Self-Regulatory Organizations; 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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36950; File No. SR-MSRB-96-02]

Self-Regulatory Organizations; 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

March 11, 1996.

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

(``Act''), 15 U.S.C. 78s(b)(1), and Rule 19b-4 thereunder, notice is

hereby given that on February 29, 1996,\1\ 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 purpose of

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the proposed rule change is to provide interpretative guidance

concerning rule G-38 on consultants. The Board has designated this

proposal as constituting a stated policy, practice, or interpretation

with respect to the meaning, administration, or enforcement of an

existing rule of the Board under Section 19(b)(3)(A) of the Act, which

renders the proposal effective upon receipt of this filing by the

Commission. The Commission is publishing this notice to solicit

comments on the proposed rule change from interested persons.

\1\ On March 7, 1996, 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 Katherine A. England, Assistant Director, Division of

Market Regulation, Commission, dated March 7, 1996.

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

of the Proposed Rule Change

The Board is filing the proposed rule change to provide

interpretative guidance concerning rule G-37 on political contributions

and prohibitions on municipal securities business. Proposed new

language is in italics.

* * * * *

Rule G-38 Questions and Answers

Consultants

1. Q: Who is considered a ``consultant'' pursuant to rule G-38?

A: Rule G-38(a)(i) defines ``consultant'' as any person used by

a dealer to obtain or retain municipal securities business \2\

through direct or indirect communication by such person with an

issuer on behalf of such dealer 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''

of the dealer, 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, accounting or

engineering advice, services or assistance in connection with the

municipal securities business that the dealer is seeking to obtain

or retain.

\2\ ``Municipal securities business'' as used in rule G-38 has

the same meaning as in rule G-37(g)(vii): (i) negotiated

underwriting (if the dealer is a manager or syndicate member); (ii)

private placement; (iii) the provision of financial advisory or

consultant services to or on behalf of an issuer (on a negotiated

bid basis); or (iv) the provision of remarketing agent services (on

a negotiated bid basis).

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2. Q: What are examples of persons who would be excluded from

the definition of consultant for providing legal, accounting or

engineering advice, services or assistance to a dealer in connection

with municipal securities business?

A: 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.

3. Q: Would an attorney hired by a dealer to conduct a legal

analysis on a transaction being contemplated by the dealer and then

subsequently paid a finder's fee by the dealer for bringing that

municipal securities business to the dealer be considered a

consultant?

A: Yes, any attorney or other professional used by the dealer as

a ``finder'' for municipal securities business is considered a

consultant pursuant to rule G-38.

4. Q: Does the definition of consultant also encompass third

parties who initiate contact with dealers to offer their services in

obtaining or retaining municipal securities business through direct

or indirect communication by such person with an issuer official?

A: Yes. The definition of consultant in rule G-38 does not

distinguish between instances in which the dealer initiates contact

with a third party to act as a consultant and instances in which the

third party initiates contact.

5. Q: Does the definition of consultant encompass a lobbyist

hired by the dealer if the only activity the lobbyist engages in on

behalf of the dealer is to lobby state legislators for legislation

which grants issuers authority to issue certain types of municipal

securities?

A: No; however, if the lobbyist is also used by the dealer to

obtain or retain municipal securities business through direct or

indirect communication with an issuer on the dealer's behalf where

the communication is undertaken for payment from the dealer or any

other person, then the lobbyist would meet the definition of

consultant.

6. Q: If an affiliated company of a bank introduces one of its

customers (a municipal issuer) to the bank's dealer department for

purposes of engaging in municipal securities business, and the

dealer pays the affiliated company for this activity, would the

affiliated company be a ``consultant'' under rule G-38?

A: Any person used by a dealer as a ``finder'' for municipal

securities business would be considered a consultant under rule G-

38. In this example, if the affiliated company is sued by the bank

dealer to obtain or retain municipal securities business through

direct or indirect communication by the affiliated company with the

issuer on the dealer's behalf, and the affiliated company does so

with the understanding of receiving payment from the dealer, then

the affiliated company would be a consultant.

7. Q: Does the definition of consultant encompass a person

retained by an affiliate or parent of a dealer if any portion of

that person's activity relates to efforts to obtain municipal

securities business for the dealer?

A: Yes, because the definition of consultant includes those who

receive payment from the dealer or ``any other person'' for use in

obtaining or retaining municipal securities business through

communication with an issuer on behalf of the dealer. In such

instances, the dealer would need to be in compliance with the

provisions of rule G-38, as discussed below.

Consultant Agreement

8. Q: Rule G-38 requires dealers to evidence their consulting

arrangements in writing. What must be included in this Consultant

Agreement?

A: The Consultant Agreement must include, at a minimum, the

name, company, role and compensation arrangement of each consultant

used by the dealer.

9. Q: When must the dealer enter into the Consultant Agreement?

A: The Consultant Agreement 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

10. Q: Does rule G-38 require a dealer to disclose its

consulting arrangements to an issuer with which it is engaging or

seeking to engage in municipal securities business?

A: Yes; such disclosures must be in writing.

11. Q: What must be included in these written disclosures to

issuers?

A: The written disclosures must include, at a minimum, the name,

company, role and compensation arrangement with the consultant or

consultants.

12. Q: When are dealers required to make their written

disclosures concerning consultants to issuers?

A: The written disclosures must be made prior to the issuer's

selection of any dealer in connection with the municipal securities

business being sought, regardless of whether the dealer making the

disclosure ultimately is the one to obtain or retain that business.

Disclosure to the Board

13. Q: Are dealers required to submit any reports concerning

their consultants to the Board?

A: Yes. Dealers must submit to the Board, on a quarterly basis,

reports of all consultants used by the dealers. These reports must

be submitted on Form G-37/ G-38.

14. Q: What information concerning consultants must be included

on Form G-37/G-38?

A: For each consultant, dealers must report, in the prescribed

format (refer to Form G-37/G-38), 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 behalf of the dealer 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.

15. Q: If a dealer includes information concerning a particular

consultant on a Form G-37/G-38 submission, must the dealer

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continue to submit information concerning this consultant on

subsequent Form G-37/ G-38 submissions?

A. 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.

16. Q: What are the due dates for the submission of Form G-37/G-

38?

A: The quarterly due dates are within 30 calendar days after the

end of each calendar quarter (i.e., January 31, April 30, July 31

and October 31).

17. Q: Will the Board accept fax transmissions of Form G-37/G-

38?

A: No. Dealers are required to submit Forms G-37/G-38 to the

Board by certified or registered mail, or some other equally prompt

means that provides a record of sending.

18. Q: Are Forms G-37/G-38 submitted by dealers available to the

public for review?

A: Yes. These forms are available to the public for inspection

and photocopying at the Board's Public Access Facility in

Alexandria, Virginia, and for review by the agencies charged with

enforcement of Board rules.

19. Q: If a dealer has adopted a voluntary ban on political

contributions and/or does not use consultants, is the dealer still

required to submit a Form G-37/G-38?

A: Dealers are required to submit a Form G-37/G-38 to the Board

if ANY one of the following occurred: (i) reportable political

contributions or payments to political parties were made during the

reporting period: (ii) the dealer engaged in municipal securities

business (as defined in rule G-37(g)(vii)) during the reporting

period; or (iii) the dealer used consultants during the reporting

period (i.e., new or continuing relationships with consultants).

Dealers are not required to submit a Form G-37/G-38 for a reporting

period if all three of the following conditions are met for that

particular reporting period: (i) there were no reportable political

contributions or payments made to political parties; (ii) the dealer

did not engage in municipal securities business; and (iii) the

dealer did not use consultants.

Recordkeeping Requirements

20. Q. What records concerning consultants must dealers

maintain?

A: Rule G-8, on books and records, required dealers to 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 dealer to obtain or retain municipal

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

termination of any consultant arrange.

21. Q. How long must dealers maintain their records concerning

consultants?

A: Rule G-9, on preservation of records, requires dealers to

maintain their records concerning consultants for a six-year period.

* * * * *

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 comment it received on the proposed rule change. The

texts 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

On January 17, 1996, the Commission approved Board rule G-38 on

consultants.\3\ 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 the

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.

Recently, the Board has received inquiries from market participants

concerning the applicability of various provisions of the rule. In

order to assist the municipal securities industry and, in particular,

brokers, dealers and municipal securities dealers in understanding and

complying with the provisions of the rule G-38, the Board has

determined to publish this notice of interpretation which sets forth,

in question-and-answer format, general guidance on rule G-38. The Board

will continue to monitor the application of rule G-38, and, from time

to time, will publish additional notices of interpretations, as

necessary.

\3\ Securities Exchange Act Release No. 36727 (Jan. 17, 1996),

61 FR 1955 (Jan. 24, 1996). The rule will become effective on March

18, 1996.

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The Board believes that 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, 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.

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

Because the proposed rule change would apply equally to all

brokers, dealers and municipal securities dealers, 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.

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 foregoing rule change has become effective upon filing pursuant

to Section 19(b)(3)(A)(i) of the Act and subparagraph (e) or Rule 19b-4

thereunder because the rule change constitutes a stated policy,

practice, or interpretation with respect to the meaning,

administration, or enforcement of an existing rule of the Board.

At any time within 60 days of the filing of a rule change pursuant

to Section 19(b)(3)(A) of the Act, the Commission may summarily

abrogate the 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.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549. Copies

of the submission, all subsequent amendments, all written statements

with respect to the proposed rule change that are filed with the

Commission, and all written communications relating to the proposed

rule change between the

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Commission and any person, other than those that may be withheld from

the public in accordance with the provisions of 5 U.S.C. 552, will be

available for inspection and copying in the Commission's Public

Reference Room. Copies of the filing will also be available for

inspection and copying at the principal office of the Board. All

submissions should refer to File No. SR-MSRB-96-02 and should be

submitted by April 5, 1995.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-6233 Filed 3-14-96; 8:45 am]

BILLING CODE 8010-01-M