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The Board has filed an amendment to rule G-23, on activities of financial advisors.
On December 23, 1997, the Board filed with the Securities and Exchange Commission ("SEC") an amendment to rule G-23, on activities of financial advisors.(1) The amendment requires a financial advisor, prior to entering into a remarketing agreement for an issue on which it advised, to disclose, in writing, to the issuer the terms of the remuneration the financial advisor could earn as remarketing agent on such issue and that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent. The proposed amendment will become effective upon approval by the SEC.
DISCUSSION
Rule G-23, on activities of financial advisors, establishes disclosure and other requirements for dealers that act as financial advisors to issuers of municipal securities. The rule is designed principally to minimize the prima facie conflict of interest that exists when a dealer acts as both financial advisor and underwriter with respect to the same issue. Specifically, rule G-23 requires a financial advisor to alert the issuer to the potential conflict of interest that might lead the dealer to act in its own best interest as underwriter rather than the issuer's best interest.(2)
The Board recently was made aware that, in certain instances, some financial advisors also have acted as remarketing agents for issues on which they advised the issuer. In May 1997, the Board published a notice (the "Notice") that, among other things, proposed for comment draft amendments to rule G-23 concerning this issue.(3) The draft amendment to rule G-23 would have required a dealer acting as both financial advisor and remarketing agent for an issue to meet the same disclosure and other requirements as a dealer acting as financial advisor and later negotiating the underwriting or acting as placement agent for the issue (which includes terminating the financial advisory relationship with regard to the issue and making certain disclosures regarding the potential conflict of interest). The concern was that there may be a potential conflict of interest for the financial advisor because its advice regarding the type of issue (i.e., variable rate) and the issue's timing and terms may be colored by the fees it expects to receive as remarketing agent.
Many of the commentators were opposed to the draft amendment. Some of the commentators felt that issuers should not be precluded from selecting a financial advisor to also serve as a remarketing agent and that the decision should be left to the issuer as to whether there is a conflict of interest involved in this situation. Based upon the comments received, the Board determined not to adopt the draft amendment to rule G-23.
Instead of requiring a broker, dealer or municipal securities dealer to resign as financial advisor for an issue prior to acting as remarketing agent for that issue, the proposed amendment requires the financial advisor, prior to entering into a remarketing agreement, to disclose, in writing, to the issuer the terms of the remuneration the financial advisor could earn as remarketing agent on such issue and that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent for the securities with respect to which the financial advisory relationship exists. The proposed amendment ensures that an issuer is made aware that there may be a conflict of interest for the financial advisor for an issue to change its capacity to that of remarketing agent for such issue and the issuer is made aware of the terms of the remuneration the dealer could earn as remarketing agent on such issue. The issuer can then decide whether to allow the financial advisor for an issue to act as remarketing agent for such issue.
The proposed amendment also requires that the financial advisor receive the issuer's acknowledgment in writing of receipt of such disclosures. The issuer's written acknowledgment of receipt can be accomplished by a variety of methods, including a signed statement from the issuer prepared by the dealer or issuer, or by the issuer signing or initialing the dealer's disclosure letter.
When the requirements contained in the proposed amendment are met, a dealer acting as financial advisor for an issue may also serve as remarketing agent for such issue.
December 23, 1997
Text of Proposed Amendment(4)
Rule G-23. Activities of Financial Advisors
(a) - (d) No change.
(e) Remarketing Activities. No broker, dealer, or municipal securities dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities shall act as agent for the issuer in remarketing such issue, unless, prior to entering into a remarketing agreement, the broker, dealer, or municipal securities dealer has expressly disclosed in writing to the issuer that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent for the securities with respect to which the financial advisory relationship exists and the terms of the remuneration the broker, dealer or municipal securities dealer could earn as remarketing agent on such issue. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure.
[(e)] (f) No change.
[(f)] (g) Each broker, dealer, and municipal securities dealer subject to the provisions of sections (d), [or] (e) or (f) of this rule shall maintain a copy of the written disclosures, acknowledgments and consents required by these sections in a separate file and in accordance with the provisions of rule G-9.
[(g)] (h) No change.
[(h)] (i) No change.
ENDNOTES
1. File No. SR-MSRB-97-16. Comments sent to the SEC should refer to the file number.
2. Rule G-23(d)(i) requires a financial advisor wishing to underwrite or place an issue of municipal securities on a negotiated basis to: (i) terminate in writing the financial advisory relationship with respect to such issue and the issuer has expressly consented in writing to such acquisition or participation; (ii) disclose in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing receipt of such disclosure; and (iii) expressly disclose in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation as financial advisor, and the issuer has expressly acknowledged in writing receipt of such disclosure. If such issue is to be sold by the issuer at competitive bid, the issuer must expressly consent in writing prior to the bid to the financial advisor's acquisition or participation.
3. "Board Review of Underwriting Process," MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.
4. Underlining indicates new language; brackets denote deletions.
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
The Board has filed proposed amendments to rule G-32, on disclosures in connection with new issues
The Board has filed proposed amendments to rule G-32, on disclosures in connection with new issues
On December 22, 1997, the Board filed with the Securities and Exchange Commission ("SEC") proposed amendments to rule G-32, on disclosures in connection with new issues, that would strengthen the rule's existing requirements regarding dissemination of official statements to dealers purchasing new issue municipal securities during the underwriting period and would incorporate a longstanding Board interpretation regarding disclosure to customers of initial offering prices in negotiated underwritings.(1)
Rule G-32 currently provides that no dealer shall sell any new issue municipal securities to a customer unless such dealer delivers to the customer no later than the settlement of the transaction, among other things, a copy of the official statement in final form and, in connection with a negotiated sale of new issue municipal securities, information regarding the initial offering price for each maturity in the new issue (the "Offering Price Disclosure Provision"). The rule also requires that managing underwriters and other dealers that sell new issue municipal securities to purchasing dealers furnish copies of the official statement to such purchasing dealers upon request (the "Dealer Dissemination Provisions"). The proposed amendments to rule G-32 would strengthen the Dealer Dissemination Provisions by requiring that official statements be sent to purchasing dealers within one business day of request and would make explicit in the Offering Price Disclosure Provision that the required disclosure to customers of the initial offering price of each maturity includes any maturities that have not been reoffered.
Amendments to Dealer Dissemination Provisions
All dealers selling new issue municipal securities to customers, not just dealers that participated in the underwriting of the new issue, are required to deliver official statements to their customers by no later than settlement of their transactions. As a result, the Dealer Dissemination Provisions were included in rule G-32 to make official statements for new issues available to all dealers so that they may fulfill their customer delivery obligation under the rule. Because dealers that are not part of the underwriting group have indicated from time to time that they have some difficulty in obtaining official statements from the managing underwriter or other selling dealers on a timely basis, the Board is proposing amendments to the Dealer Dissemination Provisions of rule G-32 to provide a specific time frame and method for delivery of official statements to purchasing dealers.
The proposed amendments would retain the existing responsibility of the managing underwriter under the rule to provide, upon request, one copy of the official statement to purchasing dealers, together with the disclosure information required for negotiated offerings, and one additional official statement per $100,000 par value purchased for resale to customers. The managing underwriter also would continue to be required to provide purchasing dealers, upon request, with instructions on how to order copies of the official statement from the printer.(2) The amendments would add a requirement that the official statement be sent by the managing underwriter to the purchasing dealer no later than the business day after the request or, if the official statement has not been received from the issuer or its agent, the business day after receipt. The managing underwriters would be required to send official statements by first class mail or other equally prompt means unless the purchasing dealer arranges some other method of delivery at its own expense. These obligations of the managing underwriter would continue to apply with respect to all purchasing dealers, even where the managing underwriter did not sell the securities to the purchasing dealer.
In addition, the proposed amendments would retain the existing requirement that every dealer selling a new issue municipal security to another dealer must furnish the official statement to such purchasing dealer upon request. The amendments would add a requirement that the selling dealer send the official statement to the purchasing dealer within the same time frame and by the same means as would be required of the managing underwriter.
The Board believes that the proposed amendments to the Dealer Dissemination Provisions would help dealers to comply with their obligation to deliver official statements to their customers by settlement and would improve dissemination of official statements to the marketplace generally during the underwriting period.
Amendment to Offering Price Disclosure Provision
Since January 1983,(3) the Board has interpreted the Offering Price Disclosure Provision to require that the initial offering price of all maturities of a new issue of municipal securities in a negotiated offering must be disclosed to customers, even for maturities that are not reoffered. The proposed amendment to the Offering Price Disclosure Provision of rule G-32 would incorporate into the rule language this longstanding Board interpretation. The Board believes that the application of the Offering Price Disclosure Provision to maturities that are not reoffered permits customers to determine whether the price they paid for a new issue municipal security is substantially different from the price being paid by presale purchasers.
December 22, 1997
Text of Amendments(4)
Rule G-32. Disclosures in Connection with New Issues
(a) Disclosure Requirements. No broker, dealer or municipal securities dealer shall sell, whether as principal or agent, any new issue municipal securities to a customer unless such broker, dealer or municipal securities dealer delivers to the customer no later than the settlement of the transaction:
(i) No change.
(ii) in connection with a negotiated sale of new issue municipal securities, the following information concerning the underwriting arrangements:
(A)-(B) No change.
(C) the initial offering price for each maturity in the issue that is offered or to be offered in whole or in part by the underwriters, including maturities that are not reoffered.
In the event an official statement in final form will not be prepared by or on behalf of the issuer, an official statement in preliminary form, if any, shall be sent to the customer with a notice that no final official statement is being prepared.
Every broker, dealer or municipal securities dealer shall send, upon request, promptly furnish the documents and information referred to in this section (a) to any broker, dealer or municipal securities dealer to which it sells new issue municipal securities , upon the request of such broker, dealer or municipal securities dealer. no later than the business day following the request or, if an official statement in final form is being prepared but has not been received from the issuer or its agent, no later than the business day following such receipt. Such items shall be sent by first class mail or other equally prompt means, unless the purchasing broker, dealer or municipal securities dealer arranges some other method of delivery and pays or agrees to pay for such delivery.
(b) Responsibility of Managing Underwriters, and Sole Underwriters and Financial Advisors. (i) Managing Underwriters and Sole Underwriters. When a final official statement is prepared by or on behalf of an issuer, the managing underwriter or sole underwriter, upon request, shall send to provide all brokers, dealers and municipal securities dealers that purchase the new issue municipal securities with an official statement and other information required by paragraph (a)(ii) of this rule and not less than one additional official statement in final form per $100,000 par value of the new issue purchased by the broker, dealer or municipal securities dealer and sold to customers. Such items shall be sent no later than the business day following the request or, if an official statement in final form is being prepared but has not been received from the issuer or its agent, no later than the business day following such receipt. Such items shall be sent by first class mail or other equally prompt means, unless the purchasing broker, dealer or municipal securities dealer arranges some other method of delivery and pays or agrees to pay for such delivery. In addition, the managing underwriter or sole underwriter, upon request and shall provide all purchasing brokers, dealers and municipal securities dealers with instructions on how to order additional copies of the final official statement directly from the printer. A managing underwriter or sole underwriter that prepares an official statement on behalf of an issuer shall print the final official statement and other information required by paragraph (a)(ii) of this rule and make them available promptly after the date of sale of the issue but no later than two business days before the date all securities are delivered by the syndicate manager to the syndicate members.
(ii) Finanicial Advisors. A broker, dealer or municipal securities dealer that, acting as financial advisor, prepares a final official statement on behalf of an issuer, shall make that official statement in final form available to the managing underwriter or sole underwriter promptly after the award is made. If the financial advisor is responsible for printing the final official statement, it shall make adequate copies of the final official statement available to the managing underwriter or sole underwriter promptly after the award is made but no later than two business days before the date all securities are delivered by the syndicate manager to the syndicate members to permit their compliance with paragraph (b)(i) of this rule.
(c) No change.
ENDNOTES
1. File No. SR-MSRB-97-14. Comments sent to the SEC should refer to the file number.
2. Consistent with the position taken by the SEC in connection with its Rule 15c2-12, the Board recognizes that the official statement is the issuer's document. As a result, the proposed amendments would remove references in the existing rule to the preparation of official statements by underwriters and dealers that act as financial advisors.
3. See "Rule G-32 - Frequently Asked Questions Concerning Disclosures in Connection with New Issues," MSRB Reports, Vol. 3, No. 1 (Jan. 1983) at 25-27. See also "Disclosure Requirements for New Issue Securities: Rule G-32," MSRB Reports, Vol. 6, No.4 (Sept. 1986) at 17-20; and "Disclosures in Connection with New Issues: Rule G-32," MSRB Reports, Vol. 16, No. 3 (Sept. 1996) at 19-23.
4. Underlining indicates additions; strikethrough denotes deletions.
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
G37EXMPT
The Board has filed proposed amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, and rule G-38, on consultants
On December 18, 1997, the Board filed with the Securities and Exchange Commission ("SEC") proposed amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, and rule G-38, on consultants, that would (1) exempt dealers that have not engaged in municipal securities business for a period of at least two years from the Form G-37/G-38 submission requirement relating to rule G-37 (but not rule G-38) and related recordkeeping requirements under rule G-8; (2) require dealers that newly engage in municipal securities business to disclose certain political contributions and payments during the preceding two-year period; (3) exempt dealers that have no information to report in any calendar quarter from the Form G-37/G-38 submission requirement for such quarter; and (4) make certain technical and clarifying amendments to rules G-37 and G-38.(1)
Rule G-37, on political contributions and prohibitions on municipal securities business, prohibits a dealer that effects transactions in municipal securities from engaging in municipal securities business(2) with an issuer within two years after certain contributions to an official of such issuer made by the dealer, any municipal finance professional ("MFP") associated with such dealer (other than certain de minimis contributions) or any political action committee ("PAC") controlled by the dealer or any MFP. In addition, rule G-37 and rule G-38, on consultants, require dealers to make disclosures of certain contributions to issuer officials, payments to political parties of states and political subdivisions, consultant arrangements and municipal securities business on Form G-37/G-38, and rule G-8, on recordkeeping, requires dealers to create records of such contributions, payments, consultants and municipal securities business.
Although the Board continues to be vigilant for any evidence that political contributions may affect the awarding of municipal securities business, the Board believes that the direct connection between political contributions to issuer officials and the awarding of municipal securities business has been substantially reduced during the last three years by rule G-37. The Board also is sensitive to the burden imposed on dealers by the requirements of rules G-37 and G-8 and is committed to reducing this burden whenever possible as long as the effectiveness of the rules is not impaired.
Thus, the Board is proposing amendments to rules G-37 and G-8 that would exempt dealers that have not engaged in municipal securities business for a period of at least two years from the reporting requirements of rule G-37 and from certain related recordkeeping requirements under rule G-8. However, dealers would continue to be subject to the rule G-38 reporting requirements. Although rule G-37 is intended only to regulate dealer engagements in municipal securities business (as defined in the rule), every dealer is currently required to comply with the reporting requirements under rule G-37 and the related recordkeeping requirements under rule G-8, even if a dealer does not engage in any such municipal securities business.
To prevent dealers that do in fact engage in municipal securities business from circumventing rule G-37 - including in particular the ban on municipal securities business - by means of this exemption, the proposed amendments would require any dealer that engages in municipal securities business to record and to disclose on Form G-37/G-38 certain contributions to issuer officials and payments to political parties of states and political subdivisions during the two-year period preceding its engagement in municipal securities business, to the extent not previously disclosed.
In addition, the Board is proposing amendments to rule G-37 to codify a previously recognized exemption to the Form G-37/G-38 submission requirement for any quarter in which a dealer has no information to report. The Board is also proposing certain technical amendments to rules G-37 and G-38 to consolidate the provisions relating to submission of Form G-37/G-38 and to clarify rule G-37 by eliminating certain cross-referencing to rule G-8.
Form G-37/G-38 Submission and Recordkeeping Exemption for Dealers Not Engaged in Municipal Securities Business
As amended, rule G-37(e)(ii)(A)(1) would provide that, if a dealer has not engaged in municipal securities business for a period of at least two years, the dealer would not be required to send Form G-37/G-38 to the Board for so long as it refrains from engaging in municipal securities business, even if the dealer had made political contributions or political party payments that would otherwise be reportable under rule G-37. In addition, new clause (K) of rule G-8(a)(xvi) would provide that such dealer would not be subject to the recordkeeping requirements of paragraph (a)(xvi) of rule G-8, relating to records concerning political contributions and prohibitions on municipal securities business, for so long as it refrains from engaging in municipal securities business.(3) The submission exemption and recordkeeping exemption are referred to collectively as the "No Business Exemption." The No Business Exemption would apply both to dealers that have never undertaken municipal securities business and to dealers that have previously undertaken such business but have ceased for the requisite period of time.(4)
If, in any quarter during which a dealer qualifies for the No Business Exemption, such dealer uses a consultant to attempt to obtain municipal securities business, such dealer would be required under amended rule G-37(e)(ii)(B) to submit Form G-37/G-38 to the Board but would only be required to report information relating to such use of consultants as required under rule G-38.
The No Business Exemption would not provide an exemption from the operation of sections (b) and (c) of rule G-37. Thus, under certain circumstances, a political contribution (other than an MFP's de minimis contribution) to an official of an issuer that was not disclosed on Form G-37/G-38 and not recorded under rule G-8(a)(xvi) by virtue of the No Business Exemption could trigger the ban on municipal securities business with such issuer.
In addition, once a dealer does in fact engage in municipal securities business, the dealer would become subject to the new Look Back Disclosure Requirement described below and would be required to send Form G-37/G-38 to the Board for the calendar quarter in which such business was undertaken and for each quarter thereafter unless the dealer qualifies for the No Information Exemption described below or again qualifies for the No Business Exemption. Furthermore, such dealer would be required to create records of political contributions and payments to political parties of states and political subdivisions under rule G-8(a)(xvi) for the then current calendar year and the two preceding calendar years and to continue to create such records thereafter unless the dealer again qualifies for the No Business Exemption. Before engaging in municipal securities business with an issuer, such dealer would need to review the newly created records to ensure that it has not been banned from business with the issuer as a result of a contribution to an official of the issuer during the period that the dealer had invoked the No Business Exemption.(5)
In proposing the elimination of the requirement to disclose political contributions and payments to political parties where the dealer has not engaged in municipal securities business for a period of at least two years, the Board recognizes that the filing of Form G-37/G-38 and compliance with the underlying recordkeeping requirements under such circumstances may not substantially further the purpose of exposing to public scrutiny contributions and payments that may be linked to the awarding of municipal securities business.
Disclosure Requirement With Respect to Dealers Newly Engaging in Municipal Securities Business
In conjunction with the proposed No Business Exemption, the proposed amendments would institute a new "Look Back Disclosure Requirement." If in any calendar quarter a dealer engages in municipal securities business, the dealer would be required under amended rule G-37(e)(iii) to report on Form G-37/G-38 for such quarter all reportable contributions to issuer officials and payments to political parties of states and political subdivisions made during the preceding two years by the dealer, any MFP, any non-MFP executive officer or any dealer-controlled or MFP-controlled PAC, to the extent not previously reported during the two-year period.(6) A disclosure obligation should arise under the Look Back Disclosure Requirement only if a dealer engages in municipal securities business after either (i) having invoked the No Business Exemption during the preceding two-year period or (ii) having become a new dealer that is for the first time subject to the rules of the Board.
The Look Back Disclosure Requirement is intended to promote public scrutiny of all contributions to issuer officials and payments to political parties of states and political subdivisions (other than qualifying de minimis contributions and payments) that may affect the awarding of municipal securities business to any dealer that is newly engaging in, or is again becoming engaged in, municipal securities business.
Form G-37/G-38 Submission Exemption for Dealers With No Information to Report
Amended rule G-37(e)(ii)(A)(2) would codify a previously recognized exemption to the quarterly Form G-37/G-38 submission requirement by providing that a dealer would not be required to send Form G-37/G-38 to the Board for any calendar quarter in which all of the following conditions apply: (1) the dealer has not engaged in municipal securities business, (2) the dealer has no reportable political contributions to issuer officials or payments to political parties of states and political subdivisions, and (3) the dealer has no reportable use of consultants (the "No Information Exemption"). The No Information Exemption would continue to obviate the need for a dealer to submit a Form G-37/G-38 that reflects no reportable activity under all category headings. However, a dealer would be required to send Form G-37/G-38 to the Board in any subsequent calendar quarter in which it does not qualify for the No Information Exemption, unless the dealer qualifies for the No Business Exemption.
Technical Amendments Relating to Form G-37/G-38 Submission Procedures
Amended rule G-37(e)(i) would consolidate the Form G-37/G-38 submission procedures that are currently set forth separately in paragraphs (i) and (ii) of rule G-37(e) and in rule G-38(d). Amended rule G-38(d) would include certain related amendments.
Clarifying Technical Amendments
The existing exemption from the reporting requirements under rule G-37 for de minimis contributions made by MFPs and non-MFP executive officers to officials of issuers(7) and to political parties of states and political subdivisions(8) is effected by a cross-reference to the recording requirements of rule G-8(a)(xvi). To clarify the nature of such de minimis exemption, amended rule G-37(e)(i)(A) incorporates into the language of rule G-37, but does not change, the specific requirements of the de minimis exemption.
December 18, 1997
Text of Amendments(9)
Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business
(a) - (d) No change.
(e)(i) Except as otherwise provided in paragraph
(e)(ii), each Each broker, dealer or municipal securities dealer
shall, by the last day of the month following the end of each calendar quarter (these
dates correspond to January 31, April 30, July 31 and October 31), send to the Board
by certified or registered mail, or some other equally prompt means that provides a record
of sending, and the Board shall make public, reports on contributions to officials
of issuers and on payments to political parties of states and political subdivisions that
are required to be recorded pursuant to rule G-8(a)(xvi). Such reports shall include
information concerning the amount of, two copies of Form G-37/G-38 setting
forth, in the prescribed format, the following information:
(A) for contributions to officials of issuers (other than a contribution made by a municipal finance professional or a non-MFP executive officer to an official of an issuer for whom such person is entitled to vote if all contributions by such person to such official of an issuer, in total, do not exceed $250 per election) and payments to political parties of states and political subdivisions (other than a payment made by a municipal finance professional or a non-MFP executive officer to a political party of a state or political subdivision in which such person is entitled to vote if all payments by such person to such political party, in total, do not exceed $250 per year):
and an indication of the contributor category of each contribution or payment made by:
(A) the broker, dealer or municipal securities dealer;
(B) all municipal finance professionals;
(C) all non-MFP executive officers; and
(D) all political action committees controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional.
Such reports also shall include information on
municipal securities business engaged in and certain other information specified in this
section (e), as well as other identifying information as may be determined by the Board
from time to time.
(ii) Two copies of the reports referred to in
paragraph (i) of this section (e) must be sent to the Board on Form G-37/G-38 by the last
day of the month following the end of each calendar quarter (these dates correspond to
January 31, April 30, July 31 and October 31), and must include, in the prescribed format,
by state, the following information on contributions to each official of an issuer and
payments to each political party of a state or political subdivision made and municipal
securities business engaged in during the reporting period:
(A)(1) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving contributions or payments during such calendar quarter, listed by state;
(B)(2) the contribution or payment amount made and the contributor category of each of the following persons and entitiesdescribed in paragraph (i) of this section (e); and (C) such other identifying information required by Form G-37/G-38. Such reports also must includemaking such contributions or payments during such calendar quarter:
(a) the broker, dealer or municipal securities dealer;
(b) each municipal finance professional;
(c) each non-MFP executive officer; and
(d) each political action committee controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional;
(B) a list of issuers with which the broker, dealer or municipal securities dealer has engaged in municipal securities business during such calendar quarter, listed by state, along with the type of municipal securities business;
(C) any information required to be included on Form G-37/G-38 for such calendar quarter pursuant to paragraph (e)(iii);
(D) any information required to be disclosed pursuant to section (d) of rule G-38; and
(E) such other identifying information required by Form G-37/G-38.
The Board shall make public a copy of each Form G-37/G-38 received from any broker, dealer or municipal securities dealer.
(ii)(A) Subject to clause (B) of this paragraph (e)(ii), no broker, dealer or municipal securities dealer shall be required to send Form G-37/G-38 to the Board for any calendar quarter in which either:
(1) such broker, dealer or municipal securities dealer has not engaged in municipal securities business, but only if such broker, dealer or municipal securities dealer had not engaged in municipal securities business during the seven consecutive calendar quarters immediately preceding such calendar quarter; or
(2) such broker, dealer or municipal securities dealer has no information that is required to be reported pursuant to clauses (A) through (D) of paragraph (e)(i) for such calendar quarter.
(B) If for any calendar quarter a broker, dealer or municipal securities dealer has met the requirements of clause (A)(1) of this paragraph (e)(ii) but has information that is required to be reported pursuant to clause (D) of paragraph (e)(i), then such broker, dealer or municipal securities dealer shall be required to send Form G-37/G-38 to the Board for such quarter setting forth only such information as is required to be reported pursuant to clauses (D) and (E) of paragraph (e)(i).
(iii) If a broker, dealer or municipal securities dealer engages in municipal securities business during any calendar quarter, such broker, dealer or municipal securities dealer shall include on Form G-37/G-38 for such calendar quarter, to the extent not previously reported on Form G-37/G-38, the information described in clause (A) of paragraph (e)(i) (including year and calendar quarter of contribution or payment) for each contribution or payment made during the two-year period preceding such calendar quarter. This paragraph (e)(iii) shall not relieve any broker, dealer or municipal securities dealer of its obligation to send Form G-37/G-38 to the Board for any calendar quarter for which such Form G-37/G-38 is required to be sent to the Board and to include in any such Form G-37/G-38 all information required to be set forth therein by this rule.
(f) - (i) No change.
Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:
(i) - (xv) No change.
(xvi)(A) - (J) No change.
(K) No broker, dealer or municipal securities dealer shall be subject to the requirements of this paragraph (a)(xvi) in any calendar quarter in which such broker, dealer or municipal securities dealer has not engaged in municipal securities business, but only if such broker, dealer or municipal securities dealer had not engaged in municipal securities business during the seven consecutive calendar quarters immediately preceding such calendar quarter. At such time as a broker, dealer or municipal securities dealer that has been exempted by this clause (K) from the requirements of this paragraph (a)(xvi) engages in any municipal securities business, all requirements of this paragraph (a)(xvi) covering the full periods of time set forth herein shall become applicable to such broker, dealer or municipal securities dealer.
(xvii) - (xix) No change.
(b) - (f) No change.
Rule G-38. Consultants
(a) - (c) No change.
(d) Disclosure to Board. Each broker, dealer or and
municipal securities dealer shall send to the Board, in the manner and at the times
prescribed in paragraph (e)(i) of rule G-37, by certified or registered mail,
or some other equally prompt means that provides a record of sending, and the
Board shall make public, reports on Form G-37/G-38 of all consultants used by the
broker, dealer or municipal securities dealer during each calendar quarter. Two
copies of the reports must be sent to the Board on Form G-37/G-38 by the last day of the
month following the end of each calendar quarter (these dates correspond to January 31,
April 30, July 31, and October 31). Such reports shall include, for each
consultant, in the prescribed format, the consultant's name, company, role and
compensation arrangement. In addition, such reports shall indicate the dollar amount of
payments made to each consultant during such calendar quarter the report
period and, if any such payments are related to the consultant's efforts on
behalf of the broker, dealer or municipal securities dealer which resulted in particular
municipal securities business, then that business and the related dollar amount of the
payment must be separately identified.
ENDNOTES
1. File No. SR-MSRB-97-12. Comments sent to the SEC should refer to the file number.
2. Municipal securities business is defined in rule G-37 to consist of negotiated underwritings or private placements of an issue of municipal securities, or financial advisory, consultant or remarketing agent services with respect to an issue of municipal securities retained on a negotiated basis. The range of activities of a dealer that constitutes effecting transactions in municipal securities may be significantly broader than those activities encompassed by the term municipal securities business.
3. Dealers would be required to continue to preserve any records that had previously been created relating to rule G-37 in the manner and for the period of time set forth in rule G-9, on preservation of records.
4. A dealer that has been subject to the rules of the Board for a period of less than two years (for example, because it came into existence during such period or because it did not previously effect municipal securities transactions) would of necessity not have engaged in municipal securities business prior to becoming a dealer. Therefore, so long as a new dealer has not engaged in any municipal securities business since becoming a dealer, such dealer would automatically satisfy the requirements for the No Business Exemption.
5. This obligation to create records and to review such records prior to engaging in municipal securities business is identical to the current requirement imposed upon new dealers immediately upon becoming subject to the rules of the Board. The proposed amendments would permit a new dealer to defer this obligation until it begins to engage in municipal securities business and would treat an existing dealer that, after not having engaged in municipal securities business for at least two years, again engages in such business in the same manner as a new dealer first engaging in municipal securities business.
6. A dealer would not be required to include in such report contributions or payments made more than two years prior to such quarter, even if not previously reported.
7. A de minimis contribution to an official of an issuer not requiring disclosure consists of a contribution made by an MFP or a non-MFP executive officer to an official of an issuer for whom such person is entitled to vote if all contributions by such person to such official of an issuer, in total, do not exceed $250 per election.
8. A de minimis payment to a political party of a state or political subdivision not requiring disclosure consists of a payment made by an MFP or a non-MFP executive officer to a political party of a state or political subdivision in which such person is entitled to vote if all payments by such person to such political party, in total, do not exceed $250 per year.
9. Underlining indicates additions; strikethrough denotes deletions.
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Additional Questions and Answers: Rule G-37 on Political Contributions and Prohibitions on Municipal Securities Business
Transition and Inaugural Expenses
1. Q: May a municipal finance professional who is entitled to vote for an issuer official make contributions to pay for such official's transition or inaugural expenses without causing a prohibition on municipal securities business with the issuer?
A: Yes, under certain conditions. The de minimis exception allows a municipal finance professional to contribute up to $250 per candidate per election if the municipal finance professional is entitled to vote for that issuer official. The de minimis exception is keyed to an election cycle; therefore, if a municipal finance professional contributed $250 to the general election of an issuer official, the municipal finance professional would not be able to make any contributions to pay for transition or inaugural expenses without causing a prohibition on municipal securities business with the issuer. If a municipal finance professional made no contributions to an issuer official prior to the election, then the municipal finance professional may, if entitled to vote for the candidate, contribute up to $250 to pay for transition or inaugural expenses and payment of debt incurred in connection with the election without causing a prohibition on municipal securities business.
Definition of Issuer Official
2. Q: An incumbent was seeking re-election as an issuer official but she lost the election. She is now soliciting money to pay for the debt incurred in connection with this election. Would there be a prohibition on engaging in municipal securities business with the issuer if a dealer or a municipal finance professional provides money for the payment of this debt?
A: No, under certain conditions. If the incumbent is out of office at the time she is soliciting money to pay for the election debt, then she is no longer considered to be within the definition of "official of an issuer" and any monies given for the payment of debt incurred in connection with the election in this instance is not subject to rule G-37. If the incumbent still holds her issuer official position at the time she is soliciting money to pay for the election debt, then, if a municipal finance professional contributed $250 to her during the general election, the municipal finance professional would not be able to make any contributions for the payment of debt without causing a prohibition on municipal securities business with the issuer. If a municipal finance professional made no contributions to the incumbent prior to the election, then the municipal finance professional may, if entitled to vote for the candidate, contribute up to $250 for the payment of debt incurred in connection with the election while the incumbent is still in office without causing a prohibition on municipal securities business. A dealer may not contribute any monies towards the payment of debt while the incumbent is still in office without causing a prohibition on municipal securities business with the issuer.
Definitions of Municipal Finance Professional and Executive Officer
3. Q: In making the determination of which associated persons of a dealer meet the definitions of municipal finance professional and executive officer, is it correct to designate all the executives of the dealer (e.g., President, Executive Vice Presidents) under the category of executive officers?
A: No. In making the determination of whether someone is a municipal finance professional or executive officer, one must review the activities of the individual and not his or her title. Rule G-37(g)(iv) defines the term "municipal finance professional" as:
(A) any associated person primarily engaged in municipal securities representative activities, as defined in rule G-3(a)(i); (B) any associated person who solicits municipal securities business, as defined paragraph (vii); (C) any associated person who is both (i) a municipal securities principal or a municipal securities sales principal and (ii) a supervisor of any persons described in subparagraphs (A) or (B); (D) any associated person who is a supervisor of any person described in subparagraph (C) up through and including, in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer or similarly situated official and, in the case of a bank dealer, the officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities, as required pursuant to rule G-1(a); or (E) any associated person who is a member of the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1) executive or management committee or similarly situated officials, if any; provided, however, that, if the only associated persons meeting the definition of municipal finance professional are those described in this subparagraph (E), the broker, dealer or municipal securities dealer shall be deemed to have no municipal finance professionals.
Rule G-37(g)(v) defines the term "executive officer" as:
an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional, as defined in paragraph (iv) of this section (g); provided, however, that, if no associated person of the broker, dealer or municipal securities dealer meets the definition of municipal finance professional, the broker, dealer or municipal securities dealer shall be deemed to have no executive officers.
Dealers should first review the activities of their associated persons to determine whether they are municipal finance professionals, and then, once that list of individuals has been established, conduct a review of the remaining associated persons to determine whether they are executive officers. Dealers should pay close attention to those associated persons who are soliciting municipal securities business and, thus, will be considered municipal finance professionals. The Board has previously stated that solicitation activities may include, but are not limited to, responding to issuer Requests for Proposals, making presentations of public finance and/or municipal marketing capabilities to issuer officials, and engaging in other activities calculated to appeal to issuer officials for municipal securities business, or which effectively do so. (See "Additional Rule G-37 Questions & Answers," MSRB Reports, Vol. 14, No. 5 (December 1994) at 8).
Reporting by Syndicate Members
4. Q: Rule G-37(e) requires, among other things, that dealers submit information to the Board on Form G-37/G-38 about the municipal securities business in which they engaged. Is information about the municipal securities business engaged in required to be submitted by all syndicate and selling group members, or is it only the responsibility of the manager(s) to submit such information on behalf of the syndicate?
A: All manager(s) and syndicate members (excluding selling group members) must separately report the municipal securities business in which they engaged.
September 9, 1997
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The Board has filed technical amendments to rule G-37, on political
contributions and prohibitions on municipal securities business, rule G-38, on
consultants, and G-8, on recordkeeping.
Questions about the amendments may be directed to Ronald W. Smith, Legal Associate.
On September 30, 1997, the Board filed with the Securities and Exchange Commission (SEC)
technical amendments to rules G-37, G-38 and G-8.(1) The
amendments will become effective on October 30, 1997.
SUMMARY OF AMENDMENTS
During the past year, the Board has received questions regarding certain technical aspects of rules G-37, G-38 and G-8. Specifically, these questions have been concerned with the definitions of municipal finance professional and executive officer, and when Form G-37/G-38 is due to be filed with the Board. The amendments clarify the requirements of the rules in these areas.
Definitions of Municipal Finance Professional and Executive Officer
The Board believes that some dealers are improperly classifying, for rule G-37 purposes, certain individuals within their firms as executive officers when these individuals actually meet the definition of municipal finance professionals and should be classified as such. Contributions by executive officers must be recorded and reported but, unlike certain contributions by municipal finance professionals, would not cause a prohibition on municipal securities business. The definition of executive officer makes clear that municipal finance professionals cannot also be executive officers. To further underscore this point, the amendments revise the name of the category of individuals currently referred to as "executive officers" to "non-MFP executive officers." This change in name should help dealers avoid any misunderstandings that a person who functions as a municipal finance professional cannot be classified, for purposes of rule G-37, as an executive officer.
Due Date for Form G-37/G-38 to be Filed with the Board
Rules G-37 and G-38 state that Form G-37/G-38 must be submitted to the Board "within thirty (30) calendar days after the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31)." Because of the inconsistency in the language for those months with 31 days, the amendments revise the rule language to require that the forms be sent "by the last day of the month following the end of each calendar quarter." The forms do not have to be received by the Board by the last day of the month following the end of each calendar quarter, but the amendments require that dealers must have the forms on their way to the Board by the last day of the month following the end of each calendar quarter in order to be in compliance with the delivery requirements of the rules.
The amendments also contain non-substantive, technical rule language changes to make similar requirements consistent throughout the rules.
TEXT OF AMENDMENTS(2)
Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business
(a) - (d) No change.
(e)(i) Each broker, dealer or municipal securities dealer shall submit
send to the Board by certified or registered mail, or some other equally prompt
means that provides a record of sending, and the Board shall make public, reports on
contributions to officials of issuers and on payments to political parties of states and
political subdivisions that are required to be recorded pursuant to rule G-8(a)(xvi). Such
reports shall include information concerning the amount of contributions to officials of
issuers and payments to political parties of states and political subdivisions and an
indication of the contributor category of each contribution or payment made by:
(A) the broker, dealer or municipal securities dealer;
(B) all municipal finance professionals;
(C) all non-MFP executive officers; and
(D) all political action committees controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional.
Such reports also shall include information on municipal securities business engaged in and certain other information specified in this section (e), as well as other identifying information as may be determined by the Board from time to time.
(e)(ii) Two copies of the reports referred to in paragraph (i) of this section (e) must
be submitted sent to the Board on Form G-37/G-38 within
thirty (30) calendar days after by the last day of the month following the
end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and
October 31), and must include, in the prescribed format, by state, the following
information on contributions to each official of an issuer and payments to each political
party of a state or political subdivision made and municipal securities business engaged
in during the reporting period: (A) name and title (including any city/county/state or
political subdivision) of each official of an issuer receiving contributions or payments;
(B) contribution or payment amount made and the contributor category of the persons and
entities described in paragraph (i) of this section (e); and (C) such other identifying
information required by Form G-37/G-38. Such reports also must include a list of issuers
with which the broker, dealer or municipal securities dealer has engaged in municipal
securities business, along with the type of municipal securities business.
(f) No change.
(g) Definitions.
(i) - (iv) No changes.
(v) The term "non-MFP executive officer" means an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional, as defined in paragraph (iv) of this section (g); provided, however, that, if no associated person of the broker, dealer or municipal securities dealer meets the definition of municipal finance professional, the broker, dealer or municipal securities dealer shall be deemed to have no non-MFP executive officers.
Each person listed by the broker, dealer or municipal securities dealer as an
a non-MFP executive officer pursuant to rule G-8(a)(xvi) is deemed to be an
a non-MFP executive officer.
(vi) - (viii) No change.
(h) - (i) No change.
Rule G-38. Consultants
(a) - (c) No change.
(d) Disclosure to Board. Each broker, dealer and municipal securities dealer shall submit
send to the Board by certified or registered mail, or some other equally prompt
means that provides a record of sending, and the Board shall make public, reports of all
consultants used by the broker, dealer or municipal securities dealer during each calendar
quarter. Two copies of the reports must be submitted sent to the
Board on Form G-37/G-38 within thirty (30) calendar days after by the
last day of the month following the end of each calendar quarter (these dates
correspond to January 31, April 30, July 31, and October 31). Such reports shall include,
for each consultant, in the prescribed format, the consultant's name, company, role and
compensation arrangement. In addition, such reports shall indicate the dollar amount of
payments made to each consultant during the report period and, if any such payments are
related tot he consultant's efforts on behalf of the broker, dealer or municipal
securities dealer which resulted in particular municipal securities business, then that
business and the related dollar amount of the payment must be separately identified.
Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:
(i)-(xv) No change.
(xvi) Records Concerning Political Contributions and Prohibitions on Municipal Securities Business Pursuant to Rule G-37. Records reflecting:
(A) No change.
(B) a listing of the names, titles, city/county and state of residence of all non-MFP executive officers;
(C) - (E) No change.
(F) the contributions, direct or indirect, to officials of an issuer made by each municipal finance professional and non-MFP executive officer for the current
andyear and separate listings for each of the previous two calendar years, which records shall include: (i) the names, titles, city/county and state of residence of contributors, (ii) the names,and titles (including any city/county/state or other political subdivision) of the recipients of such contributions, and (iii) the amounts and dates of such contributions; provided, however, that such records need not reflect any contribution made by a municipal finance professional or non-MFP executive officer to officials of an issuer for whom such person is entitled to vote if the contributions made by such person, in total, are not in excess of $250 to any official of an issuer, per election; and(G) the payments, direct or indirect, to political parties of states and political subdivisions made by all municipal finance professionals and non-MFP executive officers for the current year and separate listings for each of the previous two calendar years, which records shall include: (i) the names, titles, city/county and state of residence of contributors, (ii) the names
,and titles (including any city/county/state or other political subdivision) of the recipients of such payments and (iii) the amounts and dates of such payments; provided, however, that such records need not reflect those payments made by any municipal finance professional or non-MFP executive officer to a political party of a state or political subdivision in which such persons are entitled to vote if the payments made by such person, in total, are not in excess of $250 per political party, per year.(H) Dealers shall maintain copies of the Forms G-37/G-38
submittedsent to the Board along with the certified or registered mail receipt or other record of sending such forms to the Board.(I) - (J) No change.
(xvii) - (xix) No change.
(b) - (f) No change.
September 30, 1997
Endnotes:
1. File No. SR-MSRB-97-6. Comments sent to the SEC should refer to the file number.
2. Underlining indicates new language; strikethrough denotes deletions.
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Consultants: Rule G-38
The Board has filed an amendment to rule G-38, on consultants, that would give dealers the option of disclosing their consulting arrangements to issuers, pursuant to section (c) of the rule, on either an issue-specific or issuer-specific basis.
On November 24, 1997, the Board filed with the Securities and Exchange Commission ("SEC") a proposed amendment to rule G-38, on consultants. (1) The proposed amendment would give dealers the option of disclosing their consulting arrangements to issuers, pursuant to section (c) of the rule, on either an issue-specific of issuer-specific basis.
Rule G-38, on consultants, requires broker, dealers and municipal securities dealers (collectively referred to as "dealers"): (1) to have written agreements with certain individuals who are used by a dealer, directly or indirectly, to obtain or retain municipal securities business ("consultants"), and (2) to disclose such consulting arrangements directly to issuers and to the public through disclosure to the Board. Section (c) of the rule currently requires that each dealer disclose, in writing, to each issuer with which the dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer. The information to be disclosed includes the name, company, role and compensation arrangement of any consultant used, directly or indirectly, to obtain or retain municipal securities business with each such issuer. Dealers are required to make such disclosures prior to the issuer's selection of any dealer in connection with the particular municipal securities business sought.
It has come to the Board's attention that this issue-specific nature of the disclosure requirement can create compliance problems for dealers in the case of frequent issuers of municipal securities as well as in the co-manager selection process. For example, an issuer may bring new issues to market several times a month, and if a dealer is using a consultant to obtain a syndicate slot in each such issue, the dealer is required to disclose the same information to the same issuer month after month and possibly week after week. In addition, the Board has learned that dealers who use a consultant to help obtain co-manager business sometimes have difficulty complying with rule G-38(c) because, unlike the lead manager, a co-manager may learn of its selection for that business after the selection of the lead manager, thereby making it impossible for the dealer to disclose its consulting arrangements prior to the issuer's selection of any dealer, as required by the rule.
While the Board believes that the timing of the issue-specific disclosure requirement in rule G-38(c) is appropriate in the vast majority of cases, the Board recognizes that it can be a problem in the context of frequent issuers of municipal securities and in the co-manager selection process. Thus, the Board has determined to amend rule G-38(c) to give dealers the option of disclosing their consulting arrangements to issuers on either an issue-specific or issuer-specific basis. Pursuant to the amendment, if a dealer chooses to disclose information regarding a consulting arrangement on an issuer-specific basis, the dealer must submit the information, in writing, to the issuer within three business days of the consultant's first direct or indirect communication with that issuer, but in any event prior to the issuer's selection of that dealer for any municipal securities business. (2) To ensure that such information, once disclosed, remains current, the amendment also requires dealers to (1) promptly notify the issuer in writing of any change in the information disclosed; and (2) update issuers on an annual basis concerning any information previously disclosed, even where the information has not changed. (3) Of course, this annual updating requirement would cease to apply if the dealer is no longer using the consultant, directly or indirectly, to attempt to obtain or retain municipal securities business with a particular issuer(s).
In June, the Board published the amendment for industry comment. (4) In response, the Board received comment letters from three dealers. One of these commentators expressed its belief that the amendment is helpful and may simplify the reporting process. The other two commentators also supported the draft amendment. One commentator stated that "the proposed changes will greatly simplify the disclosure process when multiple transactions develop as the result of a consultant's activities with an issuer." However, this commentator recommended that the draft amendment require dealers to advise the issuer of any material change in the information disclosed; the commentator believes that this will obviate the need for dealers to file amended disclosure reports relating to, for example, an insignificant change to a consultant's role or to a minor change in the name of the consultant's organization. The Board believes that adopting the commentator's recommendation would introduce a subjective element to the disclosure requirement and would result in differing interpretations as to what is "material." For example, by incorporating this subjective standard, the Board could not ensure that issuers would be advised of changes in the consultant's name, company, role and compensation arrangement - information which is required to be disclosed to issuers pursuant to rule G-38(c). Thus, the Board has declined to adopt the commentator's recommendation.
November 24, 1997
Text of the Proposed Amendment (5)
Rule G-38. Consultants.
(a) - (b) No change.
(c) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, role and compensation arrangement of any consultant used, directly or indirectly, by the broker, dealer or municipal securities dealer to attempt to obtain or retain municipal securities business with each such issuer. Such information shall be submitted to the issuer either:
(i) prior to the selection of any broker, dealer or municipal securities dealer in connection with [such] the particular municipal securities business being sought[.] ; or
(ii) within three business days of the consultant's first direct or indirect communication with the issuer, but in any event prior to the issuer's selection of such broker, dealer or municipal securities dealer for any municipal securities business. Each broker, dealer or municipal securities dealer shall promptly advise the issuer, in writing, of any change in the information disclosed, pursuant to this subsection (ii), on each consulting arrangement relating to such issuer. In addition, each broker, dealer or municipal securities dealer disclosing information pursuant to this subsection (ii) shall update such information by notifying each issuer in writing within one year of the previous disclosure made to such issuer even where the information has not changed; provided, however, that this annual requirement shall not apply where the broker, dealer or municipal securities dealer has ceased to use the consultant, directly or indirectly, to attempt to obtain or retain municipal securities business with the particular issuer.
(d) No change.
ENDNOTES
1. File No. SR-MSRB-97-9. Comments submitted to the SEC should refer to this file number.
2. In contrast, the Board believes that disclosures made by a dealer on an issue-specific basis should continue to be required prior to the issuer's selection of any dealer for the particular municipal securities business being sought.
3. Pursuant to rule G-8(a)(xvii) on recordkeeping, dealers are required to maintain records of all disclosures made pursuant to rule G-38(c). This would apply to disclosures made pursuant to the amendment.
4. MSRB Reports, Vol. 17, No. 2 (June 1997) at 17-18.
5. Underlining indicates additions; [brackets] denote deletions.
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Rule G-38 on Consultants
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Comments Requested The Board requests comment on a draft amendment to rule G-38, on consultants, that would give dealers the option of disclosing information on their consulting arrangements to issuers on either an issue-specific or issuer-specific basis. |
Rule G-38, on consultants, requires dealers (1) to have written agreements with certain individuals who are used by a dealer, directly or indirectly, to obtain or retain municipal securities business (consultants), and (2) to disclose such consulting arrangements directly to issuers and to the public through disclosure to the Board.
Section (c) of the rule requires that each dealer disclose, in writing, to each issuer with which the dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer. The information to be disclosed includes the name, company, role and compensation arrangement of any consultant used, directly or indirectly, to obtain or retain municipal securities business with each such issuer. Dealers are required to make such disclosures prior to the issuer's selection of any dealer in connection with the particular municipal securities business sought.
It has come to the Board's attention that this issue-specific nature of the disclosure requirement can create compliance problems for dealers in the case of frequent issuers of municipal securities as well as in the co-manager selection process. For example, an issuer may bring new issues to market several times a month, and if a dealer is using a consultant to obtain a syndicate slot in each such issue, the dealer is required to disclose the same information to the same issuer month after month and possibly week after week. In addition, the Board has learned that dealers who use a consultant to help obtain co-manager business sometimes have difficulty complying with rule G-38(c) because, unlike the lead manager, a co-manager may learn of its selection for that business after the selection of the lead manager, thereby making it impossible for the dealer to disclose its consulting arrangements prior to the issuer's selection of any dealer, as required by the rule.
The Board believes that while the timing of this issue-specific requirement is appropriate in the vast majority of cases, it can be a problem in the context of frequent issuers of municipal securities and in the co-manager selection process. Thus, the Board is proposing for comment a draft amendment to rule G-38(c) to give dealers the option of disclosing their consulting arrangements to issuers on either an issue-specific or issuer-specific basis. Pursuant to the draft amendment, if a dealer chooses to disclose information regarding a consulting arrangement on an issuer-specific basis, the dealer must submit the information, in writing, to the issuer within three business days of the consultant's first direct or indirect communication with that issuer, but in any event prior to the issuer's selection of that dealer for any municipal securities business. [1] To ensure that such information, once disclosed, remains current, the draft amendment also would require dealers to (1) promptly notify the issuer in writing of any change in the information disclosed; and (2) update issuers on an annual basis concerning any information previously disclosed, even where the information has not changed. [2] Of course, this annual updating requirement would cease to apply if the dealer is no longer using the consultant, directly or indirectly, to attempt to obtain or retain municipal securities business with a particular issuer(s).
May 21, 1997
TEXT OF DRAFT AMENDMENT (Language between *asterisks* is proposed new language: language between brackets is proposed deleted language)
Rule G-38. Consultants (a) - (b) No change. (c) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, role and compensation arrangement of any consultant used, directly or indirectly, by the broker, dealer or municipal securities dealer to attempt to obtain or retain municipal securities business with each such issuer. Such information shall be submitted to the issuer *either:* *(i)* prior to the selection of any broker, dealer or municipal securities dealer in connection with such *the particular* municipal securities business *being sought* .*;or* *(ii) within three business days of the consultant's first direct or indirect communication with the issuer, but in any event prior to the issuer's selection of such broker, dealer or municipal securities dealer for any municipal securities business. Each broker, dealer or municipal securities dealer shall promptly advise the issuer, in writing, of any change in the information disclosed, pursuant to this subsection (ii), on each consulting arrangement relating to such issuer. In addition, each broker, dealer or municipal securities dealer disclosing information pursuant to this subsection (ii) shall update such information by notifying each issuer in writing within one year of the previous disclosure made to such issuer even where the information has not changed; provided, however, that this annual requirement shall not apply where the broker, dealer or municipal securities dealer has ceased to use the consultant, directly or indirectly, to attempt to obtain or retain municipal securities business with the particular issuer.* (d) No change.
ENDNOTES
[1] In contrast, the Board believes that disclosures made by a dealer on an issue-specific basis should continue to be required prior to the issuer's selection of any dealer for the particular municipal securities business being sought.
[2] Pursuant to rule G-8(a)(xvii) on recordkeeping, dealers are required to maintain records of all disclosures made pursuant to rule G-38(c). This would apply to disclosures made pursuant to the draft amendment.
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Request for Comments The Board requests comment on a draft amendment to rule G-38, on consultants, that would require dealers to disclose their consultants' political contributions to officials of an issuer and payments to state and local political parties. The Board also is seeking comment on a related amendment to rule G-8, on recordkeeping, and revisions to Form G-37/G-38. |
Comments on the draft amendments should be submitted no later than December 15, 1997, and may be directed to Ronald W. Smith, Legal Associate. Written comments will be available for public inspection.
BACKGROUND
Rule G-37, among other things, prohibits a dealer from engaging in municipal securities business with an issuer within two years after certain contributions to an official of such issuer made by the dealer, any municipal finance professional associated with such dealer, or any political action committee ("PAC") controlled by the dealer or any municipal finance professional. Rule G-37(d) prohibits a dealer and any municipal finance professional from doing any act indirectly which would result in a violation of the rule if done directly by the dealer or municipal finance professional. Thus, a dealer would violate rule G-37 by engaging in municipal securities business with an issuer after directing any person to make a contribution to an official of such issuer. Because the Board was concerned that dealers could circumvent rule G-37 by using consultants to make political contributions or that the contributions of consultants might be used by dealers to obtain municipal securities business, the Board believed that additional information about consultant arrangements should be made available to issuers and the public in order to maintain the integrity of the market. Accordingly, the Board adopted rule G-38.
Rule G-38 requires dealers who use consultants [1] to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"). [2] Rule G-38(c) requires each dealer to disclose to an issuer with which it is engaging or seeking to engage in municipal securities business, in writing, information on consulting arrangements relating to such issuer. The written disclosure must include, at a minimum, the name, company, role and compensation arrangement with the consultant or consultants. Dealers are required to make such written disclosures prior to the issuer's selection of any dealer in connection with the municipal securities business being sought, regardless of whether the dealer making the disclosure ultimately is the one to obtain or retain that business. [3] Rule G-38(d) requires dealers to submit to the Board, on a quarterly basis, reports of all consultants used by the dealer. [4] For each consultant, dealers must report the consultant's name, company, role and compensation arrangement, as well as the dollar amount of any payment made to the consultant during the quarterly reporting period. [5]
The rule G-38 reporting and recordkeeping requirements seek to make information public about the consultants dealers have hired and the municipal securities business obtained through such consultants. The Board sought this public disclosure so that reporters and others could investigate further whether there was a connection between contributions given by consultants and the business they obtained for the dealers that hired them.
The Board continues to be concerned about the possibility that dealers could be awarded municipal securities business due to the contributions made by their consultants. Thus, the Board is proposing the draft amendment to rule G-38 to bring more disclosure to the public about political contributions being made by consultants hired by dealers.
SUMMARY OF DRAFT AMENDMENTS
The draft amendment to rule G-38 would require a dealer to include within its Consultant Agreement a requirement that the consultant agrees to provide the dealer each calendar quarter with a listing of any, direct or indirect, political contributions to official(s) of an issuer and payments to political parties of states and political subdivisions during such quarter made by the consultant, the consultant's company and/or any PAC controlled by the consultant or the consultant's company. This is similar to the dealer-associated persons and entities subject to rule G-37 (i.e., dealers, municipal finance professionals, and PACs controlled by a dealer or any municipal finance professionals).
The draft amendment also requires information on the political contributions of consultants to be reported by dealers to the Board on Form G-37/G-38. Dealers would have to rely on consultants to supply this information in a timely fashion so that they may send their Forms G-37/G-38 to the Board within 30 calendar days after the end of each calendar quarter. Dealers may wish to include language within their Consultant Agreements to require their consultants to supply such information within a certain time frame because, as regulated entities, the onus will be on dealers to make their filings in a timely fashion.
The draft amendment states that a dealer is not required to obtain from a consultant information on political contributions to official(s) of an issuer for whom the consultant is entitled to vote and which contributions, in total, are not in excess of $250 by such consultant to each official of such issuer, per election. A dealer also would not be required to obtain from a consultant information on payments to a political party of a state or political subdivision in which such consultant is entitled to vote if the payments by such consultant, in total, are not in excess of $250 per political party, per year. These are the same de minimis exceptions contained in rule G-37 for purposes of reporting contributions and payments made by municipal finance professionals and executive officers.
The draft amendment also limits the disclosure of consultants' contributions only to those contributions to official(s) of an issuer from whom the consultant is seeking municipal securities business on behalf of the dealer. This is different than the requirement in rule G-37 that all contributions to issuer officials by dealers and municipal finance professionals be disclosed. The Board believes this narrower requirement is more appropriate because consultants may work for other non-dealer companies and the Board is only concerned about the work being done on behalf of dealers. Dealers may need to modify their Consultant Agreements to be more specific in indicating which issuers their consultants are seeking business from on the dealer's behalf. [6]
Under rule G-37, dealers also are required to record and report the contributions of executive officers to issuer officials. Rule G-37(g)(v) defines the term "executive officer" as "an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipal securities dealer(or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional." Although not included in the draft amendment, the Board is seeking comment on whether similarly situated persons within a consultant's firm also should be required to disclose their political contributions to the dealer, which the dealer would then report on Form G-37/G-38.
The Board expects dealers to report the entire amount of any contributions made to issuer officials by a consultant, the consultant's company and/or any PAC controlled by the consultant or the consultant's company. Dealers should not pro rate the amount of any contributions among other clients of the consultant who are seeking business from a particular issuer official.
The related draft amendment to rule G-8, on recordkeeping, requires dealers to keep records of contributions by their consultants, the consultant's company, and/or any PAC controlled by the consultant or the consultant's company.
Draft Changes to Form G-37/G-38
The disclosures required by the draft amendment to rule G-38 discussed above have been included in draft changes to Form G-37/G-38. The draft changes require dealers to disclose on the attachment sheet for each consultant used by the dealer the contributions and payments covered by the rule made by the consultant, the consultant's company, and/or any PAC controlled by the consultant or the consultant's company.
The Board also is seeking comment on another draft change to the form. The current form requires dealers to list the total dollar amount paid to a consultant during the reporting period. If any payment during the reporting period is related to a consultant's efforts on behalf of the dealer which resulted in particular municipal securities business, then the dealer must separately identify that business and the dollar amount of the payment. When a consultant is paid a success fee or a percentage of a successful deal, dealers appear to be complying with the requirement to disclose the payment for particular municipal securities business; however, many consultants are not paid based on each successful deal but rather they are compensated by a flat fee, usually on a monthly or quarterly basis. Thus, dealers are not indicating the flat fee as relating to any particular municipal securities business. The Board assumes that such consultants do assist in obtaining municipal securities business. Thus, the draft change to the form requires dealers to list all municipal securities business obtained or retained by their consultants (regardless of whether any payment is directly related to a consultant's efforts which resulted in such business) and, if applicable, to indicate the dollar amounts paid connected with the particular municipal securities business. The Board is seeking comment on whether dealers are able to ascertain this information relating to the municipal securities business obtained based on the efforts of their consultants. If dealers do not believe this information is easily ascertainable, the Board is seeking comment on what information dealers can disclose on the form to provide a more complete overview of the work being provided by, and the related payments being made to, dealers' consultants.
TEXT OF DRAFT AMENDMENTS (Language between *asterisks* is proposed new language: language between brackets is proposed deleted language)
Rule G-38. Consultants (a) Definitions. (i)-(v) No change. *(vi) The term "official of such issuer" or "official of an issuer" shall have the same meaning as in rule G-37(g)(vi).* (b) Written Agreement *(i)* Each broker, dealer or municipal securities dealer that uses a consultant shall evidence the consulting arrangement by a writing setting forth, at a minimum, the name, company, role and compensation arrangement of each such consultant ("Consultant Agreement"). *(ii) In addition to the information required by subparagraph (b)(i) of this rule, the Consultant Agreement shall include a statement that the consultant agrees to provide the broker, dealer or municipal securities dealer each calendar quarter with a listing of any political contributions, direct or indirect, to official(s) of an issuer and payments, direct or indirect, to political parties of states and political subdivisions during such quarter made by the consultant, the consultant's company and/or any political action committee ("PAC") controlled by the consultant or the consultant's company. With respect to the disclosure of political contributions, only those contributions to official(s) of an issuer from whom the consultant is seeking municipal securities business on behalf of the broker, dealer or municipal securities dealer are required to be provided. A broker, dealer or municipal securities dealer is not required to obtain from a consultant information on political contributions to official(s) of an issuer for whom the consultant is entitled to vote and which contributions, in total, are not in excess of $250 by such consultant to each official of such issuer, per election. A broker, dealer or municipal securities dealer also is not required to obtain from a consultant information on payments to a political party of a state or political subdivision in which such consultant is entitled to vote if the payments by such consultant, in total, are not in excess of $250 per political party, per year.* *(iii)* Such *The* Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer. (c) No change. (d) Disclosure to Board. Each broker, dealer and municipal securities dealer shall submit to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports of all consultants used by the broker, dealer or municipal securities dealer during each calendar quarter. Two copies of the reports must be submitted to the Board on Form G-37/G-38 within thirty (30) calendar days after the end of each calendar quarter (these dates correspond to January 31, April 30, July 31, and October 31). Such reports shall include, for each consultant, in the prescribed format, the consultant's name, company, role*,* and compensation arrangement *, any municipal securities business obtained or retained by the consultant with each such business listed separately, and, if applicable, dollar amounts paid to the consultant connected with particular municipal securities business.* In addition, s *S*uch reports shall indicate the *total* dollar amount of payments made to each consultant during the report period and, if any such payments are related to the consultant's efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified. *In addition, such reports shall include information concerning any political contributions, direct and indirect, to official(s) of an issuer and any payments, direct and indirect, to political parties of states and political subdivisions made by the consultant, the consultant's company and/or any PAC controlled by the consultant or the consultant's company as required to be obtained by the broker, dealer or municipal securities dealer pursuant to subparagraph (b)(ii) of this rule.*
Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers (a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer: (i) - (xvii) No change. (xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain: (i) *(A)* a listing of the name, company, role and compensation arrangement of each consultant; (ii) *(B)* a copy of each Consultant Agreement referred to in rule G-38(b); (iii)*(C)* a listing of the compensation paid in connection with each such Consultant Agreement; (iv) *(D)* where applicable, a listing of the municipal securities business obtained or retained through the activities of each consultant; (v) *(E)* a listing of issuers and a record of disclosures made to such issuers, pursuant to rule G-38(c), concerning each consultant used by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with each such issuer; and (vi) *(F) the contributions, direct or indirect, to officials of an issuer made by each consultant, which records shall include: (i) the names, city/county and state of residence of contributors; (ii) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions, and (iii) the amounts and dates of such contributions; provided, however, that only those contributions to official(s) of an issuer from whom the consultant is seeking municipal securities business on behalf of the broker, dealer or municipal securities dealer need be obtained, and that such records need not reflect any contribution made by a consultant to officials of an issuer for whom such person is entitled to vote if the contributions by such person, in total, are not in excess of $250 to any official of an issuer, per election;* *(G) the payments, direct or indirect, to political parties of states and political subdivisions made by each consultant, which records shall include: (i) the names, city/county and state of residence of contributors; (ii) the names and titles(including any city/county/state or other political subdivision) of the recipients of such payments; and (iii) the amounts and dates of such payments; provided, however, that such records need not reflect those payments made by any consultant to a political party of a state or political subdivision in which such person is entitled to vote if the payments by such person, in total, are not in excess of $250 per political party, per year;* *(H) the contributions, direct or indirect, to officials of an issuer and payments, direct or indirect, made to political parties of states and political subdivisions, by the consultant's company or any political action committee controlled by the consultant or the consultant's company, which records shall include: (i) the identity of the contributors, (ii) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions and payments; and (iii) the amounts and dates of such contributions and payments; and* *(I)* the date of termination of any consultant arrangement. (xix) No change. (b) - (f) No change.
September 11, 1997
ATTACHMENT TO FORM G-37/G-38 submit a separate attachment sheet for each consultant listed under IV)
Name of Consultant:
Consultant Company Name:
Role to be Performed by Consultant:
Compensation Arrangement:
*Municipal Securities Business Obtained or Retained by Consultant (list each such business separately and, if applicable, indicate dollar amounts paid to consultant connected with particular municipal securities business):*
Total Dollar Amount Paid to Consultant during Reporting Period:
*Contributions Made to Issuer Officials by Consultant:* *State* *Complete name, title *For each contribution, (including any city/ list contribution amount county/state or other and contributor category political subdivision) (i.e., consultant, of issuer official* consultant's company or PAC controlled by consultant or consultant's company)*
*Payments Made to Political Parties of States and Political Subdivision by Consultant:* *State* *Complete name *For each payment, list payment (including any city/ amount and contributor category county/state or other (i.e., consultant, consultant's political subdivision) company or PAC controlled by of political party* consultant or consultant's company)*
ENDNOTES
[1] Rule G-38(a)(i) defines the term "consultant" as any person used by a dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on the dealer's behalf where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the dealer or any other person.
[2] Rule G-38(b) requires that the Consultant Agreement, at a minimum, include the name, company, role and compensation arrangement of each consultant used by the dealer. The Consultant Agreement must be entered into before a consultant engages in any direct or indirect communication with an issuer on the dealer's behalf.
[3] The Board published a request for comments on a draft amendment to rule G-38(c) that would give dealers the option of disclosing information on their consulting arrangements to issuers on either an issue-specific or issuer-specific basis. See MSRB Reports, Vol. 17, No.2 (June 1997) at 17-18.
[4] Such reports must be filed on Form G-37/G-38.
[5] In addition, if any payment made during the reporting period is related to the consultant's efforts on behalf of the dealer which resulted in particular municipal securities business, whether the municipal securities business was completed during that or a prior reporting period, then the dealer must separately identify that business and the dollar amount of the payment.
[6] The Board is sued a rule G-38 Question and Answer notice dated November 18, 1996 in which it stated that dealers must indicate on Form G-37/G-38 the state or geographic area in which the consultant is working on behalf of the dealer. See MSRB Reports, Vol. 17, No. 1 (January 1997) at 15.
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
osfee2
Proposed Change Filed to Establish a Fee Relating to the OS/ARD Subsystem
Notice of Filing The Board has filed a proposed change to establish a fee relating to the operation of its OS/ARD subsystem of the MSIL(R) system.
Questions about the filing may be directed to Thomas A. Hutton, Director of MSIL.
On May 19, 1997, the Board filed with the Securities and Exchange Commission (Commission) a proposed change to establish a fee relating to the operation of its Official Statement/Advance Refunding Document (OS/ARD) subsystem of the Municipal Securities Information Library(R) ("MSIL(R)") system.[1] The Board is establishing a price of $7,000 (plus delivery or postage charges) for its 1996 document collection of official statements and refunding documents, sold as a "backlog" collection. This fee change was effective upon filing with the Commission.[2]
The OS/ARD subsystem, which was activated on April 20, 1992, is a central electronic facility through which information collected and stored pursuant to MSRB rule G-36 is made available electronically and in paper form to market participants and information vendors. [3]
May 19, 1997
ENDNOTES
[1] Municipal Securities Information Library and MSIL are registered trademarks of the Board. The MSIL system, which was approved in Securities Exchange Act Release No. 29298 (June 13, 1991), is a central facility through which information about municipal securities is collected, stored and disseminated.
[2] File No. SR-MSRB-97-3. Comments submitted to the Commission should refer to this file number.
[3] Rule G-36 requires underwriters to provide copies of final official statements and advance refunding documents within certain specified time frames for most new issues issued since January 1, 1990.
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
q_aOct97
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.
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.
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.
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rev53
Revised Effective Date Filed: Revised Series 53 Study Outline
On December 18, 1997, the Municipal Securities Rulemaking Board filed with the Securities and Exchange Commission a revision to the effective date for the revised study outline for the Boards Municipal Securities Principal Qualification Examination (Test Series 53). The effective date of the study outline is being changed from January 1, 1998, to March 1, 1998. This additional time will allow the Board to ensure that all the procedures and materials are in place in order to administer the revised Series 53 examination and for information concerning the revised effective date to be circulated to the industry. Copies of the revised study outline for the Series 53 examination are currently available from the Board.
December 18, 1997
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syndprac
Amendments Filed regarding Syndicate Practices: Rules G-11, G-12 and G-8
The Board has filed proposed amendments to rules G-11, on sales of new issue municipal securities during the underwriting period, G-12, on uniform practice, and G-8, on books and records to be made by brokers, dealers and municipal securities dealers, in regard to syndicate practices.
On December 23, 1997, the Board filed with the Securities and Exchange Commission ("SEC") amendments to rules G-11, on sales of new issue municipal securities during the underwriting period, G-12, on uniform practice, and G-8, on books and records to be made by brokers, dealers and municipal securities dealers, in regard to syndicate practices.(1) The proposed amendments will become effective upon approval by the SEC.
DISCUSSION
As part of its review of the underwriting process, in May 1997, the Board published a notice (the "Notice") that, among other things, proposed for comment draft amendments to rules G-11, G-12 and G-8 in three areas: (1) recordkeeping and disclosure of issuer syndicate requirements; (2) timing and disclosure of allocations and designations: and (3) timing of settlement of syndicate accounts.(2)
The proposed amendments adopted by the Board are summarized below.
Issuer syndicate requirements
The proposed amendments revise rules G-8(a)(viii) and G-11(f) to require the managing underwriter to maintain a record of all issuer syndicate requirements. Issuer requirements involving syndicate formation, order review, designation policies and bond allocations have become much more prevalent in the municipal securities market. Such requirements are significant because they help to determine which dealers, and ultimately which investors, obtain the bonds. If the requirements are in a published guideline, such guidelines should be maintained by the dealer and supplemented by a statement of any additional requirements that arise prior to settlement. If the requirements are not in published form, the managing underwriter must create a written detailed statement of such requirements and maintain such statement in its records. The managing underwriter must provide a copy of the published guidelines or underwriter prepared statement of issuer syndicate requirements to syndicate members prior to the first offer of any securities by the syndicate. Syndicate members must furnish this summary promptly to others, upon request. In addition, the managing underwriter must provide the issuer with a copy of any such statement for its review.
Most commentators agreed that recording and disclosing issuer policies and requirements would be beneficial, but some of the commentators were opposed to requiring the managing underwriter to create a written detailed statement of issuer syndicate requirements if they are not in published form. Managing underwriters currently take issuer direction on syndicate matters and relate such information to the members. The Board believes the formalization of this process should not be a burden; therefore, the Board determined to adopt the proposed amendments.
Allocation of securities
The proposed amendments to rule G-11(g) to require the managing underwriter to complete the allocation of securities within 24 hours of the sending of the commitment wire. Delays in allocations seem to be a growing problem in the municipal securities market. Many delays in allocations appear to be the result of issuers and financial advisors failing to review orders and proposed allocations in a timely fashion. Investors complain that they have difficulty finalizing their portfolio positions when their orders remain unfilled for as long as two or more days after the end of the order period. During volatile market conditions, delays in allocations hurt the prospect for a successful underwriting.
While some commentators noted their support for the prompt completion of allocations, they also noted that a dealer's compliance with the amendment is dependent upon the timely actions of others (i.e., issuers and financial advisors) and thus recommended that the amendment not be adopted. The Board adopted the proposed amendments to ensure a timely allocation process in the industry. The Board believes that, in order to ensure compliance with the proposed amendments, underwriters will include a provision in the bond purchase agreement that allocations must be completed within the 24-hour time frame. If issuers or financial advisors wish to review orders and proposed allocations, they will have to do so within this 24-hour period.
Disclosure of designation information
There currently is no Board rule requiring the disclosure to syndicate members of all designations to members. The proposed amendments revise rule G-11(g) to require the managing underwriter to disclose to syndicate members all available designation information within 10 business days following the date of sale and all information with the sending of the designation checks.
The draft amendments contained in the Notice required disclosure to syndicate members of all designations to members within five business days following the date of sale. Some of the commentators recommended a longer time frame to provide more time for the process to be completed. The Board determined to change the time frame to require disclosure to syndicate members of all available designation information within 10 business days following the date of sale and all information with the sending of the designation checks pursuant to rule G-12(k). The Board believes almost all of the information will be available by 10 business days, but the additional time is provided in order to receive any late information.
Disclosure of take-down
A small number of issuers are setting aside, or holding back, a portion of the take-down to direct to syndicate members at their discretion. Because this issuer "set-aside" is part of the take-down, the Board believes this should be disclosed to syndicate members in the same manner as customer designations. Accordingly, the proposed amendments revise rule G-11(g) to require the managing underwriter to disclose to members of the syndicate, in writing, the amount of any portion of the take-down that is directed to each member of the syndicate by the issuer. Such disclosure must be made by the later of 15 business days following the date of sale or three business days following receipt by the managing underwriter of notification of such set-asides.
The draft amendments contained in the Notice required disclosure to members of the syndicate within 10 business days following the date of sale. Based upon comments received suggesting that the proposed time frame was too short, the Board extended the time frame in the proposed amendments to the later of 15 business days following the date of sale or three business days following receipt by the managing underwriter of notification of such set asides.
Payment of designations
The proposed amendments to rule G-12(k) move the deadline for payment of designations from 30 business days following delivery of the securities to the customer to 30 calendar days after the issuer delivers the securities to the syndicate. The Board adopted this amendment in order to provide for more efficient operation of syndicate accounts.
December 23, 1997
Text of Proposed Amendments(3)
Rule G-11. Sales of New Issue Municipal Securities During the Underwriting Period
(a) - (e) No change.
(f) Communications Relating to Issuer Syndicate Requirements, Priority Provisions and Order Period. Prior to the first offer of any securities by a syndicate, the senior syndicate manager shall furnish in writing to the other members of the syndicate (i) a written statement of all terms and conditions required by the issuer, (ii) the priority provisions, (iii) [(ii)] the procedure, if any, by which such priority provisions may be changed, (iv) [(iii)] if the senior syndicate manager or managers are to be permitted on a case-by-case basis to allocate securities in a manner other than in accordance with the priority provisions, the fact that they are to be permitted to do so, and (v) [(iv)] if there is to be an order period, whether orders may be confirmed prior to the end of the order period. Any change in the priority provisions shall be promptly furnished in writing by the senior syndicate manager to the other members of the syndicate. Syndicate members shall promptly furnish in writing the information described in this section to others, upon request. If the senior syndicate manager, rather than the issuer, prepares the written statement of all terms and conditions required by the issuer, such statement shall be provided to the issuer.
(g) [Disclosure of] Designations and Allocations of Securities. The senior syndicate manager shall:
(i) within 24 hours of the sending of the commitment wire, complete the allocation of securities;
(ii) within two business days following the date of sale, disclose to the other members of the syndicate, in writing, a summary, by priority category, of all allocations of securities which are accorded priority over members' take-down orders, indicating the aggregate par value, maturity date and price of each maturity so allocated, including any allocation to an order confirmed at a price other than the original list price. The summary shall include allocations of securities to orders submitted through the end of the order period or, if the syndicate does not have an order period, through the first business day following the date of sale; [.]
(iii) disclose to the members of the syndicate, in writing, all available designation information to members within 10 business days following the date of sale and all information with the sending of the designation checks pursuant to rule G-12(k); and
(iv) disclose to the members of the syndicate, in writing, the amount of any portion of the take-down directed to each member by the issuer. Such disclosure is to be made by the later of 15 business days following the date of sale or three business days following receipt by the senior syndicate manager of notification of such set asides of the take- down.
(h) No change.
Rule G-12. Uniform Practice
(a) - (j) No change.
(k) Any credit designated by a customer in connection with the purchase of securities as due to a member of a syndicate or similar account shall be distributed to such member by the [municipal securities] broker, dealer or municipal securities dealer handling such order within 30 calendar [business] days following the date the issuer delivers the securities to the syndicate [delivery of the securities to the customer].
(l) No change.
Rule G-8. Books and Records to be Made By Brokers, Dealers, and Municipal Securities Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:
(i) - (vii) No change.
(viii) Records of Syndicate Transactions. With respect to each syndicate or similar account formed for the purchase of municipal securities, records shall be maintained by a managing underwriter designated by the syndicate or account to maintain the books and records of the syndicate or account, showing the description and aggregate par value of the securities, the name and percentage of participation of each member of the syndicate or account, the terms and conditions governing the formation and operation of the syndicate or account (including a separate statement of all terms and conditions required by the issuer) all orders received for the purchase of the securities from the syndicate or account (except bids at other than syndicate price), all allotments of securities and the price at which sold, the date and amount of any good faith deposit made to the issuer, the date of settlement with the issuer, the date of closing of the account, and a reconciliation of profits and expenses of the account.
(ix) - (xix) No change.
(b) - (f) No change.
ENDNOTES
1. File No. SR-MSRB-97-15. Comments sent to the SEC should refer to the file number.
2. "Board Review of Underwriting Process," MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.
3. Underlining indicates new language; brackets denote deletions.
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
amendapp299
Amendment Approved
The SEC has approved amendments to exempt certain dealers from disclosure and recordkeeping requirements relating to political contributions and municipal securities business Rules G-37, G-8, G-9 and G-38.
On February 8, 1999, the Securities and Exchange Commission approved certain amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, rule G-9, on preservation of records, and rule G-38, on consultants. The amendments (1) exempt brokers, dealers and municipal securities dealers ("dealers") that have not engaged in municipal securities business for a period of at least two years and that have filed new Form G-37x with the Board from the disclosure requirements under rule G-37 and the related recordkeeping requirements under rule G-8; (2) require dealers that engage in municipal securities business after invoking such exemption to disclose and record certain political contributions and payments during the preceding two-year period; (3) codify the previously recognized Form G-37/G-38 submission exemption for dealers that have no information to report in a calendar quarter; and (4) make certain technical, clarifying and recordkeeping amendments to rules G-8, G-9, G-37 and G-38. The amendments became effective upon approval.
For a detailed discussion of these amendments, see the Notice of Filing dated December 3, 1998. New Form G-37x may be downloaded for completion and submission to the Board.
February 9, 1999
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
forum99_agenda
| FORUM ON
LAND-SECURED DISCLOSURE September 14, 1999 in Washington, DC September 15, 1999 in Houston, Texas September 16, 1999 in Costa Mesa, California |
Preliminary Program Schedule*
| 9:30 a.m. 9:45 a.m. | Introduction
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| 9:45 a.m. 10:30 a.m. | Presentation of National Federation of
Municipal Analysts Draft "Best Practices for Land-Secured
Disclosure"
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| 10:30 a.m. 11:45 p.m. | The Role of Developers in Providing
DisclosureA Discussion of How to Achieve "Best Practices" with a Practical
Focus on Current Practices and Controversies
MODERATOR: Stephen E. Heaney, Managing Director, Stone & Youngberg LLC
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| 11:45 a.m. 1:15 p.m. | Luncheon
|
| 1:15 p.m. 2:15 p.m. | Appraisal Methodologies, Absorption
Analyses, Valuation Methods, and Lien CalculationsA Discussion of How To Best
Represent Value In Land-Secured Financing Transactions
MODERATOR: Lawrence G. Rolapp, President and Managing Principal, Feldman, Rolapp & Associates (Houston) Timothy J. Schaefer, Principal, Fieldman, Rolapp & Associates (DC and Costa Mesa)
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| 2:15 p.m. 3:00 p.m. | Issues Involving Dissemination of
Disclosure InformationTiming, Frequency and Format of Disclosure
MODERATOR: Thomas F. Walsh, Senior Vice President, Franklin Templeton Group
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| 3:00 p.m. 3:45 p.m. | Questions and Answers: Roundtable
Discussion of National Federation of Municipal Analysts Draft "Best Practices
for Land-Secured Disclosure" MODERATORS: Fritz Goss and Ron Mintz, Co-Chairs, National Federation of Municipal Analysts Disclosure Subcommittee on Land-Secured Finance |
* |
* |
* |
* Please note that this is a preliminary program schedule. Additional forum speakers will be announced at a later date.
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forumreg
Registration for
MSRB FORUMS ON LAND-SECURED DISCLOSURE
Please print this form and mail it with your $100 payment.
Indicate below the forum you will be attending:
_____ Washington, D.C.September 14, 1999
Sheraton Crystal City, 1800 Jefferson Davis Highway
Arlington, VA
(703) 486-1111_____ Houston, TXSeptember 15, 1999
Sheraton North Houston, George Bush Intercontinental Airport
15700 John F. Kennedy Blvd.
Houston, TX
(281) 442-5100_____ Costa Mesa, CASeptember 16, 1999
Westin South Coast Plaza, 686 Anton Blvd.
Costa Mesa, CA
(714) 540-2500
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Registration fee is $100.
Preregistration is required.
Registrations accepted with fee through the mail on a first come basis.
Please make checks payable to the MSRB and send to:
MUNICIPAL SECURITIES RULEMAKING BOARD
ATTENTION: PAT MACK
1150 18TH STREET, NW, SUITE 400
WASHINGTON, DC 20036-3816
Home Page | Notice | Tentative Schedule
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g-15_5_10_99
SEC Approves Amendment on Automated Confirmation/Acknowledgement: Rule G-15(d)(ii)
On May 7, 1999, the Securities and Exchange Commission ("Commission") approved an amendment to rule G-15(d)(ii) on automated confirmation/acknowledgment of customer transactions.1 The amendment allows dealers to comply with rule G-15(d)(ii) by using the services of "qualified vendors" for confirmation/acknowledgment of Delivery Versus Payment/Receipt Versus Payment (DVP/RVP) customer transactions. Previously, without the amendment, only clearing agencies that were registered with the Commission could be used to obtain the required confirmation/acknowledgment. The amendment became effective upon approval.
May 10, 1999
TEXT OF AMENDMENT2
Rule G-15. Confirmation, Clearance and Settlement of Transactions with Customers
(a) - (c) No change
(d) Delivery/Receipt vs. Payment Transactions.
(i) No change.
(ii) Requirement for Confirmation/Acknowledgment.
(A) Use of Registered Clearing Agency or Qualified Vendor. Except as provided in this paragraph (ii) of rule G-15(d), no broker, dealer or municipal securities dealer shall effect a customer transaction for settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP) basis unless the facilities of a C
clearing Aagencyregistered with the Securities and Exchange Commission (registered clearing agency)or Qualified Vendor are used for automated confirmation and acknowledgment of the transaction. Each broker, dealer and municipal securities dealer executing a customer transaction on a DVP/RVP basis shall: (A) ensure that the customer has the capability, either directly or through its clearing agent, to acknowledge transactions in an automated confirmation/acknowledgment system operated by aregisteredCclearing Aagency or Qualified Vendor; (B) submit or cause to be submitted to aregisteredCclearing Aagency or Qualified Vendor all information and instructions required by theregisteredCclearing Aagency or Qualified Vendor for the production of a confirmation that can be acknowledged by the customer or the customers clearing agent; and (C) submit such transaction information to the automated confirmation/acknowledgment system on the date of execution of such transaction; provided that a transaction that is not eligible for automated confirmation and acknowledgment through the facilities of aregisteredCclearing Aagency shall not be subject to this paragraph (ii).(B) Definitions for Rule G-15(d)(ii).
(1) "Clearing Agency" shall mean a clearing agency as defined in Section 3(a)(23) of the Act that is registered with the Commission pursuant to Section 17A(b)(2) of the Act or has obtained from the Commission an exemption from registration granted specifically to allow the clearing agency to provide confirmation/acknowledgment services.
(2) "Qualified Vendor" shall mean a vendor of electronic confirmation and acknowledgment services that:
(A) for each transaction subject to this rule: (i) delivers a trade record to a Clearing Agency in the Clearing Agencys format; (ii) obtains a control number for the trade record from the Clearing Agency; (iii) cross-references the control number to the confirmation and subsequent acknowledgment of the trade; and (iv) electronically delivers any acknowledgment received on the trade to the Clearing Agency and includes the control number when delivering the acknowledgment of the trade to the Clearing Agency;
(B) certifies to its customers: (i) with respect to its electronic trade confirmation/acknowledgment system, that it has a capacity requirements evaluation and monitoring process that allows the vendor to formulate current and anticipated estimated capacity requirements; (ii) that its electronic trade confirmation/acknowledgment system has sufficient capacity to process the volume of data that it reasonably anticipates to be entered into its electronic trade confirmation/acknowledgment service during the upcoming year; (iii) that its electronic trade confirmation/acknowledgment system has formal contingency procedures, that the entity has followed a formal process for reviewing the likelihood of contingency occurrences, and that the contingency protocols are reviewed, tested, and updated on a regular basis; (iv) that its electronic confirmation/acknowledgment system has a process for preventing, detecting, and controlling any potential or actual systems or computer operations failures, including any failure to interface with a Clearing Agency as described in rule G-15(d)(ii)(B)(2)(A), above, and that its procedures designed to protect against security breaches are followed; and (v) that its current assets exceed its current liabilities by at least five hundred thousand dollars;
(C) when it begins providing such services, and annually thereafter, submits an Auditors Report to the Commission staff which is not deemed unacceptable by the Commission staff. (An Auditors Report will be deemed unacceptable if it contains any findings of material weakness.);
(D) notifies the Commission staff immediately in writing of any material change to its confirmation/affirmation systems. (For purposes of this subparagraph (D) "material change" means any changes to the vendors systems that significantly affect or have the potential to significantly affect its electronic trade confirmation/acknowledgment systems, including: changes that: (i) affect or potentially affect the capacity or security of its electronic trade confirmation/acknowledgment system; (ii) rely on new or substantially different technology; (iii) provide a new service as part of the Qualified Vendors electronic trade confirmation/acknowledgment system; or (iv) affect or have the potential to adversely affect the vendors confirmation/acknowledgment systems interface with a Clearing Agency.);
(E) notifies the Commission staff in writing if it intends to cease providing services;
(F) provides the Board with copies of any submissions to the Commission staff made pursuant to subparagraphs (C), (D), and (E) of this rule G-15(d)(ii)(B)(2) within ten business days.
(G) promptly supplies supplemental information regarding its confirmation/acknowledgment system when requested by the Commission staff or the Board.(3) "Auditors Report" shall mean a written report which is prepared by competent, independent, external audit personnel in accordance with the standards of the American Institute of Certified Public Accountants and the Information Systems Audit and Control Association and which: (A) verifies the certifications described in subparagraph (d)(ii)(B)(2)(B) of this rule G-15; (B) contains a risk analysis of all aspects of the entitys information technology systems including, computer operations, telecommunications, data security, systems development, capacity planning and testing, and contingency planning and testing; and (C) contains the written response of the entitys management to the information provided pursuant to (A) and (B) of this subparagraph (d)(ii)(B)(3) of rule G-15.
(C) Disqualification of Vendor. A broker, dealer or municipal securities dealer using a Qualified Vendor that ceases to be qualified under the definition in rule G-15(d)(ii)(B)(2) shall not be deemed in violation of this rule G-15(d)(ii) if it ceases using such vendor promptly upon receiving notice that the vendor is no longer qualified.
(iii) No change
(e) No change.
ENDNOTES
1. Securities Exchange Act Release No. 41378 (May 7, 1999).
2. Underlining indicates additions; strikethrough denotes deletions.
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G16_081399
Amendment Filed to Rule G-16, on Periodic Compliance Examination
On August 13, 1999 the Board filed with the Securities and Exchange Commission ("SEC") a proposed amendment to rule G-16, on periodic compliance examination.1 The amendment is to revise the 24-month examination requirement in rule G-16 to a two calendar year requirement.
Section 15B(c)(7)(A) of the Securities Exchange Act of 1934 provides that periodic examinations of dealers for compliance with Board rules are to be conducted by the National Association of Securities Dealers, Inc. ("NASD") with respect to securities firms and by the appropriate federal bank regulatory agencies with respect to bank dealers. Rule G-16 permits such examinations to be combined with other periodic examinations of securities firms and bank dealers in order to avoid unnecessary regulatory duplication and undue regulatory burdens for such firms and bank dealers.
By letter dated April 28, 1999, NASD Regulation, Inc. ("NASDR") requested that the Board revise rule G-16. The letter states that because of NASDRs efforts to coordinate examination schedules, NASDR believes there is a need for a change in rule G-16. NASDR requested that the Board change the 24-month requirement in rule G-16 to a two calendar year requirement. NASDR stated that without the rule change it might be necessary to remove municipal securities examinations from the coordinated examination program.
The Board discussed the proposed amendment with representatives from the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency ("the bank regulators"). The bank regulators also examine dealers for compliance with Board rules pursuant to rule G-16. All of the bank regulators responded favorably to the NASDRs request, stating that the requested change would help bank regulators better coordinate examinations.
Coordination of on-site examinations eliminates unnecessary regulatory duplication and is less intrusive for dealers without negatively impacting investor protection. A formal Memorandum of Understanding among the North American Securities Administrators Association, Inc., SEC, NASDR and other securities industry self-regulatory organizations reflects the joint commitment to coordinated examinations. The Board believes that the proposed amendment will permit more effective coordination of examinations with other regulatory and self-regulatory organizations. It will also provide operating flexibility in planning and scheduling NASDRs and the bank regulators overall examination programs.
August 13, 1999
TEXT OF PROPOSED AMENDMENT2
Rule G-16. Periodic Compliance Examination
At least once each [twenty-four months] two calendar years, each broker, dealer and municipal securities dealer shall be examined in accordance with Section 15B(c)(7) of the Act to determine, at a minimum, whether such broker, dealer or municipal securities dealer and its associated persons are in compliance with all applicable rules of the Board and all applicable provisions of the Act and rules and regulations of the Commission thereunder.
ENDNOTES
1. File No. SR-MSRB-99-7. Comments submitted to the Commission should refer to this file number.
2. Underlining indicates new language; brackets denote deletions.
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g16app_10_20_99
SEC Approves Amendment to Rule G-16, on Periodic Compliance Examination
On October 15, 1999 the Securities and Exchange Commission approved an amendment to rule G-16, on periodic compliance examination.1The amendment alters rule G-16s requirement that compliance examinations be conducted once every 24 months to once every two years. The rule change is intended to facilitate coordination of on-site examinations to eliminate unnecessary regulatory duplication without negatively affecting investor protection. The amendment became effective upon approval.
October 20, 1999
TEXT OF AMENDMENT2
Rule G-16. Periodic Compliance Examination
At least once each twenty-four monthstwo calendar years,
each broker, dealer and municipal securities dealer shall be examined in accordance with
Section 15B(c)(7) of the Act to determine, at a minimum, whether such broker, dealer or
municipal securities dealer and its associated persons are in compliance with all
applicable rules of the Board and all applicable provisions of the Act and rules and
regulations of the Commission thereunder.
ENDNOTES
1. Securities Exchange Act Release No. 42019 (October 15, 1999).
2. Underlining indicates new language; strikethrough denotes deletions.
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g23no2
Proposed Amendment to Previously Filed Amendments to Rule G-23,
on Activities of Financial Advisors
On January 14, 1999, the Board filed with the Securities and Exchange Commission a
proposed amendment to previously filed amendments to rule G-23, on activities of financial
advisors. The proposed amendments to rule G-23 concern financial advisors who wish to act
as remarketing agents for issues on which they advised the issuer.
BACKGROUND
Rule G-23, on activities of financial advisors, establishes disclosure and other
requirements for dealers that act as financial advisors to issuers of municipal
securities. The rule is designed principally to minimize the prima facie conflict
of interest that exists when a dealer acts as both financial advisor and underwriter with
respect to the same issue. Specifically, rule G-23 requires a financial advisor to alert
the issuer to the potential conflict of interest that might lead the dealer to act in its
own best interest as underwriter rather than the issuer=s
best interest.(1) The Board recently was made
aware that, in certain instances, some financial advisors also have acted as remarketing
agents for issues on which they advised the issuer. To address this situation and its
potential conflict of interest, the Board filed with the Commission amendments to rule
G-23 to require a financial advisor, prior to entering into a remarketing agreement for an
issue on which it advised, to disclose, in writing, to the issuer the terms of the
remuneration the financial advisor could earn as remarketing agent on such issue and that
there may be a conflict of interest in changing from the capacity of financial advisor to
remarketing agent. The amendments required that the financial advisor receive the issuer=s acknowledgment in writing of receipt of such
disclosures. When these requirements were met, a dealer acting as financial advisor for an
issue also could serve as remarketing agent for such issue.
SUMMARY OF PROPOSED AMENMDENTS
Commission staff requested that the Board revise the proposed amendments to rule G-23 to include a provision requiring issuer consent to the dealer=s dual role, along with certain other technical language changes. Amendment No. 2 revises the proposed amendments to require a dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities, prior to acting as a remarketing agent for such issue, to disclose in writing to the issuer that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists and the source and basis of the remuneration the dealer could earn as remarketing agent on such issue. This written disclosure to the issuer can be in a separate writing provided to the issuer prior to the execution of the remarketing agreement or the disclosure can be in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration. If the disclosure is made prior to the execution of the remarketing agreement, the amount of the specific fee paid by the issuer to the remarketing agent still can be negotiated in the remarketing agreement. If the disclosure is made in the remarketing agreement, the dealer will have negotiated the amount of its fee with the issuer.
January 14, 1999
TEXT OF PROPOSED AMENDMENTS(2)
Rule G-23. Activities of Financial Advisors
(a) - (d) No change.
(e) Remarketing Activities. No broker, dealer, or municipal securities dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities shall act as agent for the issuer in remarketing such issue, unless the broker, dealer, or municipal securities dealer has expressly disclosed in writing to the issuer:
(i) that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists; and
(ii) the source and basis of the remuneration the broker, dealer or municipal securities dealer could earn as remarketing agent on such issue.
This written disclosure to the issuer may be included either in a separate writing provided to the issuer prior to the execution of the remarketing agreement or in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration.
[(e)] (f) No change.
[(f)] (g) Each broker, dealer, and municipal securities dealer subject to the provisions of sections (d), [or] (e) or (f) of this rule shall maintain a copy of the written disclosures, acknowledgments and consents required by these sections in a separate file and in accordance with the provisions of rule G-9.
[(g)] (h) No change.
[(h)] (i) No change.
ENDNOTES
1. Rule G-23(d)(i) requires a financial advisor wishing to underwrite or place an issue of municipal securities on a negotiated basis to: (i) terminate in writing the financial advisory relationship with respect to such issue and the issuer has expressly consented in writing to such acquisition or participation; (ii) disclose in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing receipt of such disclosure; and (iii) expressly disclose in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation as financial advisor, and the issuer has expressly acknowledged in writing receipt of such disclosure. If such issue is to be sold by the issuer at competitive bid, the issuer must expressly consent in writing prior to the bid to the financial advisor=s acquisition or participation.
2. Underlining indicates new language; brackets denote deletions.
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G23NO2approval
Financial Advisors Acting as Remarketing Agents: Rule G-23
On March 26, 1999, the Securities and Exchange Commission approved amendments to rule G-23, on activities of financial advisors. The amendments concern financial advisors who wish to act as remarketing agents for issues on which they advised the issuer. The amendments became effective upon SEC approval.
BACKGROUND
Rule G-23, on activities of financial advisors, establishes disclosure and other requirements for dealers that act as financial advisors to issuers of municipal securities. The rule is designed principally to minimize the prima facie conflict of interest that exists when a dealer acts as both financial advisor and underwriter with respect to the same issue. Specifically, rule G-23 requires a financial advisor to alert the issuer to the potential conflict of interest that might lead the dealer to act in its own best interest as underwriter rather than the issuer's best interest.1
SUMMARY OF AMENDMENTS
The amendments require a dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities to disclose in writing to the issuer, prior to acting as a remarketing agent for such issue, that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists and the source and basis of the remuneration the dealer could earn as remarketing agent on such issue. This written disclosure to the issuer can be in a separate writing provided to the issuer prior to the execution of the remarketing agreement or the disclosure can be in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration. If the disclosure is made prior to the execution of the remarketing agreement, the amount of the specific fee paid by the issuer to the remarketing agent still can be negotiated in the remarketing agreement. If the disclosure is made in the remarketing agreement, the dealer will have negotiated the amount of its fee with the issuer.
March 31, 1999
TEXT OF AMENDMENTS2
Rule G-23. Activities of Financial Advisors
(a) - (d) No change.
(e) Remarketing Activities. No broker, dealer, or municipal securities dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities shall act as agent for the issuer in remarketing such issue, unless the broker, dealer, or municipal securities dealer has expressly disclosed in writing to the issuer:
(i) that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists; and
(ii) the source and basis of the remuneration the broker, dealer or municipal securities dealer could earn as remarketing agent on such issue.
This written disclosure to the issuer may be included either in a separate writing provided to the issuer prior to the execution of the remarketing agreement or in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration.
(e) (f) No change.
(f) (g) Each broker, dealer, and municipal securities dealer subject to
the provisions of sections (d), or (e) or (f) of this rule
shall maintain a copy of the written disclosures, acknowledgments and consents required by
these sections in a separate file and in accordance with the provisions of rule G-9.
(g) (h) No change.
(h) (i) No change.
ENDNOTES
1. Rule G-23(d)(i) requires a financial advisor wishing to underwrite or place an issue of municipal securities on a negotiated basis to: (i) terminate in writing the financial advisory relationship with respect to such issue and the issuer has expressly consented in writing to such acquisition or participation; (ii) disclose in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing receipt of such disclosure; and (iii) expressly disclose in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation as financial advisor, and the issuer has expressly acknowledged in writing receipt of such disclosure. If such issue is to be sold by the issuer at competitive bid, the issuer must expressly consent in writing prior to the bid to the financial advisor's acquisition or participation.
2. Underlining indicates new language; strikethrough denotes deletions.
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g36_12_9_99
Amendment to Rule G-36(c)(i) Filed with the Securities and Exchange Commission
The Municipal Securities Rulemaking Board has filed with the Securities and Exchange Commission an amendment to rule G-36(c)(i) relating to official statements prepared in connection with most primary offerings exempt from Exchange Act Rule 15c2-12.
On December 9, 1999, the Municipal Securities Rulemaking Board (the "MSRB" or the "Board") filed with the Securities and Exchange Commission (the "SEC") an amendment to rule G-36, on delivery of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to Board or its designee.1 The amendment modifies the existing time frame for brokers, dealers or municipal securities dealers ("dealers") acting as underwriters of primary offerings subject to rule G-36(c)(i) (i.e., offerings exempt from Exchange Act Rule 15c2-12) to send official statements to the MSRB.2 The amendment provides that an underwriter in a primary offering subject to rule G-36(c)(i) for which an official statement in final form is prepared by the issuer must send two copies of the official statement in final form, together with two copies of Form G-36(OS), to the MSRB by the later of (i) one business day after the bond closing or (ii) one business day after receipt of the official statement from the issuer.
Rule G-36 was adopted by the MSRB for the purpose of creating a repository for official statements that would function much like a public library that stores, indexes and provides copies of official statements.3 This library, known as the Municipal Securities Information Library� (or MSIL�) system,4 is intended to serve as a central source for information regarding municipal securities trading in the primary and secondary markets. As originally adopted by the MSRB and approved by the SEC, rule G-36 applied to all primary offerings of municipal securities regardless of principal amount, other than primary offerings that qualified for exemption under section (d)(1) of Securities Exchange Act Rule 15c2-12.5 The MSRB subsequently amended rule G-36 to subject to its requirements certain categories of primary offerings that are exempt under Rule 15c2-12(d)(1), thereby further extending the reach of rule G-36 beyond the scope of Rule 15c2-12.6 The MSRB felt that, by expanding the scope of the rule to include such offerings, a more complete collection of disclosure documents would result and the overall integrity, efficiency and liquidity of the municipal securities market would be increased.
For any primary offering subject to rule G-36(c)(i), the underwriter currently is required to send two copies of the official statement in final form, if one is prepared, together with two copies of Form G-36(OS), to the MSRB by the business day after the issuer delivers the municipal securities to the underwriter (the "bond closing"). The MSRB reviewed certain information included by underwriters on Forms G-36(OS) submitted to the MSIL� system in 1998, including approximately 2,000 such forms submitted in connection with primary offerings subject to rule G-36(c)(i).7 For these offerings, the MSRB found that 96% of the official statements in final form were reported to have been delivered by issuers to underwriters within one business day after closing. The 4% of official statement deliveries by issuers to underwriters that were reported as being made more than one business day after closing and therefore too late to permit underwriters to comply with rule G-36(c)(i) constituted more than half (approximately 54%) of all underwriter failures to meet the time frame of that section.8
The MSRB believes that there is significant room for improvement with respect to underwriter compliance with rule G-36(c)(i) in those situations in which the official statement is received in sufficient time to send to the MSRB on a timely basis. Underwriters experiencing problems in this area should review their internal procedures for ensuring that official statements delivered by issuers are handled in a manner that permits the accurate completion of Form G-36(OS) and the prompt sending of such form and the official statement to the MSRB.
However, the MSRB is concerned that more than half of the instances in which underwriters have not met the time frame of rule G-36(c)(i) resulted from official statements that were reported to have been delivered by issuers more than one business day after closing. Of course, the MSRB has no authority to require that an issuer prepare an official statement or that any official statement that is prepared be delivered to underwriters within a specified time frame. In addition, the SEC excepted those primary offerings that are subject to rule G-36(c)(i) from Rule 15c2-12 and therefore no regulatory framework exists to compel, directly or indirectly, the preparation and delivery of an official statement in such offerings.
The MSRB notes that in approximately 36% of the offerings subject to rule G-36(c)(i), the number of business days between the sale date and the business day following closing is less than ten. As a result, for these offerings, the requirement in rule G-36(c)(i) that the underwriter send the official statement to the MSRB within one business day after the bond closing provides the underwriter with less time to comply with its official statement submission requirement than the 10 business day outside time frame of rule G-36(b)(i), were such time frame applicable to these offerings.9 At the same time, however, issuers in these offerings generally have not contracted with underwriters to deliver official statements within seven business days of the sale date, as provided in section (b)(3) of Rule 15c2-12, since such offerings are exempt from that Rule. Thus, in more than one-third of all offerings subject to rule G-36(c)(i), underwriters are required to act more quickly than they would under rule G-36(b)(i) even though there is no concomitant obligation on the part of issuers to deliver an official statement within any particular time frame.
As a result, the MSRB published the MSRB Notice seeking comment on, among other things, a draft amendment to rule G-36(c)(i) which the MSRB believed would address this situation. After reviewing the comments received on the MSRB Notice, the MSRB determined to adopt the draft amendment, with a minor clarifying change.10 As amended, the rule would provide that an underwriter in a primary offering subject to rule G-36(c)(i) for which an official statement in final form is prepared by the issuer must send two copies of the official statement in final form, together with two copies of Form G-36(OS), to the MSRB by the later of (i) one business day after the bond closing or (ii) one business day after receipt of the official statement from the issuer.11 The amendment is intended solely to provide relief to underwriters that face violation of rule G-36(c)(i) as a result of circumstances beyond their control and is not intended to imply that underwriters and other dealers may ignore their continuing obligation to deliver official statements for new issue municipal securities to customers by settlement, as required under rule G-32.
The MSRB received two comment letters in response to the MSRB Notice, only one of which addressed the draft amendment. TBMA states that it "strongly supports" the draft amendment.12 TBMA further states that the change in the timing requirement "means that underwriters and issuers could schedule closings on the basis of the needs of the transaction, rather than for the purpose of allowing a sufficient number of days to increase the odds that the official statement will be ready in time for the closing."
The MSRB strongly believes that this second statement of TBMA demonstrates a misunderstanding of the nature of the proposed amendment, the purpose of official statements in the municipal securities market and the other obligations of dealers with respect to delivery of official statements. In the MSRB Notice, the MSRB observed that, for new issue municipal securities, dealers typically seek, and customers generally expect, to settle their trades on the same day as the closing of the underwriting. As a result, underwriters need to receive the official statement from the issuer in sufficient time to ensure that the official statement can be delivered to customers by settlement of their transactions, as required under rule G-32. If an issuer is preparing an official statement in final form but does not deliver it to the underwriter by the bond closing, dealers would continue to be prohibited from settling their transactions with customers until they have delivered the official statement to the customers, with certain very limited exceptions.13 Thus, other than offerings falling within the narrow exceptions provided under rule G-32, the only offerings in which "the needs of the transaction" would not include delivery of the official statement by closing would be those in which underwriters expect to hold the securities in inventory until the official statement is in fact delivered and therefore made available for redelivery to customers.
The completion and delivery of an official statement by the closing of the underwriting is not a technical requirement imposed by the MSRB. If an official statement serves no purpose in an offering that is exempt from Rule 15c2-12, then the issuer need not prepare one. Unless an issuer is preparing an official statement for reasons entirely unrelated to the offering that it describes, it is difficult to understand how completion of an official statement after the underwriters and initial customers have received delivery of their securities can be rationalized.14 Although it is possible that the submission requirement under current rule G-36(c)(i) may in some cases influence an issuer to give completion of the official statement in final form a higher priority, it is also possible that in some cases this requirement serves as a disincentive for the actual preparation of the official statement in final form since an underwriter currently can avoid a rule G-36(c)(i) violation by prevailing upon the issuer not to prepare an official statement in final form at all (e.g., an underwriter that has purchased an issue based on a preliminary official statement could advise an issuer that it need not finalize the official statement). Changing the time frame of the rule G-36(c)(i) submission requirement would eliminate this disincentive while providing relief for underwriters that may face a potential rule violation for reasons beyond their control. The official statement delivery requirement under rule G-32 would continue to provide a powerful incentive to underwriters to urge issuers to complete the official statement in final form in sufficient time to permit the underwriters and the other dealers to which they sell such new issue municipal securities to deliver the official statement to customers by settlement.
Although TBMA supports the draft amendment to rule G-36(c)(i), it suggests that the MSRB further amend rule G-36(c)(i) to extend the one-business day time frame to two-business days. TBMA argues that "it is often logistically difficult to meet the one-day requirement" and that the MSIL� system serves "archival rather than real-time disclosure purposes."15 In adopting rule G-36 and creating the MSIL� system, the MSRB undertook to make available to the industry a comprehensive repository of official statements for use in both the primary and secondary markets. In addition to serving the vital archival purpose of ensuring that information regarding municipal securities is available throughout the life of the securities, the MSIL� system serves an important function in the primary market as an alternate source (through its subscribers) of official statements for dealers seeking to fulfill their rule G-32 customer delivery obligation. Delaying the submission of official statements to the MSRB could impair the MSIL� systems usefulness in the primary market.16 Without a more substantial showing of hardship to the dealer community, the MSRB believes that extension of the time frame for underwriters to turn the official statement around to the MSRB is not justified at this time. The ability to meet this requirement is entirely within the control of dealers, and they should review their procedures to ensure that this task is assigned to the appropriate personnel having a clear understanding of the procedural and substantive requirements of rule G-36. To the extent that dealers experience difficulty in coordinating the actions of various personnel involved in the handling of official statements, they should consider whether they have instituted procedures that adequately provide for compliance with the rule.
December 9, 1999
* * * * * * * * * *
TEXT OF AMENDMENT17
Rule G-36. Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee
(a)-(b) No change.
(c) Delivery Requirements for Issues not Subject to Securities Exchange Act Rule 15c2-12.
(i) Subject to paragraph (iii) below, each
broker, dealer, or municipal securities dealer that acts as an underwriter in a primary
offering of municipal securities not subject to Securities Exchange Act rule 15c2-12 for
which an official statement in final form is prepared by or on behalf of the issuer
shall send to the Board or its designee, by certified or registered mail, or some other
equally prompt means that provides a record of sending, within by the
later of one business day of after delivery of the securities
by the issuer to the broker, dealer, or municipal securities dealer or one business day
after receipt of the official statement in final form from the issuer or its designated
agent, the following documents and written information: two copies of the official
statement in final form, if prepared by or on behalf of the issuer; and,
if an official statement in final form is prepared, two copies of completed Form
G-36(OS) prescribed by the Board, including the CUSIP number or numbers for the issue.
(ii) No change.
(d)-(f) No change.
ENDNOTES
1. File No. SR-MSRB-99-11. Comments submitted to the SEC should refer to this file number.
2. Those primary offerings that are subject to rule G-36(c)(i) consist of offerings of municipal securities for which an official statement in final form has been prepared by or on behalf of the issuer and having (i) an aggregate principal amount of less than $1,000,000 ("Small Issue Securities"); (ii) authorized denominations of $100,000 or more if the securities have a maturity of nine months or less ("Short-Term Securities"); and (iii) authorized denominations of $100,000 or more if, at the option of the holder, the securities may be tendered to the issuer or its agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by the issuer or its agent ("Puttable Securities").
3. See Securities Exchange Act Rel. No. 28081 (June 1, 1990), 55 FR 23333 (June 7, 1990); "Delivery of Official Statements to the Board: Rules G-36 and G-8," MSRB Reports, Vol. 9, No. 3 (Nov. 1989) at 3.
4. Municipal Securities Information Library and MSIL are registered trademarks of the MSRB.
5. In primary offerings subject to Rule 15c2-12, the underwriter is required under section (b)(3) of the Rule to contract with the issuer to receive the final official statement within seven business days after any final agreement to purchase, offer or sell the municipal securities (the "sale date") and in sufficient time to accompany any confirmation that requests payment from any customer. Rule 15c2-12 does not apply to Small Issue Securities. In addition, section (d)(1) of the Rule exempts primary offerings of municipal securities if the securities are (i) in authorized denominations of $100,000 or more and are sold to no more than 35 persons with knowledge and experience in financial and business matters, capable of evaluating the merits and risks of the investment and not purchasing for more than one account or with a view to distribution ("Limited Offering Securities"); (ii) Short-Term Securities; or (iii) Puttable Securities. Thus, as originally adopted, rule G-36 applied to all primary offerings subject to Rule 15c2-12 as well as to Small Issue Securities for which an official statement in final form was prepared, but did not apply to Limited Offering Securities, Short-Term Securities and Puttable Securities.
6. See Securities Exchange Act Rel. No. 32086 (March 31, 1993), 58 FR 18290 (April 8, 1993); "Delivery of Official Statements to the Board: Rule G-36," MSRB Reports, Vol. 12, No. 3 (Sept. 1992) at 11. Thus, only primary offerings exempt from Rule 15c2-12 for which no official statement in final form is prepared and Limited Offering Securities remain exempt from rule G-36.
7. The MSRB reviewed all Forms G-36(OS) for primary offerings having sale dates in 1998 received in acceptable form by the MSIL� system on or prior to December 31, 1998. Excluded from this review were any Forms G-36(OS) that omitted the sale date, date of receipt by the underwriter of the official statement from the issuer or date that the underwriter sent the official statement to the MSIL� system. Information provided by underwriters on Form G-36(OS) is not independently verified by the MSRB but is provided to the appropriate enforcement agency on a regular basis. Underwriters are required to certify that all information contained in each Form G-36(OS) submitted to the MSIL� system is true and correct. Inaccuracies in the information reported by underwriters on Form G-36(OS) could subject such underwriter to appropriate enforcement action. The results of the MSRBs review could be affected by any such inaccuracies. The full results of this review, including results relating to other provisions of rule G-36 and to the provisions of rule G-32 and Rule 15c2-12, were published in "Official Statement Deliveries Under Rules G-32 and G-36 and Exchange Act Rule 15c2-12," MSRB Reports, Vol. 19, No. 3 (Sept. 1999) at 29 (the "MSRB Notice").
8. The remaining failures consisted of situations where the issuer was reported to have delivered the official statement to the underwriter in sufficient time for the underwriter to comply with rule G-36(c)(i) but the underwriter delayed sending the official statement to the MSRB until later than the business day after the bond closing.
9. Section (b)(i) of rule G-36 requires the underwriter of a primary offering subject to Rule 15c2-12 to send two copies of the final official statement, together with two copies of Form G-36(OS), to the MSRB within one business day after receipt of the final official statement from the issuer but no later than 10 business days after the sale date.
10. The change in language makes clearer the fact that section (c)(i) will continue to apply to a primary offering only if an official statement in final form is prepared.
11. In contrast, rule G-36(c)(i) currently requires that the underwriter send the official statement to the MSRB by the business day after the bond closing, regardless of whether the underwriter has in fact received the official statement by such day.
12. The comment letter from The Bond Market Association ("TBMA") addressed the draft amendment as well as certain other issues relating to MSRB rules G-36 and G-32 and Exchange Act Rule 15c2-12. The comment letter from Charles Schwab & Co. Inc. ("Schwab") addressed certain issues relating to rule G-32. The MSRB is considering the comments received on these other matters but has not determined to take any rulemaking action with respect to rule G-32 or any provisions of rule G-36 other than section (c)(i) thereof at this time.
13. Commercial paper is wholly exempt from the rule G-32 customer delivery requirement and preliminary official statements may be delivered by settlement (with official statements in final form sent when they become available) for Puttable Securities.
14. Of course, the MSRB believes that there is significant value to the secondary market in having official statements available throughout the life of the issue. Nonetheless, the MSRB sees no way of justifying the existence of an official statement based on the needs of the secondary market while ignoring the needs of the primary market.
15. TBMA states "that it is difficult to ensure the desirable level of coordination between the underwriter personnel who are best-positioned to authenticate the official statement as the final official statement and the personnel who are responsible for filings with the Board."
16. Schwab notes that it has "found that if the dealers [from which it purchases new issue municipal securities] do not have copies of the final official statement, such copies are also generally unavailable from the managing underwriter, financial printer, Bloomberg or another Nationally Recognized Municipal Securities Information Repository." Delays in receiving official statements by the MSIL� system would further reduce their availability from these other sources.
17. Underlining indicates additions; strikethrough indicates deletions.
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
G-37Mar2399
Notice Regarding the Application of Rule G-37 to Presidential Campaigns of Issuer Officials
In response to numerous calls on this subject, the Board wishes to reiterate its position on the application of rule G-37, on political contributions and prohibitions on municipal securities business, to Presidential campaigns of issuer officials. The Board directs persons interested in contributing to an issuer official's Presidential campaign to the MSRB Interpretation of May 31, 1995 ("the 1995 Interpretive Letter").(1)
Rule G-37, among other things, prohibits a broker, dealer or municipal securities dealer (dealer) from engaging in municipal securities business with an issuer within two years after any contribution to an official of an issuer made by the dealer; any municipal finance professional associated with the dealer; or any political action committee controlled by the dealer or any municipal finance professional. In the 1995 Interpretive Letter, the Board noted that rule G-37 is applicable to contributions given to officials of issuers who seek election to federal office, such as the Presidency. The Board also explained that the only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals.(2) Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. In the example of an issuer official running for President, any municipal finance professional in the country can contribute the de minimis amount to the official's Presidential campaign without causing a ban on municipal securities business with that issuer.
The Board previously has stated that, if an issuer official is involved in a primary election prior to the general election, a municipal finance professional who is entitled to vote for such official may contribute up to $250 for the primary election and $250 for the general election to each such official.(3) In the context of a Presidential campaign, the Board notes that the $250 de minimis amount applies to the entire primary process, up through and including the national party convention. While rule G-37 allows a municipal finance professional to then contribute another $250 to the party candidate's general election campaign fund, the Board understands that a Presidential candidate who has accepted public funding for the general election is prohibited under federal law from accepting any contributions to further his or her general election campaign.
Finally, the Board also notes that rule G-37(c) provides that no dealer or municipal finance professional shall solicit any person or political action committee to make any contributions, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business.
March 23, 1999
ENDNOTES
1. The 1995 Interpretive Letter is reprinted in MSRB Rule Book (January 1, 1999) at 201-203. It also is available from the MSRB Rules/Interpretive Letters section of the Board's Web site at www.msrb.org.
2. The term "municipal finance professional" is a defined term in rule G-37 (g)(iv). The Board wishes to remind dealers that the term is broader than persons directly involved in municipal securities activities and may include certain supervisors, including in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer, and in the case of a bank dealer, the officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities. It also may include members of the dealer's executive or management committee or similarly situated officials. See Question and Answer number 2 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports, Vol. 14, No. 3 (June 1994) at 13; Question and Answer number 3 dated September 9, 1997, reprinted in MSRB Rule Book (January 1, 1999) at 199. The Questions and Answers also are available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.
3. See Question and Answer number 10 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports, Vol. 14, No. 3 (June 1994) at 13. The Question and Answer also is available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
g38_12_9_99
Amendments Approved Requiring Dealers to Obtain from Their Consultants Information on Political Contributions and Payments to Political Parties and for Dealers to Report Such Information to the Board: Rules G-38, G-37 and G-8
On December 7, 1999, the Securities and Exchange Commission approved amendments to rules G-38, on consultants, G-37, on political contributions and prohibitions on municipal securities business, and G-8, on books and records, as well as revisions to the attachment page to Form G-37/G-38.1 The amendments require dealers to obtain from their consultants information on the consultants political contributions and payments to state and local political parties and to report such information to the Board on Form G-37/G-38. The amendments will become effective on April 1, 2000.
SUMMARY OF AMENDMENTS
The amendments require a dealer to receive and report certain contribution and payment information from the consultant;2 any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the dealer; and any political action committee ("PAC") controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer.3 A dealer is required to obtain information from its consultants about the contributions made to issuer officials only if the consultant has had direct or indirect communication with such issuer to obtain municipal securities business on behalf of the dealer.4 The political party payments required to be reported are limited to those made to political parties of states and political subdivisions that operate within the geographic area of the issuer with whom the consultant communicates on behalf of the dealer (e.g., city, county and state parties). The date that establishes the obligation for the collection of contribution information is the date of the consultants communication with the issuer to obtain municipal securities business on behalf of the dealer.
Consultant Agreement
A dealer is required to include within its Consultant Agreement5 a statement that the consultant agrees to provide the dealer each calendar quarter with a listing of reportable political contributions to official(s) of an issuer and reportable payments to political parties of states and political subdivisions during such quarter, or a report that no reportable political contributions or reportable political party payments were made, as appropriate.6
"Look-Back" and "Look-Forward" Provisions
With respect to the collection of contribution and payment information, the amendments contain a six-month "look-back" provision as well as a six-month "look-forward" provision from the date of communication with an issuer. Thus, a consultant must disclose to the dealer the contributions and payments made by the consultant during the six months prior to the date of the consultant's communication with the issuer.7 So too, if the consultant's communication with an issuer continues, any reportable contributions and payments are required to be disclosed. Once communication ceases, the consultant still must disclose contribution and payment information for six months.8 The Board believes these provisions are important in providing information for a minimum period of one year about any consultant contributions to officials of an issuer with whom the consultant communicated on behalf of a dealer to obtain municipal securities business. This should help to identify any situations in which contributions could have influenced the awarding of municipal securities business.
A dealers requirement to collect contribution and payment information from its consultants ends when a Consultant Agreement has been terminated.9 Of course, dealers should not attempt to avoid the requirements of rule G-38 by terminating a consultant relationship after directing or soliciting the consultant to make a political contribution to an issuer official after such termination. Rule G-37(d) prohibits a dealer from doing any act indirectly which would result in a violation of rule G-37 if done directly by the dealer. Thus, a dealer may violate rule G-37 by engaging in municipal securities business with an issuer after directing or soliciting any person to make a contribution to an official of such issuer.
Disclosure on Form G-37/G-38
The amendments require that the information obtained by dealers concerning their consultants' contributions and payments be submitted by dealers to the Board on Form G-37/G-38.10 The disclosures required by the amendments are reflected in the changes to Form G-37/G-38. The amendments require dealers to disclose on the attachment sheet for each consultant used by the dealer the contributions and payments covered by the rule or that the consultant reported that no such contributions or payments were made for such quarter. Furthermore, a dealer must disclose if a consultant has failed to provide it with a report concerning its contributions and payments. When completing a form, a dealer must disclose, in addition to the other required information, the calendar quarter and year of any reportable political contributions and reportable political party payments that were made prior to the calendar quarter of the form being completed (e.g., contributions and payments made in a prior quarter that are reportable as a result of the six-month look-back). "Look-back" contributions should be disclosed on the Form G-37/G-38 for the quarter in which the consultant has communicated with an issuer to obtain municipal securities business on behalf of a dealer.
As noted above, the amendments will become effective on April 1, 2000. On the reports for the second quarter of 2000 (required to be sent to the Board by July 31, 2000) dealers will be required to disclose their consultants reportable political contributions and reportable political party payments for the second quarter of 2000 and include, pursuant to the six-month look-back, reportable political contributions and reportable political party payments since October 1, 1999. Once a contribution or payment has been disclosed on a report, a dealer should not continue to disclose that particular contribution or payment on subsequent reports.
The attachment page to Form G-37/G-38 also has been revised to require dealers to separately identify all of the municipal securities business obtained or retained by the consultant for the dealer.
"Reasonable Efforts" Provision
The amendments contain a "reasonable efforts" provision that allows dealers to rely in good faith on information received from their consultants regarding contributions. This provision provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. To avail itself of the reasonable efforts, a dealer must:
(1) state in the Consultant Agreement that Board rules require disclosure of consultant contributions;
(2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information;
(3) include language in the Consultant Agreement to the effect that: (a) the Consultant Agreement will be terminated if, for any calendar quarter, the consultant fails to provide the dealer with information about its reportable contributions or payments, or a report noting that the consultant made no reportable contributions or payments, and such failure continues up to the date to be determined by the dealer but no later than the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the dealer must send its Form G-37/G-38 to the Board, and (b) the dealer may not make any further payments to the consultant, including payments owed for services performed prior to the date of termination, as of the date of such termination; and
(4) enforce the Consultant Agreement provisions described above in a full and timely manner and indicate the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.
The failure by a dealer to include the termination and non-payment provisions in a Consultant Agreement or to enforce any such provisions that may be contained in the Consultant Agreement, would not, in and of itself, constitute a violation of rule G-38 but would instead preclude the dealer from invoking the reasonable efforts provision as a defense against a possible violation for failing to disclose consultant contribution information, which the consultant may have withheld from the dealer.
Recordkeeping
The amendments to rule G-8 require a dealer to maintain: (1) records of each reportable political contribution; (2) records of each reportable political party payment; (3) records indicating, if applicable, that a consultant made no reportable political contributions or no reportable political party payments; and (4) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.
Technical amendments
Finally, the amendments contain a clarifying amendment to rule G-38(b)(i)(B), and a technical amendment to rule G-37(e)(i)(D) to conform to the amendments to rule G-38.11
December 9, 1999
TEXT OF AMENDMENTS12
Rule G-38. Consultants
(a) Definitions.
(i)-(v) No change.
(vi) The term "reportable political contribution" means:
(A) if the consultant has had direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer, a political contribution to an official(s) of such issuer made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;
(B) the term does not include those political contributions to official(s) of an issuer made by any individual referred to in subparagraph (b)(i)(A) or (B) of this rule who is entitled to vote for such official if the contributions made by such individual, in total, are not in excess of $250 to any official of such issuer, per election.
(vii) The term "reportable political party payment" means:
(A) if a political party of a state or political subdivision operates within the geographic area of an issuer with which the consultant has had direct or indirect communication to obtain or retain municipal securities business on behalf of the broker, dealer or municipal securities dealer, a payment to such party made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;
(B) the term does not include those payments to political parties of a state or political subdivision made by any individual referred to in subparagraph (b)(i)(A) or (B) of this rule who is entitled to vote in such state or political subdivision if the payments made by such individual, in total, are not in excess of $250 per political party, per year.
(viii) The term "official of such issuer" or "official of an issuer" shall have the same meaning as in rule G-37(g)(vi).
(b) Written Agreement.
(i) Each broker, dealer or municipal securities dealer that uses a consultant shall evidence the consulting arrangement by a writing setting forth, at a minimum, the name, company, business address, role and compensation arrangement of each such consultant ("Consultant Agreement"). In addition, the Consultant Agreement shall include a statement that the consultant agrees to provide the broker, dealer or municipal securities dealer with a list by contributor category, in writing, of any reportable political contributions and any reportable political party payments during each calendar quarter made by:
(A) the consultant;
(B) if the consultant is not an individual, any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and
(C) any political action committee controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer.
(ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.
(iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.
(iv) Such The
Consultant Agreement must be entered into before the consultant engages in any direct or
indirect communication with an issuer on behalf of the broker, dealer or municipal
securities dealer.
(c) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.
(i) A broker, dealer or municipal securities dealer is required to obtain information on its consultants reportable political contributions and reportable political party payments beginning with a consultant's first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).
(ii) The requirement to obtain the information referred to in paragraph (c)(i) of this rule shall end upon the termination of the Consultant Agreement.
(iii) A broker, dealer or municipal securities dealer will not violate this section if it fails to receive from its consultant all required information on reportable political contributions and reportable political party payments and thus fails to report such information to the Board if the broker, dealer or municipal securities dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. Reasonable efforts shall include:
(A) a statement in the Consultant Agreement that Board rules require disclosure of consultant contributions to issuer officials and payments to state and local political parties;
(B) the broker, dealer or municipal securities dealer sending quarterly reminders to its consultants of the deadline for their submissions to the broker, dealer or municipal securities dealer of the information concerning their reportable political contributions and reportable political party payments;
(C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:
(1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and
(2) no further payments, including payments owed for services performed prior to the date of termination, shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and
(D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.
(d) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, business address, role and compensation arrangement of any consultant used, directly or indirectly, by the broker, dealer or municipal securities dealer to attempt to obtain or retain municipal securities business with each such issuer. Such information shall be submitted to the issuer either:
(i) (ii) No change.
(d) (e) Disclosure to Board. Each broker, dealer and municipal
securities dealer shall send to the Board by certified or registered mail, or some other
equally prompt means that provides a record of sending, and the Board shall make public,
reports of all consultants used by the broker, dealer or municipal securities dealer
during each calendar quarter. Two copies of the reports must be sent to the Board on Form
G-37/G-38 by the last day of the month following the end of each calendar quarter (these
dates correspond to January 31, April 30, July 31, and October 31). Such reports shall
include, for each consultant, in the prescribed format, the consultant's name, company, business
address, role, and compensation arrangement, any
municipal securities business obtained or retained by the consultant with each such
business listed separately, and, if applicable, dollar amounts paid to the consultant
connected with particular municipal securities business. In addition, s
Such reports shall indicate the total dollar amount of payments made to each
consultant during the report period and, if any such payments are related to the
consultant's efforts on behalf of the broker, dealer or municipal securities dealer which
resulted in particular municipal securities business, then that business and the related
dollar amount of the payment must be separately identified. In addition, such
reports shall include the following information to the extent required to be obtained
during such calendar quarter pursuant to paragraph (c)(i) of this rule:
(i)(A) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving reportable political contributions or reportable political party payments, listed by state; and
(B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or
(ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or
(iii) if applicable, a statement that the consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.
Once a contribution or payment has been disclosed on a report, the dealer should not continue to disclose that particular contribution or payment on subsequent reports.
Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:
(i) - (xvii) No change.
(xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:
(i)(A) a listing of the name, company, business address, role and compensation arrangement of each consultant;
(ii)(B) a copy of each Consultant Agreement referred to in rule G-38(b);
(iii)(C) a listing of the compensation paid in connection with each such Consultant Agreement;
(iv)(D) where applicable, a listing of the municipal securities business obtained or retained through the activities of each consultant;
(v)(E) a listing of issuers and a record of disclosures made to such issuers, pursuant to rule G-38(c)(d), concerning each consultant used by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with each such issuer;and
(vi)(F) records of each reportable political contribution (as defined in rule G-38(a)(vi)), which records shall include:(1) the names, city/county and state of residence of contributors;
(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions; and
(3) the amounts and dates of such contributions;
(G) records of each reportable political party payment (as defined in rule G-38(a)(vii)), which records shall include:
(1) the names, city/county and state of residence of contributors;
(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such payments; and
(3) the amounts and dates of such payments;
(H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));
(I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and
(J) the date of termination of any consultant arrangement.
(xix) No change.
(b) - (f) No change.
Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business
(a)(d) No change.
(e)(i)(A) (C) No change.
(D) any information required to be disclosed pursuant to section
(d)(e) of rule G-38; and
(E) No change.
(ii) (iii) No change.
(f) (i) No change.
ENDNOTES
1. Securities Exchange Act Release No. 42205 (December 7, 1999).
2. Rule G-38(a)(i) defines the term "consultant" as any person used by a dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on the dealers behalf where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the dealer or any other person.
3. A "consultant" in rule G-38 can refer to an individual or a company. For example, if an individual is a consultant, this individual would report to the dealer only his or her contributions and payments and the contributions of any PAC controlled by such individual. If the consultant is a company, the company would report its contributions and payments to the dealer, as well as those made by any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer, and any PAC controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer.
4. A dealer must disclose contributions with respect to those issuers from which a consultant is seeking municipal securities business on behalf of the dealer, regardless of whether contributions are going to and communications are occurring with the same or different personnel within that particular issuer.
5. Rule G-38 requires dealers that use consultants to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"). The Consultant Agreement, at a minimum, must include the name, company, role and compensation arrangement of each consultant used by the dealer. The Consultant Agreement must be entered into before a consultant engages in any direct or indirect communication with an issuer on the dealers behalf.
6. The de minimis exception for contributions to official(s) of an issuer provides that a consultant need not provide to a dealer information about contributions of the consultant (but only if the consultant is an individual) or by any partner, director, officer or employee of the consultant (if the consultant is a company) who communicates with issuers to obtain municipal securities business on behalf of the dealer made to any official of an issuer for whom such individual is entitled to vote if such individuals contributions, in total, are not in excess of $250 to each official of such issuer, per election. Similarly, the de minimis exception for payments provides that a consultant need not provide to a dealer information about payments of the consultant to political parties of a state or political subdivision (but only if the consultant is an individual) or by any partner, director, officer or employee of the consultant (if the consultant is a company) who communicates with issuers to obtain municipal securities business on behalf of the dealer and who is entitled to vote in such state or political subdivision if the payments made by the individual, in total, are not in excess of $250 per political party, per year.
7. Such contributions and payments become reportable in the calendar quarter in which the consultant first communicates with the issuer. Thus, for the quarter in which a consultant first communicates with the issuer, the dealer would be required to collect from the consultant its reportable political contributions and reportable political party payments for such quarter and, pursuant to the six-month look-back, for the six-month period preceding such first communication.
8. Contributions and payments made simultaneously with or after the consultants first communication with the issuer are reportable in the calendar quarter in which they are made.
9. A dealer that terminates a Consultant Agreement would of course be obligated to obtain information regarding contributions and payments made up to the date of termination.
10. The amendments also require dealers to report the consultants business address on Form G-37/G-38.
11. Rule G-8(a)(xviii) was also amended to require a dealer to maintain a record of a consultants business address.
12. Underlining indicates new language; strikethrough denotes deletions.
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Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.
G38_8261999
Proposed Amendments Filed to Pending Amendments at the SEC: Rules G-38, G-37 and G-8
On August 26, 1999, the Board filed additional amendments to the pending amendments at the Securities and Exchange Commission ("SEC") concerning the disclosure of consultants contributions.1 The pending amendments to rules G-38, on consultants, and G-8, on books and records, and revisions to the attachment page to Form G-37/G-38 would require dealers to obtain from their consultants2 information on the consultants political contributions to official(s) of an issuer and payments to state and local political parties (hereafter collectively referred to as "contributions") and to require dealers to report such information to the Board on Form G-37/G-38.3 The pending amendments contain a reasonable efforts provision which provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. The proposed amendments, among other things, add two additional requirements to the reasonable efforts provision. The Board has requested that the SEC delay the effective date of the amendments until April 1, 2000.
BACKGROUND
The Board believes it is reasonable to allow dealers to rely in good faith on information received from their consultants regarding contributions and that it would be almost impossible and unduly burdensome for dealers to investigate for contributions that were not reported by their consultants. As noted above, the pending amendments contain a reasonable efforts provision. This provision states that reasonable efforts include having a dealer: (1) state in the Consultant Agreement4 that Board rules require disclosure of consultant contributions, and (2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information.
After the Board filed the pending amendments with the SEC, the SEC staff recommended to Board staff that the reasonable efforts provision contain two additional requirements: (1) the dealer must disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule, and (2) the dealer must terminate the contract should the consultant fail to provide such report by the next calendar quarter after it was due, and the dealer must not make any further payments pursuant to the Consultant Agreement. The SEC staff stated that these additional requirements to the reasonable efforts provision should help ensure that all required information on contributions is obtained from consultants.
On April 19, 1999, the Board published the SECs additional requirements so that dealers could be given the opportunity to comment to the Board about the practical implications of the requirements.5 The Board has reviewed the comments received on the notice and has determined to adopt the SECs additional requirements and file rule language to include these requirements in the amendments pending at the SEC.
SUMMARY OF COMMENTS
The Board received five comments in response to its request for comments about the draft amendments incorporating the SECs additional requirements. Most of the commentators did not limit their comments specifically to the draft amendments, which were the subject of the notice requesting comment. The commentators addressed various aspects of both the draft amendments and those amendments pending approval at the SEC. In general, none of the commentators offered support for the draft amendments.
There was concern expressed by commentators about terminating the Consultant Agreement for failure by consultants to provide the required information. In addition, commentators were concerned about the prohibition from paying a consultant once the Consultant Agreement has been terminated because the consultant could be owed payment for work performed prior to the date of termination. The Board feels strongly that rule G-38 should require the disclosure of consultants contributions and dealers should be able to avail themselves of a reasonable efforts defense if they wish to do so. The provision relating to termination of the Consultant Agreement with a consultant that does not provide the required information is a pre-condition to invoking the reasonable efforts defense. A dealer that does not terminate the Consultant Agreement in these instances does not violate rule G-38, but it does lose its ability to invoke the reasonable efforts defense.
The Board believes that the issue of a prohibition on further payments to a consultant at the time of termination of the Consultant Agreement can be addressed by dealers including a specific provision in their Consultant Agreements. This provision can indicate that, on the date of termination of the Consultant Agreement by the dealer because of the consultants failure to report the required information, no further payments will be provided by the dealer to the consultant, including payments for services performed by the consultant prior to the date of termination. In addition, to address any uncertainty in the rule language about payments for prior services, the proposed amendments filed with the SEC revise rule G-38 to note specifically that the prohibition on further payments at the time of termination of the Consultant Agreement includes payments for services performed prior to the date of termination.
SUMMARY OF PROPOSED AMENDMENTS
As noted above, the SEC staff recommended that the reasonable efforts provision require that a dealer disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule. The pending amendments require dealers to receive from their consultants reports on any reportable contributions but do not contain a requirement for dealers to receive reports if no such contributions were made. In order to establish a complete record of the information being reported by consultants, the proposed amendments revise the pending amendments to require all dealers using consultants to receive reports every quarter from their consultants listing all reportable contributions or stating that the consultants made no reportable contributions, as appropriate. The dealer would then indicate the contributions reported or that the consultant had no contributions to report, as appropriate, on its Form G-37/G-38 for the applicable quarter. Pursuant to the SEC staffs recommendation, the proposed amendments also require dealers to disclose if they did not receive a report from a consultant during a particular quarter. Thus, if a consultant does not submit a report to the dealer for a particular quarter, the dealer must report that fact on its Form G-37/G-38. These additional requirements would constitute affirmative obligations on all dealers submitting Forms G-37/G-38 who use consultants, not merely pre-conditions to invoking the reasonable efforts defense.
The SEC staffs second suggested requirement for the reasonable efforts provision is that a dealer must terminate the Consultant Agreement should a consultant fail to provide the required information by the next calendar quarter after it was due, and the dealer must not make any further payments to the consultant pursuant to the Consultant Agreement.
The proposed amendments revise the pending amendments to require dealers that wish to rely on a reasonable efforts defense to include language in their Consultant Agreements to the effect that the Consultant Agreement will be terminated if the consultant fails to provide the dealer a report of the required information within the required time frame and that no further payments will be made to the consultant from the date of termination of the Consultant Agreement if the Consultant Agreement is terminated because the consultant did not provide the required information.
If, for any calendar quarter, a consultant fails to provide the dealer with a report of its contributions or a report noting that the consultant made no reportable contributions and such failure continues up to the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, the proposed amendments requires the dealer, if it wishes to rely on the reasonable efforts defense, to terminate the Consultant Agreement by the date the form for such second quarter must be sent to the Board (i.e., January 31, April 30, July 31 or October 31).6 When a Consultant Agreement is terminated by the dealer because of a consultants failure to provide reports about its reportable contributions, the proposed amendments require a dealer that wishes to rely on a reasonable efforts defense to note on its Form G-37/G-38 that the Consultant Agreement has been terminated for this reason and the date of termination. The proposed amendments also clarify that dealers that wish to rely on a reasonable efforts defense will not be permitted to make any further payments pursuant to the Consultant Agreement from the date of termination, even if money is owed to the consultant for services already rendered.
The failure by a dealer to include the termination and non-payment provisions in a Consultant Agreement or to enforce any such provisions that may be contained in the Consultant Agreement would not, in and of itself, constitute a violation of rule G-38. Such failure would instead preclude the dealer from invoking the reasonable efforts provision as a defense against a possible violation for failing to disclose consultant contribution information which the consultant may have withheld from the dealer.
The proposed amendments also contain a clarifying amendment to rule G-38(b)(i)(B), and a technical amendment to rule G-37(e)(i)(D) to conform to the amendments to rule G-38.
Finally, as noted above, the Board has requested that the SEC delay the effective date of the amendments until April 1, 2000. This delayed effective date should provide dealers with time to amend their Consultant Agreements to conform to the amendments and to revise their procedures for compliance with rules G-38 and G-8. Dealers should be aware that the amendments pending at the SEC contain a six-month "look-back" provision from the date of communication with an issuer. Thus, if a consultant communicates with an issuer on April 1, 2000, the consultant must disclose to the dealer the reportable contributions made by the consultant to the issuer from October 1, 1999, and the dealer must then disclose these contributions on the Form G-37/G-38 it files for the second quarter of 2000.
August 26, 1999
Text of Proposed Amendments Incorporated into Pending Amendments7
Rule G-38. Consultants
(a) No additional changes.
(b) Written Agreement
(i) No additional changes.
(A) No additional changes.
(B) if the consultant is not an individual, any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and
(C) No additional changes.
(ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.
(iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.
(iv) No additional changes.
(c) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.
(i) A broker, dealer or municipal securities dealer is required to obtain information on its consultants reportable political contributions and reportable political party payments beginning with a consultant=s first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).
(ii) No additional changes.
(iii) No additional changes.
(A) (B) No additional changes.
(C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:
(1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and
(2) no further payments, including payments owed for services performed prior to the date of termination, shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and
(D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.
(d) No additional changes.
(e) No additional changes.
(i)(A) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving reportable political contributions or reportable political party payments, listed by state; and (B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or
(ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or
(iii) No additional changes.
Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers
(a) No change.
(i) - (xvii) No change.
(xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:
(A) (G) No additional changes.
(H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));
(I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and
(J) the date of termination of any consultant arrangement.
(xix) No change.
(b) - (f) No change.
Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business
(a) (d) No change.
(e)(i)(A) (C) No change.
(D) any information required to be disclosed pursuant to section
(d)(e) of rule G-38; and(E) No change.
(ii) (iii) No change.
(f) (i) No change.
ENDNOTES
1. File No. SR-MSRB-98-8, Amendment No. 1. Comments submitted to the SEC should refer to this file number.
2. Rule G-38(a) defines a consultant as "any person used by a broker, dealer or municipal securities dealer to obtain or retain municipal securities business though direct or indirect communication by such person with an issuer on behalf of such broker, dealer or municipal securities dealer where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the broker, dealer or municipal securities dealer or any other person."
3. For more information about the pending amendments at the SEC, see "Requirements for Dealers to Report Their Consultants Political Contributions and Payments to Political Parties: Rules G-38 and G-8," MSRB Reports, Vol. 18, No. 2 (August 1998) at 3-10. The notice is also posted on the Boards web site at www.msrb.org.
4. Rule G-38 requires dealers who use consultants to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"). The rule requires that the Consultant Agreement, at a minimum, include the name, company, role and compensation arrangement of each consultant used by the dealer. The Consultant Agreement must be entered into before a consultant engages in any direct or indirect communication with an issuer on the dealers behalf.
5. See "Additional Requirements for Pending Amendments on Disclosure of Consultants Contributions: Rule G-38," MSRB Reports, Vol. 19, No. 2 (April 1999) at 3-7.
6. Rule G-37(e)(i) provides that each dealer must send to the Board two copies of Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31).
7. Underlining indicates new language; strikethrough denotes deletions.
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Rule G-38 Question and Answer
Agreement to Jointly Seek Underwriting Assignments
Q: Dealer Firm A and Dealer Firm B have entered into an agreement to jointly seek underwriting assignments. As part of this agreement, the two dealers have jointly submitted proposals to issuers. Dealer Firm A ultimately is selected to underwrite a negotiated sale of a primary offering of municipal securities (i.e., "municipal securities business" as defined in rule G-37). Dealer Firm B will not act as an underwriter on this offering but will assist Dealer Firm A in structuring the transaction. Dealer Firm A will compensate Dealer Firm B for the work it provides on the transaction. Is Dealer Firm B a consultant to Dealer Firm A pursuant to rule G-38, on consultants?
A: Yes. Dealer Firm B is a consultant to Dealer Firm A because, pursuant to the definition of consultant in rule G-38(a)(i), Dealer Firm B is: (1) used by Dealer Firm A to obtain municipal securities business, (2) through direct or indirect communication with an issuer on behalf of Dealer Firm A, and (3) the communication is undertaken by Dealer Firm B in exchange for, or with the understanding of receiving, payment from Dealer Firm A. Moreover, Dealer Firm B is not exempt from the definition of consultant since it is not a municipal finance professional, and its sole basis of compensation is not the actual provision of legal, accounting or engineering advice, services or assistance. In addition, the Board believes that, even though Dealer Firm B is providing substantive work on the transaction, any dealer used by another dealer (other than a member of the syndicate) to assist in obtaining or retaining municipal securities business is acting as a consultant pursuant to rule G-38.
March 4, 1999
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