MSRB NOTICE 2004-11 (APRIL 5, 2004)

REQUEST FOR COMMENTS ON DRAFT AMENDMENT TO RULE G-38 RELATING TO SOLICITATION OF MUNICIPAL SECURITIES BUSINESS

Rule G-38, on consultants, was adopted by the Municipal Securities Rulemaking Board (the “MSRB”) to address actual and perceived abuses associated with the awarding of municipal securities business to brokers, dealers and municipal securities dealers (“dealers”).[1]  The rule was intended to deter and detect attempts by dealers to avoid the limitations placed on certain dealer activities by Rule G-37, on political contributions and prohibitions on municipal securities business, and Rule G-20, on gifts and gratuities.[2]  The rule also sought to provide information to issuers about the relationship between dealers and persons they have engaged to seek municipal securities business on their behalf.  The MSRB felt that these disclosures would help to limit undisclosed relationships that could pose potential conflicts-of-interest or result in potentially improper conduct by consultants attempting to obtain business for dealers.

Rule G-38 defines a consultant as any person used by a dealer to obtain or retain municipal securities business through direct or indirect communications by such person with an issuer on behalf of the dealer that is undertaken in exchange for (or with the understanding of receiving) payment from the dealer or any other person.[3]  The rule requires disclosure on Form G-37/G-38 of the consultant’s name, business address, role to be performed, compensation arrangement and total dollar amount paid.  The dealer also must disclose this information to the issuer either prior to the selection of any dealer for the particular municipal securities business sought or by no later than the consultant’s first communication with the issuer.  In addition, Rule G-38 requires dealers to disclose on Form G-37/G-38 contributions made by their consultants to officials of issuers with which the consultants have communicated and consultant payments to state and local political parties operating within the jurisdiction of such issuers, other than certain de minimis contributions and payments.  These forms are made publicly available on the MSRB’s website.

The MSRB believes that its consultant disclosure requirements have been extremely effective in bringing to light many aspects of dealer practices with respect to the use of consultants to solicit municipal securities business.  Nonetheless, the MSRB believes that some consultant practices challenge the integrity of the municipal securities market. The MSRB has noted in recent years significant increases in the number of consultants being used, the amount these consultants are being paid and the level of reported political giving by consultants. The MSRB is concerned that some of these political contributions may be indirect violations of Rule G-37.[4]  The MSRB also is concerned that increases in levels of compensation paid to consultants for successfully obtaining municipal securities business may be motivating consultants to use more aggressive tactics in their contacts with issuers.  These activities suggest that disclosure may not be sufficient to ensure that those who market the dealer’s services to issuers act fairly.  The MSRB believes that, in order to preserve the integrity of the municipal securities market, the basic standards of fair practice and professionalism embodied in MSRB rules should be made applicable to the process by which municipal securities business is solicited.

Thus, the MSRB is publishing for comment a draft amendment to Rule G-38 that would repeal existing Rule G-38 relating to consultants and replace it with a requirement that paid solicitations of municipal securities business on behalf of a dealer be undertaken only by persons associated with the dealer.  The MSRB also is publishing related draft amendments to Rule G-37, Rule G-8 (on books and records) and Rule G-9 (on preservation of records).  The MSRB seeks comments on all facets of this proposal.

Summary of Draft Rule Changes

The principal provisions of the draft amendments are summarized below.  The full text of the draft amendments, as well as draft revised Forms G-37 and G-37x, appear at the end of this notice.

Draft Amendments to Rule G-38 .  Existing Rule G-38 relating to consultants would be deleted in its entirety.  In its place, new Rule G-38, on solicitation of municipal securities business, would be adopted.  New Rule G-38 would prohibit dealers from making any direct or indirect payment to any person, other than an associated person of the dealer, for any solicitation of municipal securities business on behalf of the dealer.  Solicitation would be defined as a direct or indirect communication with an issuer for the purpose of obtaining or retaining municipal securities business.

The requirement that solicitations for municipal securities business only be done by associated persons would have certain ramifications, as discussed in more detail below.  First, if a dealer seeks to provide compensation to any person in exchange for solicitation of municipal securities business, such person must become an associated person and, consequently, would become a municipal finance professional under Rule G-37.[5]  In addition, the MSRB is proposing a clarification relating to the applicability of other MSRB rules to such associated persons, as described below.

Draft Amendments to Rule G-37 and Forms G-37/G-38 and G-37x .  Rule G-37 would be amended to refer to the new definition of solicitation in new Rule G-38 and to delete references to consultant information to be provided under Rule G-38.  Form G-37/G-38 would be renamed as Form G-37, and Section IV and the consultant attachment to the form would be removed.[6]  In addition, Form G-37x would be amended to delete references to the reporting of consultant information.

Draft Amendments to Rules G-8 and G-9 .  Rules G-8 and G-9 would be amended to delete recordkeeping requirements in connection with the consultant provisions of existing Rule G-38.

Request for Comments

The MSRB seeks comments on all facets of this rulemaking proposal.  In particular, the MSRB is interested in receiving the views of industry participants in the following areas.

Role of Consultants in the Municipal Securities Market .  Individuals and companies that are not affiliated with dealers have been used by dealers for years to obtain municipal securities business.  As noted above, the MSRB has determined to seek comment on this proposed rulemaking out of its concern that the use of independent consultants who are not subject to fair practice standards and rigorous supervision may potentially threaten the integrity of the municipal securities market.

  • Is the solicitation of municipal securities business from issuers on behalf of dealers a legitimate role for individuals or entities that are independent from such dealers and that operate outside the broker-dealer regulatory scheme?
  • Are there benefits derived from such an independent role that outweigh the concerns regarding the potentially negative impact of consultants on the integrity of the municipal securities market?
  • Are there ways that the current rule could be amended that would preservethe integrity of the municipal securities market more effectively than the draft amendment?

Effect of Becoming an Associated Person .  The rulemaking proposal would prohibit dealers from compensating any person who is not an associated person of the dealer for obtaining municipal securities business for the dealer.  For purposes of MSRB rules, an associated person of a broker or dealer is defined under Section 3(a)(18) of the Securities Exchange Act of 1934 as any partner, officer, director or branch manager of the broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with the broker or dealer, or any employee of the broker or dealer.[7]

Draft new Rule G-38 would necessitate that persons who are compensated for soliciting municipal securities business on behalf of a dealer become associated persons of the dealer.[8] Given the definition of municipal finance professional under Rule G-37, all solicitors who previously were considered consultants under existing Rule G-38 who become associated with a dealer in order to continue soliciting municipal securities business would be considered municipal finance professionals.[9]  Thus, solicitors’ non-de minimis contributions to issuer officials could subject the dealer to the ban on municipal securities business, and such contributions and non-de minimis payments to state or local political parties would be subject to the reporting requirements of Rule G-37.  As is the case currently under Rule G-37, payment in exchange for a solicitation is not a precondition for an associated person to be considered a municipal finance professional.  Rather, the draft amendments condition the ability of a dealer to provide compensation for such solicitation on the solicitor being associated with the dealer.

In conjunction with draft new Rule G-38, the MSRB would seek to clarify the applicability of other MSRB rules to solicitors who become associated persons of dealers.  The MSRB has previously noted that its basic fair practice rules would ordinarily not apply to persons who are associated with dealers solely by reason of a control relationship.[10]  If the MSRB adopts this proposed rulemaking, the MSRB also would clarify that, although these “controlled” associated persons would not be subject to the fair practice rules in connection with their day-to-day activities that are not related to the municipal securities activities of the dealer, MSRB rules would apply to their municipal securities activities undertaken for the benefit of the dealer.  Therefore, consistent with this view, if this rulemaking proposal is adopted, the MSRB expects that any solicitors who become associated with a dealer would conform their municipal securities activities to all applicable MSRB rules.[11]  For example, in soliciting municipal securities business, the solicitor would be subject to the MSRB’s basic fair practice rule, Rule G-17, and its rule on gifts and gratuities, Rule G-20, in connection with such solicitation.  The solicitor’s municipal securities activities also would be subject to supervision by the appropriate principal under Rule G-27.  Further, should the solicitor’s activities rise to the level of those listed in Rule G-3(a)(i) as municipal securities representative activities, the solicitor would be required to become appropriately qualified under that rule.[12]

  • Is requiring that a person be an associated person sufficient to address concerns regarding supervision and adherence to standards of fair practice, or should the rule require that a solicitor be an actual employee of the dealer?
  • What would be the legal and business impact of requiring a solicitor to be an employee of the dealer, rather than an associated person of that dealer?
  • Would requiring that a solicitor be an associated person of a dealer effectively limit such solicitor to working for only one dealer (or only for affiliated dealers)?  If so, is this appropriate?
  • Would the limitations imposed by draft new Rule G-38 have different impacts on different categories of dealers (e.g., broker-dealer vs. bank dealer, large vs. small firm, national vs. regional firm, etc.)?
  • Would the limitations imposed by draft new Rule G-38 have different impacts on different categories of persons seeking to solicit municipal securitiesbusiness for dealers (e.g., individuals vs. companies)?  Could a company that formerly served as a consultant continue to solicit municipal securities business for dealers under the requirements of draft new Rule G-38?
  • Are there circumstances where MSRB rules (other than Rule G-37) should not apply to non-employee associated persons’ municipal securities activities?
  • Do consultants under existing Rule G-38 engage in any types of activities that would be considered municipal securities representative activities under Rule G-3(a)(i) if undertaken by an associated person of a dealer?  Should Rule G-3(a)(i) be amended to make the act of soliciting municipal securities business (without more) an activity that requires qualification as a municipal securities representative?
  • Where a solicitor is an employee of a dealer’s affiliate that is subject to another regulatory regime (e.g., a bank affiliate), what is the nature of the supervision applicable to such person under such regime with respect to the person’s municipal securities activities?
  • Would the draft amendments have an impact on who will continue to solicit municipal securities business on behalf of dealers?  If so, would this have a beneficial or detrimental impact on the municipal securities market?
  • Would the draft amendments have an impact on the behavior of solicitors toward issuers?  If so, would this be beneficial or detrimental to the market?

Definition of Solicitation .  Draft new Rule G-38 would define a solicitation as any direct or indirect communication with an issuer for the purpose of obtaining or retaining municipal securities business.  This is consistent with the types of communications covered by the consultant definition in existing Rule G-38.  Thus, just as a consultant who currently communicates indirectly with an issuer through a third party (e.g., through issuer agents such as financial advisors, bond counsel, etc, or through conduit borrowers in connection with private activity bond issues) to obtain municipal securities business for a dealer can be subject to current Rule G-38, depending upon the specific facts and circumstances, so too could an indirect communication with an issuer through a third party be considered a solicitation under draft new Rule G-38.  The MSRB notes that the definition of municipal finance professional in existing Rule G-37(g)(iv) is not dependent upon the person to whom a solicitation to obtain business is made.  As this definition would be amended, either direct or indirect communications with an issuer to obtain business would trigger the application of Rule G-37.  The MSRB would not view this as a change in how Rule G-37 operates but instead as a change made to provide for a consistent definition of solicitation for purposes of Rules G-37 and G-38.

The MSRB notes that the existing concept of solicitation under Rules G-37 and G-38 includes the notion of intent in that the communication has a purpose of obtaining municipal securities business.  This notion is continued in draft new Rule G-38’s formulation that a solicitation involves a communication “for the purpose of” obtaining business for the dealer.  The determination of whether a particular communication is a solicitation is dependent upon the specific facts and circumstances relating to such communication.  Thus, if an issuer representative asks an associated person of a dealer whether the dealer has municipal securities capabilities, a limited affirmative response by the associated person, together with the provision to the issuer representative of contact information for dealer personnel who handle municipal securities business, generally would not be presumed to be a solicitation by such associated person.  However, this presumption may be lost depending upon the specific facts and circumstances, for example, if there are indications that the associated person has caused the circumstances to develop that were likely to result in such question being asked.  Similarly, if an associated person of a dealer who is providing investment banking services and corporate financing advice to a private company concludes, in his or her professional judgment, that an appropriate financing alternative may be a conduit borrowing through a private activity bond issue, a limited communication to the company by the associated person that such financing alternative may be appropriate, together with the provision to the company of contact information for dealer personnel who handle municipal securities business, generally would not be presumed to be a solicitation by such associated person.  However, this presumption may be lost depending upon the specific facts and circumstances, for example, if there are indications that the associated person is providing investment banking and corporate financing services as a pretense for suggesting a municipal securities issue to be handled by the dealer.  Further, in either example, if the associated person receives any compensation in the nature of a finder’s fee or referral fee with respect to such business or if the associated person engages in any other activities that could be deemed a solicitation with respect to such business (for example, attending presentations of the dealer’s municipal finance capabilities or responding to a request for proposals), then the associated person will be presumed to have solicited municipal securities business.[13]

Another aspect of the intent element of the term solicitation relates to communications that are incidental to undertaking tasks in connection with successfully completing municipal securities business for which the dealer has already been engaged.  These types of communications generally are not considered solicitations under current Rule G-37 and would continue not to be considered solicitations under draft new Rule G-38.  For example, if a dealer has engaged a non-associated person as a cash flow consultant to provide expert services on a negotiated underwriting for which the dealer has already been selected and the consultant communicates with the issuer with respect to cash flow matters relevant to the financing, then such communication generally would not be considered a solicitation under draft new Rule G-38.  Similarly, if a dealer has already been selected to serve as the underwriter for an airport financing and a non-municipal finance professional employee of the dealer who normally works on airline corporate matters is used to provide his or her expertise in connection with completing the financing, any communications in this regard by the employee with the issuer generally would not be considered a solicitation under draft new Rule G-38.  However, in either case, the dealer must ensure that such person does not solicit the issuer, directly or indirectly, for any other municipal securities business on behalf of the dealer in order for that person to remain outside of the scope of Rule G-37.

The MSRB seeks comment on the draft definition of solicitation.

  • Should parties other than the issuer (such as financial advisors, bond counsel, conduit borrowers or other governmental borrowers) be explicitly listed in the definition as persons to whom communications are directed?
  • Should a communication with a conduit borrower to hire a dealer as an underwriter for a private activity bond issue where the issuer ultimately must approve the underwriter for the issue be considered an indirect communication with the issuer?
  • Are the examples provided above to illustrate the concept of intent in connection with solicitations helpful in explaining the scope of the definition?  Should other circumstances be considered?
  • If an associated person of a dealer approaches an issuer representative to inform the issuer that the dealer has municipal securities capabilities and provides to the issuer representative contact information for dealer personnel who handle municipal securities business, should such a communication be considered a solicitation by such associated person?
  • Does draft Rule G-38 draw an appropriate line between those communications that would or would not constitute solicitations?  Would the rule effectively prohibit any types of contacts that are important for the marketplace, or does it fail to reach certain types of communications that can call into question the integrity of the municipal securities market?

Exemptions from Definition of Solicitation .  Unlike existing Rule G-38, the draft new rule does not provide exemptions for certain non-associated persons.  For example, existing Rule G-38 does not treat a lawyer, accountant or engineer as a consultant if its sole basis for compensation from the dealer is the actual provision of legal, accounting or engineering services in connection with the municipal securities business.  Existing Rule G-38 also has been interpreted to exclude other dealers who are members of an underwriting syndicate from the definition of consultant for purposes of that particular municipal securities business.  Draft new Rule G-38 does not include such exemptions in part because, unlike in the case of existing Rule G-38 where payment can come from either the dealer or any other person, the only payments that would be covered under the new rule are those made directly or indirectly by the dealer.

  • Would it be appropriate for draft new Rule G-38 to include the same types of exemptions provided in existing Rule G-38?  If so, should such exemptions be conditioned on the existence of a formal arrangement with the dealer that has been disclosed to the issuer?  Are there additional conditions that should be imposed in connection with such an exemption?
  • Are there other parties or roles that call for such an exemption? 

Prohibited Payments for Solicitations by Non-Associated Persons .  Draft new Rule G-38 would prohibit a dealer from providing or agreeing to provide, directly or indirectly, payment to non-associated persons for soliciting municipal securities business.  The term payment is defined in Rule G-37 as any gift, subscription, loan, advance, or deposit of money or anything of value.  Payment is not limited to cash compensation and can consist of anything of value, including reciprocal agreements to engage another party in exchange for obtaining municipal securities business.  For example, if a person obtains specific municipal securities business for a dealer in exchange for being hired by the dealer to provide services in connection with a different engagement of municipal securities business, such quid pro quo arrangement would constitute payment for purposes of draft new Rule G-38.  Further, there is no requirement under draft new Rule G-38 that there exist a formalized agreement to provide payment that induces the communication on behalf of the dealer.  Thus, a communication by any person could be considered a solicitation even if it is undertaken without the dealer’s prior knowledge or arrangement.  In such an instance, the dealer would be prohibited under draft new Rule G-38 from paying a “finder’s fee” to such person for such communication if the person is not associated with the dealer.

  • Should the rule limit its reach solely to those persons who have an agreement or understanding with a dealer to solicit municipal securities business in exchange for payment?
  • Should the rule limit only cash compensation, or only certain types of non-cash compensation?
  • Should payment by the issuer from bond proceeds to persons who have solicited municipal securities business for a dealer be considered an indirect payment by the dealer?
  • Is it appropriate for the rule to limit quid pro quo arrangements where the dealer engages a non-associated person for a different engagement of municipal securities business?
  • Instead of prohibiting payment to solicitors who are not associated with the dealer, should the rule prohibit the dealer from engaging in any municipal securities business where such business has been solicited by a non-associated person of the dealer?

Disclosure .  Existing Rule G-38 requires that the dealer provide specific information to issuers and on Form G-37/G-38 about a consultant’s role, compensation arrangement and amounts paid to it.  In addition, dealers currently are required to disclose non-de minimis political contributions made to officials of issuers with which the consultant has communicated on behalf of the dealer during the period beginning six months prior to such communication and ending six months after the communication, as well as payments to state and local political parties operating within the jurisdiction of such issuers during such period.  These contributions could subject the dealer to the ban on municipal securities business under Rule G-37 only if they were indirect contributions of the dealer pursuant to section (d) of Rule G-37.  If, pursuant to draft new Rule G-38, the dealer were to make such consultant an associated person who undertakes the same solicitation duties (thereby becoming a municipal finance professional for purposes of Rule G-37), none of the information regarding role and compensation would be subject to disclosure.  However, all non-de minimis contributions made by thenew municipal finance professional to any official of an issuer would be subject to disclosure on revised Form G-37 and could subject the dealer to a two-year ban on municipal securities business with such issuer.[14]

  • Would the process of soliciting business for dealers become less transparent to issuers, the marketplace and the public if dealers were to take solicitors on as associated persons subject to the requirements of Rule G-37 as opposed to remaining subject to the consultant requirements of existing Rule G-38?
  • Would the benefits of subjecting such solicitors to the fair practice standards and supervisory requirements of MSRB rules (including the potential ban on municipal securities business as a result of their non-de minimis contributions) outweigh this potential loss of public information?
  • Should more information about an associated person’s arrangements with dealers be made public through revised Form G-37 or be required to be provided to issuers?  For example, should the MSRB maintain disclosure requirements regarding compensation arrangements and payments made to solicitors who are associated persons but not employees of a dealer?

Recordkeeping .  In connection with draft new Rule G-38, the MSRB also is proposing to delete references to Rule G-38 from the recordkeeping requirements of Rules G-8 and G-9.

  • Should the MSRB establish any recordkeeping requirements in connection with draft new Rule G-38?

        * * * * *

Comments from all interested parties are welcome.  Comments should be submitted no later than June 4, 2004 and may be directed to Ernesto A. Lanza, Senior Associate General Counsel.  Written comments will be available for public inspection.

April 5, 2004

* * * * *

Text of Draft Amendments

[Rule G-38, on Consultants, repealed in its entirety and replaced by Rule G-38, on Solicitation of Municipal Securities Business, as follows:]

Rule G-38.  Solicitation of Municipal Securities Business

(a) No broker, dealer or municipal securities dealer may provide or agree to provide, directly or indirectly, payment to any person, other than an associated person of such broker, dealer or municipal securities dealer, for a solicitation on behalf of such broker, dealer or municipal securities dealer.

(b)(i) The term “solicitation” means a direct or indirect communication with an issuer for the purpose of obtaining or retaining municipal securities business.

(ii) The terms “issuer,” “municipal securities business” and “payment” shall have the meanings set forth in Rule G-37(g).

        * * * * *

Rule G-37.  Political Contributions and Prohibitions on Municipal Securities Business

(a) No change.

(b)(i) No change.

(ii) For an individual designated as a municipal finance professional solely pursuant to subparagraph (B) of paragraph (g)(iv) of this rule, the provisions of paragraph (b)(i) shall apply to contributions made by such individual to officials of an issuer prior to becoming a municipal finance professional only if such individual solicits (within the meaning of Rule G-38(b)(i)) municipal securities business from such issuer.

(iii) No change.

(c)-(d) No change.

(e)(i) Except as otherwise provided in paragraph (e)(ii), each broker, dealer or municipal securities dealer shall, by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31) send to the Board Form G-37/G-38 setting forth, in the prescribed format, the following information:

(A)-(B)  No change.

(C) any information required to be included on Form G-37/G-38 for such calendar quarter pursuant to paragraph (e)(iii);

(D) any information required to be disclosed pursuant to section (e) of rule G-38;

(D) (E) such other identifying information required by Form G-37/G-38; and

(F)  No change.

The Board shall make public a copy of each Form G-37/G-38 received from any broker, dealer or municipal securities dealer.

(ii)(A) No broker, dealer or municipal securities dealer shall be required to send Form G-37/G-38 to the Board for any calendar quarter in which either:

(A) (1) such broker, dealer or municipal securities dealer has no information that is required to be reported pursuant to clauses (A) through (C) (D) of paragraph (e)(i) for such calendar quarter; or

(B) (2) subject to clause (B) of this paragraph (e)(ii), such broker, dealer or municipal securities dealer has not engaged in municipal securities business, but only if such broker, dealer or municipal securities dealer:

(1) (a) had not engaged in municipal securities business during the seven consecutive calendar quarters immediately preceding such calendar quarter; and

(2) (b) has sent to the Board completed Form G-37x setting forth, in the prescribed format, (i) a certification to the effect that such broker, dealer or municipal securities dealer did not engage in municipal securities business during the eight consecutive calendar quarters immediately preceding the date of such certification, (ii) certain acknowledgments as are set forth in said Form G-37x regarding the obligations of such broker, dealer or municipal securities dealer in connection with Forms G-37/G-38 and G-37x under this paragraph (e)(ii) and rule G-8(a)(xvi), and (iii) such other identifying information required by Form G-37x; provided that, if a broker, dealer or municipal securities dealer has engaged in municipal securities business subsequent to the submission of Form G-37x to the Board, such broker, dealer or municipal securities dealer shall be required to submit a new Form G-37x to the Board in order to again qualify for an exemption under this clause (B).  subclause (A)(2).  The Board shall make public a copy of each Form G-37x received from any broker, dealer or municipal securities dealer.

(B) If for any calendar quarter a broker, dealer or municipal securities dealer has met the requirements of clause (A)(2) of this paragraph (e)(ii) but has information that is required to be reported pursuant to clause (D) of paragraph (e)(i), then such broker, dealer or municipal securities dealer shall be required to send Form G-37/G-38 to the Board for such quarter setting forth only such information as is required to be reported pursuant to clauses (D) and (E) of paragraph (e)(i).

(iii) If a broker, dealer or municipal securities dealer engages in municipal securities business during any calendar quarter after not having reported on Form G-37/G-38 the information described in clause (A) of paragraph (e)(i) for one or more contributions or payments made during the two-year period preceding such calendar quarter solely as a result of clause (B) (A)(2) of paragraph (e)(ii), such broker, dealer or municipal securities dealer shall include on Form G-37/G-38 for such calendar quarter all such information (including year and calendar quarter of such contributions or payments) not so reported during such two-year period.

(iv) A broker, dealer or municipal securities dealer that submits Form G-37/G-38 or Form G-37x to the Board shall either:

(A) No change.

(B) submit an electronic version of such form to the Board in such format and manner specified in the current Instructions for Forms G-37/G-38 and Form G-37x.

(f) No change.

(g) Definitions.

(i)-(iii) No change.

(iv) The term “municipal finance professional” means:

(A) No change.

(B) any associated person who solicits (within the meaning of Rule G-38(b)(i)) municipal securities business, as defined in paragraph (vii);

(C)-(E) No change.

Each person designated by the broker, dealer or municipal securities dealer as a municipal finance professional pursuant to Rule G-8(a)(xvi) is deemed to be a municipal finance professional.  Each person designated a municipal finance professional shall retain this designation for one year after the last activity or position which gave rise to the designation.

(v)-(viii) No change.

(h)-(j) No change.

        * * * * *

Rule G-8.  Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a)  Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

(i)-(xv) No change.

(xvi) Records Concerning Political Contributions and Prohibitions on Municipal Securities Business Pursuant to Rule G-37. Records reflecting:

(A)-(G) No change.

(H) Brokers, dealers and municipal securities dealers shall maintain copies of the Forms G-37/G-38 and G-37x sent to the Board along with the certified or registered mail receipt or other record of sending such forms to the Board.

(I)-(J) No change.

(K) No broker, dealer or municipal securities dealer shall be subject to the requirements of this paragraph (a)(xvi) during any period that such broker, dealer or municipal securities dealer has qualified for and invoked the exemption set forth in subparagraph (B) clause (A)(2) of paragraph (e)(ii) of rule G-37; provided, however, that such broker, dealer or municipal securities dealer shall remain obligated to comply with clause (H) of this paragraph (a)(xvi) during such period of exemption.  At such time as a broker, dealer or municipal securities dealer that has been exempted by this clause (K) from the requirements of this paragraph (a)(xvi) engages in any municipal securities business, all requirements of this paragraph (a)(xvi) covering the periods of time set forth herein (beginning with the then current calendar year and the two preceding calendar years) shall become applicable to such broker, dealer or municipal securities dealer.

(xvii) No change.

(xviii) [RESERVED] Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:

(A) a listing of the name of the consultant pursuant to the Consultant Agreement, business address, role (including the state or geographic area in which the consultant is working on behalf of the broker, dealer or municipal securities dealer) and compensation arrangement of each consultant;

(B) a copy of each Consultant Agreement referred to in rule G-38(b);

(C) a listing of the compensation paid in connection with each such Consultant Agreement;

(D) where applicable, a listing of the municipal securities business obtained or retained through the activities of each consultant;

(E) a listing of issuers and a record of disclosures made to such issuers, pursuant to rule G-38(d), concerning each consultant used by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with each such issuer;

(F) records of each reportable political contribution (as defined in rule G-38(a)(vi)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions; and

(3) the amounts and dates of such contributions;

(G) records of each reportable political party payment (as defined in rule G-38(a)(vii)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions; and

(3) the amounts and dates of such payments;

(H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));

(I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and

(J) the date of termination of any consultant arrangement.

(xix)-(xxii) No change.

(b)-(g) No change.

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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:

(i)-(vii) No change.

(viii) the records to be maintained pursuant to rule G-8(a)(xvi); provided, however, that copies of Forms G-37x shall be preserved for the period during which such Forms G-37x are effective and for at least six years following the end of such effectiveness; and

(ix) the records regarding information on gifts and gratuities and employment agreements required to be maintained pursuant to rule G-8(a)(xvii).; and

(x) the records required to be maintained pursuant to rule G-8(a)(xviii).

(b)-(g) No change.


Form G-37

Click here to view draft revised Form G-37 (Acrobat Reader required)

Form G-37x

Click here to view draft revised Form G-37x (Acrobat Reader required)


[1] Municipal securities business includes the purchase of a primary offering of municipal securities by a dealer from the issuer on other than a competitive bid basis (such as a negotiated underwriting), the offer or sale of a primary offering of municipal securities by a dealer on behalf of any issuer (such as a private placement or an offering of municipal fund securities), and the provision of financial advisory, consultant or remarketing agent services by a dealer to an issuer for a primary offering of municipal securities in which the dealer was chosen on other than a competitive bid basis.

[2] Rule G-37 prohibits dealers from engaging in municipal securities business with issuers for two years after certain contributions to issuer officials are made by dealers, their municipal finance professionals (as defined in Rule G-37(g)(iv)) or political action committees controlled by the dealers or their municipal finance professionals.  The rule also requires disclosure on Form G-37/G-38 of political contributions to issuer officials and payments to state and local political parties made by dealers, municipal finance professionals, other dealer executive officers, and political action committees controlled by the dealers or their municipal finance professionals.  Rule G-20 places limitations on gifts made to individuals in relation to the municipal securities activities of the individuals’ employers.

[3] A dealer’s municipal finance professionals and lawyers, accountants and engineers whose sole basis of compensation from the dealer is the actual provision of legal, accounting or engineering services are excluded from the definition of consultant.

[4] See Rule G-37 Interpretation – Notice Concerning Indirect Rule Violations:  Rules G-37 and G-38, August 6, 2003, reprinted in MSRB Rule Book.  It is also unclear whether dealers are uniformly making the required disclosures to issuers andon Form G-37/G-38 for all persons who by their actions should be considered consultants under Rule G-38.

[5] Of course, if a person who is already an associated person of the dealer solicits municipal securities business, such person would be considered a municipal finance professional under Rule G-37 regardless of whether he or she receives compensation.  See Rule G-38 Question and Answer, Bank Affiliates:  Individuals as Municipal Finance Professionals or Consultants, June 6, 2001.

[6] Form G-37/G-38 also would be amended to reflect the previous renaming of “executive officers” as “non-MFP executive officers” under Rule G-37 and to rename the municipal securities business category designation of “private placement” to “agency offering” to more accurately reflect the nature of this category.

[7] In the case of a municipal securities dealer that is a bank, an associated person is defined under Section 3(a)(32) of the Securities Exchange Act of 1934 as any person directly engaged in the management, direction, supervision, or performance of any of the municipal securities dealer’s activities with respect to municipal securities, and any person directly or indirectly controlling such activities or controlled by the municipal securities dealer in connection with such activities.  MSRB Rule D-11 provides that persons whose functions are solely clerical or ministerial are not treated as associated person of brokers, dealers or municipal securities dealers.

[8] As a general matter, such person could become associated with a dealer by becoming employed by the dealer or by entering into an arrangement with the dealer whereby the dealer is given control over such person’s municipal securities activities.  This “control” would include the application of MSRB rules to the municipal securities activities of such person and the subjection of such activities to supervision by the dealer, as described below.

[9] Rule G-37(g)(iv) defines municipal finance professional to include, among other persons, any associated person who solicits municipal securities business.  The draft amendment to Rule G-37(g)(iv) would explicitly tie this provision to the definition of solicitation under new Rule G-38(b)(i).

[10] See Rule D-11 Interpretation – Excerpt from Notice of Approval of Fair Practice Rules, October 25, 1978, reprinted in MSRB Rule Book.

[11] The MSRB is aware that a number of dealers have re-classified many employees of their affiliated banks who are associated persons of the dealers from consultants to municipal finance professionals under Rule G-37 as a result of the Securities and Exchange Commission’s administrative proceedings relating to Fifth Third Securities, Inc.  See Exchange Act Release No. 46087 (June 18, 2002), In the Matter of Fifth Third Securities, Inc.  If this rulemaking is adopted, such dealers and any other dealers with associated persons who solicit municipal securities business would need to review their compliance and supervisory procedures to ensure that the municipal securities activities undertaken by these associated persons are taken into account with respect to all applicable MSRB rules.

[12] Rule G-3(a)(i) describes municipal securities representative activities as (A) underwriting, trading or sales of municipal securities, (B) financial advisory or consultant services for issuers in connection with the issuance of municipal securities, (C) research or investment advice with respect to municipal securities, but only as it relates to the activities listed in (A) or (B) above, and (D) any other activities which involve communication, directly or indirectly, with public investors in municipal securities, but only as they relate to the activities listed in (A) or (B) above.

[13] See Rule G-37 Questions and Answers IV.10-13, reprinted in MSRB Rule Book.

[14] Any contribution to an official of an issuer from which such municipal finance professional has solicited business made during the six month period prior to becoming a municipal finance professional, and all contributions made during the one year period after ceasing solicitation activities, also would be covered by Rule G-37.  However, the disclosure of contributions and payments on revised Form G-37 would require only that the contributor category be disclosed, not the name and address of the contributor.