[Federal Register Volume 63, Number 95 (Monday, May 18, 1998)]
[Notices]
[Pages 27337-27339]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-13096]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39983; File No. SR-MSRB-97-9]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 by the Municipal Securities Rulemaking Board
Relating to Rule G-38 on Consultants
May 12, 1998.
On March 18, 1998,\1\ the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') a proposed rule change (File No.
SR-MSRB-97-9), pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposed
rule change and Amendment No. 1 are hereafter referred to collectively
as the ``proposed rule change.'' The proposed rule change is described
in Items I, II, and III below, which Items have been prepared by the
Board. The Commission is publishing this notice to solicit comments on
the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ The Board initially submitted this proposal on November 24,
1997. However, a substantive amendment was requested to modify and
clarify ambiguous timing issues in the proposed rule language. The
Board filed Amendment No. 1 on March 18, 1998.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Board is filing herewith a proposed rule change consisting of
an amendment to Rule G-38 on consultants. The proposed rule change
would give brokers, dealers and municipal securities dealers
(collectively referred to as ``dealers'') the option of disclosing
their consulting arrangements to issuers, pursuant to section (c) of
the rule, on either an issue-specific or issuer-specific basis. Below
is the text of the proposed rule change. Additions are italicized;
deletions are in brackets.
Rule G-38. Consultants
(a)-(b) No change.
(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 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 either:
(i) prior to the selection of any broker, dealer or municipal
securities dealer in connection with [such] the particular municipal
securities business being sought[.]; or
(ii) at or prior to the consultant's first direct or indirect
communication with the issuer for any municipal securities business
being sought. Each broker, dealer or municipal securities dealer shall
promptly advise the issuer, in writing, of any change in the
information disclosed, pursuant to this subsection (ii), on each
consulting arrangement relating to such issuer. In addition, each
broker, dealer or municipal securities dealer disclosing information
pursuant to this subsection (ii) shall update such information by
notifying each issuer in writing within one year of the previous
disclosure made to such issuer concerning each consultant's name,
company, role and compensation arrangement, even where the information
has not changed; provided, however, that this annual update requirement
shall not apply where the broker, dealer or municipal securities dealer
has ceased to use the consultant, directly or indirectly, to attempt to
obtain or retain municipal securities business with the particular
issuer.
(d) 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
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
Rule G-38, on consultants, requires dealers: (1) To have written
agreements with certain individuals who are used by a dealer, directly
or indirectly, to obtain or retain municipal securities business
(``consultants''), and (2) to disclose such consulting arrangements
directly to issuers and to the public through disclosure to the Board.
Section (c) of the rule currently requires that each dealer disclose,
in writing, to each issuer with which the dealer is engaging or is
seeking to engage in municipal securities business, information on
consulting arrangements relating to such issuer. The information to be
disclosed includes the name, company, role and compensation arrangement
of any consultant used, directly or indirectly, to obtain or retain
municipal securities business with each such issuer. Dealers are
required to make such disclosures prior to the issuer's selection of
any dealer in connection with the particular municipal securities
business sought.
It has come to the Board's attention that this issue-specific
nature of the disclosure requirement can create compliance problems for
dealers in the case of frequent issuers of municipal securities as well
as in the co-manager selection process. For example, an issuer may
bring new issues to market several times a month, and if a dealer is
using a consultant to obtain a syndicate slot in each such issue, the
dealer is required to disclose the same information to the same issuer
month after month and possibly week after week. In addition, the Board
has learned that dealers who use a consultant to help obtain co-manager
business sometimes have difficulty complying with Rule G-38(c) because,
unlike the lead manager, a co-manager may learn of its selection for
that business after the selection of the lead manager, thereby making
it impossible for the dealer to disclose its consulting arrangements
prior to the issuer's selection of any dealer, as required by the rule.
While the Board believes that the timing of the issue-specific
disclosure requirement in Rule G-38(c) is appropriate in the vast
majority of cases, the Board recognizes that it can be a problem in the
context of frequent issuers of municipal securities and in the co-
manager selection process. Thus, the Board has determined to amend Rule
G-38(c) to give dealers the option of disclosing their consulting
arrangements to issuers on either an issue-specific or issuer-specific
basis.
[[Page 27338]]
Pursuant to the amendment, if a dealer chooses to disclose information
regarding a consulting arrangement on an issuer-specific basis, the
dealer must submit the information, in writing, to the issuer at or
prior to the consultant's first direct or indirect communication with
that issuer for any municipal securities business.\4\ To ensure that
such information, once disclosed, remains current, the amendment also
requires dealers to (1) promptly notify the issuer, in writing, of any
change in the information disclosed; and (2) update issuers, in
writing, within one year of the previous disclosure of each
consultant's name, company, role and compensation arrangement, even
where such information has not changed.\5\ Of course, this annual
updating requirement would cease to apply if the dealer is no longer
using the consultant, directly or indirectly, to attempt to obtain or
retain municipal securities business with a particular issuer(s).
---------------------------------------------------------------------------
\4\ In contrast, the Board believes that disclosures made by a
dealer on an issue-specific basis should continue to be required
prior to the issuer's selection of any dealer for the particular
municipal securities business being sought.
\5\ Pursuant to Rule G-8(a)(xviii) on recordkeeping, dealers are
required to maintain records of all disclosures made pursuant to
Rule G-38(c). This would apply to disclosures made pursuant to the
amendment.
---------------------------------------------------------------------------
The Board submitted Amendment No. 1 in response to concerns
expressed by Commission staff to provide that dealers disclosing
information on an issuer-specific basis shall do so ``at or prior to
the consultant's first direct or indirect communication with the issuer
for any municipal securities business being sought.'' \6\ Amendment No.
1 also clarifies that the annual updating requirement for dealers
disclosing information on an issuer-specific basis is keyed off the
previous full disclosure of the consultant's name, company, role and
compensation arrangement (and not any interim disclosure of changes to
such information).
---------------------------------------------------------------------------
\6\ The amendment originally would have required that such
disclosures be made ``within three business days of the consultant's
first direct or indirect communication with the issuer, but in any
event prior to the issuer's selection of such broker, dealer or
municipal securities dealer for any municipal securities business
being sought.'' See supra note 1.
---------------------------------------------------------------------------
The Board believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act.\7\ The Board believes that the
proposed rule change will facilitate compliance with Rule G-38, thereby
protecting investors and the public interest.
---------------------------------------------------------------------------
\7\ 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 foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market
in municipal securities, and, in general, to protect investors and
the public interest.
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Board does not believe that the proposed rule change 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 June 1997, the Board published a draft amendment to Rule G-38(c)
for industry comment.\8\ In response, the Board received comment
letters from three dealers.\9\ One of these commenters expressed its
belief that the amendment ``is helpful and may simplify the reporting
process.'' \10\ The other two commenters also supported the draft
amendment.\11\ One commenter stated that ``the proposed changes will
greatly simplify the disclosure process when multiple transactions
develop as the result of a consultant's activities with an
issuer.''\12\ However, this commenter recommended that the draft
amendment require dealers to advise the issuer of any material change
in the information disclosed; the commenter believes that this will
obviate the need for dealers to file amended disclosure reports
relating to, for example, an insignificant change to a consultant's
role or to a minor change in the name of the consultant's organization.
The Board believes that adopting the commenter's recommendation would
introduce a subjective element to the disclosure requirement and would
result in differing interpretations as to what is ``material.'' For
example, by incorporating this subjective standard, the Board could not
ensure that issuers would be advised of changes in the consultant's
name, company, role and compensation arrangement--information which is
required to be disclosed to issuers pursuant to Rule G-38(c). Thus, the
Board has declined to adopt the commenter's recommendation.
---------------------------------------------------------------------------
\8\ MSRB Reports, Vol. 17, No. 2 (June 1997) at 17-18. The draft
amendment would have required dealers that disclose information on
their consulting arrangements on an issuer-specific bases to make
such disclosures ``within three business days of the consultant's
first direct or indirect communication with the issuer, but in any
event prior to the issuer's selection of such broker, dealer or
municipal securities dealer for any municipal securities business
being sought.'' As discussed above, the Board submitted Amendment
No. 1 in response to concerns expressed by Commission staff
regarding the timing of this provision. Thus, the proposed rule
change provides that dealers disclosing information on issuer-
specific basis shall do so ``at or prior to the consultant's first
direct or indirect communication with the issuer for any municipal
securities business being sought.''
\9\ A.G. Edwards, Rauscher Pierce Refsnes, Inc., and Smith
Barney.
\10\ Rauscher Pierce Refsnes, Inc.
\11\ A.G. Edwards and Smith Barney.
\12\ A.G. Edwards.
---------------------------------------------------------------------------
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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the 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-97-9 and should be
submitted by June 8, 1998.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
[[Page 27339]]
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-13096 Filed 5-15-98; 8:45 am]
BILLING CODE 8010-01-M
