MSRB NOTICE 2006-09 (APRIL 20, 2006)

MSRB FILES AMENDMENT TO WITHDRAW AN ADDITIONAL RULE G-37 AND RULE G-38 QUESTION AND ANSWER GUIDANCE

On April 20, 2006, the Municipal Securities Rulemaking Board (the “MSRB”) filed with the Securities and Exchange Commission (the “SEC”) an amendment to a previously filed proposed rule change that deleted obsolete Question-and-Answer (“Q&A”) interpretive guidance under former Rule G-38, on consultants, and certain Q&A interpretive guidance relating to the definition of solicitation under Rule G-37, on political contributions and prohibitions on municipal securities business.[1] The amendment deletes one additional Q&A interpretation under Rule G-37 and former Rule G-38, as described below.

The Rule G-37 solicitation Qs&As were deleted in connection with the consolidation of MSRB interpretive guidance on the definition of solicitation of municipal securities business under Rules G-37 and new Rule G-38 (on solicitation of municipal securities business) in a proposed interpretive notice originally filed with the SEC on June 8, 2005.[2]  In addition, the Rule G-38 Qs&As were deleted because the consultant provisions of former Rule G-38 are no longer in effect and therefore such Rule G-38 Qs&As had become obsolete.

In the filing of the proposed rule change, the MSRB indicated that it was not withdrawing a Q&A interpretation published on June 6, 2001 entitled "Bank Affiliates:  Individuals as Municipal Finance Professionals or Consultants" (the "Bank Affiliate Q&A").  Although the filing indicated that portions of the Bank Affiliate Q&A relating to former Rule G-38 would no longer apply, the guidance on determining whether employees of a bank affiliated with a dealer are municipal finance professionals of such dealer under Rule G-37 would have been retained.  This portion of the Bank Affiliate Q&A provided that, if an employee of a dealer-affiliated bank is an associated person of the dealer and has solicited municipal securities business on behalf of the dealer, such bank employee would be a municipal finance professional of the dealer.

SEC staff has expressed concern that the Bank Affiliate Q&A, which continues to have language relating to former Rule G-38, may cause unnecessary confusion.  In addition, upon further review, the MSRB believes that the Bank Affiliate Q&A is not necessary for determining whether an employee of a dealer-affiliated bank may be a municipal finance professional since the current language of Rule G-37,[3] as well as other existing guidance and SEC enforcement actions relating to the rule, provide sufficient guidance in this regard.[4]  Thus, based on these considerations, the MSRB has filed the amendment to withdraw the Bank Affiliate Q&A.  The withdrawal of the Bank Affiliate Q&A does not effect a substantive change in how dealers should determine whether an associated person of the dealer is a municipal finance professional.

Questions regarding this notice may be directed to Ernesto A. Lanza, Senior Associate General Counsel, or Jill C. Finder, Assistant General Counsel.

April 20, 2006

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TEXT OF WITHDRAWN BANK AFFILIATE Q&A

Bank Affiliates: Individuals as Municipal Finance Professionals or Consultants

June 6, 2001

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 given 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”).1  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.2 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.


 

Endnotes

1. 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.

2. 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.



[1] Amendment No. 1 to File No. SR-MSRB-2006-01.  The proposed rule change was originally filed on March 17, 2006 and refiled on March 28, 2006 due to technical difficulties with the electronic filing system.  See MSRB Notice 2006-05 (March 17, 2006).

[3] Rule G-37(g)(iv)(B) defines a municipal finance professional as, among other persons, any associated person (including but not limited to any affiliated person of the dealer) who solicits municipal securities business.  Rule G-38(b)(ii) defines an affiliated person as a partner, director, officer, employee or registered person of the dealer or of an affiliated company of the dealer.  This definition would apply to the scenario described in the Bank Affiliate Q&A.

[4] The MSRB has previously provided guidance to the effect that, in determining whether a person is a municipal finance professional of a dealer, the dealer must first determine whether that person is an associated person of the dealer.  See Q&A IV.6 (dated May 24, 1994, as revised on October 30, 2003) published in MSRB Rule Book (January 1, 2006).  See also In the Matter of Fifth Third Securities, Inc., Exchange Act Release No. 46087 (June 18, 2002).