Self-Regulatory Organizations; Notice of Filing 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. 34-39541; File No. SR-MSRB-98-1]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Municipal Securities Rulemaking Board Relating to

Interpretation of Rule G-38 on Consultants

January 12, 1998.

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 January 9, 1998,\3\ the Municipal Securities Rulemaking Board

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

Commission (``Commission'' or ``SEC'') the proposed rule change, (File

No. SR-MSRB-98-1), as described in Items I, II, and III below, which

Items have been prepared by the Board. The Commission is publishing

this notice to solicit comments on the proposed rule change from

interested persons.

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

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

\3\ On November 13, 1997, the Board filed the same proposal

under Section 19(b)(3)(A) of the Act, which renders the proposal

effective upon receipt of filing by the Commission. See Securities

Exchange Act Release No. 39391 (December 3, 1997), 62 FR 65114

(December 10, 1997). The Commission received four comment letters on

the filing. See infra note 12. In order to provide additional time

to fully air the concerns of commenters, the Board agreed to

withdraw this filing and resubmit it, pursuant to Section 19(b)(2).

See letter from Diane G. Klinke, General Counsel, Municipal

Securities Rulemaking Board, to Katherine A. England, Assistant

Director, Division of Market Regulation, dated January 9, 1998.

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

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

Substance of the Proposed Rule Change

The Board is filing herewith a notice of interpretation concerning

Rule G-38 on consultants (hereafter referred to as ``the proposed rule

change''). The proposed rule change is as follows:

Rule G-38 Questions and Answer Bank Affiliates and Definition of

Payment

Q: A bank and its employees communicate with an issuer on behalf

of an affiliated dealer to obtain municipal securities business for

that dealer. In return, the bank and its employees receive certain

``credits'' from the dealer. These credits, which do not involve any

direct or indirect cash payments from the dealer to the bank or its

employees, are used for internal purposes to identify the source of

business referrals. Are the credits considered a ``payment'' under

rule G-38 thereby requiring the dealer to designate the bank or its

employees as consultant and comply with the requirements of rule G-

38?

A: Rule G-38 defines a consultant as any person used by a dealer

to obtain or retain

[[Page 3011]]

municipal securities business through direct or indirect

communication by such person with an issuer on behalf of the dealer

where the communication is undertaken by the person in exchange for,

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

any other person.\4\ The term payment, as used in rule G-38, means

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

anything of value. The absence of an immediate transfer of funds or

anything of value to an affiliate or individual employed by the

affiliate would not exclude the credits from the definition of

payment if such credits eventually (e.g., at the end of the fiscal

year) result in compensation to the affiliate or individual employed

by the affiliate for referring municipal securities business to the

dealer. In this regard, the compensation may be in the form of cash

(e.g., a bonus) or non-cash. In either case, if the dealer or any

other person \5\ eventually gives anything of value (i.e., makes a

``payment'') to the affiliate or individual based, even in part, on

the referral, then the affiliate or individual is a consultant for

purposes of rule G-38 and the dealer must comply with the various

requirements of the rule. For additional guidance in this area, you

may wish to review Q&A numbers 6 and 7 (dated February 28, 1996) in

the MSRB Manual following Rule G-38, as well as Q&A number 4 (dated

December 7, 1994) in the MSRB Manual following Rule G-37.

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

\4\ Municipal finance professionals and any person whose sole

basis of compensation is the actual provision of legal, accounting

or engineering advice, services or assistance are excepted from the

definition of consultant.

\5\ The Securities Exchange Act of 1934 (the ``Act'') defines

the term ``person'' as a ``natural person, company, government, or

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

Board rule D-1 provides that unless the context otherwise

specifically requires, the terms used in Board rules shall have the

same meanings as set forth in the Act.

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

* * * * *

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

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.\6\ The Board adopted the rule because it was concerned

about dealers' increasing use of consultants to obtain or retain

municipal securities business, notwithstanding the requirements of Rule

G-37 \7\ on political contributions and prohibitions on municipal

securities business, Rule G-20 \8\ on gifts and gratuities, and Rule G-

17 \9\ 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 definition of payment, as used in Rule G-

38, and whether bank affiliates and their employees may, under certain

circumstances, be deemed consultants for purposes 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 Rule G-38, the Board has determined to publish this

third notice of interpretation which sets forth, in question-and-answer

format, general guidance on Rule G-38.\10\ 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.

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

\6\ Securities Exchange Act Release No. 36727 (Jan. 17, 1996);

61 FR 1955 (Jan. 24, 1996). The rule became effective on March 18,

1996. See also MSRB Manual, General Rules, Rule G-38 (CCH)

para.3686.

\7\ MSRB Manual, General Rules, Rule G-37 (CCH) para.3681.

\8\ MSRB Manual, General Rules, Rule G-20 (CCH) para.3596.

\9\ MSRB Manual, General Rules, Rule G-17 (CCH) para.3581.

\10\ See Securities Exchange Act Release No. 36950 (March 11,

1996); 61 FR 10828 (March 15, 1996) and Securities Exchange Act

Release No. 37997 (Nov. 29, 1996); 61 FR 64781 (Dec. 6, 1996). See

also MSRB Reports Vol. 16, No. 2 (June 1996) at 3-5; and Vol. 17,

No. 1 (Jan. 1997) at 15.

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

The Board believes the proposed rule change is consistent with

Section 15B(b)(2)(C) of the Act.\11\

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

\11\ Section 15B(b)(2)(C) states in pertinent part that the

rules of the Board ``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

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, because it would apply equally

to all brokers, dealers and municipal securities dealers.

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

Rule Change Received From Members, Participants, or Others

The Commission received four comment letters from banking industry

participants, opposing this interpretation of Rule G-38.\12\ As a

result of these comments, the Board resubmitted the proposed rule

change pursuant to Section 19(b)(2).\13\

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

\12\ See letter from Sarah A. Miller, Senior Government

Relations Counsel, Trust and Securities, American Bankers

Association, to Jonathan G. Katz, Secretary, SEC, dated December 30,

1997; letter from Alan R. Leach, Senior Vice President and Manager,

Dealer Bank Department, Deposit Guaranty National Bank, to Jonathan

G. Katz, Secretary, SEC, dated January 5, 1998; letter from Robert

J. Nagy, Senior Counsel, NationsBank, to Jonathan G. Katz,

Secretary, SEC, dated December 31, 1997; and letter from Victor M.

DiBattista, Chief Regional Counsel, PNC Bank, N.A., to Jonathan G.

Katz, Secretary, SEC, dated January 2, 1998.

\13\ See supra note 3.

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

III. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Within 35 days of the date of publication of this notice in the

Federal Register or within such longer period (i) as the Commission may

designate up to 90 days of such date if it finds such longer period to

be appropriate and publishes its reasons for so finding or (ii) as to

which the self-regulatory organization consents, the Commission will:

A. By order approve such proposed rule change, or

B. Institute proceedings to determine whether the proposed rule

change should be disapproved.

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, N.W., Washington, D.C. 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 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

[[Page 3012]]

the Board's principal offices. All submissions should refer to File No.

SR-MSRB-98-1 and should be submitted by February 10, 1998.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\14\

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

\14\ 17 CFR 200.30-3(a)(12).

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

Margaret J. McFarland,

Deputy Secretary.

[FR Doc. 98-1181 Filed 1-16-98; 8:45 am]

BILLING CODE 8010-01-M