[Federal Register Volume 60, Number 233 (Tuesday, December 5, 1995)]
[Notices]
[Pages 62274-62284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29513]
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[[Page 62275]]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36522; File No. SR-MSRB-95-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to
Consultants
November 28, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on
September 28, 1995,\1\ the Municipal Securities Rulemaking Board
(MSRB'' or ``Board'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II
and III below, which Items have been prepared by the MSRB. The Board
has requested that the Commission delay the effective date of the
proposed rule change until sixty (60) days after the Commission's
approval thereof. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
\1\ On November 15, 1995, the MSRB filed Amendment No. 1 with
the Commission. Amendment No. 1 was a minor technical amendment, the
text of which may be examined in the Commission's Public Reference
Room, See Letter from Jill C. Finder, Assistant General Counsel,
MSRB, to Ethan D. Corey, Senior Counsel, Division of Market
Regulation, Commission, dated November 15, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Board proposes to amend rules G-8 \2\ and G-9,\3\ on
recordkeeping and record retention, rule G-27,\4\ on political
contributions and prohibitions on municipal securities business, and
add a new rule G-38 regarding consultants. The Board also proposes to
amend its Form G-37, and redesignate it as Form G-37/G-38.
\2\ MSRB Manual, General Rules, G-8 (CCH) para. 3536.
\3\ MSRB Manual, General Rules, G-9 (CCH) para. 3541.
\4\ MSRB Manual, General Rules, G-37 (CCH) para. 3681.
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Below is the text of the proposed rule change. Proposed new
language is italicized; proposed deletions are in brackets.
Rule G-8. Books and Records To Be Made by Brokers, Dealers and
Municipal Securities Dealers
(a) Description of Books and Records Required to be Made.
* * * * *
(xvi) Records Concerning Political Contributions and Prohibitions
on Municipal Securities Business Pursuant to Rule G-37, Records
reflecting: * * *
(D) a listing of the issuers with which the broker, dealer or
municipal securities dealer has engaged in municipal securities
business, along with the type of municipal securities business engaged
in, during the current year and separate listings for each of the
previous two calendar years[. Where applicable, a listing of the name,
company, role and compensation arrangement of any person employed by
the broker, dealer or municipal securities dealer to obtain or detain
municipal securities business with such issuers also shall be made]; *
* *
(xvii) Records Concerning Consultants Pursuant to Rule G-38. Each
broker, dealer and municipal securities dealer shall maintain: (i) A
listing of the name, company, role and compensation arrangement of each
consultant; (ii) a copy of each Consultant Agreement referred to in
rule G-38(b); (iii) a listing of the compensation paid in connection
with each such Consultant Agreement; (iv) where applicable, a listing
of the municipal securities business obtained or retained through the
activities of each consultant; (v) a listing of issuers and a record of
disclosures made to such issuers, pursuant to rule G-38(c), concerning
each consultant used by the broker, dealer or municipal securities
dealer to obtain or retain municipal securities business with each such
issuer; and (vi) the date of termination of any consultant arrangement
* * * * *
(f) Compliance with Rule 17a-3. Brokers, dealers and municipal
securities dealers other than bank dealers which are in compliance with
rule 17a-3 of the Commission will be deemed to be in compliance with
the requirements of this rule, provided that the information required
by subparagraph (a)(iv)(D) of this rule as it relates to uncompleted
transactions involving customers; paragraph (a)(viii); paragraph
(a)(xi); paragraph (a)(xii); paragraph (a)(xiii); paragraph (a)(xiv);
paragraph (a)(xv); paragraph (a)(xvi); [and] paragraph (a)(xvii); and
paragraph (a)(xviii) shall in any event be maintained.
Rule G-9. Preservation of Records
(a) Records to be Preserved for Six Years. Every broker, dealer and
municipal securities dealer shall preserve the following records for a
period of not less than six years. * * *
(x) the records required to be maintained pursuant to rule G-
8(a)(xviii).
* * * * *
Rule G-37. Political Contributions and Prohibitions on Municipal
Securities Business
* * * * *
(e)(i) Each broker, dealer or municipal securities dealer shall
submit to the Board, by certified or registered mail, or some other
equally prompt means that provides a record of sending, and the Board
shall make public, reports on contributions to officials of issuers and
on payments to political parties of states and political subdivisions
that are required to be recorded pursuant to rule G-8(a)(xvi). Such
reports shall include information concerning the amount of
contributions to officials of issuers and payments to political parties
of states and political subdivisions and an indication of the
contributor category of each contribution or payment made by: * * *
Such reports also shall include information on municipal securities
business engaged in and certain other information specified in this
section (e), as well as other identifying information as may be
determined by the Board from time to time [in accordance with Board
rule G-37 filing procedures].
(ii) Two copies of the [R]reports referred to in paragraph (i) of
this section (e) must be submitted to the Board on Form G-37/G-38 [in
accordance with Board rule G-37 filing procedures, quarterly with due
dates determined by the Board,] within thirty (30) calendar days after
the end of each calendar quarter (these dates correspond to January 31,
April 30, July 31 and October 31), and must include, in the prescribed
format, by state, the following information on contributions to each
official of an issuer and payments to each political party of a state
or political subdivision made and municipal securities business engaged
in during the reporting period: (A) name and title (including any city/
county/state or political subdivision) of each official of an issuer
and political party receiving contributions or payments; (B) [total
number and dollar amount of contributions or payments made by]
contribution or payment amount made and the contributor category of the
persons and entities described in paragraph (i) of this section (e);
and (C) such other identifying information required by Form G-37/G-38.
Such reports also must include a list of issuers with which the broker,
dealer or municipal securities dealer has engaged in municipal
securities business, along with the type of municipal securities
business [and the name, company, role and compensation arrangement of
any person, other than a municipal finance
[[Page 62276]]
professional, employed by the broker, dealer or municipal securities
dealer to obtain or retain municipal securities business with such
issuers].
(f) The Board will accept additional information related to
contributions made to officials of issuers and payments to political
parties of states and political subdivisions voluntarily submitted by
brokers, dealers, or municipal securities dealers or others provided
that such information is submitted in accordance with [Board rule G-37
filing procedures] section (e) of this rule.
* * * * *
[Rule G-37 Filing Procedures. Each dealer is required to file two
copies of Form G-37. Each dealer is required to file Form G-37 within
thirty (30) calendar days after the end of each calendar quarter.
(These dates correspond to January 31, April 30, July 31, and October
31).]
Rule G-38. Consultants
(a) Definitions.
(i) The term ``consultant'' means any person used by a broker,
dealer or municipal securities dealer to obtain or retain municipal
securities business through direct or indirect communication by such
person with an issuer on behalf of such broker, dealer or municipal
securities dealer where the communication is undertaken by such person
in exchange for, or with the understanding of receiving, payment from
the broker, dealer or municipal securities dealer or any other person;
provided, however, that the following persons shall not be considered
consultants for purposes of this rule: (A) a municipal finance
professional of the broker, dealer or municipal securities dealer; and
(B) any person whose sole basis of compensation from the broker, dealer
or municipal securities dealer is the actual provision of legal,
accounting or engineering advice, services or assistance in connection
with the municipal securities business that the broker, dealer or
municipal securities dealer is seeking to obtain or retain.
(ii) The term ``issuer'' shall have the same meaning as in rule G-
37(g)(ii).
(iii) The term ``municipal finance professional'' shall have the
same meaning as in rule G-37(g)(iv).
(iv) The term ``municipal securities business'' shall have the same
meaning as in rule G-37(g)(vii).
(v) The term ``payment'' shall have the same meaning as in rule G-
37(g)(viii).
(b) Written Agreement. Each broker, dealer or municipal securities
dealer that uses a consultant shall evidence the consulting arrangement
by a writing setting forth, at a minimum, the name, company, role and
compensation arrangement of each such consultant (``Consultant
Agreement''). Such Consultant Agreement must be entered into before the
consultant engages in any direct or indirect communication with an
issuer on behalf of the broker, dealer or municipal securities dealer.
(c) 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, role and compensation arrangement of any consultant
used, directly or indirectly, by the broker, dealer or municipal
securities dealer to attempt to obtain or retain municipal securities
business with each such issuer. Such information shall be submitted to
the issuer prior to the selection of any broker, dealer or municipal
securities dealer in connection with such municipal securities
business.
(d) Disclosure to Board. Each broker, dealer or municipal
securities dealer shall submit to the Board by certified or registered
mail, or some other equally prompt means that provides a record of
sending, and the Board shall make public, reports of all consultants
used by the broker, dealer or municipal securities dealer during each
calendar quarter. Two copies of the reports must be submitted to the
Board on Form G-37/G-38 within thirty (30) calendar days after the end
of each calendar quarter (these dates correspond to January 31, April
30, July 31, and October 31). Such reports shall include, for each
consultant, in the prescribed format, the consultant's name, company,
role and compensation arrangement. In addition, such reports shall
indicate the dollar amount of payments made to each consultant during
the report period and, if any such payments are related to the
consultant's efforts on behalf of the broker, dealer or municipal
securities dealer which resulted in particular municipal securities
business, then that business and the related dollar amount of the
payment must be separately identified.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Board included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Board has prepared summaries, set forth in Sections
(A), (B), and (C) below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Over the last few years, the Board has been concerned about abuses
associated with the awarding of municipal securities business. Rule G-
37, which became effective in April 1994, prohibits a dealer from
engaging in municipal securities business with an issuer within two
years after any contribution to an official of such issuer made by the
dealer, any municipal finance professional associated with the dealer,
or any political action committee controlled by the dealer or any
municipal finance professional.\5\ The rule also prohibits a dealer
from doing anything indirectly which would result in a violation of the
rule if done directly by the dealer. For example, a violation would
result if a dealer engages in municipal securities business with an
issuer after directing third parties (such as consultants) to make
contributions to that issuer. In addition to recording and disclosing
political contributions, rule G-37 currently requires dealers to record
and disclose on Form G-37 those issuers with which the dealer has
engaged in municipal securities business and, where applicable, the
name, company, role and compensation arrangement of any person employed
by the dealer to obtain or retain business with such issuers.
\5\ Rule G-37(b) contains de minimis exception for certain
contributions made by municipal finance professionals.
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Rule G-20, on gifts and gratuities, prohibits dealers from,
directly or indirectly, giving or permitting to be given any thing or
service of value in excess of $100 per year to any person, other than
an employee or partner of the dealer, in relation to the municipal
securities activities of the person's employer. All gifts given by the
dealer and its associated persons, or by consultants at the direction
of the dealer, are used to compute the $100 limitation and this
limitation applies to gifts and gratuities to customers, individuals
associated with issuers, and employees of other dealers.\6\
\6\ Rule G-20(b) exempts ``normal business dealings'' from the
$100 annual limit. These payments are defined as occasional gifts of
meals or tickets to theatrical, sporting, and other entertainments,
as well as the sponsoring of legitimate business functions that are
recognized by the IRS as deductible business expenses, and gifts of
reminder advertising. However, the rule also provides that such
gifts can not be so frequent or so expensive as to raise a
suggestion of unethical conduct.
[[Page 62277]]
The Board believes that rules G-37 and G-20, along with rule G-17,
on fair dealing,\7\ set appropriate standards for dealer conduct in the
municipal securities industry. However, the Board is concerned about
dealers' increasing use of consultants to obtain or retain municipal
securities business. While the Board believes that in many instances
the use of consultants is appropriate, it also believes that, in a
number of instances, the use of consultants may be in response to
limitations placed on dealer activities by rule G-37 and rule G-20.\8\
While both of these rules prohibit dealers from doing indirectly what
they are precluded from doing directly, indirect activities often are
difficult to prove. The Board recognizes that vigorous enforcement of
its rules, as well as the antifraud provisions of the federal
securities laws, will be effective in uncovering improper conduct, as
well as deterring further violations, in connection with municipal
securities business. Notwithstanding such efforts, or the current rule
G-37 requirement that dealers disclose certain information about
consultant arrangements, the Board believes that additional information
about such arrangements should be made available to issuers and the
public. Currently, the limited amount of information regarding
consulting arrangements and the role of consultants in helping dealers
obtain or retain municipal securities business makes it difficult to
determine the extent to which payments to consultants influence the
issuer's selection process in connection with municipal securities
business, as well as the extent to which such payments increase the
cost of bringing municipal securities issues to market. The Board
believes that disclosure of consulting arrangements (even those that
would not result in any rule violations) is necessary. Furthermore, the
Board believes that disclosure requirements regarding consultants
should be embodied in a separate rule in order to highlight the
importance of this information and to facilitate its disclosure to, and
accessibility by, the municipal securities market and the public.
Accordingly, the Board is proposing new rule G-38, on consultants. At
this time, the board is not proposing any substantive restrictions on
arrangements between dealers and consultants. If, at a later date, the
Board learns of specific dealer practices regarding the use of
consultants that it believes should be addressed, then the Board may
proceed with additional rulemaking in this area.
\7\ Rule G-17 provides that, in the conduct of its municipal
securities business, each broker, dealer, and municipal securities
dealer shall deal fairly with all persons and shall not engage in
any deceptive, dishonest, or unfair practice.
\8\ For example, the Commission has charged that kickbacks and
conflicts of interest have occurred in connection with municipal
securities offerings. In one instance, the Commission alleged that
dealer personnel paid a large kickback to the issuer's financial
advisor and inflated the underwriters' discount to fund the
kickback. See SEC Litigation Release No. 14421 (February 23, 1995)
regarding SEC v. Nicholas A. Rudi, Joseph C. Salema, Public Capital
Advisors, Inc. (formerly known as Consolidated Financial Management,
Inc.), George L. Tuttle, Jr. and Alexander S. Williams. In another
instance, the SEC alleged that dealer personnel provided loans and
direct payments to an employee of an issuer that had an important
role in selecting the underwriter. See SEC Litigation Release No.
14397 (January 23, 1995) regarding SEC v. Terry D. Busbee and
Preston C. Bynum.
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Background
In April 1995, the Board published for comment draft rule G-38
(``April 1995 Draft Rule'').\9\ The April 1995 Draft Rule would have
required dealers to have written agreements with consultants and to
disclose such arrangements to issuers and to the public through
disclosure to the Board. It defined the term ``consultant'' very
broadly, and included, among others, persons that acted as ``finders''
for municipal securities business or that lobbied state and local
government officials. The term also included persons who engaged in
legal, accounting or financial advisory services if such persons were
engaged, even in part, because they could assist a dealer in efforts to
obtain or retain municipal securities business with an issuer, and
included persons engaged by a dealer at the request or direction of the
issuer (e.g., underwriter's counsel).
\9\ MSRB Reports, Vol. 15, No. 1 (April 1995) at 3-10.
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While most of the commenters responding to the April 1995 Draft
Rule supported the Board's goal of making additional information on
consultants available to the market, many expressed concern that the
definition of consultant was too broad and included a number of
categories of persons who did not perform ``traditional'' consulting
roles or services.\10\ The Board carefully considered these and other
concerns and suggestions expressed by the commenters, and adopted the
proposed rule change. Proposed rule G-38 differs in certain respects
from the April 1995 Draft Rule, particularly with regard to the
definition of consultant. By making such changes, the Board believes
that the proposed rule effectively addresses concerns raised by the
commenters without sacrificing the Board's goal of making information
about consultants available to issuers and the public.
\10\ A summary of these comments is discussed infra Section
II.C.
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Summary of Proposed Rule G-38
Definition of Consultant
Proposed rule G-38 defines consultant as any person used by a
dealer to obtain or retain municipal securities business through direct
or indirect communication by such person with an issuer on the dealer's
behalf where the communication is undertaken by such person in exchange
for, or with the understanding of receiving, payment from the dealer or
any other person.\11\ The definition specifically excludes ``municipal
finance professionals,'' as that term is defined in rule G-37(g)(iv),
because such individuals are covered by the requirements of rule G-37.
The definition also excludes any person whose sold basis of
compensation from the dealer is the actual provision of legal advice,
accounting or engineering assistance in connection with the municipal
securities business that the dealer is seeking to obtain or retain. The
exclusion would apply, for example, to a lawyer retained to conduct a
legal analysis on a particular transaction contemplated by the dealer,
or to review local regulations; an accountant retained to conduct a tax
analysis or to scrutinize financial reports; or an engineer retained to
perform a technical review or feasibility study. The exemption is
intended to ensure that professionals who are engaged by the dealer
solely to perform substantive work in connection with municipal
securities business are not brought within the definition of consultant
as long as their compensation is in consideration of only those
professional services actually
[[Page 62278]]
provided in connection with such municipal securities business.
However, any attorney or other professional used by the dealer as a
``finder'' for municipal securities business would be considered a
consultant under the proposed rule.
\11\ ``Person'' is defined in Section 3(a)(9) of the Securities
Exchange Act of 1934 as ``a natural person, company, government, or
political subdivision, agency, or instrumentality of a government.''
``Municipal securities business'' has the same meaning as in
rule G-37(g)(vii), i.e., (A) the purchase of a primary offering (as
defined in rule A-13(d)) of municipal securities from the issuer on
other than a competitive bid basis (i.e., negotiated underwriting);
(B) the offer or sale of a primary offering of municipal securities
on behalf of any issuer (i.e., private placement); (C) the provision
of financial advisory or consultant services to or on behalf of an
issuer with respect to a primary offering of municipal securities on
other than a competitive basis; or (D) the provision of remarketing
agent services to or on behalf of an issuer with respect to a
primary offering of municipal securities on other than a competitive
bid basis.
``Payment'' has the same meaning as in rule G-37(g)(viii), i.e.,
any gift, subscription, loan, advance, or deposit of money or
anything of value.
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Written Agreement
Proposed rule G-38 requires dealers who use consultants to evidence
the consulting arrangement in writing (referred to as a ``Consultant
Agreement''), and that, at a minimum, the writing must include the
name, company, role and compensation arrangement of each consultant
used by the dealer. Such written agreements must be entered into before
the consultant engages in any direct or indirect communication with an
issuer on the dealer's behalf.
Disclosure to Issuers
Proposed rule G-38 requires each dealer to disclose to an issuer
with which it is engaging or seeking to engage in municipal securities
business, in writing, information on consulting arrangements relating
to that issuer. The written disclosure must include, at a minimum, the
name, company, role and compensation arrangements with the consultant
or consultants. Dealers are required to make such written disclosures
prior to the issuer's selection of any dealer in connection with the
municipal securities business sought, regardless of whether the dealer
making the disclosure ultimately is the one to obtain or retain that
business. Thus, while dealers have an obligation to disclose their
consulting arrangements to all issuers from which they are seeking
municipal securities business, they have more leeway in the timing of
their disclosures as long as the disclosure is made before the issuer
selects a dealer for the municipal securities business sought.
Disclosure to the Board
Proposed rule G-38 requires dealers to submit to the Board, on a
quarterly basis, reports of all consultants used by the dealer. For
each consultant, dealers must report, in the prescribed format, the
consultant's name, company, role and compensation arrangement, as well
as the dollar amount of any payment made to the consultant during the
quarterly reporting period. If any payment made during the reporting
period is related to the consultant's efforts on the dealer's behalf
which resulted in particular municipal securities business, whether the
municipal securities business was completed during that or a prior
reporting period, then the dealer must separately identify that
business and the dollar amount of the payment. In addition, as long as
the dealer continues to use the consultant to obtain or retain
municipal securities business (i.e., has a continuing arrangement with
the consultant), the dealer must report information concerning such
consultant every quarter, whether or not compensation is paid to the
consultant during the reporting period. The Board believes that the
reporting of these continuing consulting arrangements each quarter will
assist enforcement agencies and the public in their review of such
arrangements.
For ease of compliance and reporting, the Board has determined to
delete the current reporting requirements regarding consultants from
rule G-37. It also has determined to merge the reporting requirements
for both rules into a single form--Form G-37/G-38. Dealers must submit
two copies of such reports on proposed Form G-37/G-38.\12\ The
quarterly due dates are the same as the due dates currently required
under the rule G-37 (i.e., within 30 calendar days after the end of
each calendar quarter, which corresponds to each January 31, April 30,
July 31, and October 31). Finally, consistent with current rule G-37,
dealers are required to submit these reports to the Board by certified
or registered mail, or some other equally prompt means that provides a
record of sending.\13\ The Board will then make these documents
available to the public for inspection and photocopying at its Public
Access Facility in Alexandria, Virginia, and for review by agencies
charged with enforcement of Board rules.
\12\ Proposed Form G-37/G-38 is included in Exhibit 3 to the
proposed rule change, along with instructions for filing the Form.
In addition to the new rule G-38 consultant reporting requirements,
Form G-37/G-38 includes revisions to the rule G-37 political
contribution reporting requirements. Such revisions include, for
each contribution, a required notation of the category of the
contributor (e.g., municipal finance professional or executive
officer) and the amount of the contribution, as well as a separate
section for the reporting of ``payments'' to political parties
distinct from ``contributions'' to issuer officials.
\13\ For ease of compliance, the Board has included the Rule G-
37 Filing Procedures within the language of rule G-37, and has
included the Rule G-38 Filing Procedures within the language of new
rule G-38.
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Recordkeeping Requirements
To facilitate compliance with, and enforcement of, proposed rule G-
38, the Board also proposes to amend existing rules G-8 and G-9,
concerning recordkeeping and record retention, respectively. The
proposed amendments to rule G-8 require dealers to maintain: (i) A
listing of the name, company, role and compensation arrangement of each
consultant; (ii) a copy of each Consultant Agreement; (iii) a listing
of the compensation paid in connection with each Consultant Agreement;
(iv) where applicable, a listing of the municipal securities business
obtained or retained through the activities of each consultant; (v) a
listing of the issuers and a record of disclosures made to such issuers
concerning each consultant used by the dealer to obtain or retain
municipal securities business with each such issuer; and (vi) the date
of termination of any consultant arrangement. The amendment to rule G-9
requires dealers to maintain these records for a six-year period.
The Board believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act, which provides that the Board's rules
shall:
Be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in
regulating, clearing, setting, processing information with respect
to, and facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market
in municipal securities, and, in general, to protect investors and
the public interest.
The proposed rule change serves a number of the Board's enumerated
purposes, including promoting just and equitable principles of trade,
by ensuring that dealers compete for, and are awarded, municipal
securities business on the basis of merit, and not political or
financial influence. Such healthy competition will act to lower
artificial barriers to those dealers not willing or able to hire
consultants to obtain or retain municipal securities business, thereby
maintaining the integrity of the municipal securities market, as well
as the public trust and confidence that is essential to the long-term
health and liquidity of the market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Board does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act since the proposed rule change
would apply equally to all brokers, dealers and municipal securities
dealers. The Board believes that the proposed rule change will improve
competition in the awarding of municipal securities business by
ensuring that dealers compete for, and are awarded, such business on
the basis of merit, not political or financial influence.
[[Page 62279]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
The Board received 17 comment letters in response to its April 1995
Draft Rule from the following commenters.\14\
\14\ MSRB Reports, Vol. 15, No. 1 (April 1995) at 3-10. Copies
of the Notice Requesting Comment and the comment letters received
are included in Exhibit 2.
A.G. Edwards & Sons, Inc.
American Government Financial Services Company
American Institute of Certified Public Accounts
Artemis Capital Group
Broward County, FL Finance and Administrative Services Dept.
Chapman and Cutler
Chemical Securities, Inc.
Gilmore & Bell
Goldman Sachs & Co.
Government Finance Officers Association
JP Morgan Securities Inc.
Morgan Stanley & Co., Inc.
National Association of Bond Lawyers
Public Securities Association
Seattle-Northwest Securities Corporation
Smith Barney Inc.
Willkie Farr & Gallagher
Summary and Discussion of Comments
The April 1995 Draft Rule would have required dealers (1) to have
written agreements with persons who are used by a dealer for the
purpose of seeking to obtain or retain municipal securities business,
and (2) to disclose such arrangements with consultants directly to
issuers and to the public through disclosure to the Board.
Necessity of a New Rule
Certain commenters believe that the April 1995 Draft Rule is
unnecessary and should not be adopted.\15\ The majority of commenters
believe that the Board's goals in proposing the rule can more readily
be accomplished by amending existing rule G-37, on political
contributions and prohibitions on municipal securities business.\16\
One commenter states that ``duplicative regulation should be avoided''
noting that rules G-37 and G-20 already address the use of consultants
by dealers for impermissible purposes.\17\ This commenter states that:
\15\ Gilmore & Bell; Goldman Sachs.
\16\ A.G. Edwards; Artemis; Broward County; Chemical; GFOA;
Gilmore & Bell; JP Morgan; PSA; and Smith Barney.
\17\ Gilmore & Bell.
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To the extent the market sees Rule G-38 as a rule without a
needed purpose and as increasing compliance costs without any
corresponding benefit, it will erode overall market support for the
more important efforts to reform and improve the municipal
securities markets * * *. Changes are occurring rapidly in the
regulation of municipal securities, and there may be considerable
merit in allowing the market to respond to Rule G-37, the [SEC's]
1994 Interpretive Release and similar efforts to see if they are
effective in limiting influence peddling in the industry before
additional rules are adopted.\18\
\18\ Id.
Another commenter believes that in attempting to address concerns
about the possible circumvention of rules G-37 and G-20, the April 1995
Draft Rule ``is overly broad, mandating disclosure about a host of
professionals whose activities and terms of engagement raise no
legitimate specter of `pay-to-play' abuses and often constitute
proprietary and confidential business arrangements.'' \19\
\19\ Goldman Sachs.
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One commenter ``strongly believes that proposed rule G-38 is not
necessary'' and argues that the rule ``would seriously impair and
discourage the traditional business relationships among professionals
in the industry which have made the municipal securities market
uniquely efficient in raising capital for states and localities.'' \20\
This commenter believes that ``[i]n lieu of an additional and
duplicative regulatory reporting regime'' the Board should amend rule
G-37 to ``target those consulting relationships that are used for the
exclusive purpose of retaining or obtaining municipal securities
business.'' \21\ In this regard, the commenter recommends that the
Board provide a focused definition of consultant, as more fully
discussed below.
\20\ PSA.
\21\ Id.
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One of the commenters states that, pursuant to the requirements of
rule G-37, basic information is filed with the MSRB about consultants
with whom a dealer has a business relationship.\22\ Thus, this
commenter questions the need for the April 1995 Draft Rule, ``which
will impose significant new compliance burdens that will increase
issuer borrower costs.'' \23\ The commenter suggests that the Board
review rule G-37 and Form G-37 ``to determine whether they might be
modified to capture additional information.'' \24\ Instead of a new
rule, the commenter favors vigorous enforcement of existing Board rules
for deterring improper conduct in the municipal securities industry.
\22\ GFOA.
\23\ Id.
\24\ Id.
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One commenter believes that the April 1995 Draft Rule will create
confusion with existing disclosure requirements under rule G-37, and
that any required disclosures relating to consultant activity should be
embodied in the same rule.\25\ Thus, this commenter suggests amending
rule G-37 or, in the alternative, removing the consultant disclosure
requirements currently under rule G-37 and incorporating them into a
modified version of the April 1995 Draft Rule.
\25\ A.G. Edwards.
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Board Response
In response to commenters' concerns, the Board has modified the
April 1995 Draft Rule, particularly with regard to the definition of
consultant, as more fully discussed below. In addition, the Board is
proposing to delete from rule G-37 the current disclosure requirements
regarding consultants and to include all such requirements under new
rule G-38. The Board also is proposing to replace Form G-37 with a new
Form G-37/G-38, to consolidate dealers' reporting requirements under
both rules G-37 and G-38. The Board believes that, by modifying the
definition of consultant and including all disclosure requirements
within a single rule, the proposed rule effectively addresses concerns
raised by the commenters, including those relating to the need for a
new rule, without sacrificing the Board's goal of making information
about consultants available to issuers and the public in order to
ensure the integrity of the municipal securities market.
Definition of ``Consultant''
The April 1995 Draft Rule defined ``consultant'' as any person,
other than an employee or partner of a dealer, who is used by a dealer
for the purpose of seeking to obtain or retain municipal securities
business, including any person performing services for such dealer at
the request or direction of an issuer. Fifteen of the 17 commenters
expressed concern over this definition.\26\ In general, the commenters
are opposed to extending the definition to the following:
\26\ A.G. Edwards; AICPA; Artemis; Broward County; Chapman &
Cutler; Chemical; GFOA; Gilmore & Bell; Goldman Sachs; JP Morgan;
Morgan Stanley; NABL; PSA; Seattle-Northwest; and Smith Barney.
Professional service providers who are not actively engaged in
assisting the underwriter to obtain or retain municipal securities
business (e.g., an accounting firm retained to conduct a tax
analysis; a certified public
[[Page 62280]]
accountant retained to provide audit and attestation services; and a
law firm retained to conduct a legal analysis on a particular
transaction contemplated).\27\
\27\ A.G. Edwards; PSA. PSA does not believe that ``persons or
firms which offer other professional services commonly employed in a
municipal securities transaction should be treated as consultants
merely because a . . . dealer engages in conversations or
discussions with such persons or firms about concepts or ideas which
might be offered to an issuer to achieve or encourage a particular
financing.'' PSA argues that the definition ``is so broad as to
interfere with traditional and appropriate methods of developing new
business opportunities.''
---------------------------------------------------------------------------
Professionals designated by an issuer to provide services to the
dealer (e.g., underwriter's counsel).\28\
\28\ Artemis; GFOA; Gilmore & Bell; JP Morgan; Morgan Stanley;
and NABL. NABL believes that the rule ``should make clear that
providers of substantive professional advice and services are not
`consultants' . . . and that a law firm which is selected as counsel
to the underwriter, even if `designated' as such by the issuer, does
not become a `consultant' to the underwriter. . . .'' The GFOA
states that ``there are many instances where issuers make
designations using merit-based criteria and it would not be
appropriate to assume that such `designated' persons should be
treated as if they were used by a dealer to obtain or retain
business . . .'' and that the April 1995 Draft Rule should
distinguish between ``merit-based and nonmerit-based designations.''
Broward County shares this position. Gilmore & Bell is ``not
comfortable with the entire concept of calling issuer-designated
persons `consultants' to the dealer. . . .'' They believe that the
``whole concept of a consultant under the Rule is someone who
assists the dealer in obtaining or retaining municipal securities
business. In no sense is an issuer-designated representative of the
dealer a person who helped the dealer get the business; rather, that
issuer-designated person or firm is imposed on the dealer as a
condition to participating in the offering.'' Morgan Stanley does
not believe that issuer-designated professionals should be defined
as consultants. ``Far from helping dealers to solicit or win
business, issuer-designated professionals are all too often imposed
on dealers * * *.'' Morgan Stanley supports the disclosure of such
relationships, and suggests removing such persons from the scope of
the definition and adding a disclosure requirement to a separate
section of the draft rule. JP Morgan also supports the disclosure of
such relationships ``once an underwriting has been won, * * * but
that in no way should these * * * professionals be deemed to be
`consultants' to the dealer.'' A.G. Edwards, on the other hand,
believes that even those persons who may be engaged by the dealer as
a ``precondition'' to obtaining an issuer's business (e.g.,
underwriter's counsel designated by the issuer), ``are the type of
`consultants' to which the disclosure rule should apply.''
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Professional from whom a dealer seeks substantive or technical
advice in connection with an issuer presentation with no intention
of seeking their intercession with the issuer (e.g., engineers who
perform technical reviews or feasibility studies; lawyers who review
local regulations; and accountants who scrutinize financial
reports).\29\
\29\ Morgan Stanley; PSA; and Smith Barney.
---------------------------------------------------------------------------
Any individual retained as a consultant but treated by a dealer
as a municipal finance professional (e.g., a limited partner or
other retired employee of the dealer).\30\
\30\ Goldman Sachs. Presumably the dealer has deemed the person
to be subject to rules G-37 and G-20, and is recording information
on political contributions and gifts and gratuities, as required by
those rules.
---------------------------------------------------------------------------
Lobbyists who are not acting to obtain or retain business (e.g.,
a lobbyist employed to keep the dealer apprised of legislation that
could impact the dealer or its issuer clients).\31\
\31\ Seattle-Northwest.
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PSA recommends the following definition of consultant:
Any person, other than a municipal finance professional, who is
employed by the broker, dealer or municipal securities dealer on an
exclusive basis with respect to either an issuer or a particular
transaction to obtain or retain municipal securities business,
provided that such employment (A) includes any direct or indirect
communication with the issuer by such person which is made on behalf
of the broker, dealer or municipal securities dealer to obtain or
retain such municipal securities business, and (B) is undertaken
with the understanding of receiving compensation from such broker,
dealer or municipal securities dealer.
Another commenter is concerned about the Board's definition of
consultant because ``any third party with whom a dealer discusses any
issue which might bear on the firm's decision to seek business could
qualify as a consultant. After all, since firms are in business to do
business, they have little reason to talk to anyone unless it is to
help get business.'' \32\ This commenter endorses PSA's definition of
consultant, and believes that at least two factors are relevant to the
creation of a consulting relationship: (1) The person will actively
promote the underwriter--and only that underwriter--to an issuer; and
(2) the person will be compensated in some way by the underwriter. Two
other commenters also endorse PSA's proposed definition of consultant,
and believe that it should be incorporated into rule G-37.\33\ Another
commenter, without criticizing the commenter's proposed definition,
recommends a modified version thereof.\34\ On the other hand, Morgan
Stanley is critical of certain elements of PSA's definition.\35\ With
respect to the definition proposed in the April 1995 Draft Rule, this
commenter argues that that definition inappropriately applies to three
groups of professionals: (1) Professionals designated by an issuer to
provide services to the dealer; (2) professionals from whom a dealer
seeks substantive or technical advice in connection with an issuer
presentation with no intention of seeking their intercession with the
issuer; and (3) ``professionals who may in fact recommend a broker-
dealer to an issuer--on the basis of substantive professional
familiarity and respect and not on the expectation or promise of quid
pro quo recompense.'' Morgan Stanley is concerned that the Board's
definition could ``cause disruptions in an industry currently
undergoing contraction * * * [and] may lead larger firms, with other
sources of revenue, finally to conclude that the burden of ensuring
municipal market compliance outweights the benefit of what, frankly, is
currently a marginal business for many of them.'' Morgan Stanley
believes the definition of consultant ``should be restored to its
common-sense meaning in the context of the municipal securities
business. * * * [and] should reflect * * * the two essential elements
of disclosable consulting relationships in the municipal securities
business: compensation and the proposed intercession with an issuer by
the consultant in exchange for such compensation.'' \36\ The commenter
notes that its proposed definition incorporates ``not only direct but
also indirect consultant use and issuer intercession and * * *
[alludes] to the possibility of compensation from persons other than
the dealer.'' Thus, Morgan Stanley recommends the following definition
of consultant:
\32\ Smith Barney.
\33\ Chemical Securities; JP Morgan.
\34\ Artemis recommends a version that would not include the
elements of exclusivity or indirect communication with the issuer.
\35\ Morgan Stanley opposes PSA's requirement for
``exclusivity'' which ``is intended to disqualify a relationship
under the definition if a putative consultant has also been retained
to solicit the same business on behalf of another firm.'' Morgan
Stanley does not understand ``why exclusivity makes any difference.
* * * [and is concerned that] the phrase could be read to disqualify
a consultant who is soliciting business from more than one issuer
and a consultant hired by two dealers to solicit the same piece of
business on their joint behalf.'' Morgan Stanley also is concerned
that PSA's proposal, which would limit the definition of consultant
to persons hired ``with respect to either an issuer or a particular
transaction,'' will ``inappropriately limit the number of
consultants required to be disclosed * * * [for example,] by
excluding consultants who are hired not with respect to particular
issuers and transactions but according to other organizing
principles: by type of transaction (e.g., student loan deals), by
type of issuer, by geographic area * * *.''
\36\ Morgan Stanley further suggests defining ``compensation''
to mirror the definition of ``payment'' under rule G-37.
---------------------------------------------------------------------------
Any person or entity used, directly or indirectly, by a broker,
dealer or municipal securities dealer to obtain or retain municipal
securities business through direct or indirect intercession by such
person or entity with the relevant municipal issuer on behalf of
such broker, dealer or municipal securities dealer where such
intercession is undertaken by such person or entity in exchange for,
or with the understanding of receiving, payment (as defined in rule
G-37) from such broker, dealer or municipal securities dealer or any
other person.
[[Page 62281]]
Several other commenters share Morgan Stanley's view that
compensation is a relevant factor in determining the existence of a
consulting relationship. For example, one of the commenters does not
believe the draft rule should apply to ``persons who are merely engaged
by a dealer in connection with municipal securities business * * * [but
rather] should apply only to persons engaged by a dealer with the
expectation of receiving compensation for seeking to obtain or retain
municipal securities business.'' \37\ Another commenter believes that
``a dealer may `use' a person in a broad sense (and in a perfectly
permissible sense) without that person being a consultant to the dealer
in any common sense meaning of the word.'' \38\ But if a dealer
compensates a person for services in obtaining or retaining municipal
securities business, ``then obviously such person is working for the
dealer and a `consulting' relationship exists. * * *'' \39\ In this
regard, the commenter argues that, at a minimum, the definition of
consultant should include any person who is paid or compensated (rather
than ``used'') by a dealer for the purpose of seeking to obtain or
retain municipal securities business. Another commenter notes that such
compensation ``can take various forms, such as payment of a finder's
fee, a percentage of revenues or fees earned on the transaction, a fee
for services in excess of the industry standard for such services, and
political contributions.'' \40\
\37\ A.G. Edwards.
\38\ Gilmore & Bell.
\39\ Id.
\40\ Artemis.
---------------------------------------------------------------------------
One of the commenters believes the definition should extend to
private entities that construct or develop facilities from the proceeds
of municipal financings, including nursing home and retirement center
projects, housing issues, and land-based development financings.\41\
This commenter believes that ``it is quite common for such private
parties, after making large political contributions, to bring their own
finance teams, including underwriters, onto the scene and to pressure
issuers to use those teams. * * * [t]hus, the private parties can be
viewed as acting on behalf of the underwriters. * * * ''
\41\ American Government Financial Services.
---------------------------------------------------------------------------
Board Response
In response to the commenters' concerns over the definition of
consultant in the April 1995 Draft Rule, the proposed rule now defines
consultant as any person used by a dealer to obtain or retain municipal
securities business through direct or indirect communication by such
person with an issuer on the dealer's behalf where the communication is
undertaken by such person in exchange for, or with the understanding of
receiving, payment from the dealer or any other person. The definition
specifically excludes ``municipal finance professionals,'' as that term
is defined in rule G-37(g)(iv), because such individuals are covered by
the requirements of rule G-37. The definition also excludes any person
whose sole basis of compensation from the dealer is the actual
provision of legal advice, accounting or engineering assistance in
connection with the municipal securities business that the dealer is
seeking to obtain or retain. The exclusion would apply, for example, to
a lawyer retained to conduct a legal analysis on a particular
transaction contemplated by the dealer, or to review local regulations;
an accountant retained to conduct a tax analysis or to scrutinize
financial reports; or an engineer retained to perform a technical
review or feasibility study. The exemption is intended to ensure that
professionals who are engaged by the dealer solely to perform
substantive work in connection with municipal securities business are
not brought within the definition of consultant as long as their
compensation is in consideration of only those professional services
actually provided in connection with such municipal securities
business. However, any attorney or other professional used by the
dealer as a ``finder'' for municipal securities business would be
considered a consultant under the proposed rule.
Also, in response to certain commenters' concerns, the Board has
eliminated ``issuer-designated'' professionals from the definition of
consultant. The Board agrees with these commenters that persons who are
engaged by a dealer at the request or direction of the issuer (e.g.,
underwriter's counsel) are not, in fact, consultants because they do
not assist the dealer in obtaining or retaining municipal securities
business. However, the Board continues to believe that the subject of
issuer involvement in the underwriting process merits review, and will
address this subject, including the question of requiring disclosure of
issuer-designated persons, at a future time.
Requirement of a Written Agreement
The April 1995 Draft Rule would have required dealers to have
written agreements with their consultants before the consultants could
provide any services on their behalf. The April 1995 Draft Rule would
have provided that the ``Consultant Agreement'' must indicate the role
to be performed by the consultant and the compensation arrangement. One
of the commenters opposes the requirement of a written agreement,
arguing that it could ``hinder the effective and timely rendering of
legal services due to the proposed rule's prohibition of services until
the execution of a contract. The prospect of depriving a client of
substantive legal advice for any reason, and even for a modest
timeframe, is by itself troubling.'' \42\ Another commenter also
opposes this requirement, arguing that whether or not a consultant and
a dealer enter into a written agreement ``is a business decision best
left to the interested parties.'' \43\ One commenter, while not opposed
to memorializing traditional consultant agreements, believes that the
content of such agreements ``is best left to private negotiation
between the parties, and not subject to any specific regulatory
strictures.'' \44\ Another commenter shares this view.\45\
\42\ Goldman Sachs.
\43\ PSA.
\44\ A.G. Edwards.
\45\ Chemical Securities.
---------------------------------------------------------------------------
A number of commenters are concerned about the timing of the
requirement of a written agreement. One commenter ``strongly objects''
to the requirement that a written agreement be in place before using
the services of professional service providers, such as lawyers,
accountants, and printers, and believes that such a requirement ``will
disrupt traditional and legitimate business relationships and impede
the ability of dealers to respond to issuer's needs, particularly in
the case of ad-hoc inquiries from issuers in response to which dealers
routinely make use of professional providers such as lawyers or
accountants.'' \46\ Another commenter states that ``it would be a legal
and logistical nightmare if every firm was required to enter into a
contract with the entire universe of persons and entities who provide
information to underwriters in the normal course of business. It would
be much less burdensome--though still in our view an unnecessary
intrusion into business relationships--to limit the requirement of a
written agreement to those situations in which the firm is retaining a
third party to promote the firm to an issuer for a fee or other
compensation.'' \47\
\46\ A.G. Edwards.
\47\ Smith Barney.
[[Page 62282]]
---------------------------------------------------------------------------
Other commenters support the requirement of a written
agreement.\48\ One of these commenters believes such a requirement
represents a way of discouraging the hiring of consultants solely for
their personal or political influence with issuers.\49\ However, this
commenter conditions its support on the Board limiting the definition
of consultant.\50\
\48\ Artemis; Morgan Stanley.
\49\ Morgan Stanley.
\50\ In its Request for Comments, the Board asked whether it
should require that all written agreements with consultants be
approved by the head of the dealer's municipal finance group and the
general counsel's office. Morgan Stanley supports such a
requirement, while Chemical ``believes it is not beneficial or
necessary. . . .'' Artemis supports a requirement that the agreement
be approved by the head of the municipal finance group.
---------------------------------------------------------------------------
Board Response
The requirement of a written agreement embodied in proposed rule G-
38 is similar to the April 1995 Draft Rule, and requires dealers who
use consultants to evidence the consulting arrangement in writing
(referred to as a ``Consultant Agreement''). At a minimum, the writing
must include the name, company, role and compensation arrangement of
each consultant used by the dealer. Such written agreements must be
entered into before the consultant engages in any direct or indirect
communication with an issuer on the dealer's behalf. Although certain
commenters were opposed to the requirement of a written agreement, the
Board believes that this requirement is necessary to ensure that
dealers are aware of arrangements that their branch offices or local
personnel may have with consultants. The requirement also will assist
dealers in developing mechanisms to monitor such arrangements, and will
assist enforcement agencies to inspect for compliance with rule G-38.
With regard to commenters' concern over the timing of this requirement
(i.e., that a written agreement must be entered into before the
consultant provides any services on behalf of the dealer), the Board
believes that by limiting the scope of the definition of consultant (as
discussed above) and by revising the timing of the agreement (i.e.,
before any communication by the consultant with an issuer on the
dealer's behalf), it has ameliorated many, if not all, of these
concerns.
Disclosure of Consulting Arrangements to Issuers
The April 1995 Draft Rule would have required dealers to disclose
to issuers in writing all consultants with which they have entered into
a Consultant Agreement in connection with an effort to obtain or retain
municipal securities business with that issuer, along with the basic
terms of the Consultant Agreement. The April 1995 Draft Rule required
dealers to make such disclosures when they become involved in the
issuer's process for selecting a dealer for municipal securities
business, whether or not the issuer requests such information in a
Request for Proposal.
Most commenters agree that disclosure to issuers of consulting
arrangements is appropriate. However, one of these commenters believes
that the timing of the disclosure requires clarification.\51\ This
commenter notes that financing ideas frequently are discussed
informally prior to the beginning of ``the issuer's selection
process,'' and that it would be ``imprudent to stifle'' such
discussion.\52\ Similarly, another commenter supports disclosure to
issuers, but is concerned that the timing of such disclosures ``is too
vague.'' \53\ This commenter believes that ``it is sufficient to
require that the disclosure be made at least prior to a dealer's
acceptance of business from an issuer, on the theory that at that time
the issuer is still in a position to rescind the award of business if
the disclosed facts are sufficiently unpalatable.'' \54\ The commenter
also believes that ``[l]imiting the disclosure obligation to
consultants with whom the dealer has already entered into an agreement
* * * would seem to create unnecessary timing issues as well as
unnecessary opportunities for manipulation.'' \55\ Accordingly, the
commenter proposes extending the disclosure requirement to all
consultants used by the dealer in connection with the relevant issuer
or the relevant securities offering, regardless of the status of the
written agreement between them.
\51\ PSA. Artemis shares this view.
\52\ PSA.
\53\ Morgan Stanley.
\54\ Id.
\55\ Id.
---------------------------------------------------------------------------
One of the commenters believes that the disclosure of consultant
relationships should only be made upon the request of the issuer, and
notes that issuers can include a request for such information in their
Request for Proposal and that if the issuer wants additional
information, it can simply ask the dealer for further details.\56\ The
commenter also believes that ``a specific description of a consultant's
role is difficult to set forth at the onset of a relationship'' and
therefore disclosure of a consultant relationship should include only a
general description of the role to be performed by the consultant.\57\
Furthermore, the commenter believes that certain information, such as
the details of the compensation arrangement, should remain
confidential.
\56\ Chemical Securities.
\57\ Id.
---------------------------------------------------------------------------
Another commenter believes that disclosure to the public is of
greater importance than disclosure to issuers; ``[i]ssuers are aware of
the activities of consultants; the public often is not. The most
powerful tool for preserving the integrity of the market is the public
disclosure by the MSRB of the consulting relationships reported to
it.'' \58\ However, the commenter believes that consultants hired on
the dealer's initiative should be disclosed to an issuer and the Board
``only when (i) the issuer is engaged in a formal process of either
reviewing its underwriting relationships or placing a specific piece of
debt and (ii) the dealer is actually selected for the program or the
specific underwriting.'' \59\ The commenter states that ``this two-part
test will result in meaningful information regarding the actual
involvement of consultants in completed municipal finance transactions
being made available.'' \60\ Another commenter also is concerned about
disclosure reaching the public domain, and states that any disclosure
to issuers should be made to their governing bodies ``for inclusion in
the publicly available records thereof'' otherwise the goal of public
disclosure of consultant relationship can easily be frustrated.\61\
\58\ JP Morgan.
\59\ Id.
\60\ Id.
\61\ Willkie Farr.
---------------------------------------------------------------------------
Board Response
In response to commenters' concerns, particularly over timing, the
Board has modified the proposed rule's requirement concerning
disclosure of consulting arrangements to issuers. Proposed rule G-38
now requires each dealer to disclose to an issuer with which it is
engaging or seeking to engage in municipal securities business, in
writing, information on consulting arrangements relating to such
issuer. The written disclosure must include, at a minimum, the name,
company, role and compensation arrangement with the consultant or
consultants. Dealers are required to make such written disclosures no
later than the issuer's selection of any dealer in connection with the
municipal securities business sought, regardless of whether the dealer
making the disclosure ultimately is the one to obtain or retain that
business.
[[Page 62283]]
Thus, while dealers have an obligation to disclose their consulting
arrangements to all issuers from which they are seeking municipal
securities business, they have more leeway in the timing of their
disclosures as long as the disclosure is made before the issuer selects
a dealer for the municipal securities business sought. However, the
Board cautions dealers that the time period set forth in the proposed
rule represents the last possible opportunity to comply with the
disclosure requirement, and therefore strongly recommends that dealers
make such disclosures as early as possible. For example, a dealer
seeking certain municipal securities business may not be aware of the
issuer's selection of another dealer for that business. So too, an
issuer may select a pool or group of dealers from which the issuer
intends to choose underwriters for particular issues over the next few
years. If a dealer has used a consultant to help secure any of this
business, the Board believes that dealers should make their required
disclosures to issuers as soon as possible to ensure that the
disclosure is received by the issuer prior to the selection of any
dealer for the municipal securities business.
Disclosure of Consulting Arrangements to the Public Through Disclosure
to the Board
The April 1995 Draft Rule would have required a dealer to submit
reports to the Board of all consultants with which the dealer entered
into Consultant Agreements, not just those consultants that are
connected with particular municipal securities business awarded during
the reporting period (i.e., as currently required under rule G-37).
These reports would have been submitted on Form G-38 on a quarterly
basis, within one month after the end of each calendar quarter. Form G-
38 would have required dealers to list the names of all consultants and
complete for each consultant an Attachment to Form G-38 that provides
in the prescribed format the consultant's company, the role to be
performed by the consultant, and the compensation arrangement. Dealers
also would have been required to report all dollar amounts paid to each
consultant during the reporting period and, if any amounts paid were
connected with particular municipal securities business, such issue and
the amount paid would have been separately identified.
A number of commenters believe that disclosures to the Board should
be merged with the reporting requirements of rule G-37.\62\ In the
alternative, two of these commenters suggest removing the disclosure
requirements from rule G-37 and incorporating them into a modified
version of the April 1995 Draft Rule.\63\ One such commenter believes
that ``consolidation and combination is sensible not only from an
administrative and compliance point of view but will help ensure * * *
consistency in terminology and interpretation in this complex area.''
\64\
\62\ A.G. Edwards; Artemis; Chemical; GFOA; PSA; and Smith
Barney.
\63\ A.G. Edwards; Morgan Stanley.
\64\ Morgan Stanley.
---------------------------------------------------------------------------
Another commenter notes that rule G-37 currently requires
disclosure of consulting relationships if business is obtained or
retained, i.e., ``after the fact.'' \65\ This commenter believes that
the public would benefit if information were available ``before a piece
of business was awarded or a transaction completed'' and thus
recommends that dealers be required to report all consulting
relationships entered into by (or ongoing with) firms during quarterly
reporting periods, regardless of whether business is obtained during
that reporting period.\66\ Similarly, another commenter believes that
dealers should be required to report all consultant arrangements
whether or not such arrangements result in the awarding of business to
the dealer.\67\ And another commenter also supports disclosure of ``all
existing business consulting arrangements * * * whether or not they
have resulted in a particular transaction. * * *'' \68\ This commenter
further suggests that ``such `bulk disclosure' be organized by
reference to the jurisdictions (from largest to smallest) in which each
consultant is directly or indirectly employed to operate and, if
applicable, to the issuers with which such consultant is employed,
directly or indirectly, to intercede.'' \69\ Finally, the commenter
supports linking particular consulting relationships with particular
transactions in order to avoid ``a blizzard of accurate but general
information [that] could conceal more than it reveals.'' \70\
\65\ Smith Barney.
\66\ Id.
\67\ Chemical Securities.
\68\ Morgan Stanley.
\69\ Id.
\70\ Id.
---------------------------------------------------------------------------
One of the commenters suggests that dealers be required to report
``a continuing arrangement, rather than report it repeatedly, each
quarter.'' \71\ Another commenter ``believes that dealers should be
required to list continuing arrangements each quarter and to note when
any such arrangement has concluded * * *. However, if the compensation
arrangements remain the same * * * [the commenter recommends] that
dealers not be required to restate these terms quarterly.'' \72\
\71\ Chemical Securities.
\72\ Artemis.
---------------------------------------------------------------------------
Board Response
The proposed rule's requirement concerning disclosure to the Board
is similar to the April 1995 Draft Rule. The proposed rule requires
dealers to submit to the Board, on a quarterly basis, reports of all
consultants used by the dealer. For each consultant, dealers must
report, in the prescribed format, the consultant's name, company, role
and compensation arrangement, as well as the dollar amount of any
payment made to the consultant during the quarterly reporting period.
If any payment made during the reporting period is related to the
consultant's efforts on the dealer's behalf which resulted in
particular municipal securities business, whether the municipal
securities business was completed during that or a prior reporting
period, then the dealer must separately identify that business and the
dollar amount of the payment. In addition, as long as the dealer
continues to use the consultant to obtain or retain municipal
securities business (i.e., has a continuing arrangement with the
consultant), the dealer must report information concerning such
consultant every quarter, whether or not compensation is paid to the
consultant during the reporting period. The Board believes that the
reporting of these continuing consulting arrangements each quarter will
assist enforcement agencies and the public in their review of such
arrangements.
As recommended by certain commenters, the Board has determined, for
ease of compliance and reporting, to delete the current reporting
requirements regarding consultants from rule G-37. It also has
determined to merge the reporting requirements of both rules G-37 and
G-38 into a single form--Form G-37/G-38. Dealers must submit two copies
of such reports on proposed Form G-37/G-38.\73\ The quarterly due dates
are the same as the due dates currently required under rule G-37 (i.e.
within 30 calendar days after the end of each calendar quarter, which
corresponds to each January 31, April 30, July 31, and October 31).
Finally, consistent with current rule G-37,
[[Page 62284]]
dealers are required to submit these reports to the Board by certified
or registered mail, or some other equally prompt means that provides a
record of sending.\74\ The Board will then make these documents
available to the public for inspection and photocopying at its Public
Access Facility in Alexandria, Virginia, and for review by agencies
charged with enforcement of Board rules.
\73\ Proposed Form G-37/G-38 is included in Exhibit 3 to the
proposed rule change, along with instructions for filing the Form.
\74\ For ease of compliance, the Board has included the Rule G-
37 Filing Procedures within the language of rule G-37, and has
included the Rule G-38 Filing Procedures within the language of new
rule G-38.
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Recordkeeping Requirements
To facilitate compliance with, and enforcement of, proposed rule G-
38, the Board also proposes to amend existing rules G-8 and G-9,
concerning recordkeeping and record retention, respectively. The
proposed amendments to rule G-8 require dealers to maintain: (i) A
listing of the name, company, role and compensation arrangement of each
consultant; (ii) a copy of each Consultant Agreement; (iii) a listing
of the compensation paid in connection with each Consultant Agreement;
(iv) where applicable, a listing of the municipal securities business
obtained or retained in connection with each Consultant Agreement; (v)
a listing of the issuers and a record of disclosures made to such
issuers concerning consultants used by the dealer to obtain or retain
municipal securities business with each such issuer; and (vi) the date
of termination of any consultant arrangement. The amendment to rule G-9
requires dealers to maintain these records for a six-year period.
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. The Commission requests that, in
addition to any general comments concerning whether the proposed rule
change is consistent with Section 15(b)(2)(C) of the Act, commentators
address whether the proposed definition of consultant needs to be
amended to encompass instances in which third parties initiate contact
with prospective underwriters to offer their services in obtaining or
retaining municipal securities business through direct or indirect
communications by such person with an issuer official. 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 submissions, 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 they 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-95-
15 and should be submitted by December 26, 1995.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority, 17 U.S.C. 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29513 Filed 12-4-95; 8:45 am]
BILLING CODE 8010-01-M
