MSRB Reports -- Volume 19, Number 2 -- April 1999

Request for Comments             COMMENTS DUE BY MAY 28, 1999

Additional Requirements for Pending Amendments on Disclosure of Consultants’ Contributions: Rule G-38

 

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Comments Requested

The Board is requesting comments regarding draft amendments to the reasonable efforts provision contained in proposed amendments to rule G-38, on consultants, pending at the Securities and Exchange Commission.

Comments should be submitted to the Board no later than May 28, 1999, and may be directed to Ronald W. Smith, Senior Legal Associate. Written comments will be available for public inspection.

 

On June 16, 1998, the Board filed with the Securities and Exchange Commission ("SEC") proposed amendments to rules G-38 and G-8, and revisions to the attachment page to Form G-37/G-38, to require dealers to obtain from their consultants1 information on the consultants’ political contributions to official(s) of an issuer and payments to state and local political parties (hereafter collectively referred to as "contributions") and to require dealers to report such information to the Board on Form G-37/G-38.2

"REASONABLE EFFORTS" PROVISION

The proposed amendments contain a "reasonable efforts" provision. The Board believes it is reasonable to allow dealers to rely in good faith on information received from their consultants regarding contributions and that it would be almost impossible and unduly burdensome for dealers to investigate for contributions that were not reported by their consultants. The reasonable efforts provision provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. The proposed amendments state that reasonable efforts include having a dealer: (1) state in the Consultant Agreement that Board rules require disclosure of consultant contributions, and (2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information. The Board stated in its filing of the amendments that, while the Board does not believe dealers have a duty to investigate whether the contribution information provided is accurate or complete, the Board would expect a dealer to vigorously enforce its contract with a consultant if the dealer becomes aware that the consultant is not providing it with materially complete or accurate information concerning contributions on a timely basis.

DRAFT AMENDMENTS

The SEC staff has recommended that the reasonable efforts provision contain two additional requirements: (1) the dealer must disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule, and (2) the dealer must terminate the contract should the consultant fail to provide such report by the next calendar quarter after it was due, and the dealer must not make any further payments pursuant to the Consultant Agreement. The SEC staff has stated that these additional requirements to the reasonable efforts provision should help ensure that all required information on contributions is obtained from consultants.

Disclosure of Any Consultant that Does Not Provide the Required Report

As noted above, the SEC staff has recommended that the reasonable efforts provision require that a dealer disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule. The pending proposed amendments currently require dealers to receive from their consultants reports on any reportable contributions but the amendments do not contain a requirement for dealers to receive reports if no such contributions were made. In order to establish a complete record of the information being reported by consultants, the draft amendments would revise the pending proposed amendments to require all dealers to receive reports every quarter from their consultants listing all reportable contributions or stating that the consultants made no reportable contributions, as appropriate. The dealer would then indicate the contributions reported or that the consultant had no contributions to report, as appropriate, on its Form G-37/G-38 for the applicable quarter. The Board believes it would be helpful for the general requirements in the rule language (and not the reasonable efforts provision) also to require dealers to disclose if they did not receive a report from a consultant during a particular quarter. Thus, if a consultant does not submit a report to the dealer for a particular quarter, the dealer must report that fact on its Form G-37/G-38.

Termination of Contract and No Further Payments

The SEC staff’s second suggested requirement for the reasonable efforts provision is that a dealer must terminate the contract should a consultant fail to provide the required information by the next calendar quarter after it was due, and the dealer must not make any further payments to the consultant pursuant to the Consultant Agreement.

The draft amendments would revise the pending proposed amendments to require dealers that wish to rely on a reasonable efforts defense to include language in their Consultant Agreements to the effect that the Consultant Agreement will be terminated if the consultant fails to provide the dealer a report of the required information within the required time frame and that no further payments will be made to the consultant from the date of termination of the Consultant Agreement if the Consultant Agreement is terminated because the consultant did not provide the required information. When a Consultant Agreement is terminated by the dealer because of a consultant’s failure to provide reports about its reportable contributions, the draft amendments would require a dealer that wishes to rely on a reasonable efforts defense to note on its Form G-37/G-38 that the Consultant Agreement has been terminated for this reason and the date of termination.

If, for any calendar quarter, a consultant fails to provide the dealer with a report of its contributions or a report noting that the consultant made no reportable contributions and such failure continues up to the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, the dealer must terminate the Consultant Agreement by the date the form for such second quarter must be sent to the Board (i.e., January 31, April 30, July 31 or October 31) in order to rely on the reasonable efforts provision.3 Dealers that wish to rely on a reasonable efforts defense would not be permitted to make any further payments pursuant to the Consultant Agreement from the date of termination, even if money is owed to the consultant for services already rendered.

REQUEST FOR COMMENTS

The Board is requesting comments from interested parties about the draft amendments, including the requirements to require consultants to report to dealers that no reportable contributions were made, if applicable, and to require dealers to disclose to the Board when no reports have been received from their consultants.4 While dealers do not have to rely on the reasonable efforts provision, most dealers that have contacted the Board regarding the proposed amendments have indicated that they would try to do so. As to the additional requirements to the reasonable efforts provision, the Board asks for comments particularly on the contractual provision that would require termination if a consultant fails to provide the required report after two quarters. In addition, the Board asks for comments on the requirement to cease paying the consultant pursuant to the Consultant Agreement as of the termination date.

April 19, 1999

TEXT OF AMENDMENTS5

 

Rule G-38. Consultants

(a) Definitions.

(i)-(v) No change.

(vi) The term Areportable political contribution@ means:

        (A) if the consultant has had direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer, a political contribution to an official(s) of such issuer made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those political contributions to official(s) of an issuer made by any individual referred to in subparagraphs (b)(i)(A) or (B) of this rule who is entitled to vote for such official if the contributions made by such individual, in total, are not in excess of $250 to any official of such issuer, per election.

(vii) The term Areportable political party payment@ means:

        (A) if a political party of a state or political subdivision operates within the geographic area of an issuer with which the consultant has had direct or indirect communication to obtain or retain municipal securities business on behalf of the broker, dealer or municipal securities dealer, a payment to such party made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those payments to political parties of a state or political subdivision made by any individual referred to in subparagraphs (b)(i)(A) or (B) of this rule who is entitled to vote in such state or political subdivision if the payments made by such individual, in total, are not in excess of $250 per political party, per year.

(viii) The term Aofficial of such issuer@ or Aofficial of an issuer@ shall have the same meaning as in rule G-37(g)(vi).

(b) Written Agreement

        (i) Each broker, dealer or municipal securities dealer that uses a consultant shall evidence the consulting arrangement by a writing setting forth, at a minimum, the name, company, business address, role and compensation arrangement of each such consultant (AConsultant Agreement@). In addition, the Consultant Agreement shall include a statement that the consultant agrees to provide the broker, dealer or municipal securities dealer with a list by contributor category, in writing, of any reportable political contributions and any reportable political party payments during each calendar quarter made by:

        (A) the consultant;

        (B) any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and

        (C) any political action committee controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer.

       (ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.

        (iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.

        (iv) Such The Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer.

(c) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.

        (i) A broker, dealer or municipal securities dealer is  to obtain information on its consultant’s reportable political contributions and reportable political party payments beginning with a consultant=s first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).

        (ii) The requirement to obtain the information referred to in paragraph (c)(i) of this rule shall end upon the termination of the Consultant Agreement.

        (iii) A broker, dealer or municipal securities dealer will not violate this section if it fails to receive from its consultant all required information on reportable political contributions and reportable political party payments and thus fails to report such information to the Board if the broker, dealer or municipal securities dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. Reasonable efforts shall include:

        (A) a statement in the Consultant Agreement that Board rules require disclosure of consultant contributions to issuer officials and payments to state and local political parties; and

        (B) the broker, dealer or municipal securities dealer sending quarterly reminders to its consultants of the deadline for their submissions to the broker, dealer or municipal securities dealer of the information concerning their reportable political contributions and reportable political party payments;

        (C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:

        (1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and

        (2) no further payments shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and

        (D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

(d) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, business address, role and compensation arrangement of any consultant used, directly or indirectly, by the broker, dealer or municipal securities dealer to attempt to obtain or retain municipal securities business with each such issuer. Such information shall be submitted to the issuer either:

        (i) – (ii) No change.

(d) (e) Disclosure to Board. Each broker, dealer and municipal securities dealer shall send to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports of all consultants used by the broker, dealer or municipal securities dealer during each calendar quarter. Two copies of the reports must be sent to the Board on Form G-37/G-38 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). Such reports shall include, for each consultant, in the prescribed format, the consultant=s name, company, business address, role, and compensation arrangement, any municipal securities business obtained or retained by the consultant with each such business listed separately, and, if applicable, dollar amounts paid to the consultant connected with particular municipal securities business. In addition, s Such reports shall indicate the total dollar amount of payments made to each consultant during the report period and, if any such payments are related to the consultant=s efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified. In addition, such reports shall include the following information to the extent required to be obtained during such calendar quarter pursuant to paragraph (c)(i) of this rule:

        (i)(A) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving reportable political contributions or reportable political party payments, listed by state; and

        (B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or

        (ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or

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

Once a contribution or payment has been disclosed on a report, the dealer should not continue to disclose that particular contribution or payment on subsequent reports.

 

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) - (xvii) No change.

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

        (i) (A) a listing of the name, company, business address, role and compensation arrangement of each consultant;

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

        (iii) (C) a listing of the compensation paid in connection with each such

Consultant Agreement;

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

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

        (vi) (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 payments; 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) No change.

(b) - (f) No change.

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

(a) – (d) No change.

(e)(i)(A) – (C) No change.

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

        (E) No change.

(ii) – (iii) No change.

(f) – (i) No change.


ENDNOTES

1. Rule G-38 defines a consultant as "any person used by a broker, dealer or municipal securities dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on behalf of such broker, dealer or municipal securities dealer where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the broker, dealer or municipal securities dealer or any other person." Specifically excluded from the definition of "consultant" in rule G-38 are municipal finance professionals of the broker, dealer or municipal securities dealer and "any person whose sole basis of compensation from the broker, dealer or municipal securities dealer is the actual provision of legal, accounting or engineering advice, services or assistance in connection with the municipal securities business that the broker, dealer or municipal securities dealer is seeking to obtain or retain." The definition does not exclude any dealer used by another dealer (other than a member of the syndicate) that assists in obtaining or retaining municipal securities business. See Question and Answer to rule G-38 dated March 4, 1999, MSRB Manual (CCH), 3686

2. Rule G-38(b) requires each dealer that uses a consultant to evidence the consulting arrangement by a writing setting forth, at a minimum, the name, company, role and compensation arrangement of each such consultant ("Consultant Agreement"). The Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on behalf of the dealer. The proposed amendments require a dealer to include within its Consultant Agreement a statement that the consultant agrees to provide the dealer each quarter with a listing of reportable political contributions to official(s) of an issuer and report payments to political parties of states and political subdivisions during such quarter. The Consultant Agreement must require the consultant to provide the required information to the dealer in sufficient time for the dealer to meet its reporting obligations under rule G-38. For a more complete description of the proposed amendments, see "Requirements for Dealers to Report Their Consultants’ Political Contributions and Payments to Political Parties: Rules G-38 and G-8," MSRB Reports, Vol. 18, No. 2 (August 1998) at 3-10. This notice is also available on the Board’s Web site at www.msrb.org.

3. Rule G-37(e)(i) provides that each dealer must send to the Board two copies of Form G-37/G-38 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).

4. The draft amendments also include a technical amendment to rule G-37(e)(i)(D) to conform to the draft amendments to rule G-38.

5. Underlining indicates proposed amendments pending at the SEC; strikethrough indicates deletions; and bold with underlining indicates draft amendments.

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