[Federal Register Volume 64, Number 196 (Tuesday, October 12, 1999)]
[Notices]
[Pages 55326-55334]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26524]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41975; File No. SR-MSRB-98-08]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change Relating to Rule G-38,
on Consultants, Rule G-37, Political Contributions and Prohibitions on
Municipal Securities Business, Rule G-8, on Books and Records, and
Revisions to the Attachment Page to Form G-37/G-38
October 4, 1999.
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 June 16, 1998, 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. On August 26, 1999, the Board filed Amendment No. 1 which
replaces and supersedes the proposed rule change.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as contained in Amendment No. 1, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On June 16, 1998, the MSRB submitted its initial proposal
which amended G-38 to define the meaning of ``reportable
contributions,'' outlined what Consultant Agreements should include,
and provided dealers with a ``reasonable efforts'' defense. The
defense would have held that a dealer does not violate Rule G-38 if
the dealer fails to receive all required information from its
consultant and thus, fails to report such information to the Board,
but can demonstrate that it used reasonable efforts in attempting to
obtain the information, including a statement in the dealer's
Consultant Agreement that Board rules require disclosure of
consultant contributions and payments, and send quarterly reminders
to its consultants of the deadline for their submissions to the
dealer of the required information. After discussions with the
Commission, the Board amended the proposal and published it for
comment. See Additional Requirements for Pending Amendments on
Disclosure of Consultants' Contributions: Rule G-38, MSRB Reports,
Vol. 19, No. 2 (April 1999) at 3-7. Amendment No. 1, among other
things, modifies the ``reasonable efforts'' defense established in
the initial proposal by imposing stricter requirements on dealers in
monitoring their consultants' activities.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The MSRB is proposing to amend Rule G-38, on consultants, Rule G-
37, on political contributions and prohibitions on municipal securities
business, Rule G-8, on books and records, and to revise the attachment
page to Form G-37/G-38. The proposed rule change requires brokers,
dealers, or municipal securities dealers (``dealers'') to obtain from
their consultants information on the consultants' political
contributions and payments to state and local political parties and to
report such information to the Board on Form G-37/G-38. The Board has
requested that the Commission delay the effectiveness of the proposed
rule change until April 1, 2000, to provide time for dealers to revise
their contracts with their consultants and to put supervisory
procedures in place for compliance with the proposed rule change. Below
is the text of the proposed rule change. Additions are italicized;
deletions are bracketed.
Rule G-38. Consultants
(a) Definitions.
(i)-(v) No change.
(vi) The term ``reportable political contribution'' means:
(A) if the consultant has had direct or indirect communication with
an issuer on behalf of the broker, dealer or municipal securities
dealer to obtain or retain municipal securities business for such
broker, dealer or municipal securities dealer, a political contribution
to an official(s) of such issuer made by any contributor referred to in
paragraph (b)(i) during the period beginning six months prior to such
communication and ending six months after such communication;
(B) the term does not include those political contributions to
official(s) of an issuer made by any individual referred to in
subparagraph (b)(i)(A) or (B) of this rule who is entitled to vote for
such official if the contributions made by such individual, in total,
are not in excess of $250 to any official of such issuer, per election.
(vii) The term ``reportable political party payment'' means:
[[Page 55327]]
(A) if a political party of a state or political subdivision
operates within the geographic area of an issuer with which the
consultant has had direct or indirect communication to obtain or retain
municipal securities business on behalf of the broker, dealer or
municipal securities dealer, a payment to such party made by any
contributor referred to in paragraph (b)(i) during the period beginning
six months prior to such communication and ending six months after such
communication;
(B) the term does not include those payments to political parties
of a state or political subdivision made by any individual referred to
in subparagraph (b)(i)(A) or (B) of this rule who is entitled to vote
in such state or political subdivision if the payments made by such
individual, in total, are not in excess of $250 per political party,
per year.
(viii)( The term ``official of such issuer'' or ``official of an
issuer'' shall have the same meaning as in rule G-37(g)(vi).
(b) Written Agreement
(i) 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, business address, role
and compensation arrangement of each such consultant (``Consultant
Agreement''). In addition, the Consultant Agreement shall include a
statement that the consultant agrees to provide the broker, dealer or
municipal securities dealer with a list by contributor category, in
writing, of any reportable political contributions and any reportable
political party payments during each calendar quarter made by:
(A) the consultant;
(B) if the consultant is not an individual, any partner, director,
officer or employee of the consultant who communicates with an issuer
to obtain municipal securities business on behalf of the broker, dealer
or municipal securities dealer; and
(C) any political action committee controlled by the consultant or
any partner, director, officer or employee of the consultant who
communicates with an issuer to obtain municipal securities business on
behalf of the broker, dealer or municipal securities dealer.
(ii) The Consultant Agreement shall require that, if applicable the
consultant shall provide to the broker, dealer or municipal securities
dealer a report that no reportable political contributions or
reportable political party payments were made during a calendar
quarter.
(iii) The Consultant Agreement shall require that the consultant
provide the reportable political contributions and political party
payments for each calendar quarter, or report that no reportable
political contributions or political party payments were made for a
particular calendar quarter, to the broker, dealer or municipal
securities dealer in sufficient time for the broker, dealer or
municipal securities dealer to meet its reporting obligations under
paragraph (e) of this rule.
(iv) [Such] The 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.
(c) Information Concerning Political Contributions to Official(s)
of an Issuer and Payments to State and Local Political Parties Made by
Consultants.
(i) A broker, dealer or municipal securities dealer is required to
obtain information on its consultant's reportable political
contributions and reportable political party payments beginning with a
consultant's first direct or indirect communication with an issuer on
behalf of the broker, dealer or municipal securities dealer to obtain
or retain municipal securities business for such broker, dealer or
municipal securities dealer. The broker, dealer or municipal securities
dealer shall obtain from the consultant the information concerning each
reportable political contribution required to be recorded pursuant to
rule G-8(a)(xviii)(F) and each reportable political party payment
required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if
applicable, a report indicating that the consultant made no reportable
political contributions and no reportable political party payments
required to be recorded pursuant to rule G-8(a)(xviii)(H).
(ii) The requirement to obtain the information referred to in
paragraph (c)(i) of this rule shall end upon the termination of the
Consultant Agreement.
(iii) A broker, dealer or municipal securities dealer will not
violate this section if it fails to receive from its consultant all
required information on reportable political contributions and
reportable political party payments and thus fails to report such
information to the Board if the broker, dealer or municipal securities
dealer can demonstrate that it used reasonable efforts in attempting to
obtain the necessary information. Reasonable efforts shall include:
(A) a statement in the Consultant Agreement that Board rules
require disclosure of consultant contributions to issuer officials and
payments to state and local political parties;
(B) the broker, dealer or municipal securities dealer sending
quarterly reminders to its consultants of the deadline for their
submissions to the broker, dealer or municipal securities dealer of the
information concerning their reportable political contributions and
reportable political party payments;
(C) the broker, dealer or municipal securities dealer including in
the Consultant Agreement provisions to the effect that:
(1) the Consultant Agreement will be terminated by the broker,
dealer or municipal securities dealer if, for any calendar quarter, the
consultant fails to provide the broker, dealer or municipal securities
dealer with information about its reportable political contributions or
reportable political party payments, or a report noting that the
consultant made no reportable political contributions or no reportable
political party payments, and such failure continues up to the date to
be determined by the dealer, but no later than the date by which the
broker, dealer or municipal securities dealer is required to send Form
G-37/G-38 to the Board with respect to the next succeeding calendar
quarter, such termination to be effective upon the date the broker,
dealer or municipal securities dealer must send its Form G-37/G-38 to
the Board (i.e., January 31, April 30, July 31 or October 31); and
(2) no further payments, including payments owed for services
performed prior to the date of termination, shall be made to the
consultant by or on behalf of the broker, dealer or municipal
securities dealer as of the date of such termination; and
(D) the broker, dealer or municipal securities dealer enforcing the
Consultant Agreement provisions described in paragraph (c)(iii)(C) of
this rule in a full and timely manner and indicating the reason for and
date of the termination on its Form G-37/G-38 for the applicable
quarter.
(d) Disclosure to Issuers. Each broker, dealer or municipal
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, business address, 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
[[Page 55328]]
information shall be submitted to the issuer either:
(i)-(ii) No change.
[(d)] (e) Disclosure to Board. Each broker, dealer and municipal
securities dealer shall send 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 sent to the Board
on Form G-37/G-38 by the last day of the month following 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,
business address, role, [and] compensation arrangement, any municipal
securities business obtained or retained by the consultant with each
such business listed separately, and, if applicable, dollar amounts
paid to the consultant connected with particular municipal securities
business. [In addition, s] Such reports shall indicate the total 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]. In addition, such reports shall include the
following information to the extent required to be obtained during such
calendar quarter pursuant to paragraph (c)(i) of this rule:
(i)(A) the name and title (including any city/county/state or
political subdivision) of each official of an issuer and political
party receiving reportable political contributions or reportable
political party payments, listed by state; and
(B) contribution or payment amounts made and the contributor
category of the persons and entities described in paragraphs (b)(i) of
this rule; or
(ii) if applicable, a statement that the consultant reported that
no reportable political contributions or reportable political party
payments were made; or
(iii) if applicable, a statement that the consultant failed to
provide any report of information to the dealer concerning reportable
political contributions or reportable political party payments.
Once a contribution or payment has been disclosed on a report, the
dealer should not continue to disclose that particular contribution or
payment on subsequent reports.
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. Except as
otherwise specifically indicated in this rule, every broker, dealer and
municipal securities dealer shall make and keep current the following
books and records, to the extent applicable to the business of such
broker, dealer or municipal securities dealer:
(i)-(xvii) No change.
(xviii) Records Concerning Consultants Pursuant to Rule G-38. Each
broker, dealer and municipal securities dealer shall maintain:
[(i)] (A) a listing of the name, company, business address, role
and compensation arrangement of each consultant;
[(ii)] (B) a copy of each Consultant Agreement referred to in rule
G-38(b);
[(iii)] (C) a listing of the compensation paid in connection with
each such Consultant Agreement;
[(iv)] (D) where applicable, a listing of the municipal securities
business obtained or retained through the activities of each
consultant;
[(v)] (E) a listing of issuers and a record of disclosures made to
such issuers, pursuant to rule G-38 [(c) (d), 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)] (F) records of each reportable political contribution (as
defined in rule G-38(a)(vi)), which records shall include:
(1) the names, city/county and state of residence of contributors;
(2) the names and titles (including any city/county/state or other
political subdivision) of the recipients of such contributions; and
(3) the amounts and dates of such contributions;
(G) records of each reportable political party payment (as defined
in rule G-38(a)(vii)) which records shall include:
(1) the names, city/county and state of residence of contributors;
(2) the names and titles (including any city/county/state or other
political subdivision) of the recipients of such payments; and
(3) the amounts and dates of such payments;
(H) records indicating, if applicable, that a consultant made no
reportable political contributions (as defined in rule G-38(a)(vi)) or
no reportable political party payments (as defined in rule G-
38(a)(vii));
(I) a statement, if applicable, that a consultant failed to provide
any report of information to the dealer concerning reportable political
contributions or reportable political party payments; and
(J) the date of termination of any consultant arrangement.
(xix) No change.
(b)-(f) No change.
Rule G-37. Political Contributions and Prohibitions on Municipal
Securities Business
(a)-(d) No change.
(e)(i)(A)-(C) No change.
(D) any information required to be disclosed pursuant to section
[(d)](e) of rule G-38; and
(E) No change.
(ii)-(iii) No change.
(f)-(i) No change.
* * * * *
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
1. Background
Rule G-37 \4\ among other things, prohibits a dealer from engaging
in municipal securities business with an issuer within two years after
certain contributions to an official of such issuer made by the dealer,
any municipal finance professional associated with such dealer, or any
political action committee (``PAC'') controlled by the dealer or any
municipal finance professional. Rule G-37(d) prohibits a dealer and any
municipal finance professional from doing any act indirectly which
would result in a violation of the rule if done directly by the dealer
or municipal finance professional. Thus, a dealer would violate Rule G-
37 by engaging in municipal securities business with an
[[Page 55329]]
issuer after directing any person to make a contribution to an official
of such issuer. As indirect activities are often difficult to prove,
the Board believes that additional information about consultant
arrangements should be made available to issuers and the public in
order to maintain the integrity of the market. Accordingly, the Board
adopted Rule G-38.\5\
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\4\ MSRB Manual, General Rules, Rule G-37 (CCH) 3681.
\5\ MSRB Manual, General Rules, Rule G-38 (CCH) 3686.
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Rule G-38 requires dealers who use consultants \6\ to evidence the
consulting arrangement in writing (referred to as a ``Consultant
Agreement'').\7\ Rule G-38(c) 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 either prior to the issuer's selection of any dealer in
connection with the municipal securities business being sought, or at
or prior to the consultant's first direct or indirect communication
with the issuer for any municipal securities business. Rule G-38(d)
requires dealers to submit to the Board, on a quarterly basis, reports
of all consultants used by the dealer.\8\ For each consultant, dealers
must report 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.\9\
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\6\ Rule G-38(a)(i) defines the term ``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.
\7\ Rule G-38 requires that the Consultant Agreement, at a
minimum, include the name, company, role and compensation
arrangement of each consultant used by the dealer. The Consultant
Agreement must be entered into before a consultant engages in any
direct or indirect communication with an issuer on the dealer's
behalf.
\8\ Such reports must be filed on Form G-37/G-38.
\9\ In addition, 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.
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As mentioned above, one of the reasons the Board adopted Rule G-38
was because of its concern that dealers might be circumventing Rule G-
37 by using consultants to make political contributions. There also was
concern about dealers hiring consultants who had made their own
contributions to issuer officials.\10\ The Rule G-38 reporting and
recordkeeping requirements seek to make information public about the
consultants that dealers have hired and the municipal securities
business obtained through such consultants. One reason the Board sought
this public disclosure was so that reporters and others could
investigate further whether there was a connection between
contributions given by consultants and the business they obtained for
the dealers that hired them. The Board determined to adopt the proposed
rule change to Rule G-38 because of concern that, given the increased
enforcement of Rule G-37, more dealers may seek to circumvent Rule G-37
by hiring consultants who make substantial contributions to issuer
officials.
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\10\ In October 1993, at the urging of SEC Chairman Arthur
Levitt, 19 major dealers agreed to a Statement of Initiative
(``Initiative'') to support the principle that political
contributions which are intended to influence the awarding of
municipal securities should be prohibited. Within a few months,
another 36 dealers ``signed on'' to the Initiative. Interpretation
No. 1 was issued on December 6, 1993, and among other things,
provides requirements for a dealer that uses a consultant to obtain
or retain municipal securities business. This interpretation
requires, among other things, that a dealer have a written agreement
with the consultant and that such agreement prohibit the consultant,
its officers, directors, partners, and non-clerical employees from
making any political contributions or other payments, directly or
indirectly, for the purposes of obtaining or retaining municipal
securities business.
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2. Summary of Proposed Rule Change
The proposed rule change would require a dealer to receive and
report certain contribution and payment information from: the
consultant; any partner, director, officer or employee of the
consultant who communicates with an issuer to obtain municipal
securities business on behalf of the dealer; and, any PAC controlled by
the consultant or any partner, director, officer or employee of the
consultant who communicates with issuers to obtain municipal securities
business on behalf of the dealer.\11\ A dealer would be required to
include within its Consultant Agreement a statement that the consultant
agrees to provide the dealer each calendar quarter with a listing of
reportable political contributions to official(s) of an issuer and
reportable payments to political parties of states and political
subdivisions during such quarter, or a report that no reportable
political contributions or reportable political party payments were
made, as appropriate.\12\
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\11\ A ``consultant'' in Rule G-38 can refer to an individual or
a company (e.g., a bank affiliated with a bank dealer). For example,
if an individual is a consultant, this individual would report to
the dealer only his or her contributions and payments and the
contributions of any PAC controlled by such individual. If the
consultant is a company, the company would report its contributions
and payments to the dealer, as well as those made by any partner,
director, officer or employee of the consultant who communicates
with issuers to obtain municipal securities business on behalf of
the dealer, and any PAC controlled by the consultant or any partner,
director, officer or employee of the consultant who communicates
with issuers to obtain municipal securities business on behalf of
the dealer.
\12\ The de minimis exception for contributions to official(s)
of an issuer provides that a consultant need not provide to a dealer
information about contributions made by any partner, director,
officer or employee of the consultant who communicates with issuers
to obtain municipal securities business on behalf of the dealer to
any official of an issuer for whom such individual is entitled to
vote if such individual's contributions, in total, are not in excess
of $250 to each official of such issuer, per election. Similarly,
the de minimis exception for payments provides that a consultant
need not provide to a dealer information about payments to political
parties of a state or political subdivision made by any partner,
director, officer or employee of the consultant who communicates
with issuers to obtain municipal securities business on behalf of
the dealer who is entitled to vote in such state or political
subdivision if the payments by the individual, in total, are not in
excess of $250 per political party, per year.
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The proposed rule change would require a dealer to obtain
information from its consultants about the contributions made to issuer
officials only if the consultant has had direct or indirect
communication with such issuer to obtain municipal securities business
on behalf of the dealer.\13\ The political party payments required to
be reported are limited to those made to political parties of states
and political subdivisions that operate within the geographic area of
the issuer with whom the consultant communicates on behalf of the
dealer (e.g., city, county and state parties). The date that
establishes the obligation for the collection of contribution
information is the date of the consultant's communication with the
issuer to obtain municipal securities business on behalf of the dealer.
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\13\ A dealer must disclose contributions with respect to those
issuers from which a consultant seeking municipal securities
business on behalf of the dealer, regardless of whether
contributions are going to and communications are occurring with the
same or different personnel within that particular issuer.
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With respect to the collection of contribution and payment
information, the proposed rule change contains a six-month ``look-
back'' as well as a six-month ``look-forward'' provision from the date
of communication with an issuer. Thus, a consultant must disclose to
the dealer the contributions and payments made by the consultant
[[Page 55330]]
during the six months prior to the date of the consultant's
communication with the issuer.\14\ So too, if the consultant's
communication with an issuer continues, any reportable contributions
and payments would be required to be disclosed. Once communication
ceases, the consultant still must disclose contribution and payment
information for six months.\15\ The Board believes these provisions are
important in providing information for a minimum period of one year
about any consultant contributions to officials of an issuer with whom
the consultant communicated on behalf of a dealer to obtain municipal
securities business. This should help to identify any situations in
which contributions could have influenced the awarding of municipal
securities business. The proposed rule change would require dealers to
keep records under Rule G-8 of all reportable political contributions
and all reportable political party payments.
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\14\ Such contributions and payments become reportable in the
calendar quarter in which the consultant first communicates with the
issuer.
\15\ Contributions and payments made simultaneously with or
after the consultant's first communication with the issuer are
reportable in the calendar quarter in which they are made.
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A dealer's requirement to collect contribution and payment
information from its consultants ends when a Consultant Agreement has
been terminated.\16\ Of course, dealers should not attempt to avoid the
requirements of Rule G-38 by terminating a consultant relationship
after directing or soliciting the consultant to make a political
contribution to an issuer official after such termination. Rule G-37(d)
prohibits a dealer from doing any act indirectly which would result in
a violation of Rule G-37 if done directly by the dealer. Thus, a dealer
may violate Rule G-37 by engaging in municipal securities business with
an issuer after directing or soliciting any person to make a
contribution to an official of such issuer.
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\16\ A dealer that terminates a Consultant Agreement would of
course be obligated to obtain information regarding contributions
and payments made up to the date of termination.
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The proposed rule change would require that the information
obtained by dealers concerning their consultant's contributions and
payments be submitted by dealers to the Board on Form G-37/G-38.\17\
The disclosures required by the proposed rule change are reflected in
the draft changes to Form G-37/G-38. The draft changes require dealers
to disclose on the attachment sheet for each consultant used by the
dealer the contributions and payments covered by the rule or that no
such contributions or payments were made for such quarter. Further, a
dealer must disclose if a consultant has failed to provide it with a
report concerning its contributions and payments. When completing the
form, a dealer must disclose, in addition to the other required
information, the calendar quarter and year of any reportable political
contributions and reportable political party payments that were made
prior to the calendar quarter of the form being completed (e.g.,
contributions and payments made in a prior quarter that are reportable
as a result of the six-month look-back). Reportable ``look-back''
contributions and payments also must be disclosed on the Form G-37/G-38
for the quarters in which the consultant has communicated with an
issuer to obtain municipal securities business on behalf of a
dealer.\18\ Once a contribution or payment has been disclosed on a
report, a dealer should not continue to disclose that particular
contribution or payment on subsequent reports. The attachment page to
Form G-37/G-38 also has been revised to require dealers to separately
identify all of the municipal securities business obtained or retained
by the consultant for the dealer.\19\
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\17\ The proposed rule change also requires dealers to report
the consultant's business address on Form G-37/G-38.
\18\ If the amendments to Rule G-38 become effective on April 1,
2000, as the Board has requested, on the reports for the second
quarter of 2000 (required to be sent to the Board by July 31, 2000)
dealers would be required to disclose their consultants' reportable
political contributions and reportable political party payments for
the second quarter of 2000 and include, pursuant to the six-month
look-back, reportable political contributions and reportable
political party payments since October 1, 1999.
\19\ The existing version of the form requires dealers to list
only the municipal securities business obtained or retained by the
consultant in which the consultant was paid a specific dollar amount
for the particular municipal securities business.
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The proposed rule change includes a ``reasonable efforts''
provision that allows dealers to rely in good faith on information
received from their consultant regarding contributions and payments.
The reasonable efforts provision provides that a dealer will not
violate Rule G-38 if the dealer fails to receive from its consultant
all required contribution and payment information and thus fails to
report such information to the Board if the dealer can demonstrate that
it used reasonable efforts in attempting to obtain the necessary
information. However, to avail itself of the reasonable efforts
provision, a dealer must:
(1) State in its Consultant Agreement that Board rules require
disclosure of consultant contributions and payment;
(2) Send quarterly reminders to consultant of the deadline for
their submissions to the dealer of contribution information;
(3) Include language in the Consultant Agreement to the effect
that: (a) The Consultant Agreement will be terminated if, for any
calendar quarter, the consultant fails to provide the dealer with
information about its reportable contributions or payments, or a report
noting that the consultant made no reportable contributions or
payments, and such failure continues up to the date to be determined by
the dealer but no later than the date by which the dealer is required
to send Form G-37/G-38 to the Board with respect to the next succeeding
calendar quarter, such termination to be effective upon the date the
dealer must send its Form G-37/G-38 to the Board, and (b) the dealer
may not make any further payments to the consultant, including payments
owed for services performed prior to the date of termination, as of the
date of such termination; and
(4) Enforce the Consultant Agreement provisions described above in
a full and timely manner and indicate the reason for and date of the
termination on its Form G-37/G-38 for the applicable quarter.
The failure by a dealer to include the termination and non-payment
provisions in a Consultant Agreement or to enforce any such provisions
that may be contained in the Consultant Agreement, would not, in and of
itself, constitute a violation of Rule G-38 but would instead preclude
the dealer from invoking the reasonable efforts provision as a defense
against a possible violation for failing to disclose consultant
contribution information, which the consultant may have withheld from
the dealer.
Finally, the proposed rule change contains a clarifying amendment
to Rule G-38(b)(i)(B), and a technical amendment to Rule G-37(e)(i)(D)
to conform to the amendments to Rule G-38.
The Board is very concerned about consultants making contributions
to obtain municipal securities business on behalf of the dealer and,
while the Board, at this time, is only requiring disclosure of
consultants' political contributions and payments to state and local
political parties, it will be paying close attention to this issue. The
Board will take whatever further steps it feels are necessary to sever
the connection between the giving of political
[[Page 55331]]
contributions and the awarding of municipal securities business.
The Board believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act.\20\
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\20\ Section 15B(b)(2)(C) states 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 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 would
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
In September 1997, the Board published a notice that proposed for
comment draft amendments to Rules G-38 and G-8 and revisions to Form G-
37/G-38 that would require dealers to disclose their consultants'
political contributions to officials of an issuer and payments to state
and local political parties.\21\ In response to its request for
comments, the Board received comment letters from Cox Newspapers, Piper
Jaffray Companies, Inc. (``Piper Jaffray''), and The Bond Market
Association (``TBMA'').
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\21\ ``Disclosure of Consultants' Political Contributions and
Payments,'' MSRB Reports, Vol. 17, No. 3 (October 1997) at 3-7.
---------------------------------------------------------------------------
1. Payments to State and Local Political Parties
TBMA and Piper Jaffray recommended that the draft amendments be
modified to make clear that only those contributions to state and local
political parties operating within the jurisdiction of the issuer which
is the subject of the Consultant Agreement must be reported. TBMA
stated that the reporting of all contributions to state and local
political parties by consultants (except for the $250 de minimis)
``would impose an unfair burden on all dealers employing consultants to
monitor and report on all contributions to state and local political
parties by independent third party market participants even though
there was no nexus or other reasonable relationship between those
political parties and the purpose of employing the consultant.'' Pipeer
Jaffray stated that requiring a dealer to ``monitor and report all
political contributions to state and local parties of a consultant and
their corporate PAC, even when there is no relationship between the
political party and the purpose of employing the consultant, is time
consuming.''
The Board determined to revise the draft amendments to limit the
political party contributions required to be reported to those made to
political parties of states and political subdivisions that operate
within the geographic area of the issuer with whom the consultant
communicates on behalf of the dealer.\22\ This is consistent with the
requirements for reporting contributions.
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\22\ The proposed rule change contains a de minimis exception
from the reporting of consultants' payments to political parties in
which such consultant is entitled to vote if the payments are not in
excess of $250 per political party, per year.
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2. Consultant's Business Address
Cox Newspaper suggested that Rule G-38 require disclosure of the
address and telephone number of the consultant or (when applicable) the
address and telephone number of the consultant's company. It noted that
such information would help in contacting consultants to ask questions
about connections between contributions and business and in checking
campaign finance reports. It also noted that this information helps to
avoid confusion with other people who have the same name as the
consultant. Finally, it noted that the Federal Election Commission
(``FEC'') regulations require the address of any contributor of $200 or
more as one of the items that must be reported by political committees.
The Board revised the draft amendments to Rule G-38 to require that
the consultant's business address be reported on Form G-37/G-38.\23\
This requirement is similar to the FEC regulations. Including the
address would be helpful for anyone trying to contact the consultant to
inquire about contributions or any other consultant information
contained on Form G-37/ G-38. The Board believes that requiring dealers
to include consultants' telephone numbers could lead to unnecessary
calls to the consultant; however, by requiring that the disclosure of
addresses for consultants, anyone wishing to call a consultant should
be able to obtain the telephone number.
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\23\ Rule G-8(a)(xviii) was also amended to require a dealer to
maintain a record of a consultant's business address.
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3. Additional Time for Reporting Consultants' Contributions and
Payments
TBMA and Piper Jaffray recommended that the draft amendments to
Rule G-8 be modified to allow for more time in which to report the
information received from consultants pursuant to Rule G-38. TBMA
stated that, ``[i]n order to meet the 30-day deadline, dealers would
have to impose a much earlier deadline on their consultants, which
would give consultants less time to collect the information and
transmit it to the dealers * * *. This lack of time would make it
extremely difficult, and perhaps impossible, for dealers to collect all
the required information for reporting in time allowed.'' TBM and Piper
Jaffray stated that it would be more appropriate to require consultant
contributions to be included in the report filed for the quarter
following the making of any political contributions. TBMA stated that
``[t]he additional 90 days would allow dealers to ensure that all of
the consultants have reported and that the filed G-37/T-38 forms are
completed properly.''
The Board understands why dealers would wish more time to report
their consultants' contributions and payments. However, the Board is
concerned that industry participants could view this delay of up to six
months in reports of consultant contributions and payments as a
weakening of the rule. Thus, the Board determined not to grant
additional time to report consultant contributions and payments.
4. Good Faith Defense
TBMA and Piper Jaffray stated that dealers should not be required
to guarantee the accuracy of the information they obtain from their
consultants, and TBMA stated that dealers should not ``be expected to
conduct any investigation into the accuracy or completeness of the
information provided to the.'' TBMA recommended that Rule G-38
``include language which will afford dealers confidence that they may
in good faith rely upon the information they receive from their
consultants in submitting their reports.''
The Board believes it is reasonable to allow dealers to rely in
good faith on their consultants' reports and that it would be almost
impossible for dealers to investigate for contributions made by their
consultants that were not reported. The amendments originally filed
with the Commission stated that a dealer will not violate Rule G-38 if
it fails to
[[Page 55332]]
receive from its consultant all required contribution and payment
information and thus, fails to report such information to the Board if
the dealer can demonstrate that it used reasonable efforts in
attempting to obtain the necessary information. The FEC has similar
requirements for reporting of contribution information by various
entities. The amendments originally filed with the Commission stated
that ``reasonable efforts'' would include having a dealer: (1) State in
the Consultant Agreement that Board rules require disclosure of
consultant contributions and payments, and (2) send quarterly reminders
to consultants of the deadline for their submissions to the dealer of
contribution and payment information.
In January 1999, the Commission staff recommended to Board staff
that the reasonable efforts provisions contain two additional
requirements: (1) The dealer must disclose in its quarterly filings any
consultant that does not provide a report of the information required
by the rule, and (2) the dealer must terminate the contract should the
consultant fail to provide such report by the next calendar quarter
after it was due, and the dealer must not make any further payments
pursuant to the Consultant Agreement. The Commission staff stated that
these additional requirements to the reasonable efforts provision
should ensure that all required information on contributions is
obtained from consultants. On April 19, 1999, the Board published a
notice for comment concerning the additional requirements for the
amendments pending at the Commission concerning the disclosure of
consultants' contributions.\24\ The Board received five comment letters
in response to its request for comments on these additional
requirements. Comment letters were received from the American Bankers
Association (``ABA''); First Kentucky Securities Corp. (``First
Kentucky''); State Treasurer, State of Washington (``Washington State
Treasurer''); TBMA; and Wells Fargo & Company (``Wells Fargo'')
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\24\ ``Additional Requirements for Pending Amendments on
Disclosure of Consultants' Contributions,'' MSRB Reports, Vol. 19,
No. 2 (April 1999) at 3-7.
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In general, none of the commenters offered support for the
additional requirements. The Washington State Treasurer stated that he
objects to the additional requirements ``as both unnecessary and
inappropriate.'' TBMA stated that the additional requirements
``represent excessive micromanagement of dealers' business.'' Specific
comments are summarized and discussed below.
1. De Minimus Exemption From Reporting
Wells Fargo asked that ``the Board enlarge the scope of the de
minimus contribution exemption contained in [r]ules G-37 and G-38.'' It
noted that a ``general de minimus exemption for all elections and the
elimination of the reporting requirements for both de minimus
contributions and no contributions would greatly ease the reporting
burden.'' In addition, Wells Fargo stated that ``[a] more limited
approach would be to expand the de minimus exemption to the state and/
or metropolitan area in which the person making the contribution works
or lives.''
The ABA also noted that ``given the contiguous state borders in
many metropolitan areas * * * and the geographic freedom provided by
the Internet, it is far more likely that individuals may wish to make
contributions outside of those jurisdictions in which they can vote.''
The ABA ``recommends that the de minimus exception of $250 per
candidate apply to all elections, rather just than to candidates for
whom an individual may vote'' because ``expanding the scope of the
exemption would go far toward eliminating the burden of the proposed
rule.''
Response: The de minimus exemption in the proposed amendments does
not require disclosure of certain contributions to issuer officials for
whom a consultant is entitled to vote. This exception is similar to
that in Rule G-37. The Commission addressed the issue of the de minimus
exemption and its scope in Rule G-37 in its order approving that
rule.\25\ The Commission noted that it
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\25\ Securities Exchange Act Release No. 33868 (April 7, 1994),
59 FR 17621 (April 13, 1994).
believes that the MSRB's determinations as to the amount of the de
minimus exemption and limiting its application to contributions to
officials for whom the municipal finance professional is entitled to
vote are appropriate and reasonable. As discussed, the proposal
provides specific guidelines to prevent ``pay to play''
contributions. The proposal provides an appropriate balance between
limiting ``pay to play'' practices and the ability of dealers and
their employees to demonstrate support for state and local
candidates. The proposal recognizes that certain contributions made
for legitimate political purposes present less risk of a conflict of
interest or the appearance of a conflict of interest. Although an
individual may have a legitimate interest in making contributions to
candidates for whom she is ineligible to vote, there is a greater
risk in such circumstances that the contribution is motivated by an
improper attempt to influence municipal officials. Thus, the
proposal enables municipal finance professionals to contribute $250
per election to candidates for whom they are entitled to vote
without triggering the proposal's business limitation. As discussed,
the proposal does not prevent dealers or their employees from
demonstrating support for local and state officials in other ways
including volunteer political campaign activity.\26\
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\26\ Id.
Also, the proposed rule change does not require a dealer to obtain
information about all political contributions made by its consultants.
A dealer must obtain information from its consultants about the
contributions made to issuer officials only if the consultant has had
direct or indirect communication with such issuer to obtain municipal
securities business on behalf of the dealer. The political party
payments required to be reported are limited to those made to political
parties of states and political subdivisions that operate within the
geographic area of the issuer with whom the consultant communicates on
behalf of the dealer (e.g., city, county and state parties). The date
that establishes the obligation for the collection of contribution
information is the date of the consultant's communication with the
issuer to obtain municipal securities business on behalf of the dealer.
2. Requirement To Terminate Consultant Agreement
The Washington State Treasurer stated that requiring dealers to
terminate their Consultant Agreements with consultants who fail to
provide information about their reportable political contributions ``is
not in the public's best interest, for it deprives municipal securities
dealers of any opportunity to exercise independent judgment.''
The ABA stated that ``it is unclear from the proposed language * *
* whether or not a dealer would be prohibited from paying a consultant
whose contract the dealer was required to terminate pursuant to [r]ule
G-38, for work that had already been performed under the contract.''
The ABA ``believes that the rule should make clear that even at
termination, a dealer may still avail itself of the `reasonable
efforts' defense if it pays a consultant for work that was completed
prior to the date of termination.'' The ABA further stated that
``[a]bsent such a clarification, the dealer could find itself liable
for breach of the Consultant Agreement with respect to work already
performed.''
[[Page 55333]]
TBMA states that ``it may be impossible to suspend all payments of
compensation to the consultant at the time of termination of the
contract--if, for example, the consultant has not billed for services
previously rendered, or there is a billing dispute that has not been
resolved.'' TBMA believes the ``prohibition should more appropriately
be limited to payment for services rendered after the date of
termination.''
Response: The Board feels strongly that Rule G-38 should require
the disclosure of consultants' contributions and dealers should be able
to avail themselves of a reasonable efforts defense if they wish to do
so. The provision relating to termination of the Consultant Agreement
with a consultant that does not provide the required information is a
pre-condition to invoking the reasonable efforts defense. A dealer that
does not terminate the Consultant Agreement in these instances does not
violate Rule G-38, but it does lose its ability to invoke the
reasonable efforts defense.
The Board believes that the issue of a prohibition on further
payments to a consultant at the time of termination of the Consultant
Agreement can be addressed by dealers including a specific provision in
their Consultant Agreements. This provision can indicate that, on the
date of termination of the Consultant Agreement by the dealer because
of the consultant's failure to report the required information, no
further payments will be provided by the dealer to the consultant,
including payments for services performed by the consultant prior to
the date of termination. In addition, to address any uncertainty in the
rule language about payments for prior services, the proposed rule
change would amend Rule G-38 to note specifically that the prohibition
on further payments at the time of termination of the Consultant
Agreement includes payments for services performed prior to the date of
termination. It is not clear what TBMA means by limiting payment for
services rendered after the date of termination because, presumably, a
consultant would not be performing services for which it would expect
to be paid after the Consultant Agreement has been terminated.
3. Consultant Activities Other Than Seeking Municipal Securities
Business
The ABA stated that ``it is likely that agreements with consultants
may cover activities in addition to municipal securities consulting''
and that ``[i]n such instances, the requirement to terminate should
apply only to that portion of the contract subject to [r]ule G-38.''
Response: Rule G-38(b) requires a dealer that uses a consultant to
have a written Consultant Agreement. The Consultant Agreement, pursuant
to Board rules, addresses a consultant's activities on behalf of a
dealer in which the consultant is used to obtain or retain municipal
securities business. If a Consultant Agreement includes other
activities unrelated to municipal securities activities pursuant to
Rule G-38, the requirement to terminate the Consultant Agreement would
apply only to the activities covered by Rule G-38. If a dealer has only
one contract with a consultant, presumably the dealer could demonstrate
to an enforcement agency that, depending upon the facts and
circumstances, terminating the consultant's Rule G-38 activities and
ceasing payments with respect to such Rule G-38 activities, while the
consultant continues other consulting activities and receives payments
from the dealer for such activities, would meet the pre-conditions for
invoking the reasonable efforts defense. A dealer may wish to consider
having a separate contract or contracts with a consultant for these
additional activities in addition to the Consultant Agreement that
conforms to the requirements of Rule G-38.
4. Participation in the Political Process
Wells Fargo stated that it is ``very concerned about the chilling
effect that the adoption of the proposed rule will have on
participation in the political process.''
Response: The proposed rule change requires dealers to record and
report information about certain political contributions and payments
to state and local political parties received from their consultants.
The proposed rule change does not prohibit political contributions or
payments to political parties; therefore, there should be no chilling
effect on participation in the political process.
5. Reporting
Wells Fargo stated that it ``is concerned about the burden that the
proposed reporting requirements will impose.'' It noted that the
``broad definition of `consultant' in the [r]ule may subject bankers
who provide referrals for municipal securities underwriting business to
the reporting and disclosure rules.'' The ABA found that ``the proposed
requirements to monitor the political contributions of consultants
through quarterly reports to the Board and quarterly reminders to non-
complaint consultants will impose significant regulatory burdens on
financial institutions operating nationwide that rely on cross-selling
of affiliates' products as a significant part of their marketing
strategy.''
Response: Rule G-38 has always required that dealers record and
report certain information about their consultants every quarter, the
amendments add additional items of information that must be recorded
and reported. While the additional information may be an added burden
on dealers, the Board believes it is important that dealers obtain and
report the information so that consultants' political contributions can
be reviewed in order to determine whether there are issues that should
be addressed, possibly through future Board rulemaking.
The ABA mentioned the ``regulatory burden'' of dealers sending
``quarterly reminders to non-compliant consultants.'' [emphasis added]
One of the requirements of the reasonable efforts provision for dealers
that wish to avail themselves of such a defense is that dealers send
quarterly reminders to their consultants of the deadline for their
submissions to the dealer of their reportable contribution information;
there is no reference to non-compliant consultants in this regard.
6. Recordkeeping
First Kentucky stated that the amendment to Rule G-8(a)(xviii)(H),
which requires dealers to maintain records indicating, if applicable,
that a consultant made no reportable political contributions or
political party payments, is unnecessary and is another opportunity for
the enforcement agencies to cite dealers for improper record retention.
Wells Fargo stated that the requirement for dealers to report when no
contributions have been made by consultants will be burdensome.
Response: The amendments in the original filing required dealers to
receive from their consultants reports on any reportable contributions,
but the amendments did not contain a requirement for dealers to receive
reports if no such contributions were made. To establish a complete
record of the information being reported by consultants, Amendment No.
1 revises the amendments in the original filing to require dealers to
receive reports every quarter from their consultants listing all
reportable contributions or stating that the consultants made no
reportable contributions, as appropriate. A dealer would then indicate
the contributions reported or that a consultant had no contributions to
report, as appropriate, on its Form G-37/G-38 for the
[[Page 55334]]
applicable quarter. The proposed rule change requires dealers to
disclose if they did not receive a report from a consultant during a
particular quarter. Thus, if a consultant does not submit a report to
the dealer for a particular quarter, the dealer must report this fact
on its Form G-37/G-38.
For recordkeeping purposes, the proposed amendments to Rule G-8
establish a complete record of the reports submitted by consultants.
These amendments require a dealer to maintain: (1) Records of each
reportable political contribution; (2) records of each reportable
political party payment; (3) records indicating, if applicable, that a
consultant made no reportable political contributions or no reportable
political party payments; and (4) a statement, if applicable, that a
consultant failed to provide any report of information to the dealer
concerning reportable political contributions or reportable political
party payments.
Although some dealers may believe the requirements to report and
maintain records indicating that a consultant made no reportable
political contributions would be burdensome, such reports and records
provide a complete record of a consultant's contributions. If it should
be determined later that a consultant did in fact make a reportable
contribution after reporting that no reportable contributions were
made, the dealer will have a record to demonstrate that the consultant
hid the contribution information from the dealer.
7. List of Consultants That Have Been Subject to Termination
TBMA stated that ``a dealer will have no way to knowing whether the
consultant it uses has complied with similar obligations to other
dealers in the past'' and it suggested that the Board ``could remedy
this situation by posting on its website a list of consultants that
have been subject to termination as a result of their failure to comply
with these disclosure provisions.'' TMBA noted that ``[t]his would also
serve to create a strong disincentive to the consultant to disregard
its contractual obligations in this manner.''
Response: The Board posts on its web site the Forms G-37/G-38 it
receives. The porposed amendment to Rule G-38 include a requirement for
a dealer wishing to rely on the reasonable efforts provision to
indicate on its Form G-37/G-38 the reason for the date of termination
of the Consultant Agreement in thos instances in which a Consultant
Agreement has been terminated because the consultant did not provide
the required informaiton concerning reportable political contributions
and political party payments. Thus, information about Consultant
Agreements terminated for failure to provide the required information
will be available for review on the Board's web site. In addition, if a
dealer is concerned about whether a potential consultant has provided
the required informaiton in the past to other dealers, the dealer can
ask the consultant to address the issue and/or the issue can be
addressed in the Consultant Agreement.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
The Board has requested that the Commission delay the effectiveness
of the proposed rule change until April 1, 2000. Within 35 days of the
date of publication of this notice in the Federal Register of 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 appropriated 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 people are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. People making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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 the Board's principal offices.
All submissions should refer to File No. SR-MSRB-98-08 and should be
submitted by November 2, 1999.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Johathan G. Katz,
Secretary.
[FR Doc. 99-26524 Filed 10-8-99; 8:45 am]
BILLING CODE 8010-01-M
