The MSRB has become aware of problems in transaction reporting as a result of dealers "bunching" certain inter-dealer transactions in the comparison system.  Recently, some dealers have reported the sum of two trades as one transaction in instances when two dealers effected two trades with each other in the same issue and at the same price.  When two transactions are effected, two transactions should be reflected in each dealer's books and records and two transactions are required to be reported to the MSRB.  The time of trade for each transaction also must accurately reflect the time at which a contractual commitment was formed for each quantity of securities.  For example, if Dealer A purchases $50,000 of a municipal issue at a price of par from Dealer B at 11:00 am and then purchases an additional $50,000 at par from Dealer B at 2:00 pm, two transactions are required to be reflected on each dealers' books and records and two transactions are required to be reported to the MSRB. 

Since the same inter-dealer trade record submitted for automated comparison under Rule G-12(f) also is used to satisfy the requirements of Rule G-14, on transaction reporting, each inter-dealer transaction should be submitted for automated comparison separately in order to comply with Rule G-14's requirement to report all transactions.  Failure to do so causes erroneous information concerning transaction size and time of trade to appear in the transparency reports published by the MSRB as well as in the audit trail used by regulators and enforcement agencies.  To the extent that dealers use the records generated by the comparison system for purposes of complying with MSRB Rule G-8, on recordkeeping, it may also create erroneous information as to the size of transactions effected or time of trade execution.

In recent months, the MSRB has received a number of questions relating to certain kinds of transactions in which independent investment advisors instruct selling dealers to make deliveries to other dealers.  This notice addresses questions that have been raised relating to Rule G-12(f)(i), on automated comparison, and Rule G-14, on transaction reporting.  It describes existing requirements that follow from the language of the rules and does not set forth any new policies or procedures.

An independent investment advisor purchasing securities from one dealer sometimes instructs that dealer to make delivery of the securities to other dealers where the investment advisor's clients have accounts.  The identities of individual account holders typically are not given.[1] The dealers receiving the deliveries in these cases generally are providing "wrap fee" or similar types of accounts that allow investors to use independent investment advisors to manage their municipal securities portfolios. In these kinds of arrangements, the investment advisor chosen by the account holder may be picked from a list of advisors approved by the dealer; however, dealers offering these accounts have indicated that the investment advisor acts independently in effecting transactions for the client's municipal securities portfolio.

The following example illustrates the situation. An Investment Advisor purchases a $1 million block of municipal bonds from the Selling Dealer and instructs the Selling Dealer to deliver $300,000 of the bonds to Dealer X and $700,000 to Dealer Y. The Investment Advisor does not give the Selling Dealer the individual client accounts at Dealer X and Dealer Y to which the bonds will be allocated and there is no contact between the Selling Dealer and Dealers X and Y at the time of trade. The Investment Advisor, however, later informs Dealer X and Dealer Y to expect the delivery from the Selling Dealer, and gives the identity and quantity of securities that will be delivered, the final monies, and the individual account allocations. For example, the Investment Advisor may instruct Dealer X to allocate its $300,000 delivery by placing $100,000 in John Doe's account and $200,000 in Mary Smith's account. 

With respect to transaction reporting requirements in this situation, the Selling Dealer should report a $1 million sale to a customer.  No other dealer should report a transaction.  The comparison system should not be used for the inter-dealer transfers between the Selling Dealer and Dealers X and Y because this would cause them to be reported as inter-dealer trades. 

Frequently Asked Questions

One frequently asked question in the context of the above example is whether the transfers of the $300,000 and $700,000 blocks by the Selling Dealer to Dealer X and Dealer Y should be reported as inter-dealer transactions.  Another question is whether these transfers may be accomplished by submitting them to the automated comparison system for inter-dealer transactions.  Based on the information that has been provided to the MSRB, these transfers do not appear to represent inter-dealer trades and thus should not be reported under Rule G-14 or compared under Rule G-12(f)(i) using the current central comparison system. 

One reason for the conclusion that no inter-dealer trade exists is that municipal securities professionals for firms in the roles of Dealer X and Y have stated that the Investment Advisor is acting independently and is not acting as their agent when effecting the trade with the Selling Dealer.  In support of this assertion, they note that they often are not informed of the transaction or the deliveries that they should expect until well after the trade has been effected by the Investment Advisor.  They also note that the actions of the Investment Advisor are not subject to their control or supervision.  Thus, the $300,000 and $700,000 inter-dealer transfers in the above example appear to be simply deliveries made in accordance with a contract made by, and the instructions given by, the Investment Advisor.  The inter-dealer transfers thus do not constitute inter-dealer transactions.

Because Rule G-14 transaction reporting of inter-dealer trades is accomplished through the central comparison system, any dealer submitting the $300,000 and $700,000 inter-dealer transfers to the comparison system is in effect reporting inter-dealer transactions that did not occur.  In addition, this practice tends to drive down comparison rates and the overall performance of dealers in the automated comparison system.  As noted above, the trading desks of Dealer X and Dealer Y generally do not know about the Investment Advisor's transaction at the time of trade.  They consequently cannot submit comparison information to the system unless the Investment Advisor provides them with the trade details in a timely, accurate and complete manner.  Since the Investment Advisor is acting independently and is not supervised by municipal securities professionals at Dealer X and Dealer Y, there is no means for the municipal securities professionals at Dealer X and Dealer Y to ensure that this happens.

Questions also have been received on whether the individual allocations to investor accounts (e.g., the $100,000 and $200,000 allocations to the accounts of John Doe and Mary Smith in the example above) should be reported under Rule G-14 as customer transactions.  Even though the dealer housing these accounts obviously has important obligations to the investor with respect to receiving deliveries, paying the Selling Dealer for the securities, and processing the allocations under the instructions of the Investment Advisor, it does not appear that the dealer entered into a purchase or sale contract with the investor and thus nothing is reportable under Rule G-14.  This conclusion again is based upon statements by dealers providing the "wrap fee" and similar accounts, who indicate that the investment advisor acts independently and not as the dealer's agent when it effects the original block transaction and when it makes allocation decisions. 

For purposes of price transparency, the only transaction to be reported in the above example is a single $1 million sale to a customer.  This is appropriate because the only market price to be reported is the one set between the Selling Dealer and the Investment Advisor for the $1 million block of securities.  It is appropriate that the $300,000 and $700,000 inter-dealer transfers, and the $100,000 or $200,000 investor allocations are not disseminated as transactions since they would have to be reported using the price for the $1 million block.  This could be misleading in that market for $1 million round lots are often different than market prices for smaller transaction sizes.

Draft Interpretive Guidance

On November 18, 2002, the MSRB published for comment draft interpretive guidance on marketing of 529 college savings plan employee payroll deduction programs.[2] The MSRB received six comment letters. After reviewing these comments, the MSRB approved the draft interpretive guidance, with certain modifications, for filing with the SEC. The MSRB modified the draft interpretive guidance to: (i) change the term “introducing broker” to “selling broker;” (ii) reflect the existence of other scenarios in which 529 college savings plans are marketed in the workplace; (iii) provide more guidance as to when dealers may rely on others to fulfill regulatory responsibilities; and (iv) clarify certain recordkeeping obligations. The text of the proposed interpretive notice filed with the SEC appears at the end of this notice.

Summary of Comments on Draft Interpretive Guidance

One commentator fully supported the draft interpretive notice, stating that it “clearly sets out the rationale for providing guidance in this area … [and] will make it possible for our Representatives to assist companies in offering 529 college savings plans to their employees.” Four other commentators generally supported the draft interpretive notice, although each requested that the MSRB further broaden and/or clarify the guidance in various respects.[3]

Three commentators requested that the MSRB substitute the term “selling broker” or “selling dealer” for the term “introducing broker” used in the draft interpretive notice. They stated that the term “introducing broker” is used with different meanings under the federal securities laws applicable to other types of securities and may cause some confusion. In addition, one of these commentators recommended that, for purposes of the interpretation, the term “selling broker” also encompass the primary distributor where it directly establishes the relationship with the employer. It stated, “In addition to recognizing that a selling broker rarely, if ever, has a suitability obligation in the context of a payroll deduction program, the Notice should clarify that a primary distributor who makes 529 Plan investments available through a third-party broker would not have a suitability obligation under Rule G-19, as it too makes no recommendation to an employee.” The MSRB has changed the term “introducing broker” to “selling broker” in the revised interpretive notice. Contrary to the statement that the interpretive notice recognizes “that a selling broker rarely, if ever, has a suitability obligation,” the notice does not assess the likelihood or frequency of recommendations being made by selling brokers. The notice does provide some guidance regarding the factors to consider when determining whether a recommendation has occurred. The MSRB believes that no further guidance in this area is necessary.

Four commentators noted that the scenario described in the draft interpretive notice is not the only form in which dealers may seek to market 529 college savings plans through employers. In addition to arrangements where selling brokers having a contractual relationship with the primary distributor to market through employers, with the employees making investments directly through the primary distributor (as described in the draft interpretive notice), these commentators noted that: (1) primary distributors may themselves market 529 college savings plans through employers; (2) selling brokers sometimes have contractual relationships with the issuer rather than the primary distributor; (3) selling brokers may handle employee investments and maintain long-term relationships with employees, rather than merely introducing employees to the primary distributor; (4) transfer agents may undertake significant responsibilities in connection with employees’ investments; and (5) employees may in some instances use a dealer other than the selling broker or primary distributor to make an investment that may still be considered part of the employer-sponsored program. These commentators requested that the MSRB address some or all of these additional scenarios. In addition, one of these commentators suggested that the MSRB make clear that the scenarios addressed in the draft interpretive notice are illustrative and that other models may be implemented.

The MSRB has made significant modifications to the initial paragraphs of the notice to reflect the existence of these other scenarios. No significant change in interpretation results from a primary distributor acting in the role of a selling broker. The identity of the selling broker’s counterparty on the selling agreement also does not significantly change its regulatory obligations. Selling brokers that make recommendations remain fully obligated under MSRB rules and remain ultimately responsible where the primary distributor has not affirmatively undertaken regulatory obligations on behalf of the selling broker (as discussed below). The guidance provided by the notice is primarily intended for dealers that are formally involved in a workplace marketing program; thus, the notice is of limited applicability to dealers that do not have a formal role in such a program.

A commentator observed that the draft interpretive notice referred to on-line enrollment with the primary distributor and noted that in many circumstances enrollment and investments continue to be handled by mail. Also, three commentators noted that other forms of payment, such as ACH (automated clearing house) bank transfers, may be used in addition to traditional employee payroll deductions. These commentators requested that the MSRB recognize these variants in its final notice. The revised interpretive notice now more clearly acknowledges these different processes.

Four commentators sought further clarification on the circumstances under which selling brokers may rely on other parties to meet their regulatory obligations. Two of these commentators stated that dealers should be able to rely on issuers to distribute official statements to customers. One noted its concern that customers may be confused by the receipt of redundant (and possibly out-dated) disclosure documents if dealers must deliver official statements regardless of whether the issuer has sent them to customers. Another suggested that the ability of the selling broker to rely on the primary distributor for delivery of the official statement as provided in the draft interpretive notice be extended to the ability to rely on other parties, such as other dealers, employers and issuers.

The revised interpretive notice permits a selling broker to conclusively rely on the primary distributor to meet its disclosure obligations and certain supervisory obligations (described below) only under the limited circumstances in which employee orders are not accepted without actual delivery of the official statement and the primary distributor has affirmatively agreed to undertake such regulatory obligations on behalf of the selling broker. In such circumstances, the primary distributor will be responsible for fulfilling such obligations. In all other circumstances, the notice clarifies that a selling broker may agree with another party to take certain actions on its behalf but that if such other party fails to take such actions, the selling broker remains responsible for fulfilling its regulatory obligation.

One commentator suggested that the MSRB should permit selling brokers to enter into arrangements with the primary distributor to meet their supervisory obligations to review and approve customer accounts and transactions based upon having procedures in place that provide assurances to the selling brokers that such review and approval is being undertaken by the primary distributor. Another commentator questioned the value of requiring a selling broker to review customer accounts and transactions well after the transaction is executed, especially if the transaction was not recommended. In addition, it questioned why a requirement for such review and related recordkeeping would be dependent upon whether the selling broker receives compensation for a transaction.

The revised interpretive notice clarifies that, where a selling broker does not make a recommendation and the primary distributor affirmatively agrees to take on both the disclosure responsibilities and the supervisory responsibilities with regard to opening of accounts and approval of transactions, the regulatory obligation may be shifted to the primary distributor. However, supervisory responsibility remains with the selling broker so long as the selling broker retains any affirmative duties to employees. The MSRB believes that the limited recordkeeping obligations imposed on all selling brokers in the notice are appropriate. The revised interpretive notice makes clear that the limited recordkeeping requirements that remain for subsequent transactions effected by the primary distributor where compensation is paid to the selling broker applies only when such compensation is transaction based since, depending on the facts and circumstances, this information may be necessary to determine compliance with MSRB’s fair pricing and fair commission requirements.

With respect to transfer agents, a commentator noted that many plans provide for applications and customer orders to be sent directly to a transfer agent, with the primary distributor’s activities “limited to managing the overall marketing of the program and the production of marketing and promotional materials.” It stated that “only the transfer agent maintains any investor records and these records are the plan’s investor records. Thus, in this model, the primary distributor’s regulatory responsibilities are limited primarily to compliance with applicable rules governing marketing materials but not those rules mandating customer account related procedures.” The commentator sought assurance that primary distributors did not retain residual customer protection obligations under MSRB rules in the scenario where applications and orders are submitted directly to the transfer agent.

The MSRB notes that transfer agents generally are viewed under the Exchange Act as working on behalf of the issuer but that, in the 529 college savings plan market, transfer agents also sometimes contractually agree to act on behalf of the primary distributor. In the revised interpretive notice, where transactions are effected through a transfer agent without the direct involvement of the primary distributor or the selling broker, the selling broker is permitted to conclusively rely on the primary distributor to fulfill certain of the selling broker’s regulatory obligations only if the transfer agent has contractually agreed to act on behalf of the primary distributor. Otherwise, the transfer agent is effectively treated as an agent of the issuer and the dealer that enlisted the corresponding employer to participate in the workplace marketing plan remains ultimately responsible for compliance with MSRB rules.

A commentator asked why a selling broker would have a fair dealing obligation under Rule G-17 to an employer since the employer is not the dealer’s client. It also sought guidance regarding the nature of information that a dealer would be obligated to provide to the employer under the Rule G-17 disclosure obligation. Two commentators also questioned the need for the selling broker to maintain a record of the name and address of an employer that the dealer solicited, as well as for principal review of such solicitation. Another commentator sought assurances that the fair dealing obligation toward the employer would not give rise to any inference that the issuer has any federal securities law obligation to employers under the scenario described in the draft interpretive notice.

The fair dealing requirement of Rule G-17 applies, on its face, to all persons, not just customers. The MSRB believes that it appropriately applies to the selling broker’s relationship with employers, particularly since the selling broker is inducing the employer to create a captive audience of investors and the employer’s agreement to participate in the program may lead employees to believe that the employer endorses investment under the program. Under these circumstances, it is important that selling brokers provide adequate information regarding the program to the employer so that it can make an informed decision with regard to enrollment in the program. The limited recordkeeping regarding the employer required by the notice is important in the context of documenting the ability of a selling broker to rely on the guidance provided in the notice with respect to particular transactions. The revised interpretive notice provides assurances that a dealer’s fair dealing obligation to the employer is not intended to imply that the issuer has a similar legal obligation to the employer.

* * * * *

[1] The Daily Report is available by subscription at no cost. Currently, "frequently traded" securities are those that traded two or more times during a trading day. As noted below, inter-dealer transactions must be compared on trade date to be eligible for this report.

[2] The MSRB also publishes a "Daily Comprehensive Report," providing details of all municipal securities transactions that were effected during the trading day one week earlier. The Daily Comprehensive Report is available by subscription for $2,000 per year. Along with trades in issues that are not "frequently traded," this report includes transactions reported to the MSRB late, inter-dealer trades compared after trade date, and transaction data corrected by dealers after trade date.

[3] A dealer may call the MSRB at (703) 797-6600 and ask to speak with a Transaction Reporting Assistant who can check to see if its firm is signed up for this free service.

[4] A complete description of the service is available at www.msrb.org in the Municipal Price Reporting / Transaction Reporting System section. NASD also has informed dealers of this service in "Municipal Transaction Reporting Compliance Information," Regulatory and Compliance Alert (Summer 2002).

[5] Under NSCC procedures, no buy-side trade report should be submitted for comparison against a syndicate "takedown" trade submitted by the syndicate manager. Syndicate transactions are "one-sided submissions" and compare automatically after being submitted by the syndicate manager. Paragraph (a) (ii) of Rule G-14 procedures thus requires that only the syndicate manager submit the trade.

[6] The EBS statistics reflect the aggregate number of such errors found in transaction data submitted by a particular NSCC member firm for itself and/or for its correspondents. This statistic cannot be generated individually for each correspondent because the EBS needed to identify the correspondent is itself missing or invalid. EBS statistics only measure the validity of the input the submitter provides to identify its own side of the trade and do not measure the accuracy with which a dealer uses EBSs to identify its contra-parties.

[7] In 1994, the MSRB stated that, "introducing brokers share the responsibility for complying with [Rule G-12(f)] with their clearing brokers. Introducing brokers who fail to submit transaction information in a timely and accurate manner could subject either or both parties to enforcement action for violating [Rule G-12(f)]." See "Enforcement Initiative," MSRB Reports, Vol. 14, No. 3 (June 1994) at 35. NASD has since reiterated this policy; see the following articles in Regulatory and Compliance Alert: "Introducing Firm Responsibility When Reporting Municipal Trades Through Service Bureaus and Clearing Firms" (Winter 2000) and "Municipal Securities Transaction Reporting Compliance Information" (Spring 2001).

[8] As explained above, one of the problems often associated with stamped advisories is that the EBS on transaction records may be missing or inaccurate. Since a clearing broker may have many correspondents, stamping an advisory can make it impossible for market regulators to know which correspondent actually effected the trade.

[9] Of course, if the initial information reported to the MSRB, such as total par value, is changed, the trade record must be amended to make it correct.

Purchase of new issue from issuer. This is in response to your letter in which you ask whether Board rule G-17, on fair dealing, or any other rule, regulation or federal law, requires an underwriter to purchase a bond issue from a municipal securities issuer at a “fair price.”

Rule G-17 states that, in the conduct of its municipal securities business, each broker, dealer and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice. Thus, the rule requires dealers to deal fairly with issuers in connection with the underwriting of their municipal securities.  Whether or not an underwriter has dealt fairly with an issuer is dependent upon the facts and circumstances of an underwriting and cannot be addressed simply by virtue of the price of the issue. For example, in a competitive underwriting where an issuer reserves the right to reject all bids, a dealer submits a bid at a net interest cost it believes will enable it to successfully market the issue to investors. One could not view a dealer as having violated rule G-17 just because it did not submit a bid that the issuer considers fair. On the other hand, when a dealer is negotiating the underwriting of municipal securities, a dealer has an obligation to negotiate in good faith with the issuer. If the dealer represents to the issuer that it is providing the best market price available on this issue, and this is not the case, the dealer may violate rule G-17. Also, if the dealer knows the issuer is unsophisticated or otherwise depending on the dealer as its sole source of market information, the dealer’s duty under rule G-17 is to ensure that the issuer is treated fairly, specifically in light of the relationship of reliance that exists between the issuer and the underwriter. MSRB interpretation of December 1, 1997.

MSRB TRANSACTION REPORTING PROGRAM

QUESTIONS AND ANSWERS

October 1997

Most of these questions and answers were included in an MSRB mailing sent to each broker, dealer and municipal securities dealer on March 31, 1997. Questions numbered 60 and higher have been added since that mailing.

These questions and answers touch upon the following topics:

GENERAL QUESTIONS

CUSTOMER TRANSACTION REPORTING

• Preparing for Customer Transaction Reporting
• Completing the Customer Transaction Reporting Form
• Price and Yield
• Settlement Date
• Agency and Principal Transactions
• Control Numbers
• Records Amending and Cancelling Trades
• Submission of Files
• File Forwarding by NSCC
• Transaction Reporting to MSRB Using MSRB's Dial-Up Facility
• Testing Customer Transaction Reporting with the MSRB
• Record and File Format Questions
• Other Questions

 

INTER-DEALER TRANSACTION REPORTING

• Accrued Interest
• Executing Broker Symbol
• Time of Trade
• Problems in Inter-Dealer Transaction Reporting

 

QUESTIONS ADDED AFTER MARCH 1997

• Yield
• Commission
• File Format

 

GENERAL QUESTIONS

1. Q: What is the purpose of the requirement in MSRB rule G-14 to report each municipal securities transaction to the MSRB?

A: One purpose of the requirement is to make transaction information (e.g., prices and volumes) available to market participants. This is generally known as the "transparency" function of the MSRB Transaction Reporting Program. It is being accomplished at this time through a daily report that shows information such as the high, low and average prices of municipal securities that were traded four or more times on the previous day. A second, equally important, function of the program is market surveillance. Each transaction reported is entered into a database that essentially is an audit trail of transactions. This database is available only to the SEC, the NASD and other regulators charged with surveillance of the market. Transparency and surveillance functions have long been in existence in other major U.S. securities markets. The MSRB is responsible to bring these functions to full implementation in the municipal securities market.

2. Q: Have the requirements of G-14 been approved by the Securities and Exchange Commission?

A: Yes. The Commission approved the transaction reporting requirements described here on November 29, 1996 (Securities and Exchange Act Release No. 37998; see also MSRB Reports, Vol. 17, No. 1 [January 1997] at 3-8).

3. Q: When does compliance with these functions have to take place?

A: Inter-dealer transaction reporting began on January 23, 1995, with an amendment to rule G-14. (See MSRB Reports, Vol. 14, No. 5 [December 1994] at 3-6.) Each dealer should now be well aware of the specific requirements of reporting inter-dealer transactions. A number of notices have appeared in MSRB Reports indicating areas where attention is specifically needed to improve reporting. (See, e.g., MSRB Reports, Vol. 16, No. 2 [June 1996] at 9-12.) Customer transaction reporting begins with mandatory testing in July 1997 and full program operations are planned for early 1998.

4. Q: How does a dealer report municipal securities transactions to the MSRB?

A: The answer to the question differs depending upon whether the transaction is with another dealer ("inter-dealer transaction") or with an entity that is not a dealer ("customer transaction"). Inter-dealer transactions are reported by submitting the required transaction information, in proper form, to the automated comparison system for municipal securities. Dealers achieve both the automated comparison function and the transaction reporting function by submitting a single file to the comparison system. For customer transactions, dealers must produce a computer-readable file specifically for the MSRB and transmit that file to the MSRB each night.

CUSTOMER TRANSACTION REPORTING

Preparing for Customer Transaction Reporting

5. Q: What should dealers be doing now to prepare for customer transaction reporting?

A: After becoming familiar with the G-14 requirements, dealers should either be making changes to their computer systems necessary to produce and transmit customer transaction files, or making arrangements with clearing brokers or service bureaus who will do this on their behalf. Although the mandatory testing period does not begin until summer 1997, preparations should be made now.

6. Q: Is there anything else that a dealer can do now to prepare?

A: Each dealer should complete and return a Customer Transaction Reporting Form.

Completing the Customer Transaction Reporting Form

7. Q: In completing the information form for customer transaction reporting, whom should I identify as the "primary contact with the MSRB for purposes of customer transaction reporting"? Should I name our Municipal Securities Department Director or our Compliance Officer?

A: The primary contact should be the individual who will be ultimately responsible for ensuring that MSRB mailings and other communications (e.g., phone calls) on this subject will reach the appropriate persons in the firm. The primary contact will be the MSRB's initial contact regarding tests of customer transaction reporting.

8. Q: Who should be identified as the "point-of-contact regarding technical matters"?

A: The MSRB will contact this person on computer-related matters such as the firm's telecommunications and methods for transmitting files, how many characters each field should have in the record of a trade, what headers must be included in the files, etc.

9. Q: How do the above topics differ from the person designated for questions about the "correctness of trade details"?

A: A question about trade details might arise, for example, if MSRB calculates a yield that differs substantially from the dealer-reported yield for the same trade. MSRB staff may ask the dealer what it used to derive yield from dollar price to account for the difference. In general, the contact for "correctness of trade details" will be the person called if the question is about the substantive information being provided about a transaction.

10. Q: In response to the question on page one of the form, my firm does not effect municipal securities transactions, does not intend to do so and does not intend to submit transactions to the MSRB for other dealers. I will check the appropriate box and return the form. What should I do if my firm's plans later change?

A: Since all transactions in municipal securities will have to be reported to the MSRB, if a firm decides to begin effecting transactions or to submit transaction data, it should immediately contact the MSRB to obtain and complete this form.

11. Q: What is the "dial-up transmission facility" referred to in the form?

A: Most dealers will send customer trade data to the MSRB through National Securities Clearing Corporation (NSCC), but some low-volume transmissions may be done by dialing the MSRB's computer directly using a personal computer and telephone modem. By checking the appropriate box on the form, you may request more information about the dial-up facility from the MSRB. In response, the MSRB will mail information before testing begins that describes how the dial-up facility can be installed and used to report customer trades. (More detailed questions and answers about the dial-up facility are found below.)

12. Q: Where can I find a description of the data elements that must be included in transaction records?

A: The MSRB document entitled "File and Record Specifications for Reporting Customer Transactions" defines the data elements and provides format specifications for transaction records and files.

Price and Yield

13. Q: Both price and yield are required to be included for transactions on which the settlement date is known. Why is that?

A: One of the most difficult problems in collecting and disseminating accurate information on municipal securities transactions is that there are approximately 1.3 million different municipal securities. Typographical errors in trade input, for example, are always possible, and since there is generally not a stream of transaction data coming in on a specific issue, it is difficult for the system collecting the information to mechanically check reported information to ensure that it is not a likely input error. This is particularly important when it is recognized that the price information collected will be disseminated and reviewed by market participants on the next day and may be used as part of trading or investment decisions. Requiring both yield and price, along with the CUSIP number of the issue being reported, will allow the MSRB to mechanically perform mathematical checks that will help to ensure that the information being reported makes sense, given the coupon, maturity date and call features of the security. Other means of checking data accuracy also will be employed. For example, the CUSIP check digit is required to guard against typographical errors in the entry of CUSIP numbers. (More questions and answers about error correction are found below.)

14. Q: What if a yield cannot not be computed for a transaction done on a dollar price basis, for example, because the trade is in a variable rate security or in a defaulted security?

A: The trade may be submitted using a dollar price only in these cases. Note, however, that if the security is not known to the MSRB system as one which is a variable rate instrument or in default, the MSRB may contact you to ensure that its information about the security is correct and so that subsequent transaction input in the security will not be questioned in the future.

See also questions 60 and 61.

Settlement Date

15. Q: What if settlement for a transaction is not known because the transaction is in a new issue and settlement date has not been set?

A: The transaction should be reported with a yield or a dollar price and without a settlement date.

16. Q: If the settlement date for the transaction is determined after a submission is made without a settlement date, should the dealer report revised trade information to the MSRB?

A: No. If the only change in the transaction information is the settlement date on a new issue, the dealer should not send an amended transaction report. Once the settlement date for the new issue becomes known to the MSRB, that settlement date will be included in the transaction data automatically.

Agency and Principal Transactions

17. Q: When reporting dollar prices on agency transactions, should the effect of commissions be included in the dollar price submitted?

A: No. There is a separate field for submitting the commission amount on agency transactions. The MSRB will include the effect of the commission in the dollar price when aggregating principal and agency transactions and reporting price information on the daily report. There should be no "commissions" on principal transactions so that the dollar price given on principal transactions should be the net transaction dollar price to the customer.

18. Q: How should commissions be reported?

A: Commission is reported in dollars per $100 par value.

See also questions 62 and 63.

Control Numbers

19. Q: The file format requires each transaction submitted by a dealer to have a unique "control number" (unique for the dealer) that is no longer than 20 characters and that may be composed of alpha and/or numeric characters. Why is this necessary?

A: The control number given by the dealer is the mechanism by which the dealer identifies a specific transaction to the Transaction Reporting System. The dealer chooses its own numbering system; however, the control number for a transaction must be unique for the dealer within a three-year period. For example, if a dealer submits two different transactions with the same control number, the system may reject the second transaction. Use of the control number is critical so that the dealer may correct information submitted in error to the system. The MSRB also will use the dealer's control number to report back information to the dealer about the transaction.

Records Amending and Cancelling Trades

20. Q: Under what circumstances would a dealer need to correct information about a transaction submitted to the system?

A: An example might be a dealer who has made an input error resulting in the wrong price or yield being submitted for a transaction. Note that it is important for these errors to be corrected as soon as possible so that the audit trail and surveillance database is correct. Note also that it is important for errors like these to be minimized since the prices reported on trade date will be used for the daily reports appearing on the next business day.

21. Q: What will the MSRB do if it discovers a probable input error that has resulted in submitted transaction information?

A: As part of the daily process of collecting transaction information from dealers, the MSRB will send to each dealer that submitted transaction information a receipt with messages identifying errors in transactions that failed to meet acceptance testing, together with a copy of all such input records.

22 Q: What should happen next?

A: If the dealer finds that the record should be amended -- for example, because of a typographical error in the price -- he or she will submit an "Amend" record as soon as possible (i.e., a record with "A" as the "Cancel/Amend Code"). The "Amend" record must include the same dealer control number as the first report of the trade and must include all of the correct information about the trade. If the dealer finds that the questioned record was correct -- as might happen if the dealer knows features about the bond that affect the price/yield calculation and that are not in the MSRB's database -- a "Verify" record should be submitted, including the original dealer control number, to indicate that it is correct.

23. Q: What happens if I try to amend a transaction with a control number that I have not previously reported?

A: If a transaction is submitted with a "Cancel/Amend Code" of "A" and there is not an existing transaction in the database with that control number, the transaction information will be rejected -- that is, returned to the dealer for correction.

24. Q: Can I amend any information about a trade that I have previously reported?

A: No. The following fields cannot be amended: dealer identity, CUSIP number, and transaction control number. If you report a trade with an error in one of these fields, you should cancel the transaction report, as described below, and then report the trade using a new control number.

25. Q: Under what circumstances would a transaction be "cancelled" in the system and how is that done?

A: There may be limited numbers of instances in which customer transactions are reported, but the transactions later must be cancelled with customers due to circumstances beyond the dealer's control (for example, a new issue is cancelled). In this case, the dealer must submit a record with the control number of the transaction and with the "Cancel/Amend Code" set to "C" for "Cancel." Doing so will allow MSRB to indicate the transaction as cancelled in the surveillance database so that the database is accurate.

26. Q: For how long after initial submission is it possible for dealers to amend or cancel transactions that have been entered into the system?

A: This can be done for a period of three months after initial submission. However, for new issues for which there is no settlement date, it will be possible to submit cancellations until three months after the settlement date of the issue. Note that, while some numbers of cancellations and corrections are inevitable, it is important for dealers to minimize the need for these types of corrections by making sure that procedures are in place for reporting necessary information correctly in the initial submission.

Submission of Files

27. Q: When must a transaction be reported to the MSRB?

A: A transaction record, in the correct format, must reach the MSRB by midnight on trade date.

28. Q: How are these transaction records sent to the MSRB?

A: The records are put into a file with appropriate header information. The resulting file is sent to the MSRB.

29. Q: My firm is a clearing broker and will be submitting a file each day on behalf of many of our correspondents. Is there any special way in which the records in the file should be organized?

A: No. As long as the header information is correct and the information in each record is correct, the records within the file can be in any order. The header identifies the party submitting the file; the records may pertain to any number of executing dealers.

File Forwarding by NSCC

30. Q: My organization processes thousands of customer transactions in municipal transactions each day. How can such a large file be sent to the MSRB?

A: National Securities Clearing Corporation is providing its participants the ability to send the MSRB customer transaction file to NSCC along with other types of files that are sent to NSCC each day. NSCC will forward the MSRB customer transaction file to the MSRB.

31. Q: My firm uses another broker-dealer for clearing and processing municipal securities transactions. The clearing broker submits my inter-dealer transactions to NSCC on my behalf. Can the clearing broker submit my customer transaction reports to NSCC for forwarding on to the MSRB on my behalf?

A: Yes. The clearing broker can submit transaction reports for dealers for which it clears transactions. Note that the dealer effecting transactions is responsible for the clearing broker's performance in this regard. You should talk with your clearing broker now to ensure that it will provide this service.

32. Q: My firm uses a service bureau to submit inter-dealer transaction information to NSCC. Can the service bureau also submit customer transaction files to NSCC for forwarding to the MSRB?

A: Yes. As in the previous answer, the dealer effecting transactions is responsible to report the transactions correctly.

33. Q: Are there any special requirements for formatting the file to NSCC and getting the file to NSCC?

A: Yes. You should review NSCC's April 2, 1997 Important Notice on the interface requirements for customer transaction reporting (Notice No. A-4571 and P&S 4155). Similarly, if a clearing broker or service bureau will be sending your MSRB customer transaction files to NSCC for forwarding to the MSRB, they should ensure that the files can be sent in the correct format.

34. Q: Will customer transaction records submitted to NSCC for forwarding to the MSRB be included in the automated comparison system?

A: No. The MSRB customer transaction file sent to NSCC for forwarding to the MSRB is a totally separate file than the inter-dealer transactions and other files sent to NSCC for clearance and settlement purposes. NSCC will not process data in the MSRB customer transaction files, but will only forward the files to the MSRB. The use of NSCC for this purpose will allow dealers and service bureaus to use existing telecommunication channels set up between dealers and NSCC and between NSCC and the MSRB. Thus, it should provide efficiencies, especially for dealers that have many customer transactions each day. (An additional question on this subject is given below, under "Other Questions.")

Transaction Reporting to MSRB Using MSRB's Dial-Up Facility

35. Q: My firm submits its inter-dealer transactions to NSCC through a dial-up terminal or personal computer. Can I use this method of file transfer to transmit customer transaction files to NSCC for forwarding to the MSRB?

A: No; as noted in NSCC's Important Notice, all dial-up connections will be directly to the MSRB.

36. Q: How will this be done?

A: MSRB will offer a facility whereby dealers may send relatively small files directly to the MSRB by using a personal computer and a standard telephone modem, such as those made by Hayes, U.S. Robotics and others. The MSRB will provide telecommunications software by summer 1997 to dealers who ask for this service. Please note that this software will run only on computers using the Windows 95 or Windows NT operating systems. Also note that dealers using this method of transmitting files directly to the MSRB will still need a means to generate files from their own records that meet MSRB file and record format requirements.

Testing Customer Transaction Reporting with the MSRB

37. Q: What is the purpose of the mandatory testing?

A: The purpose of testing is to ensure each dealer that its own system can produce files containing the required information in the proper format, that it is able to correct erroneous input, and so forth. Testing is mandatory so that all dealers will be ready before the reporting requirement becomes effective in January 1998.

38. Q: What is the date for dealers to test their customer transaction reporting capabilities with the MSRB?

A: Mandatory testing will begin in July 1997. The MSRB plans to schedule the first tests with the dealers that have the greatest volume of customer trades and with service bureaus, followed by the lower-volume dealers. The MSRB will publicize the testing schedule before testing begins.

39. Q: What will happen during the test?

A: First, the MSRB will contact the designated primary contact person listed on your organization's MSRB Transaction Reporting form. Information will be obtained on how the organization will be submitting data, a fax number for the dealer to receive receipt/error logs from the MSRB, and technical details. Dates will be chosen to run your test. The contact person will arrange to send test files to the MSRB, using either NSCC or the MSRB dial-up facility, to establish that the telecommunications link is working, and that the trade records meet the format specifications.

40. Q: How long will the test last?

A: Each test cycle should take approximately five days. However, it may take more than one test cycle for a dealer to validate its methodology for creating files in the proper formats and for handling trade data corrections.

41. Q: Will there be special formats and test procedures for submission through NSCC?

A: Yes. As part of testing the communications, dealers and service bureaus will go through NSCC's usual procedures for setting up transmission of a new data stream or "SysID" - verifying that the file header meets Datatrak specifications, etc. Details are provided in the NSCC Important Notice previously mentioned (Notice No. A-4571 and P&S 4155).

Record and File Format Questions

42. Q: What is the format for the computer-readable file that must be sent to the MSRB each day to comply with the customer transaction reporting requirement?

A: For files sent directly to the MSRB via the MSRB dial-up facility, the physical formats for transaction records, and for the file header record that must precede them, are specified in the MSRB document entitled "File and Record Specifications for Reporting Customer Transactions." Files sent to NSCC will need to be in the format specified by NSCC. See NSCC's April 1997 Important Notice.

See also questions 64 through 66.

Other Questions

43. Q: Is the customer's identity included anywhere in the information reported?

A: No. The customer's identity is never submitted in reports of customer transactions. Each record must correctly indicate whether the transaction was a sale to a customer or a purchase from a customer, whether it is a principal or agency transaction, and certain other information.

44. Q: Are institutional and retail customer transactions reported in the same way?

A: Yes.

45. Q: How should the "Buy/Sell" code be reported?

A: If the dealer has sold securities to the customer, report this as "S" (sell). If the dealer has purchased securities from the customer, report this as "B" (buy).

46. Q: May I include my inter-dealer trades in the customer trade file I send to the MSRB?

A: No. All files submitted as part of a dealer's customer transaction file must report only customer transactions -- no inter-dealer transactions may be included.

INTER-DEALER TRANSACTION REPORTING

47. Q: How are inter-dealer transactions reported to the MSRB?

A: By submitting the transactions on trade date, to the automated comparison system, in the format and manner required by that system to obtain a comparison on the night of trade date. NSCC provides this information to the MSRB to accomplish transaction reporting for those trades. (Please note that these requirements are currently in effect under MSRB rule G-14.)

48. Q: What items are required by rule G-14, in addition to the items necessary to obtain an automated comparison of an inter-dealer trade on the night of trade date?

A: Specific items that are mandatory, in addition, to the information required for automated comparison, are: (i) accrued interest, on any transaction in which the settlement date is known; (ii) executing broker identity; and (iii) time of trade.

Accrued Interest

49. Q: Why does the MSRB need accrued interest in inter-dealer transaction reports?

A: For most transactions reported through the automated comparison system, dealers report a final money figure in lieu of a dollar price or yield. The MSRB derives a dollar price for these transactions by subtracting the reported accrued interest and dividing the result by the par amount traded. Therefore, if accrued interest is not reported correctly, the resulting dollar price may not be accurate.

Executing Broker Symbol

50. Q: Why does the MSRB need an "executing broker symbol"?

A: This symbol is used for the audit trail function. It identifies the dealer that actually effected the transactions (in contrast to the dealer that submitted the trade to NSCC or who cleared the trade). It is particularly important for dealer identification when one dealer clears for several other dealers. The dealer that actually effected the transaction should be the one identified with this symbol.

51. Q: What symbol should be used for executing broker identity?

A: The four-character symbol of the firm or bank assigned by the NASD, for example, ABCD.

52. Q: Is it permissible for my firm to use our NSCC clearing number (e.g., 1234) instead of this symbol? In our case, this would serve the same purpose since we only clear for ourselves.

A: No. The four-character alphabetic symbol is required, as it is the standard identifier used in the surveillance database. Note that, when the customer reporting phase of the Program becomes operational, this NASD-assigned symbol will be the primary identifier.

53. Q: My organization does not have one of these symbols. Should we just use the symbol of the dealer that we clear through?

A: No, if your organization is a broker, dealer or municipal securities dealer and it is effecting trades in municipal securities (with other dealers or with customers), it must use its own symbol.

54. Q: How does a dealer obtain an NASD-assigned symbol if it does not already have one?

A: Call NASD Subscriber Services at (800) 777-5606 and explain that you need a symbol for reporting municipal securities transactions.

55. Q: Will the NASD assign a symbol, even though my organization is a dealer bank?

A: Yes.

Time of Trade

56. Q: Why does the MSRB need the time of trade?

A: This information is also needed for audit trail purposes. It is not currently used in the transparency component of the program.

57. Q: How is time of trade submitted for inter-dealer transactions?

A: It is submitted in military format (e.g., 1400 for 2:00 p.m.) and in terms of Eastern time.

Problems in Inter-Dealer Transaction Reporting

58. Q: What kind of problems has the MSRB seen in the inter-dealer transaction information submitted under rule G-14?

A: For the daily report generated by the Program, only compared transactions can be used for generating price and volume information. It accordingly is very important for dealers to ensure that their procedures for reporting inter-dealer transactions are designed to submit correct information reliably to the automated comparison system. A significant number of the following types of transaction in the automated comparison system indicates that a dealer is having problems that require a review of its procedures and corrective action: (i) stamped advisories; (ii) "as of" submissions; (iii) "demand-as-of" submissions coming in against the dealer; (iv) compared transactions that are deleted using either the "one-sided delete" function or using the "withhold" function.

59. Q: My firm clears through a clearing broker. When my firm does trades with another firm that also uses that same clearing broker, must that transaction be reported to the MSRB by submitting the trade to the automated comparison system?

A: Yes. Note that the submission to the automated comparison system is also required in this instance by rule G-12(f) on automated comparison.

QUESTIONS ADDED AFTER MARCH 1997

Yield

60. Q: Should I report to the MSRB the transactions's yield to maturity or another yield -- yield to first call, yield to par call, etc.? My system calculates several yields for use in customer confirmations.

A: Report the yield as required by MSRB rule G-15(a) for customer confirmations. Rule G-15(a) in most cases requires the yield to be computed to the lower of call or nominal maturity date. Exception: If the transaction was effected at par, the yield (coupon rate) should be reported on the customer trade record, even though rule G-15(a) allows the yield to be omitted from the confirmation in such a case.

If reporting the yield is not possible because the transaction was done on a dollar price basis and no settlement date has been set for a "when-issued" security, leave the yield blank or enter zero.

61. Q: How should I report negative yield?

A: Enter a negative number in the "yield" field. The minus sign may precede or follow the number, as long as it is inside the defined field area.

Commission

62. Q: Should the effect of the commission be reported in the yield?

A: Yes. You should report as yield the same "net" yield that is reported on customer confirmations. Therefore, the reported yield should include the effect of any commission (see MSRB rule G-15(a)).

63. Q: Should miscellaneous fees such as transaction fees be included in the commission field or elsewhere? If the sales representative receives a portion of the firm's profit, should that portion be reported?

A: No. Neither miscellaneous fees nor sales representatives' portions should be reported.

File format

64. Q: Can I include binary data in the customer transaction file, along with ASCII data?

A: No. Binary data should not be included, even in the unused portions of the record. Including binary data will likely cause errors such as skipped records when MSRB processes the file. 
 

Q: The MSRB file header record requires a "version number." What should be put here?

A: This field identifies the version of the MSRB format specification that applies to the file. Initially, use '0010' here.

65. Q: The header record requires a "record count" field. What should be put here?

A: Put here the count of the number of transactions being reported in this file. Do not count the header record(s). Depending on the format used, the record count is the same as the number of physical transaction records or one-half the number of physical transaction records.

66. Q: If the header record of a transaction file contains errors, how will MSRB inform the submitter of this fact?

A: If the header of a file forwarded by NSCC does not identify a submitter and site known to the MSRB, then MSRB staff will ask NSCC to follow up. (MSRB will not accept any direct submissions by dial-up from unknown parties.) Otherwise, MSRB will send a receipt/error message file or fax to the submitter. The header errors will be identified in the file in the first two records following the receipt record, using the same format as for transaction detail errors.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Recently, dealers have raised questions regarding how the prohibition on municipal securities business in rule G-37, on political contributions and prohibitions on municipal securities business, applies to certain situations. Rule G-37 prohibits any dealer from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the dealer; (ii) any municipal finance professional associated with such dealer; or (iii) any political action committee controlled by the dealer or any municipal finance professional.[1] If a municipal finance professional makes a political contribution to an issuer official for whom he is not entitled to vote, the dealer is prohibited from engaging in municipal securities business with that issuer for two years. The Board has been asked whether the prohibition on municipal securities business extends to certain services provided under contractual agreements with an issuer that pre-date the contribution. The Board is issuing the following interpretation of the prohibition on municipal securities business pursuant to rule G-37.

"New" Municipal Securities Business

 A dealer subject to a prohibition on municipal securities business with an issuer may not enter into any new contractual obligations with that issuer for municipal securities business.[2] The Board adopted rule G-37 in an effort to sever any connection between the making of political contributions and the awarding of municipal securities business. The Board believes that the problems associated with political contributions––including the practice known as "pay-to-play"––undermine investor confidence in the municipal securities market, which confidence is crucial to the long-term health of the market, both in terms of liquidity and capital-raising ability.

Pre-Existing Issue-Specific Contractual Undertakings

The Board believes that it is consistent with the intent of rule G-37 that a dealer subject to a prohibition on municipal securities business with an issuer be allowed to continue to execute certain issue-specific contractual obligations in effect prior to the date of the contribution that caused the prohibition. For example, if a bond purchase agreement was signed prior to the date of the contribution, a dealer may continue to perform its services as an underwriter on the issue. Also, if an issue-specific agreement for financial advisory services was in effect prior to the date of the contribution, the dealer may continue in its role as financial advisor for that issue. In the same manner, a dealer may act as remarketing agent or placement agent for an issue and also may continue to underwrite a commercial paper program as long as the contract to perform these services was in effect prior to the date of the contribution. Subject to the limitations noted below, these activities are not considered new municipal securities business and thus can be performed by dealers under a prohibition on municipal securities business with the issuer.

Dealers also have asked questions regarding certain terms in contracts to provide on-going municipal securities business that allow for additional services or compensation. For example, a dealer may have an agreement to provide remarketing services for a municipal securities issue, the terms of which allow the issuer to change the "mode" of the outstanding bonds from variable to a fixed rate of interest or from Rule 2a-7 eligible to non-Rule 2a-7 eligible. [3] Generally, the per bond fee increases if the dealer sells fixed rate municipal securities or non-money market fund securities. Also, an agreement to underwrite a commercial paper program may include terms for increasing the size of the program. While the per bond fee probably does not increase if more commercial paper is underwritten, the amount of money paid to the dealer does increase. The Board views the provisions in existing contracts that allow for changes in the services provided by the dealer or compensation paid by the issuer as new municipal securities business and, therefore, rule G-37 precludes a dealer subject to a prohibition on municipal securities business from performing such additional functions or receiving additional compensation.

Non-Issue Specific Contractual Undertakings

Dealers also at times enter into long-term contracts with issuers for municipal securities business, e.g., a five-year financial advisory agreement. If a contribution is given after such a non-issue-specific contract is entered into that results in a prohibition on municipal securities business, the Board believes the dealer should not be allowed to continue with the municipal securities business, subject to an orderly transition to another entity to perform such business. This transition should be as short a period of time as possible and is intended to give the issuer the opportunity to receive the benefit of the work already provided by the dealer and to find a replacement to complete the work, as needed.

* * *

The Board recognizes that there is a great variety in the terms of agreements regarding municipal securities business and that the interpretation noted above may not adequately deal with all such agreements. Thus, the Board is seeking comment on how a prohibition on municipal securities business pursuant to rule G-37 affects contracts for municipal securities business entered into with issuers prior to the date of the contribution triggering the prohibition on business. In particular, the Board is seeking comment on other examples whereby a dealer may be contractually obligated to perform certain activities after the date of the triggering contribution. If other examples are provided, the Board would like comments on how these situations should be addressed pursuant to rule G-37.

Based upon the comments received on this notice, the Board may issue additional interpretations or amend the language of rule G-37. 

[1] The only exception to rule G-37’s absolute prohibition on municipal securities business is for certain contributions made to issuer officials by municipal finance professionals. Contributions by such persons to officials of issuers do not invoke application of the prohibition on business if (i) the municipal finance professional is entitled to vote for such official and (ii) contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election.

[2] The term "municipal securities business" is defined in the rule to encompass certain activities of dealers, such as acting as negotiated underwriters (as managing underwriter or as syndicate member), financial advisors, placement agents and negotiated remarketing agents. The rule does not prohibit dealers from engaging in business awarded on a competitive bid basis.

[3] SEC Rule 2a-7 under the Investment Company Act of 1940 defines eligible securities for inclusion in money market funds

Financial advisor to conduit borrower.  This is in response to your letter concerning rule G-37, on political contributions and prohibitions on municipal securities business. You state that your firm served as financial advisor to the underlying borrower, not the governmental issuer, for a certain issue of municipal securities. You ask whether you are required to report this financial advisory activity on Form G-37/G-38.

Rule G-37(g)(vii) defines the term "municipal securities business" to include "the provision of financial advisory or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities in which the dealer was chosen to provide such services on other than a competitive bid basis." If the financial advisory services your firm provided were to the underlying borrower and not "to or on behalf of an issuer,"[1] then your firm was not engaging in "municipal securities business" and these financial advisory services are not required to be reported on Form G-37/G-38.  MSRB interpretation of January 23, 1997.
__________

[1] Rule G-37(g)(ii) defines "issuer" as the governmental issuer specified in section 3(a)(29) of the Securities Exchange Act.

Fairness opinions. This is in response to your letter concerning the retention of your firm by issuers to render a fairness opinion on the pricing associated with certain negotiated issues of general obligation municipal securities issued by [state deleted] governmental units. You ask whether the rendering of these fairness opinions on the pricing of municipal securities issues is a financial advisory activity which must be disclosed on Form G-37/G-38 as municipal securities business.

Rule G-23, on activities of financial advisors, states in paragraph (b) that a financial advisory relationship shall be deemed to exist when

a broker, dealer, or municipal securities dealer renders or enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such issue or issues, for a fee or other compensation or in expectation of such compensation for the rendering of such services. [Emphasis added]

Thus, the activity your firm performs on behalf of issuers of municipal securities pursuant to an agreement (i.e. , rendering advice with respect to the terms of a new issue) establishes that a financial advisory relationship exists between your firm and these issuers.

Rule G-37, on political contributions and prohibitions on municipal securities business, requires dealers to report municipal securities business to the Board on Form G-37/G-38. The definition of "municipal securities business" contained in rule G-37(g)(viii) includes

the provision of financial advisory or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities in which the dealer was chosen to provide such services on other than a competitive bid basis.

Pursuant to the information contained in your letter, your firm should submit a Form G-37/G-38 during each quarter in which the firm reaches an agreement to provide the financial advisory services you described. If your firm has an on-going financial advisory arrangement with an issuer, your firm would need to list each new issue in which your firm acted as financial advisor during the quarter in which the new issue settled. I have enclosed for your information a copy of the Rule G-37 and Rule G-38 Handbook which includes instructions for completing and filing Form G-37/G-38. MSRB interpretation of January 10, 1997.