[Federal Register Volume 63, Number 12 (Tuesday, January 20, 1998)]
[Notices]
[Pages 3010-3012]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1181]
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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.
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\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.
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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.
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\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.
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* * * * *
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.
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\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.
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The Board believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act.\11\
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\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.''
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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\
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\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.
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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\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret J. McFarland,
Deputy Secretary.
[FR Doc. 98-1181 Filed 1-16-98; 8:45 am]
BILLING CODE 8010-01-M
