|Question & Answer Notice: Rule G-38
||Rule G-38 Question and Answer
On May 20, 1998, the Securities and Exchange Commission approved this revised rule G-38 Question and Answer.
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.(1)
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(2)
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. In this regard, each dealer (bank or
securities firm) should determine whether the affiliate or individual employee(s) of the
affiliate is its consultant(s), and must then ensure compliance with rule G-38, including
the contractual arrangements and disclosures required by the rule. For additional guidance
in this area, you may wish to review Q&A numbers 6 and 7 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.
May 20, 1998
1. 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.
2. 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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