01-16257. Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Interpretation of Rule G-37, on Political Contributions and Prohibitions on ...

June 20, 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and Rule 19b-4 thereunder,^[1] notice is hereby given that on June 7, 2001, the Municipal Securities Rulemaking Board (“MSRB”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change (File No. SR-MSRB-2001-02) as described in Items, I, II, and III below, which Items have been prepared by the MSRB. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The MSRB has filed with the Commission a proposed rule change consisting of a notice of interpretation concerning rules G-37, on political contributions and prohibitions on municipal securities business, and G-38, on consultants. The text of the proposed rule change is set forth below. The new text is italicized and underlined.

Question and Answer Notice: Rules G-37 and G-38

Bank Affiliates: Individuals as Municipal Finance Professionals or Consultants

Q: In a Question and Answer Notice relating to rule G-38 dated May 20, 1998, the MSRB discussed a scenario in which a bank and its employees communicate with an issuer on behalf of an affiliated broker, dealer or municipal securities dealer (a “dealer”) to obtain municipal securities business for that dealer in return for certain “credits.” These credits, which do not involve any direct or indirect cash payments from the dealer to the bank or its employees, are used for internal purposes to identify the source of business referrals. The MSRB observed that, even if there is no immediate transfer of funds or anything of value to an affiliate or individual employed by the affiliate, the referral credits would still be considered payment for purposes of rule G-38 if such credits eventually (e.g., at the end of the fiscal year) result in compensation to the affiliate or individual employed by the affiliate for referring municipal securities business to the dealer. The MSRB concluded that if the dealer or any other person eventually gives anything of value (e.g., makes a “payment”) to the affiliate or individual based, even in part, on the referral, then the affiliate or individual is a consultant for purposes of rule G-38. Does this mean that in all cases where a bank's employee refers municipal securities business to an affiliated dealer, such bank employee is necessarily a consultant under rule G-38 rather than a municipal finance professional of the dealer under rule G-37?

A: No. The purpose of the Question and Answer Notice was to illustrate that the term “payment” as used in rule G-38 is not limited to cash payments but also includes anything of value, such as referral credits, that ultimately results in cash or non-cash compensation to the bank employee. The MSRB was not providing guidance as to whether such bank employee should be considered a consultant rather than a municipal finance professional of the dealer. As the MSRB noted in footnote 1 to the Question and Answer Notice, municipal finance professionals are excluded from the definition of consultant. If a dealer has an arrangement whereby referral credits are give to an employee of a bank affiliate in exchange for a referral of municipal securities business, the dealer should first determine whether the bank employee is a municipal finance professional of the dealer. As a threshold question, the dealer must determine whether such bank employee is a person associated with the dealer within the meaning of the Securities Exchange Act of 1934, as amended the “Exchange Act”).^[2] If the bank employee is an associated person of the dealer and has solicited municipal securities business on behalf of the dealer, the employee would be a municipal finance professional of the dealer subject to the provisions of rule G-37, regardless of whether such employee has received a referral credit or any other payment.^[3] Such employee, as a municipal finance professional of the dealer, is excluded from being a consultant of the dealer under rule G-38. If the bank employee is not an associated person of the dealer and has received such referral credits as a result of a solicitation of municipal securities business for the dealer, the employee would be a consultant of the dealer subject to the provisions of rule G-38.

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 MSRB 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 MSRB 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

(a) Since adoption of rules G-37 and G-38, the MSRB has received numerous inquiries concerning the application of these rules. In order to assist the municipal securities industry in understanding and complying with the provisions of the rules, the MSRB has published a series of interpretive notices, which set forth, in question-and-answer format, general guidance on rules G-37 and G-38.

On May 20, 1998, the Commission approved an interpretive notice of the MSRB relating to rule G-38.^[4] This question-and-answer notice provided guidance regarding the meaning of the term payment under rule G-38 in the context of the granting of referral credits to an employee of a bank in exchange for the referral of municipal securities business to a dealer affiliated with the bank. The MSRB made clear that, even if there is not immediate transfer of funds or anything of value to an affiliate of a dealer or an individual employed by such affiliate, the referral credits would still be considered payment for purposes of rule G-38 if the credits eventually result in compensation to the affiliate or individual for referring municipal securities business to the dealer.

The MSRB recently has learned that some members of the municipal securities industry may have misunderstood the guidance provided by this prior question-and-answer notice. Some industry participants appear to believe that the MSRB has determined that an employee of a bank that refers municipal securities business to a dealer affiliated with such bank would necessarily be considered a consultant of the dealer under rule G-38 rather than a municipal finance professional of the dealer under rule G-37. This was not the intent of the prior interpretation, which focused solely on whether referral credits could be considered payment for purposes of rule G-38. The interpretation did not seek to analyze the further factors that must be considered in determining whether an individual should be considered a municipal finance professional or a consultant. As a result, the MSRB has determined that it is necessary to provide clarification of the prior question-and-answer notice and to provide further guidance on the factors to be considered in determining whether an employee of an affiliate of a dealer that makes a referral of municipal securities business to the dealer is a consultant under rule G-38 or a municipal finance professional under rule G-37.

(b) The MSRB believes that the proposed rule change is consistent with Section 15B(b)(2)(C) of the Act, which requires that the MSRB's rules.

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.

The MSRB believes that the proposed rule change is consistent with the Act in that it provides guidance to dealers in complying with existing MSRB rules.

B. Self-Regulatory Organization's Statement on Burden on Competition

The MSRB 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 it would apply equally to all dealers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The MSRB has designated this proposed rule change as constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing MSRB rule under section 19(b)(3)(A)(i) of the Act,^[5] and subparagraph (f) of Rule 19b-4, thereunder.^[6] At any time within 60 days of the filing of this proposed rule change, the Commission may summarily abrogate this rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

V. 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, 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 MSRB's principal offices. All submissions should refer to File No. SR-MSRB-2001-02 and should be submitted by July 19, 2001.

For the Commission, by the Division of Market Regulations, pursuant to delegated authority.^[7]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4.

2.  Questions regarding the scope of the term “person associated with a broker or dealer” under Section 3(a)(18) of the Exchange Act or “person associated with a municipal securities dealer” under Section 3(a)(32) of the Exchange Act should be addressed to staff of the Securities and Exchange Commission.

3.  The definition of municipal finance professional in rule G-37 is not dependent upon whether the associated person has received payment in exchange for the solicitation of municipal securities business.

4.  Securities Exchange Act Release No. 40014 (May 20, 1998), 63 FR 29282 (May 28, 1998).

5.  15 U.S.C. 78s(b)(3)(A)(i).

6.  17 C.F.R. 240.19b-4(f).

7.  17 CFR 200.30-3(a)(12).