In November 1998, the MSRB published an interpretation about the use of electronic media to deliver and receive information by brokers, dealers and municipal securities dealers under Board rules (the “1998 interpretation”).  Since that time, the MSRB has been granted rulemaking authority over municipal advisors, and in the exercise of that authority, the MSRB has been developing a comprehensive regulatory framework for municipal advisors.

The Board believes that the use of electronic media to deliver and receive information under Board rules also is important for municipal advisors, and extends the guidance provided in the 1998 interpretation, as relevant, to municipal advisors.  See Rule G-32 Interpretation – Notice Regarding Electronic Delivery and Receipt of Information by Brokers, Dealers and Municipal Securities Dealers (November 20, 1998).

The MSRB is providing interpretive guidance to address the applicability of Rule G-42, which establishes core standards of conduct for municipal advisors [1] that engage in municipal advisory activities,[2] other than municipal advisory solicitation activities (for purposes of this guidance and Rule G-42, “municipal advisors”), in the area of conduit financing. Using various scenarios, the guidance discusses a municipal advisor’s relationship(s) with, and duties and obligations owed to, a municipal entity issuer, an obligated person that is a conduit borrower,[3] or both, in connection with the issuance of municipal securities for the conduit borrower. For purposes of this guidance, the MSRB assumes that the conduit borrower is not a municipal entity, as defined in Section 15B(e)(8) of the Exchange Act, except in the final section of the guidance entitled, “When a Conduit Borrower is also a Municipal Entity.”

A few broad principles should be noted. First, institutions that are often conduit borrowers, such as large universities, may choose to issue debt securities directly without the involvement of a municipal entity issuer. The exemption from registration under the Securities Act of 1933 (“Securities Act”)[4] may be based on Section 3(a)(4)[5] or Regulation D under the Securities Act,[6] rather than on Section 3(a)(2).[7] In such cases, there may be no municipal security, and Rule G-42 would not apply. In cases where there is a private placement “tail” (i.e., a non-municipal security) side-by-side with the issuance of a tax-exempt municipal security, the advice and the activities a municipal advisor engages in regarding the tax-exempt security, including any conduct or communication to fulfill the municipal advisor’s duties and obligations under Rule G-42, may have an impact or consequences for the municipal advisor with respect to its negotiations or other activities related to the non-municipal security (e.g., the disclosure to the client of a material conflict of interest as required under Rule G-42(b)).

Second, the scenarios described below may involve advice given to both the municipal entity issuer and the conduit borrower. Rule G-42 provides that a fiduciary duty is owed only to a municipal entity, and a duty of care is owed to both the municipal entity and the conduit borrower. If an issue arises as to an activity that involves only the duty of care, such as inquiry as to the facts that provide the basis for advice provided to the client, the duty owed may be the same to both the municipal entity and the conduit borrower. Other issues, however, may involve the duty of loyalty owed the municipal entity as part of the municipal advisor’s fiduciary duty, and thus the municipal advisor’s obligation to the issuer may be higher (or different) than the duty owed the conduit borrower.

Initially, the MSRB provides interpretive guidance regarding the applicability of Rule G-42 when an issuer hires a municipal advisor to provide advice directly to a conduit borrower (“First Scenario”). The MSRB then considers whether an issuer may retain a municipal advisor (either for a specific transaction, or on a long-term basis), and then provide advice that the issuer obtains from the municipal advisor, in connection with a specific issuance of municipal securities, indirectly through the issuer, to the conduit borrower in connection with the issuance (“Second Scenario”). In a third scenario, the MSRB considers whether a conduit borrower may retain a municipal advisor that, as a practical matter, will also provide advice to an issuer on which the issuer will rely, in cases where the issuer chooses not to retain a separate municipal advisor, and, in such circumstances, whether the municipal advisor must provide the issuer the disclosures set forth in Rule G-42 (“Third Scenario”). The MSRB also provides interpretive guidance regarding the application of Rule G-42 to an issuer and a conduit borrower when the issuer and the conduit borrower retain the same municipal advisor to provide advice regarding an issuance (“Fourth Scenario”). Finally, in a fifth scenario (“Fifth Scenario”), the MSRB interprets the applicability of Rule G-42 to a scenario involving two natural persons, A and B, who are employees or otherwise associated persons of a registered municipal advisor, where A is retained by the issuer to provide municipal advisory services to the issuer, and B is retained by the conduit borrower to provide municipal advisory services to the conduit borrower.

Section 1: First Scenario

In the First Scenario, the MSRB considers the applicability of Rule G-42, when, in connection with a specific issuance of municipal securities, an issuer hires a municipal advisor to provide advice directly to a conduit borrower. (For purposes of the First Scenario, the MSRB assumes that the municipal advisor does not provide municipal advisory services to the issuer. Instead, consistent with the issuer’s intent, the municipal advisor is retained for, and in fact, provides municipal advisory services solely to or on behalf of the conduit borrower.)

Under Rule G-42, a municipal advisor may provide municipal advisory services directly to a conduit borrower, in connection with an issuance of municipal securities by an issuer, if the municipal advisor is retained and compensated by the issuer. Whether a person (in this case, the municipal advisor retained by the issuer) is a municipal advisor to the issuer, another person (in this case, the conduit borrower), or both and therefore is subject to Rule G-42, is activity-based and turns on whether the person is providing advice or otherwise engaging in municipal advisory activities for or on behalf of the recipient. Although the First Scenario focuses on the payment of compensation by the issuer, the existence or non-existence of compensation is not a factor in determining whether the municipal advisor is a municipal advisor to the issuer or to the conduit borrower.[8] In addition, the fact that, as to the conduit borrower, the municipal advisor is paid compensation by a third party is also not a factor in determining if the municipal advisor is a municipal advisor to the conduit borrower.

In the First Scenario, the municipal advisor engages in municipal advisory activities solely for or on behalf of the conduit borrower, and is subject to the requirements of Rule G-42. The municipal advisor is required to comply with all the provisions of Rule G-42 as to the conduit borrower,[9] and the rule applies in all respects to the municipal advisor in its relationship with the conduit borrower, except provisions applicable solely to a municipal entity client.

The threshold question regarding the application of Rule G-42 to the municipal advisor in its relationship to the issuer is whether the Securities and Exchange Commission (SEC) would interpret the facts and circumstances of the First Scenario – where the issuer does not receive the municipal advisory services, and the services are in fact provided solely to and on behalf of the conduit borrower – as the municipal advisor engaging (as a legal matter) in municipal advisory activities also to or on behalf of the issuer.

The Exchange Act definition of municipal advisor includes a person that “[p]rovides advice[10] to or on behalf of [emphasis added] a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues.”[11] The SEC has stated that the determination of “whether a person provides advice to or on behalf of a municipal entity or an obligated person regarding municipal financial products or the issuance of municipal securities depends on all the relevant facts and circumstances.”[12] The meaning of the phrase “on behalf of” in the context of the First Scenario and more broadly, whether a person is engaged in municipal advisory activities for or on behalf of another person and is a municipal advisor to such person are interpretive issues that are solely within the jurisdiction of the SEC. Requests for interpretation regarding such issues should be directed to the SEC’s Office of Municipal Securities.

If, in the First Scenario, the activities of the municipal advisor with the issuer are not interpreted by the SEC to mean that the municipal advisor is also a municipal advisor to the issuer, then the municipal advisor would not be required to comply with Rule G-42 with respect to the issuer. For example, the municipal advisor would not be required by Rule G-42 to provide disclosures of conflicts of interest, if any existed, to the issuer.

Although compensation is not a factor in determining whether a person is a municipal advisor to a particular party (except as to a solicitor municipal advisor), the MSRB believes that, in the First Scenario, the compensation paid by the issuer to the municipal advisor for services for a conduit borrower may present a material conflict of interest, requiring the municipal advisor to make full and fair disclosure of such conflict in writing to the conduit borrower. Rule G-42 requires a municipal advisor to disclose all material conflicts of interest under Rule G-42(b)(i). (Such requirements are also incorporated in Rule G-42(c)). The requirement is not limited to actual material conflicts of interest. As provided in Rule G-42(b)(i)(F), for example, the municipal advisor must disclose potential material conflicts of interest that the municipal advisor becomes aware of after reasonable inquiry, that could reasonably be anticipated to impair the municipal advisor’s ability to provide advice to or on behalf of the client in accordance with the applicable standards of conduct under the Rule – the duty of care, and if applicable, the duty of loyalty. In this scenario, the client is the conduit borrower and the municipal advisor owes its client the duty of care as provided in Rule G‑42(a)(i) and SM .01.[13] Even if the compensation paid by the issuer to the municipal advisor is not viewed as an actual material conflict of interest by the municipal advisor, the municipal advisor must carefully consider if such payments give rise to a potential material conflict of interest. In the MSRB’s view, the payments from the issuer to the municipal advisor may create a relationship between the municipal advisor and the issuer, that even if not a municipal advisor-client relationship, generally would give rise to a potential material conflict of interest that could reasonably be anticipated to impair the municipal advisor’s ability to provide advice to or on behalf of the conduit borrower in accordance with the standards of Rule G-42(a). Before making any such disclosures to the conduit borrower, the municipal advisor should consider the guidance set forth in SM .05. Under SM .05, when a municipal advisor is required to make disclosures of material conflicts of interest, including those required under Rule G-42(b)(i)(F), the municipal advisor’s disclosures must be sufficiently detailed to inform the conduit borrower of the nature, implications and potential consequences of each conflict, and must also include an explanation of how the municipal advisor addresses or intends to manage or mitigate each conflict.

Finally, the relationship between the issuer and the municipal advisor, however characterized or limited, may create other compliance concerns under Rule G-42. For example, in some cases, the issuer, although not the client, may wish to provide policy direction or instructions to the municipal advisor regarding the issuance of the municipal securities. If the issuer communicates, explicitly or implicitly, an instruction or direction which the municipal advisor follows and which inhibited or limited the municipal advisor’s ability to fulfill its duties and obligations to the conduit borrower client under Rule G-42, the municipal advisor would violate the rule.

Section 2: Second Scenario

The MSRB has been asked to provide guidance regarding a scenario where a municipal advisor is engaged in municipal advisory activities as directed by an issuer and for such issuer, pursuant to an explicit arrangement or agreement, and the municipal advisor “indirectly” also provides advice to a conduit borrower, because the issuer provides to the conduit borrower the advice the issuer receives from the municipal advisor. For purposes of this Second Scenario, the MSRB assumes that the municipal advisor is aware of the flow of information from the issuer to the conduit borrower.

To assess whether the municipal advisor owes duties to the conduit borrower when the municipal advisor provides advice to the issuer that then flows through to the conduit borrower, again, a threshold question must be answered: Is the municipal advisor also engaged in municipal advisory activities for or on behalf of the conduit borrower because the conduit borrower is receiving, through the issuer, some or all of the advice that was provided by the municipal advisor to the issuer, establishing a municipal advisory relationship between the municipal advisor and the conduit borrower?

As set forth above, the SEC has stated that the determination of “whether a person provides advice to or on behalf of a municipal entity or an obligated person regarding municipal financial products or the issuance of municipal securities depends on all the relevant facts and circumstances,”[14] and whether a person is engaged in municipal advisory activities for or on behalf of another person and is a municipal advisor to such person are interpretive issues that are solely within the jurisdiction of the SEC.[15] 

If, in the Second Scenario, the transfer of advice from the issuer to the conduit borrower is interpreted by the SEC to mean that the municipal advisor is engaged in municipal advisory activities for or on behalf of the conduit borrower, the municipal advisor must comply with the requirements of Rule G-42 with respect to the issuer and the conduit borrower. This dual representation may raise several compliance issues.

Rule G-42 distinguishes the duties and obligations that a municipal advisor owes to an issuer client (i.e., a municipal entity) from those owed to a conduit borrower client in two provisions. First, in the conduct of all municipal advisory activities for and on behalf of an issuer client, a municipal advisor is subject to a fiduciary duty as provided in Rule G-42(a)(ii). The fiduciary duty is more specifically described as a requirement to act in accordance with a duty of loyalty[16] and a duty of care,[17] as described in, respectively, SM .02 and SM .01. In contrast and as discussed above, when the municipal advisor’s client is a conduit borrower, the municipal advisor owes a duty of care to the client as provided in Rule G-42(a)(i) and SM .01, but not a duty of loyalty. Second, in connection with a municipal advisor’s municipal advisory activities for and on behalf of an issuer client, a municipal advisor, and any affiliate of the municipal advisor, is prohibited from engaging in certain principal transactions with the issuer, as provided in Rule G-42(e)(ii).[18] This specific prohibition does not apply to a municipal advisor when its client is a conduit borrower. However, all other provisions and protections in Rule G-42 apply in the same manner to a municipal advisor whether its client is an issuer (i.e., a municipal entity) or a conduit borrower. For example, municipal advisors must provide the same timely disclosures of material conflicts of interest and material legal and disciplinary events in the earliest stages of their dealings with their conduit borrower clients as they provide to their municipal entity clients (and supplement such disclosures as necessary during the relationship). Similarly, municipal advisors have the same obligations to an issuer client and a conduit borrower to provide written documentation of the municipal advisory relationship (and supplement such documentation as necessary during the relationship). Also, if a municipal advisor makes a recommendation of a municipal securities transaction to either type of client, the municipal advisor must have a reasonable basis to believe that the recommended municipal securities transaction is suitable for the client.

The MSRB believes that a municipal advisor’s dual representation of an issuer and a conduit borrower with respect to the same issuance raises at least two types of compliance issues and concerns. First, the differing standards and other distinctions that Rule G-42 makes between issuer clients and conduit borrower clients will require a municipal advisor to consider whether, in every aspect of its conduct and representation, the municipal advisor acts in compliance with the more stringent standard applicable to its issuer client, and also fulfills its duties and obligations to its conduit borrower client. Moreover, under Rule G-42, compliance concerns and issues may require greater diligence to identify and address, because although certain duties and obligations are specified in Rule G-42(a)(i) and (ii) and SM. 01 and SM .02, generally, all of the specific duties or obligations that fall under the broad umbrella of the fiduciary duty cannot be specifically enumerated. Among other things, the MSRB cannot anticipate and identify all the situations that may arise in a particular offering, and, as a result, the rule cannot provide explicit instruction or guidance to a municipal advisor to an issuer, regarding what acts must be taken (or avoided) or what must be communicated (or not communicated) to an issuer to comply fully with the municipal advisor’s fiduciary duty. Similarly, all duties and obligations that a municipal advisor owes to a conduit borrower under the duty of care in a particular offering also cannot be specifically enumerated for the same reasons.

Further, when compliance issues or concerns arise, whether the duty owed is a fiduciary duty (a duty of loyalty and a duty of care) or a duty of care, under Rule G-42 and SM .04, the standards of conduct applicable to the municipal advisor and, except as provided in SM .04, the duties and obligations owed to the municipal advisor’s client(s), cannot be eliminated, diminished or modified by disclosure, mutual agreement or otherwise. SM .04 makes clear that nothing in the rule shall be construed to permit a municipal advisor to alter the standards of conduct or impose limitations on any of the duties prescribed in Rule G-42. For example, in various requests for guidance, the MSRB was asked, regarding dual representations, if the MSRB could confirm a municipal advisor engaged in dual representations could continue its representation of both clients if full and fair disclosures of any conflicts of interest or other issues were made to both clients. Generally, disclosure alone would not be sufficient for a municipal advisor to ensure, in all facts and circumstances, that a municipal advisor would be in compliance with all the duties and obligations owed to one or both clients, including, as to a fiduciary, the obligation of a municipal advisor not to “engage in municipal advisory activities for a municipal entity client if it cannot manage or mitigate its conflicts of interest in a manner that will permit it to act in the municipal entity’s best interests.”[19] However, certain limitations may be placed on the scope of a municipal advisory relationship with a client, and the ability to do so is not limited to dual representation scenarios. Under SM .04, if requested or expressly consented to by a client, a municipal advisor may limit the scope of the municipal advisory activities to be performed to certain specified activities or services. (The effectiveness of any such specified limitation of the scope of municipal advisory activities may be negated, however, if the municipal advisor then engages in a course of conduct that is inconsistent with the specified limitations.)

In the Second Scenario and any other scenario involving a dual representation, before entering into the dual representation, a municipal advisor must determine if it is possible to meet its duties and obligations to both clients under Rule G-42. The municipal advisor must determine it can comply with Rule G-42 when the duties and obligations owed to one client, the issuer, are more stringent and more difficult to fulfill, than those duties and obligations that the municipal advisor owes to the second client, the conduit borrower. Among other things, the duty of loyalty owed to the issuer requires a municipal advisor to act in the best interests of the issuer client without regard to the financial or other interests of the municipal advisor. The municipal advisor must consider whether it will be able to act consistently with this standard during the entire engagement while also providing municipal advisory services to the conduit borrower client, without putting its interests or the interests of the conduit borrower, before or above those of the issuer client, including not providing any advantages or benefits to itself or any other client to the loss or detriment of the issuer, including any financial loss or lost opportunity.

In addition, as discussed above, in all municipal advisory relationships, a municipal advisor must identify and disclose to its client material conflicts of interest, after reasonable inquiry, and such disclosures must be sufficiently detailed to inform the client of the nature, implications and potential consequences of each conflict. In the MSRB’s view, conflicts of interest are, in most cases, inherent in a dual representation, although they may not always be material. In a dual representation, the MSRB believes that such conflicts of interest should be identified prior to or upon engaging in municipal advisory activities with each client. Further, in the MSRB’s view, the potential for an identified, but non-material conflict to become a material conflict of interest during the dual representation is great enough that the municipal advisor will have an obligation to make an initial disclosure pursuant to Rule G-42(b)(i)(F), of the facts and circumstances of the dual representation, how such dual representation is a potential material conflict of interest and the risk that such conflict could reasonably be anticipated to impair the municipal advisor’s ability to dually represent both clients in accordance with the standards of conduct under Rule G-42(a).[20] Further, for each client, the municipal advisor must include an explanation of how the municipal advisor addresses or intends to manage or mitigate each conflict, as provided in SM .05.

However, because the municipal advisor owes a fiduciary duty to one client but not the other, if any material conflict of interest is identified that the municipal advisor cannot manage or mitigate in a manner that will permit the municipal advisor to act in the issuer’s best interests, the municipal advisor must not engage in, or must cease engaging in, the municipal advisory activities for the issuer. Practically, this would require the municipal advisor to terminate the relationship with the issuer, or act to eliminate the material conflict of interest. For example, if such conflicts derive from the municipal advisor’s relationship with the conduit borrower, as an alternative to terminating its relationship with the issuer, the municipal advisor may be able to eliminate such material conflicts by amending or terminating its relationship with the conduit borrower. The MSRB notes that, in either scenario, the municipal advisor’s elimination of its conflicts of interest, by terminating its relationship with the issuer, or by amending or terminating its municipal advisory relationship with the conduit borrower, may create both legal and related business issues. If termination of the municipal advisory relationship with the issuer or the conduit borrower is required, among other things, the termination may have a detrimental impact on the schedule or costs of completing the issuance, or impair the terminated client’s ability to obtain informed advice. For these reasons, municipal advisors are cautioned to determine before or upon beginning a dual representation how either municipal advisory relationship would be modified or terminated if the municipal advisor is no longer able to comply with its Rule G-42 obligations in a dual representation. Among other things, a municipal advisor may wish to consider if, prior to finalizing the initial documentation of the municipal advisory relationship as required in Rule G-42(c), the municipal advisor should negotiate the specific terms and conditions that would apply to a future termination of a municipal advisory relationship with either of the clients. As required by Rule G-42(c), if specific terms regarding termination are agreed upon, such terms must be incorporated in the writing(s) that document the municipal advisory relationship.[21]

An example of a difficult circumstance for the municipal advisor to resolve arises when, for example, a major university or hospital chain is engaged in multiple conduit financings in different jurisdictions around the country. The conduit borrower may have developed a certain type of financing to fit within its own broader financing plan, such as consistently structured variable rate securities. One state education authority, which is approached by the university conduit borrower, may, however, have a strong policy against the issuance of variable rate debt. The municipal advisor should bring the conflict to both parties at the earliest possible stage in the financing and make a determination whether it can advise both parties and fulfill its obligations under Rule G-42.

The MSRB also cautions municipal advisors that neither the facts and circumstances characterizing an issuance involving an issuer and a conduit borrower, nor the duties and obligations under Rule G-42 as applied to a relationship, are static or fixed. The requirements of Rule G-42 apply at any time during which municipal advisory activities are engaged in for or on behalf of an issuer or a conduit borrower, and with equal rigor throughout the representation. For example, although the standards of conduct do not change, as facts and circumstances change, a municipal advisor must assess if, under such changed circumstances, there are specific acts, duties or obligations that are not enumerated under Rule G-42 that must be performed or attended to arising from the broad duty of care and, if applicable, duty of loyalty.[22] Rule G-42 also incorporates protections for municipal advisory clients in certain key provisions, which are based on the recognition that key facts and circumstances may change (i.e., the continuing obligation to provide promptly to a client amended or supplemental information in writing, regarding any changes and additions in the relationship documentation, such as amendments or supplements needed regarding the material conflicts of interest disclosures, or the disclosures regarding certain legal and disciplinary events).

Changes in the facts and circumstances regarding the municipal securities issuance, or in the municipal advisory relationships with an issuer, a conduit borrower or both may require the municipal advisor to review if such changes may affect its ability to continue the dual representation and fully comply with Rule G-42. Even if an issuer, a conduit borrower and a municipal advisor believe at the beginning of the dual representation that the issuer and conduit borrower will be in agreement on all major issues that may arise during the course of the issuance, the interests and goals of each client may diverge later. Either the issuer, the conduit borrower, or both, may develop substantially divergent views on issues material to the issuance. Municipal advisors considering dual representation should assess initially the extent to which the interests and goals of the issuer and the conduit borrower are the same or substantially similar and make reassessments periodically thereafter.

Although challenging, in certain circumstances, the MSRB believes that it may be possible for a municipal advisor to provide municipal advisory services to an issuer and, in the manner described in the Second Scenario, indirectly, to engage in municipal advisory activities for or on behalf of a conduit borrower and remain in compliance with Rule G-42. Specifically, the circumstances where dual representation as described in the Second Scenario may be most feasible are those where the interests of the issuer and the conduit borrower are aligned. This may occur when the issuer is created to finance a specific project for the benefit of a metropolitan area, or in instances where the issuer applies a policy-neutral or hands-off approach to proposed projects, provided that such projects and the related financings comply with fundamental legal requirements for issuance. In such circumstances where an issuer and a conduit borrower have a complete or substantially complete convergence of interests and goals, or where the issuer’s concerns are somewhat limited and related for the most part to determining that an issuance will fully comply with the applicable legal and regulatory requirements, it may be possible for the municipal advisor to deal honestly and with the utmost good faith and act in the best interests of the issuer without regard to the financial or other interests of the municipal advisor (including the municipal advisor’s financial or other interest arising from its relationship with the conduit borrower) as required under the duty of loyalty, and also meet its obligations to both clients under the duty of care. It also may be possible for the municipal advisor, which by the very status of its dual representation creates a potential material conflict of interest that must be disclosed in the initial disclosures made pursuant to Rule G-42(b), to manage or mitigate this and any other of “its conflicts of interest in a manner that will permit it to act in the municipal entity’s best interests,” as required under SM .02.

Conversely, where there is not a substantially complete convergence of interests and goals of the issuer and the conduit borrower, or when the shared interests and goals of the issuer and the conduit borrower at the beginning of the issuance process diverge during the course of the issuance, it may not be possible for a municipal advisor to fulfill its duties of loyalty and care to its municipal entity client, and also provide, under the duty of care, the appropriate expert professional advice to the conduit borrower and otherwise fulfill its obligations to the conduit borrower that arise under the duty of care. Although dual representation is possible, for every action taken during an issuance, it is incumbent upon a municipal advisor to assess and determine, as to each client, if such actions comply with the standards of conduct and other requirements under Rule G-42.

Given the broad scope of the duty of care and the broader and more strict obligations arising in a fiduciary relationship, the MSRB concludes that it may be possible for a municipal advisor in the Second Scenario to engage in dual representations for or on behalf of both an issuer and a conduit borrower, but the municipal advisor will face a number of challenges in such situations. Moreover, the challenges to fully and completely comply with its obligations to each client will be heightened in lengthier and more complex engagements.

Section 3: Third, Fourth and Fifth Scenarios

The Third, Fourth and Fifth Scenarios raise the same compliance issues and concerns under Rule G-42 as discussed in the First and Second Scenarios. In the Third Scenario, the municipal advisor, an issuer and a conduit borrower expressly recognize that the municipal advisor is retained by and provides municipal advisory services for the conduit borrower and, also, as a practical matter, provides advice to the issuer, on which the issuer relies.[23] Although in the Third Scenario, the conduit borrower, rather than the issuer compensates the municipal advisor, all the compliance and regulatory issues arising regarding Rule G-42 are the same as those discussed above regarding the Second Scenario.

In relation to the Third Scenario, municipal advisors also have requested guidance regarding the municipal advisor’s responsibilities to the issuer when the municipal advisor is retained and compensated by the conduit borrower. For example, does the municipal advisor have a fiduciary responsibility to the issuer to whom advice is being provided, and is the municipal advisor required to provide disclosures of conflicts of interest to the issuer? If the provision of such advice to the issuer means, under SEC rules, that the provider is a municipal advisor to the issuer, then the municipal advisor would be a fiduciary to the issuer and subject to all the duties and obligations under Rule G-42. Thus, the municipal advisor would be required, among other things, to comply with the requirements to make disclosures of material conflicts of interest as provided in Rule G-42(b), and to provide such conflicts of interest disclosures as part of the relationship documentation as provided in Rule G-42(c).

The Fourth Scenario is another scenario in which a municipal advisor is engaged in a dual representation of an issuer and a conduit borrower. Rule G-42 would apply in the Fourth Scenario in the same manner as it applies in the Second Scenario.

The Fifth Scenario is also an example of dual representation by one municipal advisor of an issuer and a conduit borrower regarding the same issuance of municipal securities and, thus, raises the same issues regarding the municipal advisor’s compliance with Rule G-42 that are discussed for the Second Scenario. The duties and obligations of Rule G-42 run not only from a municipal advisor firm’s associated persons but also from the municipal advisor firm to the issuer and the conduit borrower. Although, in the Fifth Scenario, one employee is designated to act on behalf of the issuer and a second is designated to act on behalf of the conduit borrower, the employees are agents of their employer, a single municipal advisor firm. In the MSRB’s view, therefore, how Rule G-42 applies in the Fifth Scenario does not differ in any material respect from the Second, Third and Fourth Scenarios. In a dual representation, and, in particular, a dual representation purposefully established from the beginning of the issuance, a municipal advisor firm having the capacity to do so is likely to rely on the services of more than one of its associated persons, whether structured to work in coordination as one team, or separately.

Section 4: When a Conduit Borrower is also a Municipal Entity

In the discussion above regarding the five scenarios, the MSRB assumes that, in dual representations, the issuer client is a municipal entity, and the second client, the conduit borrower, is not. As discussed above, because under the Exchange Act and Rule G-42, a municipal advisor owes more rigorous obligations and duties to a municipal entity client – that is, a fiduciary duty – than are owed to a conduit borrower, in certain scenarios involving dual representation, a municipal advisor may find it difficult, or not possible, to fully comply with its obligations to both clients under Rule G-42.

The MSRB recognizes that, at times, both the issuer and the conduit borrower are municipal entities, and, in this discussion, a conduit borrower that is a municipal entity is referred to as a municipal entity conduit borrower. In such cases, a municipal advisor that provides advice to or on behalf of the issuer and the municipal entity conduit borrower would owe the more rigorous duties required of a fiduciary to both clients equally (e.g., the municipal advisor would be required, in all contexts, to deal honestly and with the utmost good faith with the issuer and the municipal entity conduit borrower, and, as to each, to act in the client’s best interests without regard to the financial or other interests of the municipal advisor).

Before undertaking such a dual engagement, the municipal advisor must assess its ability to comply with Rule G-42, including the proscription in Rule G-42, SM .02, which prohibits a municipal advisor from engaging in municipal advisory activities for a client if the municipal advisor could not manage or mitigate its conflicts of interest in a manner that would permit the municipal advisor to act in the best interests of the client. In addition, if the dual representation were undertaken, the municipal advisor’s assessment of its ability to fully comply with Rule G-42, including SM .02, should be carefully considered at the beginning of the dual representation and thoughtfully re-considered periodically during the course of the dual engagement. In the MSRB’s view, the facts and circumstances wherein a municipal advisor would be able to fully comply with Rule G-42, including all obligations as a fiduciary to each municipal entity, are not likely to occur frequently.

This interpretive guidance is intended for use only as a resource. It does not describe all provisions of Rule G-42. In addition, the MSRB has adopted other rules and interpretations that may be applicable to the conduct described in the five scenarios.

[1] This guidance is limited to persons that are municipal advisors as defined in Section 15B(e)(4) of the Securities Exchange Act of 1934 (“Exchange Act”), and the relevant rules and regulations promulgated pursuant to the Exchange Act (“Exchange Act rules”), but excludes municipal advisors engaged solely in the undertaking of a solicitation of a municipal entity or an obligated person, for compensation, on behalf of certain third parties (“solicitor municipal advisors”), because Rule G-42 does not apply to solicitor municipal advisors. See Exchange Act Release No. 70462 (September 20, 2013), 78 FR 67467 (November 12, 2013) (“Order Adopting SEC Final Rule”) (the Exchange Act rules and regulations referred to above include, but are not limited to, Exchange Act Rules 15Ba1-1 through 15Ba1-8. See also Section 15B(e)(4)(A)(ii); Exchange Act Rule 15Ba1-1(d)(1)(i) (the term “municipal advisor” includes solicitors of obligated persons); Section 15B(e)(9) of the Exchange Act (definition of “solicitation of a municipal entity or obligated person”); and Order Adopting SEC Final Rule, 78 FR 67467, at n. 138 and n. 408.

[2] In Exchange Act Rule 15Ba1-1(e), the term “municipal advisory activities” means “(1) [p]roviding advice to or on behalf of a municipal entity or obligated person with respect to municipal financial products or the issuance of municipal securities, including advice with respect to the structure, timing, terms, and other similar matters concerning such financial products or issues; or (2) [s]olicitation of a municipal entity or an obligated person.” Further, the Rule provides that, in the absence of an exclusion or an exemption, these activities would cause a person to be a municipal advisor.

[3] Although the term “conduit borrower” is not specifically defined in the Exchange Act, a conduit borrower in a municipal securities issuance, such as a private university, non-profit hospital, private corporation, or a public hospital or public university, is a type of “obligated person.” See Order Adopting SEC Final Rule, at 67483, n. 200 (the term obligated person can include entities acting as conduit borrowers, such as private universities and non-profit hospitals).

The term, “obligated person,” is defined in Exchange Act Section 15B(e)(10) to mean:

any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person, committed by contract or other arrangement to support the payment of all or part of the obligations on the municipal securities to be sold in an offering of municipal securities.

Generally, for purposes of this guidance, the terms “obligated person” and “conduit borrower” have the same meaning. In addition, for this guidance, both terms exclude a municipal entity acting as an issuer of municipal securities.

[4] 15 U.S.C. 77a et seq.

[5] 15 U.S.C. 77c(a)(4).

[6] 17 CFR 230.500 – 508.

[7] 15 U.S.C. 77c(a)(2).

[8] See Order Adopting SEC Final Rule, at 67477 (the SEC concluded that compensation should not factor into a determination of whether a person must register (or be registered) as a municipal advisor, except in connection with solicitor municipal advisors; in such cases, the person must becompensated for such solicitation activity to be required to register (or be registered) as a municipal advisor).

[9] These requirements include, but are not limited to: complying with the broad obligations under the duty of care under Rule G-42(a)(i) and Supplemental Material (“SM”) .01 under the rule in all aspects of the municipal advisor’s municipal advisory relationship with the conduit borrower; making the required disclosures to the conduit borrower regarding material conflicts of interest and material legal and disciplinary events (and updating them as necessary) as set forth in Rule G-42(b) and SM .05; providing relationship documentation to the conduit borrower (and updating the documentation as necessary) as provided in Rule G-42(c) and SM .05 and SM .06; if making a recommendation to the conduit borrower, or if reviewing a recommendation from the issuer or another party to the conduit borrower, following the requirements of Rule G-42(d) and SM .09 and SM .10; and not engaging in the specifically prohibited conduct as outlined in Rule G-42(e)(i) and SM .11.

[10] In the Order Adopting SEC Final Rule, the SEC provided guidance to interpret “advice” as that term is used in the definition of municipal advisor and related terms. See Order Adopting SEC Final Rule, at 67471 (providing examples of communications that are excluded from the term “advice”) and 67478 - 80 (SEC guidance regarding the meaning of “advice,” statement that the SEC does not believe that the term “advice” is susceptible to a bright-line definition).

Jurisdiction to resolve the interpretive issue of whether “advice” has been provided, based on the facts and circumstances, lies with the SEC.

[11] See Exchange Act Section 15B(e)(4)(A)(i).

[12] See Order Adopting SEC Final Rule, at 67479.

[13] SM .01 of Rule G-42 sets forth core principles regarding the duty of care a municipal advisor owes to all clients, whether issuers or conduit borrowers. The duty of care includes, but is not limited to, the specific duties enumerated in the rule. For example, to fulfill its obligations under the duty of care, the municipal advisor must, among other things: possess the degree of knowledge and expertise needed to provide the client with informed advice; make a reasonable inquiry as to the facts that are relevant to a client’s determination as to whether to proceed with a course of action or that form the basis for advice provided to the client; and undertake a reasonable investigation to determine that it is not basing any recommendation on materially inaccurate or incomplete information. Also, a municipal advisor must have a reasonable basis for any advice provided to or on behalf of a client; any representations made in a certificate that it signs that will be reasonably foreseeably relied upon by the client, any other party involved in the municipal securities transaction, or investors in the issuer’s securities or municipal securities secured by payments from the conduit borrower client; and any information provided to the client or other parties involved in the municipal securities transaction in connection with the preparation of an official statement for any issue of municipal securities as to which the municipal advisor is advising. For example, to make a recommendation that complies with the duty of care, prior to making a recommendation, a municipal advisor is required to determine if the recommended municipal securities transaction is suitable, based on numerous factors, as applicable to the particular type of client. Various factors are set forth in SM .09 and include, but are not limited to: the client’s financial situation and needs, objectives, tax status, risk tolerance, liquidity needs, the client’s experience with, in this scenario, the issuance of municipal securities and related municipal securities transactions, the client’s experience with municipal securities issuance and related municipal securities transactions of the type and complexity being recommended, the client’s financial capacity to withstand changes in market conditions during the period that the municipal securities to be issued are reasonably expected to be outstanding and any other material information known by the municipal advisor about the client and the municipal securities issuance, after reasonable inquiry.

[14] See Order Adopting SEC Final Rule, at 67479.

[15] See supra notes 10-12, and accompanying text.

[16] SM .02 of Rule G-42 sets forth core principles regarding the duty of loyalty owed to the issuer. Under SM .02, the duty of loyalty includes, but is not limited to, the duties and obligations to “deal honestly and with the utmost good faith with a municipal entity client and act in the client’s best interests without regard to the financial or other interests of the municipal advisor.” In addition, “[a] municipal advisor must not engage in municipal advisory activities for a municipal entity client if it cannot manage or mitigate its conflicts of interest in a manner that will permit it to act in the municipal entity’s best interests.”

[17] See n. 13, supra.

[18] Additional information and requirements regarding the specific prohibition in Rule G‑42(e)(ii) are set forth in SM .13, SM .14 and SM .15.

[19] More specifically, requestors asked if the MSRB would confirm that full and fair disclosure of any conflicts of interest or other issues would address any concerns under the Rule with the result that there would be no unmanageable conflict of interest or issue that would prevent a municipal advisor from advising both an issuer and a conduit borrower (or two advisors from the same firm from representing, separately, an issuer and the related conduit borrower) as required under SM .02.

[20] The MSRB believes that a conflict of interest arises in a dual representation described in the Second Scenario as it does in the First Scenario, when a municipal advisor provides municipal advisory services to a conduit borrower and the payment for such services is provided by a third-party, such as an issuer, in that such circumstances often can create or foster divided loyalties. In both cases, the MSRB believes that the potential that such conflicts of interest, which are present at the onset of such relationship(s), may later become material conflicts of interest requires, at a minimum, that such conflict(s) be disclosed initially to the client(s) pursuant to Rule G-42(b)(i)(F).

[21] Rule G-42(c)(vi) requires that the written documentation of the municipal advisory relationship include, in writing, “the date, triggering event, or means for the termination of the municipal advisory relationship, or, if none, a statement that there is none.” Rule G‑42(c)(vii) requires that the written documentation include “any terms relating to withdrawal from the municipal advisory relationship.”

[22] As noted above, all of the municipal advisor’s obligations and duties cannot be specifically enumerated or identified at the beginning of the dual representation. Instead, the duties and obligations under either standard of conduct will unfold during the dual representation.

[23] The Third Scenario is limited to situations where an issuer chooses not to retain a separate municipal advisor. However, changing the facts and circumstances of the Third Scenario to include the retention of another municipal advisor by the issuer is not conclusive in determining if Rule G-42 would apply to the municipal advisor retained by the conduit borrower in its conduct with the issuer. If the municipal advisor retained by the conduit borrower provides municipal advisory services indirectly or, as a practical matter, to the issuer, and if the SEC interprets such conduct as engaging in municipal advisory activity for or on behalf of the issuer, the provision of such advice makes Rule G-42 applicable to the provider, except where the provider is subject to an exclusion or an exemption (from the definition of municipal advisor), such as the Independent Registered Municipal Advisor exemption provided under Exchange Act Rule 15Ba1-1(d)(3)(vi).

The MSRB amended Rule G-17, regarding fair dealing, to require that, in the conduct of their municipal advisory activities, municipal advisors, including solicitor municipal advisors, and their associated persons must deal fairly with all persons and not engage in any deceptive, dishonest, or unfair practice. (Previously, the rule applied only to dealers and their associated persons.) Rule G-17 became applicable to all municipal advisors, including solicitor municipal advisors, and their associated persons, on December 22, 2010.

Rule G-17 contains an anti-fraud prohibition similar to the standard set forth in Rule 10b-5 adopted by the SEC under the Exchange Act. Thus, all municipal advisors must refrain from engaging in certain conduct and must not misrepresent or omit the facts, risks, or other material information about municipal advisory activities undertaken. However, Rule G-17 does not merely prohibit deceptive conduct on the part of a municipal advisor. The rule also establishes a general duty of a municipal advisor to deal fairly with all persons, even in the absence of fraud.

Rule G-17 imposes a duty of fair dealing on solicitor municipal advisors when they are soliciting business from municipal entities and obligated persons on behalf of third parties. Again, municipal advisors are reminded that the term “municipal entity” also includes certain entities that do not issue municipal securities. Thus, in addition to owing the specific obligations discussed below to issuers of municipal securities, solicitor municipal advisors also owe such obligations to, for example, state and local government sponsored public pension plans and local government investment pools.

The duty of fair dealing includes, but is not limited to, a duty to disclose to the municipal entity or obligated person being solicited material facts about the solicitation, such as the name of the solicitor’s client; the type of business being solicited; the amount and source of all of the solicitor’s compensation; payments (including in-kind) made by the solicitor to another solicitor municipal advisor (including an affiliate, but not an employee) to facilitate the solicitation regardless of characterization; and any relationships of the solicitor with any employees or board members of the municipal entity or obligated person being solicited or any other persons affiliated with the municipal entity or obligated person or its officials who may have influence over the selection of the solicitor’s client.

Additionally, if a solicitor municipal advisor is engaged by its client to present information about a product or service offered by the third-party client to the municipal entity or obligated person, the solicitor municipal advisor must disclose all material risks and characteristics of the product or service. The solicitor municipal advisor must also advise the municipal entity or obligated person of any incentives received by the solicitor (that are not already disclosed as part of the solicitor municipal advisor’s compensation from its client) to recommend the product or service, as well as any other conflicts of interest regarding the product or service, and must not make material misstatements or omissions when discussing the product or service.

Under the Exchange Act, municipal advisors and their associated persons are deemed to owe a fiduciary duty to their municipal entity clients.[*] Similarly, Rule G-42 (which applies only to non-solicitor municipal advisors) follows the Exchange Act in deeming municipal advisors to owe a fiduciary duty, for purposes of Rule G-42, to such municipal entity clients. However, because a solicitor municipal advisor’s clients are not the municipal entities that they solicit, but rather the third parties that retain or engage the solicitor municipal advisor to solicit such municipal entities, solicitor municipal advisors do not owe a fiduciary duty under the Exchange Act or MSRB rules to their clients (or the municipal entity) in connection with such activity. Nonetheless, as noted above, solicitor municipal advisors are subject to the fair dealing standards under Rule G-17 (including with respect to their clients and the entities that they solicit).

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.