Question & Answer Notice: Rule G-38
Additional Question and Answer Notice Published
The Board is publishing a third Question and Answer notice concerning rule G-38.
On November 13, 1997 the Board filed with the Securities and Exchange Commission (SEC) a third notice of interpretation, in question-and-answer format, on rule G-38 on consultants.(1) The Board issued the interpretation in response to inquiries received from market participants concerning the applicability of the rule to bank affiliates, as well as the rule's definition of payment. The SEC requested comment on the interpretation and, in response, received letters expressing opposition.(2) The SEC then asked the Board to withdraw and refile the interpretation pursuant to Section 19(b)(2) under the Securities and Exchange Act of 1934 in order to provide additional time for public comment. Accordingly, on January 9, 1998 the Board withdrew and resubmitted the interpretation as File No. SR-MSRB-98-1. Anyone wishing to comment to the SEC on the interpretation should refer to this file number. The interpretation is as follows:
BANK AFFILIATES AND DEFINITION OF PAYMENT
Q: A bank and its employees communicate with an
issuer on behalf of an affiliated dealer to obtain municipal securities business for that
dealer. In return, the bank and its employees receive certain "credits" from the
dealer. 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. Are the credits considered a "payment" under rule G-38
thereby requiring the dealer to designate the bank or its employees as consultants and
comply with the requirements of rule G-38?
A: Rule G-38 defines a consultant as any person used by a dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on behalf of the dealer where the communication is undertaken by the person in exchange for, or with the understanding of receiving, payment from the dealer or any other person.(3) The term payment, as used in rule G-38, means any gift, subscription, loan, advance, or deposit of money or anything of value. The absence of an immediate transfer of funds or anything of value to an affiliate or individual employed by the affiliate would not exclude the credits from the definition of payment 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. In this regard, the compensation may be in the form of cash (e.g., a bonus) or non-cash. In either case, if the dealer or any other person(4) eventually gives anything of value (i.e., 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 and the dealer must comply with the various requirements of the rule. For additional guidance in this area, you may wish to review Q&A numbers 6 and 7 (dated February 28, 1996) in the MSRB Manual following rule G-38, as well as Q&A number 4 (dated December 7, 1994) in the MSRB Manual following rule G-37.
January 9, 1998
1. File No. SR-MSRB-97-8.
2. Securities Exchange Act Release No. 39391 (Dec. 3, 1997), 62 FR 65114 (Dec. 10, 1997).
3. Municipal finance professionals and any person whose sole basis of compensation is the actual provision of legal, accounting or engineering advice, services or assistance are excepted from the definition of consultant.
4. The Securities Exchange Act of 1934 (the "Act") defines the term "person" as a
"natural person, company, government, or political subdivision, agency, or instrumentality of a government." Board rule D-1 provides that unless the context otherwise specifically requires, the terms used in Board rules shall have the same meanings as set forth in the Act.
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