not actively engaged in

assisting the underwriter to obtain or retain municipal securities

business (e.g., an accounting firm retained to conduct a tax

analysis; a certified public

[[Page 62280]]

accountant retained to provide audit and attestation services; and a

law firm retained to conduct a legal analysis on a particular

transaction contemplated).\27\

\27\ A.G. Edwards; PSA. PSA does not believe that ``persons or

firms which offer other professional services commonly employed in a

municipal securities transaction should be treated as consultants

merely because a . . . dealer engages in conversations or

discussions with such persons or firms about concepts or ideas which

might be offered to an issuer to achieve or encourage a particular

financing.'' PSA argues that the definition ``is so broad as to

interfere with traditional and appropriate methods of developing new

business opportunities.''

---------------------------------------------------------------------------

Professionals designated by an issuer to provide services to the

dealer (e.g., underwriter's counsel).\28\

\28\ Artemis; GFOA; Gilmore & Bell; JP Morgan; Morgan Stanley;

and NABL. NABL believes that the rule ``should make clear that

providers of substantive professional advice and services are not

`consultants' . . . and that a law firm which is selected as counsel

to the underwriter, even if `designated' as such by the issuer, does

not become a `consultant' to the underwriter. . . .'' The GFOA

states that ``there are many instances where issuers make

designations using merit-based criteria and it would not be

appropriate to assume that such `designated' persons should be

treated as if they were used by a dealer to obtain or retain

business . . .'' and that the April 1995 Draft Rule should

distinguish between ``merit-based and nonmerit-based designations.''

Broward County shares this position. Gilmore & Bell is ``not

comfortable with the entire concept of calling issuer-designated

persons `consultants' to the dealer. . . .'' They believe that the

``whole concept of a consultant under the Rule is someone who

assists the dealer in obtaining or retaining municipal securities

business. In no sense is an issuer-designated representative of the

dealer a person who helped the dealer get the business; rather, that

issuer-designated person or firm is imposed on the dealer as a

condition to participating in the offering.'' Morgan Stanley does

not believe that issuer-designated professionals should be defined

as consultants. ``Far from helping dealers to solicit or win

business, issuer-designated professionals are all too often imposed

on dealers * * *.'' Morgan Stanley supports the disclosure of such

relationships, and suggests removing such persons from the scope of

the definition and adding a disclosure requirement to a separate

section of the draft rule. JP Morgan also supports the disclosure of

such relationships ``once an underwriting has been won, * * * but

that in no way should these * * * professionals be deemed to be

`consultants' to the dealer.'' A.G. Edwards, on the other hand,

believes that even those persons who may be engaged by the dealer as

a ``precondition'' to obtaining an issuer's business (e.g.,

underwriter's counsel designated by the issuer), ``are the type of

`consultants' to which the disclosure rule should apply.''

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Professional from whom a dealer seeks substantive or technical

advice in connection with an issuer presentation with no intention

of seeking their intercession with the issuer (e.g., engineers who

perform technical reviews or feasibility studies; lawyers who review

local regulations; and accountants who scrutinize financial

reports).\29\

\29\ Morgan Stanley; PSA; and Smith Barney.

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Any individual retained as a consultant but treated by a dealer

as a municipal finance professional (e.g., a limited partner or

other retired employee of the dealer).\30\

\30\ Goldman Sachs. Presumably the dealer has deemed the person

to be subject to rules G-37 and G-20, and is recording information

on political contributions and gifts and gratuities, as required by

those rules.

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Lobbyists who are not acting to obtain or retain business (e.g.,

a lobbyist employed to keep the dealer apprised of legislation that

could impact the dealer or its issuer clients).\31\

\31\ Seattle-Northwest.

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PSA recommends the following definition of consultant:

Any person, other than a municipal finance professional, who is

employed by the broker, dealer or municipal securities dealer on an

exclusive basis with respect to either an issuer or a particular

transaction to obtain or retain municipal securities business,

provided that such employment (A) includes any direct or indirect

communication with the issuer by such person which is made on behalf

of the broker, dealer or municipal securities dealer to obtain or

retain such municipal securities business, and (B) is undertaken

with the understanding of receiving compensation from such broker,

dealer or municipal securities dealer.

Another commenter is concerned about the Board's definition of

consultant because ``any third party with whom a dealer discusses any

issue which might bear on the firm's decision to seek business could

qualify as a consultant. After all, since firms are in business to do

business, they have little reason to talk to anyone unless it is to

help get business.'' \32\ This commenter endorses PSA's definition of

consultant, and believes that at least two factors are relevant to the

creation of a consulting relationship: (1) The person will actively

promote the underwriter--and only that underwriter--to an issuer; and

(2) the person will be compensated in some way by the underwriter. Two

other commenters also endorse PSA's proposed definition of consultant,

and believe that it should be incorporated into rule G-37.\33\ Another

commenter, without criticizing the commenter's proposed definition,

recommends a modified version thereof.\34\ On the other hand, Morgan

Stanley is critical of certain elements of PSA's definition.\35\ With

respect to the definition proposed in the April 1995 Draft Rule, this

commenter argues that that definition inappropriately applies to three

groups of professionals: (1) Professionals designated by an issuer to

provide services to the dealer; (2) professionals from whom a dealer

seeks substantive or technical advice in connection with an issuer

presentation with no intention of seeking their intercession with the

issuer; and (3) ``professionals who may in fact recommend a broker-

dealer to an issuer--on the basis of substantive professional

familiarity and respect and not on the expectation or promise of quid

pro quo recompense.'' Morgan Stanley is concerned that the Board's

definition could ``cause disruptions in an industry currently

undergoing contraction * * * [and] may lead larger firms, with other

sources of revenue, finally to conclude that the burden of ensuring

municipal market compliance outweights the benefit of what, frankly, is

currently a marginal business for many of them.'' Morgan Stanley

believes the definition of consultant ``should be restored to its

common-sense meaning in the context of the municipal securities

business. * * * [and] should reflect * * * the two essential elements

of disclosable consulting relationships in the municipal securities

business: compensation and the proposed intercession with an issuer by

the consultant in exchange for such compensation.'' \36\ The commenter

notes that its proposed definition incorporates ``not only direct but

also indirect consultant use and issuer intercession and * * *

[alludes] to the possibility of compensation from persons other than

the dealer.'' Thus, Morgan Stanley recommends the following definition

of consultant:

\32\ Smith Barney.

\33\ Chemical Securities; JP Morgan.

\34\ Artemis recommends a version that would not include the

elements of exclusivity or indirect communication with the issuer.

\35\ Morgan Stanley opposes PSA's requirement for

``exclusivity'' which ``is intended to disqualify a relationship

under the definition if a putative consultant has also been retained

to solicit the same business on behalf of another firm.'' Morgan

Stanley does not understand ``why exclusivity makes any difference.

* * * [and is concerned that] the phrase could be read to disqualify

a consultant who is soliciting business from more than one issuer

and a consultant hired by two dealers to solicit the same piece of

business on their joint behalf.'' Morgan Stanley also is concerned

that PSA's proposal, which would limit the definition of consultant

to persons hired ``with respect to either an issuer or a particular

transaction,'' will ``inappropriately limit the number of

consultants required to be disclosed * * * [for example,] by

excluding consultants who are hired not with respect to particular

issuers and transactions but according to other organizing

principles: by type of transaction (e.g., student loan deals), by

type of issuer, by geographic area * * *.''

\36\ Morgan Stanley further suggests defining ``compensation''

to mirror the definition of ``payment'' under rule G-37.

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Any person or entity used, directly or indirectly, by a broker,

dealer or municipal securities dealer to obtain or retain municipal

securities business through direct or indirect intercession by such

person or entity with the relevant municipal issuer on behalf of

such broker, dealer or municipal securities dealer where such

intercession is undertaken by such person or entity in exchange for,

or with the understanding of receiving, payment (as defined in rule

G-37) from such broker, dealer or municipal securities dealer or any

other person.

[[Page 62281]]

Several other commenters share Morgan Stanley's view that

compensation is a relevant factor in determining the existence of a

consulting relationship. For example, one of the commenters does not

believe the draft rule should apply to ``persons who are merely engaged

by a dealer in connection with municipal securities business * * * [but

rather] should apply only to persons engaged by a dealer with the

expectation of receiving compensation for seeking to obtain or retain

municipal securities business.'' \37\ Another commenter believes that

``a dealer may `use' a person in a broad sense (and in a perfectly

permissible sense) without that person being a consultant to the dealer

in any common sense meaning of the word.'' \38\ But if a dealer

compensates a person for services in obtaining or retaining municipal

securities business, ``then obviously such person is working for the

dealer and a `consulting' relationship exists. * * *'' \39\ In this

regard, the commenter argues that, at a minimum, the definition of

consultant should include any person who is paid or compensated (rather

than ``used'') by a dealer for the purpose of seeking to obtain or

retain municipal securities business. Another commenter notes that such

compensation ``can take various forms, such as payment of a finder's

fee, a percentage of revenues or fees earned on the transaction, a fee

for services in excess of the industry standard for such services, and

political contributions.'' \40\

\37\ A.G. Edwards.

\38\ Gilmore & Bell.

\39\ Id.

\40\ Artemis.

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One of the commenters believes the definition should extend to

private entities that construct or develop facilities from the proceeds

of municipal financings, including nursing home and retirement center

projects, housing issues, and land-based development financings.\41\

This commenter believes that ``it is quite common for such private

parties, after making large political contributions, to bring their own

finance teams, including underwriters, onto the scene and to pressure

issuers to use those teams. * * * [t]hus, the private parties can be

viewed as acting on behalf of the underwriters. * * * ''

\41\ American Government Financial Services.

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Board Response

In response to the commenters' concerns over the definition of

consultant in the April 1995 Draft Rule, the proposed rule now defines

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 the dealer's behalf where the communication is

undertaken by such person in exchange for, or with the understanding of

receiving, payment from the dealer or any other person. The definition

specifically excludes ``municipal finance professionals,'' as that term

is defined in rule G-37(g)(iv), because such individuals are covered by

the requirements of rule G-37. The definition also excludes any person

whose sole basis of compensation from the dealer is the actual

provision of legal advice, accounting or engineering assistance in

connection with the municipal securities business that the dealer is

seeking to obtain or retain. The exclusion would apply, for example, to

a lawyer retained to conduct a legal analysis on a particular

transaction contemplated by the dealer, or to review local regulations;

an accountant retained to conduct a tax analysis or to scrutinize

financial reports; or an engineer retained to perform a technical

review or feasibility study. The exemption is intended to ensure that

professionals who are engaged by the dealer solely to perform

substantive work in connection with municipal securities business are

not brought within the definition of consultant as long as their

compensation is in consideration of only those professional services

actually provided in connection with such municipal securities

business. However, any attorney or other professional used by the

dealer as a ``finder'' for municipal securities business would be

considered a consultant under the proposed rule.

Also, in response to certain commenters' concerns, the Board has

eliminated ``issuer-designated'' professionals from the definition of

consultant. The Board agrees with these commenters that persons who are

engaged by a dealer at the request or direction of the issuer (e.g.,

underwriter's counsel) are not, in fact, consultants because they do

not assist the dealer in obtaining or retaining municipal securities

business. However, the Board continues to believe that the subject of

issuer involvement in the underwriting process merits review, and will

address this subject, including the question of requiring disclosure of

issuer-designated persons, at a future time.

Requirement of a Written Agreement

The April 1995 Draft Rule would have required dealers to have

written agreements with their consultants before the consultants could

provide any services on their behalf. The April 1995 Draft Rule would

have provided that the ``Consultant Agreement'' must indicate the role

to be performed by the consultant and the compensation arrangement. One

of the commenters opposes the requirement of a written agreement,

arguing that it could ``hinder the effective and timely rendering of

legal services due to the proposed rule's prohibition of services until

the execution of a contract. The prospect of depriving a client of

substantive legal advice for any reason, and even for a modest

timeframe, is by itself troubling.'' \42\ Another commenter also

opposes this requirement, arguing that whether or not a consultant and

a dealer enter into a written agreement ``is a business decision best

left to the interested parties.'' \43\ One commenter, while not opposed

to memorializing traditional consultant agreements, believes that the

content of such agreements ``is best left to private negotiation

between the parties, and not subject to any specific regulatory

strictures.'' \44\ Another commenter shares this view.\45\

\42\ Goldman Sachs.

\43\ PSA.

\44\ A.G. Edwards.

\45\ Chemical Securities.

---------------------------------------------------------------------------

A number of commenters are concerned about the timing of the

requirement of a written agreement. One commenter ``strongly objects''

to the requirement that a written agreement be in place before using

the services of professional service providers, such as lawyers,

accountants, and printers, and believes that such a requirement ``will

disrupt traditional and legitimate business relationships and impede

the ability of dealers to respond to issuer's needs, particularly in

the case of ad-hoc inquiries from issuers in response to which dealers

routinely make use of professional providers such as lawyers or

accountants.'' \46\ Another commenter states that ``it would be a legal

and logistical nightmare if every firm was required to enter into a

contract with the entire universe of persons and entities who provide

information to underwriters in the normal course of business. It would

be much less burdensome--though still in our view an unnecessary

intrusion into business relationships--to limit the requirement of a

written agreement to those situations in which the firm is retaining a

third party to promote the firm to an issuer for a fee or other

compensation.'' \47\

\46\ A.G. Edwards.

\47\ Smith Barney.

[[Page 62282]]

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Other commenters support the requirement of a written

agreement.\48\ One of these commenters believes such a requirement

represents a way of discouraging the hiring of consultants solely for

their personal or political influence with issuers.\49\ However, this

commenter conditions its support on the Board limiting the definition

of consultant.\50\

\48\ Artemis; Morgan Stanley.

\49\ Morgan Stanley.

\50\ In its Request for Comments, the Board asked whether it

should require that all written agreements with consultants be

approved by the head of the dealer's municipal finance group and the

general counsel's office. Morgan Stanley supports such a

requirement, while Chemical ``believes it is not beneficial or

necessary. . . .'' Artemis supports a requirement that the agreement

be approved by the head of the municipal finance group.

---------------------------------------------------------------------------

Board Response

The requirement of a written agreement embodied in proposed rule G-

38 is similar to the April 1995 Draft Rule, and requires dealers who

use consultants to evidence the consulting arrangement in writing

(referred to as a ``Consultant Agreement''). At a minimum, the writing

must include the name, company, role and compensation arrangement of

each consultant used by the dealer. Such written agreements must be

entered into before the consultant engages in any direct or indirect

communication with an issuer on the dealer's behalf. Although certain

commenters were opposed to the requirement of a written agreement, the

Board believes that this requirement is necessary to ensure that

dealers are aware of arrangements that their branch offices or local

personnel may have with consultants. The requirement also will assist

dealers in developing mechanisms to monitor such arrangements, and will

assist enforcement agencies to inspect for compliance with rule G-38.

With regard to commenters' concern over the timing of this requirement

(i.e., that a written agreement must be entered into before the

consultant provides any services on behalf of the dealer), the Board

believes that by limiting the scope of the definition of consultant (as

discussed above) and by revising the timing of the agreement (i.e.,

before any communication by the consultant with an issuer on the

dealer's behalf), it has ameliorated many, if not all, of these

concerns.

Disclosure of Consulting Arrangements to Issuers

The April 1995 Draft Rule would have required dealers to disclose

to issuers in writing all consultants with which they have entered into

a Consultant Agreement in connection with an effort to obtain or retain

municipal securities business with that issuer, along with the basic

terms of the Consultant Agreement. The April 1995 Draft Rule required

dealers to make such disclosures when they become involved in the

issuer's process for selecting a dealer for municipal securities

business, whether or not the issuer requests such information in a

Request for Proposal.

Most commenters agree that disclosure to issuers of consulting

arrangements is appropriate. However, one of these commenters believes

that the timing of the disclosure requires clarification.\51\ This

commenter notes that financing ideas frequently are discussed

informally prior to the beginning of ``the issuer's selection

process,'' and that it would be ``imprudent to stifle'' such

discussion.\52\ Similarly, another commenter supports disclosure to

issuers, but is concerned that the timing of such disclosures ``is too

vague.'' \53\ This commenter believes that ``it is sufficient to

require that the disclosure be made at least prior to a dealer's

acceptance of business from an issuer, on the theory that at that time

the issuer is still in a position to rescind the award of business if

the disclosed facts are sufficiently unpalatable.'' \54\ The commenter

also believes that ``[l]imiting the disclosure obligation to

consultants with whom the dealer has already entered into an agreement

* * * would seem to create unnecessary timing issues as well as

unnecessary opportunities for manipulation.'' \55\ Accordingly, the

commenter proposes extending the disclosure requirement to all

consultants used by the dealer in connection with the relevant issuer

or the relevant securities offering, regardless of the status of the

written agreement between them.

\51\ PSA. Artemis shares this view.

\52\ PSA.

\53\ Morgan Stanley.

\54\ Id.

\55\ Id.

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One of the commenters believes that the disclosure of consultant

relationships should only be made upon the request of the issuer, and

notes that issuers can include a request for such information in their

Request for Proposal and that if the issuer wants additional

information, it can simply ask the dealer for further details.\56\ The

commenter also believes that ``a specific description of a consultant's

role is difficult to set forth at the onset of a relationship'' and

therefore disclosure of a consultant relationship should include only a

general description of the role to be performed by the consultant.\57\

Furthermore, the commenter believes that certain information, such as

the details of the compensation arrangement, should remain

confidential.

\56\ Chemical Securities.

\57\ Id.

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Another commenter believes that disclosure to the public is of

greater importance than disclosure to issuers; ``[i]ssuers are aware of

the activities of consultants; the public often is not. The most

powerful tool for preserving the integrity of the market is the public

disclosure by the MSRB of the consulting relationships reported to

it.'' \58\ However, the commenter believes that consultants hired on

the dealer's initiative should be disclosed to an issuer and the Board

``only when (i) the issuer is engaged in a formal process of either

reviewing its underwriting relationships or placing a specific piece of

debt and (ii) the dealer is actually selected for the program or the

specific underwriting.'' \59\ The commenter states that ``this two-part

test will result in meaningful information regarding the actual

involvement of consultants in completed municipal finance transactions

being made available.'' \60\ Another commenter also is concerned about

disclosure reaching the public domain, and states that any disclosure

to issuers should be made to their governing bodies ``for inclusion in

the publicly available records thereof'' otherwise the goal of public

disclosure of consultant relationship can easily be frustrated.\61\

\58\ JP Morgan.

\59\ Id.

\60\ Id.

\61\ Willkie Farr.

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Board Response

In response to commenters' concerns, particularly over timing, the

Board has modified the proposed rule's requirement concerning

disclosure of consulting arrangements to issuers. Proposed rule G-38

now requires each dealer to disclose to an issuer with which it is

engaging or seeking to engage in municipal securities business, in

writing, information on consulting arrangements relating to such

issuer. The written disclosure must include, at a minimum, the name,

company, role and compensation arrangement with the consultant or

consultants. Dealers are required to make such written disclosures no

later than the issuer's selection of any dealer in connection with the

municipal securities business sought, regardless of whether the dealer

making the disclosure ultimately is the one to obtain or retain that

business.

[[Page 62283]]

Thus, while dealers have an obligation to disclose their consulting

arrangements to all issuers from which they are seeking municipal

securities business, they have more leeway in the timing of their

disclosures as long as the disclosure is made before the issuer selects

a dealer for the municipal securities business sought. However, the

Board cautions dealers that the time period set forth in the proposed

rule represents the last possible opportunity to comply with the

disclosure requirement, and therefore strongly recommends that dealers

make such disclosures as early as possible. For example, a dealer

seeking certain municipal securities business may not be aware of the

issuer's selection of another dealer for that business. So too, an

issuer may select a pool or group of dealers from which the issuer

intends to choose underwriters for particular issues over the next few

years. If a dealer has used a consultant to help secure any of this

business, the Board believes that dealers should make their required

disclosures to issuers as soon as possible to ensure that the

disclosure is received by the issuer prior to the selection of any

dealer for the municipal securities business.

Disclosure of Consulting Arrangements to the Public Through Disclosure

to the Board

The April 1995 Draft Rule would have required a dealer to submit

reports to the Board of all consultants with which the dealer entered

into Consultant Agreements, not just those consultants that are

connected with particular municipal securities business awarded during

the reporting period (i.e., as currently required under rule G-37).

These reports would have been submitted on Form G-38 on a quarterly

basis, within one month after the end of each calendar quarter. Form G-

38 would have required dealers to list the names of all consultants and

complete for each consultant an Attachment to Form G-38 that provides

in the prescribed format the consultant's company, the role to be

performed by the consultant, and the compensation arrangement. Dealers

also would have been required to report all dollar amounts paid to each

consultant during the reporting period and, if any amounts paid were

connected with particular municipal securities business, such issue and

the amount paid would have been separately identified.

A number of commenters believe that disclosures to the Board should

be merged with the reporting requirements of rule G-37.\62\ In the

alternative, two of these commenters suggest removing the disclosure

requirements from rule G-37 and incorporating them into a modified

version of the April 1995 Draft Rule.\63\ One such commenter believes

that ``consolidation and combination is sensible not only from an

administrative and compliance point of view but will help ensure * * *

consistency in terminology and interpretation in this complex area.''

\64\

\62\ A.G. Edwards; Artemis; Chemical; GFOA; PSA; and Smith

Barney.

\63\ A.G. Edwards; Morgan Stanley.

\64\ Morgan Stanley.

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Another commenter notes that rule G-37 currently requires

disclosure of consulting relationships if business is obtained or

retained, i.e., ``after the fact.'' \65\ This commenter believes that

the public would benefit if information were available ``before a piece

of business was awarded or a transaction completed'' and thus

recommends that dealers be required to report all consulting

relationships entered into by (or ongoing with) firms during quarterly

reporting periods, regardless of whether business is obtained during

that reporting period.\66\ Similarly, another commenter believes that

dealers should be required to report all consultant arrangements

whether or not such arrangements result in the awarding of business to

the dealer.\67\ And another commenter also supports disclosure of ``all

existing business consulting arrangements * * * whether or not they

have resulted in a particular transaction. * * *'' \68\ This commenter

further suggests that ``such `bulk disclosure' be organized by

reference to the jurisdictions (from largest to smallest) in which each

consultant is directly or indirectly employed to operate and, if

applicable, to the issuers with which such consultant is employed,

directly or indirectly, to intercede.'' \69\ Finally, the commenter

supports linking particular consulting relationships with particular

transactions in order to avoid ``a blizzard of accurate but general

information [that] could conceal more than it reveals.'' \70\

\65\ Smith Barney.

\66\ Id.

\67\ Chemical Securities.

\68\ Morgan Stanley.

\69\ Id.

\70\ Id.

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One of the commenters suggests that dealers be required to report

``a continuing arrangement, rather than report it repeatedly, each

quarter.'' \71\ Another commenter ``believes that dealers should be

required to list continuing arrangements each quarter and to note when

any such arrangement has concluded * * *. However, if the compensation

arrangements remain the same * * * [the commenter recommends] that

dealers not be required to restate these terms quarterly.'' \72\

\71\ Chemical Securities.

\72\ Artemis.

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Board Response

The proposed rule's requirement concerning disclosure to the Board

is similar to the April 1995 Draft Rule. The proposed rule requires

dealers to submit to the Board, on a quarterly basis, reports of all

consultants used by the dealer. For each consultant, dealers must

report, in the prescribed format, the consultant's name, company, role

and compensation arrangement, as well as the dollar amount of any

payment made to the consultant during the quarterly reporting period.

If any payment made during the reporting period is related to the

consultant's efforts on the dealer's behalf which resulted in

particular municipal securities business, whether the municipal

securities business was completed during that or a prior reporting

period, then the dealer must separately identify that business and the

dollar amount of the payment. In addition, as long as the dealer

continues to use the consultant to obtain or retain municipal

securities business (i.e., has a continuing arrangement with the

consultant), the dealer must report information concerning such

consultant every quarter, whether or not compensation is paid to the

consultant during the reporting period. The Board believes that the

reporting of these continuing consulting arrangements each quarter will

assist enforcement agencies and the public in their review of such

arrangements.

As recommended by certain commenters, the Board has determined, for

ease of compliance and reporting, to delete the current reporting

requirements regarding consultants from rule G-37. It also has

determined to merge the reporting requirements of both rules G-37 and

G-38 into a single form--Form G-37/G-38. Dealers must submit two copies

of such reports on proposed Form G-37/G-38.\73\ The quarterly due dates

are the same as the due dates currently required under rule G-37 (i.e.

within 30 calendar days after the end of each calendar quarter, which

corresponds to each January 31, April 30, July 31, and October 31).

Finally, consistent with current rule G-37,

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dealers are required to submit these reports to the Board by certified

or registered mail, or some other equally prompt means that provides a

record of sending.\74\ The Board will then make these documents

available to the public for inspection and photocopying at its Public

Access Facility in Alexandria, Virginia, and for review by agencies

charged with enforcement of Board rules.

\73\ Proposed Form G-37/G-38 is included in Exhibit 3 to the

proposed rule change, along with instructions for filing the Form.

\74\ For ease of compliance, the Board has included the Rule G-