On October 3, 2005, the Securities
and Exchange Commission (“SEC”) approved amendments to Rule G-20, on gifts, gratuities
and non-cash compensation, and the related recordkeeping provisions of Rule
G-8.[1]
The amendments, which became effective upon SEC approval, are summarized below.[2]
SUMMARY OF AMENDMENTS
The amendments more fully conform MSRB Rule G-20 to
current NASD requirements relating to gifts and gratuities, and add new
provisions governing non-cash compensation and sales incentives in connection
with primary offerings of municipal securities, based on NASD requirements for
non-cash compensation and sales incentives. The MSRB has determined that
similar treatment across the securities markets is appropriate and will
facilitate dealer understanding of, and compliance with, requirements relating
to sales incentives and non-cash compensation. The amendments result in the
following changes to Rule G-20:
•
Modifies the provision in Rule G-20 that permits occasional gifts
of meals or sports and entertainment tickets, and sponsorship of business
functions outside of the $100 per year limitation by requiring that dealer
personnel host (accompany) such meals, entertainment and business functions in
conformity with NASD gift rule limitations, and further modifies the language
of the requirement to incorporate NASD language to the effect that such occasional
gifts must not call into question the dealer’s ethical standards.[3]
•
Incorporates definitions of “non-cash compensation,” “cash
compensation” and “offeror” based on language in NASD Rules 2710, 2820 and
2830, and expands the definition of offeror to include, with respect to
securities held as assets underlying municipal fund securities, any person
considered an offeror under relevant NASD rules.
•
Treats non-cash sales incentives relating to primary offerings of
municipal securities in a manner similar to NASD’s treatment of non-cash sales
incentives relating to mutual funds, variable contracts, and corporate debt and
equity offerings, including, among other things, by permitting gifts that do
not exceed $100 per individual per year and are not preconditioned on
achievement of a sales target; and by permitting the giving and receipt of
occasional gifts of meals or tickets to theatrical, sporting and other
entertainment, but only if such occasional gifts are not preconditioned on
achievement of a sales target.
•
Limits the circumstances under which dealers or offerors may pay
or reimburse costs of training or education, based on NASD rules, including
ensuring that attendance at, and payment for, such meetings is not
preconditioned on achievement of a sales target; reimbursement is not applied
to expenses of associated persons’ guests; and that such meetings are held at
appropriate locations.
• Requires that non-cash compensation arrangements include the
total production and equal weighting requirements under NASD rules, which are
designed to ensure that the arrangement does not favor sales of one municipal
security over another.
• Amends the recordkeeping requirements in Rule G-8 to require that
dealers maintain a record of non-cash compensation received in connection with
a primary offering from the issuer or its advisers, the underwriter, or any of
their affiliates, as well as records regarding any internal sales incentive
program for municipal fund securities.
The MSRB intends
generally that the provisions of Rule G-20 be read consistently with the
analogous NASD provisions, unless the MSRB specifically indicates otherwise.
Thus, relevant NASD interpretations are presumed to apply to the comparable
MSRB provision, subject to the MSRB’s right to make distinctions when necessary
and appropriate. Further, the MSRB intends to continue coordinating its
requirements relating to gifts, gratuities and non-cash compensation with those
of the other relevant self-regulatory organizations in the securities markets.
* * * * *
Questions concerning this notice should be directed
to Ernesto A. Lanza, Senior Associate General Counsel, or Jill C. Finder,
Assistant General Counsel, at 703-797-6600.
October 5, 2005
TEXT OF AMENDMENTS[4]
Rule G-20 – Gifts, and Gratuities and
Non-Cash Compensation.
(a) General Limitation on Value of Gifts and Gratuities.
No broker, dealer or municipal securities dealer shall, directly or indirectly,
give or permit to be given any thing or service of value, including gratuities,
in excess of $100 per year to a person other than an employee or partner of
such broker, dealer or municipal securities dealer, if such payments or
services are in relation to the municipal securities activities of the employer
of the recipient of the payment or service. For purposes of this rule the term
“employer” shall include a principal for whom the recipient of a payment or
service is acting as agent or representative.
(b) Normal Business Dealings. Notwithstanding the foregoing,
the provisions of section (a) of this rule shall not be deemed to prohibit
occasional gifts of meals or tickets to theatrical, sporting, and other
entertainments hosted by the broker, dealer or municipal securities dealer;
the sponsoring by the broker, dealer or municipal securities dealer of
legitimate business functions that are recognized by the Internal Revenue
Service as deductible business expenses; or gifts of reminder advertising;
provided, that such gifts shall not be so frequent or so expensive extensive
as to raise a suggestion of conduct inconsistent with high standards of
professional ethics in the municipal securities industry any question of
propriety.
(c) No change.
(d) Non-Cash Compensation in Connection with Primary Offerings. In
connection with the sale and distribution of a primary offering of municipal
securities, no broker, dealer or municipal securities dealer, or any associated
person thereof, shall directly or indirectly accept or make payments or offers
of payments of any non-cash compensation. Notwithstanding the provisions
of section (a) of this rule, the following non-cash compensation arrangements
are permitted:
(i) gifts that do not exceed $100 per individual per year and are
not preconditioned on achievement of a sales target;
(ii) occasional gifts of meals or tickets to theatrical, sporting, and
other entertainments; provided that such gifts are not so frequent or so
extensive as to raise any question of propriety and are not
preconditioned on achievement of a sales target;
(iii) payment or reimbursement by offerors in connection with meetings
held by an offeror or by a broker, dealer or municipal securities dealer for
the purpose of training or education of associated persons of a broker, dealer
or municipal securities dealer, provided that:
(A) associated persons obtain the prior approval of the broker,
dealer or municipal securities dealer to attend the meeting and attendance is
not preconditioned by the broker, dealer or municipal securities dealer on
achievement of a sales target or any other incentives pursuant to a non-cash
compensation arrangement permitted by paragraph (d)(iv);
(B) the location is appropriate to the purpose of the meeting,
which shall mean an office of the offeror or the broker, dealer or municipal
securities dealer, a facility located in the vicinity of such office, a
regional location with respect to regional meetings, or a location at which a
significant asset, if any, being financed or refinanced in the primary offering
is located;
(C) the payment or reimbursement is not applied to the expenses
of guests of the associated person; and
(D) the payment or reimbursement is not preconditioned by the
offeror on achievement of a sales target or any other non-cash compensation
arrangement permitted by paragraph (d)(iv).
(iv) non-cash compensation arrangements between a broker, dealer
or municipal securities dealer and its associated persons, or a company that
controls the broker, dealer or municipal securities dealer and the associated
persons of the broker, dealer or municipal securities dealer, provided that:
(A) the non-cash compensation arrangement is based on the total
production of associated persons with respect to all municipal securities
within respective product types distributed by the broker, dealer or municipal
securities dealer;
(B) the non-cash compensation arrangement requires that the
credit received for each municipal security within a municipal security product
type is equally weighted; and
(C) no entity that is not an associated person of the broker,
dealer or municipal securities dealer participates directly or indirectly in
the organization of a permissible non-cash compensation arrangement.
(v) contributions by any person other than the broker, dealer or
municipal securities dealer to a non-cash compensation arrangement between a
broker, dealer or municipal securities dealer and its associated persons,
provided that the arrangement meets the criteria in paragraph (d)(iv).
(e) Definitions. For purposes of this rule, the following
terms have the following meanings:
(i) The term “non-cash compensation” shall
mean any form of compensation received in connection with the sale and
distribution of municipal securities that is not cash compensation, including
but not limited to merchandise, gifts and prizes, travel expenses, meals and
lodging.
(ii) The term “cash compensation” shall mean
any discount, concession, fee, service fee, commission, asset-based sales
charge, loan, override or cash employee benefit received in connection with the
sale and distribution of municipal securities.
(iii) The term “offeror” shall mean, with
respect to a primary offering of municipal securities, the issuer, any adviser
to the issuer (including but not limited to the issuer’s financial adviser,
bond or other legal counsel, or investment or program manager in connection
with the primary offering), the underwriter of the primary offering, or any
person controlling, controlled by, or under common control with any of the
foregoing; provided, however, that, with respect to a primary offering of
municipal fund securities, “offeror” shall also include any person considered
an “offeror” under NASD Rule 2710, NASD Rule 2820 or NASD Rule 2830 in
connection with any securities held as assets of or underlying such municipal
fund securities.
(iv) The term “primary offering” shall
mean a primary offering defined in Securities Exchange Act Rule 15c2-12(f)(7).
Rule G-8 – Books and Records to be Made by
Brokers, Dealers and Municipal Securities Dealers
(a)(i) – (xvi) No change.
(xvii) Records Concerning Compliance with Rule G-20. Each broker, dealer and municipal securities dealer shall maintain:
(A) (i) a separate record of any gift or gratuity referred
to in Rule G-20(a); and
(B)(ii) all agreements referred to in Rule G-20(c)
and all compensation paid as a result of those agreements; and.
(C) records of all non-cash compensation referred to in Rule
G-20(d). The records shall include the name of the person or entity
making the payment, the names of the associated persons receiving the payments
(if applicable), and the nature (including the location of meetings described
in Rule G-20(d)(iii), if applicable) and value of non-cash compensation
received.
(xviii) – (xxii) No change.
(b)-(g) No change.
