MSRB NOTICE 2006-05 (MARCH 17, 2006)

MSRB FILES SECOND AMENDMENT TO INTERPRETATION ON THE DEFINITION OF SOLICITATION UNDER RULES G-37 AND G-38 AND FILES WITHDRAWAL OF CERTAIN RULE G-37 AND G-38 QUESTION AND ANSWER GUIDANCE

On March 17, 2006, the Municipal Securities Rulemaking Board (the “MSRB”) filed with the Securities and Exchange Commission (the “SEC”) a second amendment to a previously filed proposed rule change consisting of an interpretive notice relating to the definition of “solicitation” for purposes of Rule G-37, on political contributions and prohibitions on municipal securities business, and Rule G-38, on solicitation of municipal securities business (as amended by the second amendment, the “Solicitation Guidance”).[1]  The second amendment consolidates guidance on the definition of solicitation in the Solicitation Guidance.  In addition, the MSRB has determined to withdraw certain Question and Answer interpretations providing guidance on the meaning of solicitation under Rule G-37 (the “Rule G-37 solicitation Qs&As”) and to withdraw obsolete Question and Answer interpretations under former Rule G-38 relating to consultants (the “former Rule G-38 Qs&As”) since, as a result of the adoption of current Rule G-38 in 2005, the consultant provisions to which the former Rule G-38 Qs&As relate have been superseded and are no longer in effect.[2]

The SEC published the proposed rule change for comment and received one comment letter.[3]  The commentator stated that, in certain respects, the guidance on solicitation and related matters provided in the proposed rule change may not be wholly consistent with guidance previously provided by the MSRB and that such prior guidance should be withdrawn.  The MSRB agrees that it would be appropriate to consolidate its guidance on the definition of solicitation for purposes of Rules G-37 and G-38 in the Solicitation Guidance and therefore has filed the second amendment.  The second amendment deletes a footnote in the proposed rule change referencing the Rule G-37 solicitation Qs&As (which are being withdrawn simultaneously) and instead inserts the substantive language of such Qs&As into the text of the Solicitation Guidance. The second amendment and the withdrawal of the Rule G-37 solicitation Qs&As and former Rule G-38 Qs&As do not effect a substantive change in the MSRB’s guidance on the definition of solicitation as set forth in the proposed rule change.  Rather, the language of the Rule G-37 solicitation Qs&As, which had previously been incorporated by reference, would now be explicitly included within the Solicitation Guidance.

The commentator noted an apparent inconsistency between the proposed rule change and a former Rule G-38 Q&A published on March 4, 1999 relating to circumstances where joint ventures between dealers might give rise to one of the dealers being considered a consultant under former Rule G-38.  The range of professionals covered by the final paragraph of the Solicitation Guidance relating to communications by non-affiliated professionals is broader than the range of professionals previously designated within an exception to the definition of consultant under former Rule G-38.[4]  Such professionals would not be subject to current Rule G-38 under the Solicitation Guidance only so long as they are not being paid directly or indirectly by the dealer for communicating with an issuer for the purpose of obtaining or retaining municipal securities business for the dealer (i.e., the professionals are paid solely for the provision of professional services with respect to the business).  Professional services provided by a non-affiliated person in connection with municipal securities business for which payments may be made under the final paragraph of the Solicitation Guidance must in fact constitute bona fide services and not be illusory in nature.  Finally, the MSRB notes that the application of the Solicitation Guidance is dependent upon the specific facts and circumstances and the MSRB has no opinion on how the Solicitation Guidance would be applied in any particular scenario.

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

March 17, 2006

 

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TEXT OF SECOND AMENDMENT TO PROPOSED RULE CHANGE

The second paragraph under the heading “Limited Communications with Issuer Representative” in the proposed rule change is amended as follows:[5]

In the examples above, if the affiliated person receives compensation such as a finder’s or referral fee for such business or if the affiliated person engages in 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), the affiliated person generally would be viewed as having solicited the municipal securities business.1  The MSRB has long regarded receipt of a finder’s fee for bringing municipal securities business to the dealer and activities such as attending presentations to issuer personnel of the dealer’s municipal finance capabilities or responding to issuer requests for proposals as presumptively constituting solicitations of municipal securities business and does not view this notice as altering such presumption.

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

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WITHDRAWN RULE G-37 SOLICITATION QUESTION AND ANSWER INTERPRETATIONS

The following Rule G-37 solicitation Qs&As or portions thereof as indicated are withdrawn:[6]

IV.10 (December 7, 1994) – Q:  What constitutes "solicitation" of municipal securities business?

A:  Solicitation activities may include, but are not limited to, responding to issuer Requests for Proposals, making presentations of public finance and/or municipal securities marketing capabilities to issuer officials, and engaging in other activities calculated to appeal to issuer officials for municipal securities business, or which effectively do so.

IV.11 (December 7, 1994) – Q:  Has a "solicitation" occurred if a retail sales person receives a "finder's fee" for bringing municipal securities business to the dealer?

A:  If a retail sales person receives a "finder's fee" for bringing municipal securities business to the dealer, then there should be a presumption that the sales person solicited municipal business from an issuer official. In such situations, the sales person becomes a municipal finance professional and any contributions made by that person to an issuer official may subject the dealer to the two-year prohibition on business with that issuer.

IV.13 (March 22, 1995) – Q: Any associated person who solicits municipal securities business is deemed a municipal finance professional under Rule G-37. The Board previously noted that "solicitation" may encompass a number of activities, including, for example, making presentations of public finance and/or municipal securities marketing capabilities to issuer officials, and engaging in other activities calculated to appeal to issuer officials for municipal securities business, or which effectively do so.  If an associated person of a dealer attends a presentation by dealer personnel of public finance capabilities, would this also constitute "solicitation" under Rule G-37?

A: Yes. If an associated person of a dealer attends such a presentation, then he or she is assumed to have solicited municipal securities business and therefore is deemed a municipal finance professional under Rule G-37. Accordingly, any contributions given to issuer officials by that person within the last two years could subject the dealer to the rule's two-year prohibition on business with such issuers.

IV.18 (September 9, 1997, revised October 30, 2003) – Q: In making the determination of which associated persons of a dealer meet the definitions of municipal finance professional and non-MFP executive officer, is it correct to designate all the executives of the dealer (e.g., President, Executive Vice Presidents) under the category of non-MFP executive officers?

A: No. In making the determination of whether someone is a municipal finance professional or non-MFP executive officer, one must review the activities of the individual and not his or her title. Rule G-37(g)(iv) defines the term “municipal finance professional” as:

 (A) any associated person primarily engaged in municipal securities representative activities, as defined in Rule G-3(a)(i), provided, however, that sales activities with natural persons shall not be considered to be municipal securities representative activities for purposes of this subparagraph (A);

(B) any associated person who solicits municipal securities business, as defined in paragraph (vii);

(C) any associated person who is both (i) a municipal securities principal or a municipal securities sales principal and (ii) a supervisor of any persons described in subparagraphs (A) or (B);

(D) any associated person who is a supervisor of any person described in subparagraph (C) up through and including, in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer or similarly situated official and, in the case of a bank dealer, the officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank’s municipal securities dealer activities, as required pursuant to Rule G-1(a); or

(E) any associated person who is a member of the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in Rule G-1) executive or management committee or similarly situated officials, if any; provided, however, that, if the only associated persons meeting the definition of municipal finance professional are those described in this subparagraph (E), the broker, dealer or municipal securities dealer shall be deemed to have no municipal finance professionals.

Rule G-37(g)(v) defines the term “non-MFP executive officer” as:

an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipalsecurities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in Rule G-1), but does not include any municipal finance professional, as defined in paragraph (iv) of this section (g); provided, however, that, if no associated person of the broker, dealer or municipal securities dealer meets the definition of municipal finance professional, the broker, dealer or municipal securities dealer shall be deemed to have no non-MFP executive officers. {emphasis added}

Dealers should first review the activities of their associated persons to determine whether they are municipal finance professionals, and then, once that list of individuals has been established, conduct a review of the remaining associated persons to determine whether they are non-MFP executive officers. Dealers should pay close attention to those associated persons who are soliciting municipal securities business and, thus, will be considered municipal finance professionals. The Board has previously stated that solicitation activities may include, but are not limited to, responding to issuer Requests for Proposals, making presentations of public finance and/or municipal marketing capabilities to issuer officials, and engaging in other activities calculated to appeal to issuer officials for municipal securities business, or which effectively do so.

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WITHDRAWN FORMER RULE G-38 QUESTION AND ANSWER INTERPRETATIONS

All former Rule G-38 Qs&As are withdrawn except the Q&A published on June 6, 2001.  Click here to view the text of the withdrawn former Rule G-38 Qs&As.

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