(Volume 16, Number 2) June 1996
Route To: Manager, Muni Department Underwriting Trading Sales Public Finance Compliance
Questions and Answers Notice Published The notice sets forth general guidance on the various provisions of rule G-38.
On January 17, 1996, the Commission approved Board rule G-38 on consultants.[1] The rule will become effective on March 18, 1996. The Board adopted the rule because it was concerned about dealers' increasing use of consultants to obtain or retain municipal securities business, notwithstanding the requirements of rule G-37 on political contributions and prohibitions on municipal securities business, rule G-20 on gifts and gratuities, and rule G-17 on fair dealing. Rule G-38 requires dealers to disclose information about their consultant arrangements to issuers and the public. Recently, the Board has received inquiries from market participants concerning the applicability of various provisions of the rule. In order to assist the municipal securities industry and, in particular, brokers, dealers and municipal securities dealers in understanding and complying with the provisions of rule G-38, the Board has determined to publish this notice of interpretation which sets forth, in question-and-answer format, general guidance on rule G-38. The Board will continue to monitor the application of rule G-38, and, from to time, will publish additional notices of interpretations, as necessary.
1. Q: Who is considered a "consultant" pursuant to rule G-38?
A: Rule G-38(a)(i) defines "consultant" as any person used by a dealer to obtain or retain municipal securities business[2] through direct or indirect communication by such person with an issuer on behalf of such dealer 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. The definition specifically excludes "municipal finance professionals" of the dealer, as that term is defined in rule G-37(g)(iv), because such individuals are covered by the requirements of rule G-37. The definition also excludes any person whose sole basis of compensation from the dealer is the actual provision of legal, accounting or engineering advice, services or assistance in connection with the municipal securities business that the dealer is seeking to obtain or retain.
2. Q: What are examples of persons who would be excluded from the definition of consultant for providing legal, accounting or engineering advice, services or assistance to a dealer in connection with municipal securities business?
A: The exclusion would apply, for example, to a lawyer retained to conduct a legal analysis on a particular transaction contemplated by the dealer, or to review local regulations; an accountant retained to conduct a tax analysis or to scrutinize financial reports; or an engineer retained to perform a technical review or feasibility study. The exemption is intended to ensure that professionals who are engaged by the dealer solely to perform substantive work in connection with municipal securities business are not brought within the definition of consultant as long as their compensation is in consideration of only those professional services actually provided in connection with such municipal securities business.
3. Q: Would an attorney hired by a dealer to conduct a legal analysis on a transaction being contemplated by the dealer and then subsequently paid a finder's fee by the dealer for bringing that municipal securities business to the dealer be considered a consultant?
A: Yes, any attorney or other professional used by the dealer as a "finder" for municipal securities business is considered a consultant pursuant to rule G-38.
4. Q: Does the definition of consultant also encompass third parties who initiate contact with dealers to offer their services in obtaining or retaining municipal securities business through direct or indirect communication by such person with an issuer official?
A: Yes. The definition of consultant in rule G-38 does not distinguish between instances in which the dealer initiates contact with a third party to act as a consultant and instances in which the third party initiates contact.
5. Q: Does the definition of consultant encompass a lobbyist hired by the dealer if the only activity the lobbyist engages in on behalf of the dealer is to lobby state legislators for legislation which grants issuers authority to issue certain types of municipal securities?
A: No; however, if the lobbyist is also used by the dealer to obtain or retain municipal securities business through direct or indirect communication with an issuer on the dealer's behalf where the communication is undertaken for payment from the dealer or any other person, then the lobbyist would meet the definition of consultant.
6. Q: If an affiliated company of a bank introduces one of its customers (a municipal issuer) to the bank's dealer department for purposes of engaging in municipal securities business, and the dealer pays the affiliated company for this activity, would the affiliated company be a "consultant" under rule G-38?
A: Any person used by a dealer as a "finder" for municipal securities business would be considered a consultant under rule G-38. In this example, if the affiliated company is used by the bank dealer to obtain or retain municipal securities business through direct or indirect communication by the affiliated company with the issuer on the dealer's behalf, and the affiliated company does so with the understanding of receiving payment from the dealer, then the affiliated company would be a consultant.
7. Q: Does the definition of consultant encompass a person retained by an affiliate or parent of a dealer if any portion of that person's activity relates to efforts to obtain municipal securities business for the dealer?
A: Yes, because the definition of consultant includes those who receive payment from the dealer or "any other person" for use in obtaining or retaining municipal securities business through communication with an issuer on behalf of the dealer. In such instances, the dealer would need to be in compliance with the provisions of rule G-38, as discussed below.
8. Q: Rule G-38 requires dealers to evidence their consulting arrangements in writing. What must be included in this Consultant Agreement?
A: The Consultant Agreement must include, at a minimum, the name, company, role and compensation arrangement of each consultant used by the dealer.
9. Q: When must the dealer enter into the Consultant Agreement?
A: The Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on the dealer's behalf.
10. Q: Does rule G-38 require a dealer to disclose its consulting arrangements to an issuer with which it is engaging or seeking to engage in municipal securities business?
A: Yes; such disclosures must be in writing.
11. Q: What must be included in these written disclosures to issuers?
A: The written disclosures must include, at a minimum, the name, company, role and compensation arrangement with the consultant or consultants.
12. Q: When are dealers required to make their written disclosures concerning consultants to issuers?
A: The written disclosures must be made 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.
13. Q: Are dealers required to submit any reports concerning their consultants to the Board?
A: Yes. Dealers must submit to the Board, on a quarterly basis, reports of all consultants used by the dealers. These reports must be submitted on Form G-37/G-38.
14. Q: What information concerning consultants must be included on Form G-37/G-38?
A: For each consultant, dealers must report, in the prescribed format (refer to Form G-37/G-38), 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. 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.
15. Q: If a dealer includes information concerning a particular consultant on a Form G-37/G-38 submission, must the dealer continue to submit information concerning this consultant on subsequent Form G-37/G-38 submissions?
A: As long as the dealer continues to use the consultant to obtain or retain municipal securities business (i.e., has a continuing arrangement with the consultant), the dealer must report information concerning such consultant every quarter, whether or not compensation is paid to the consultant during the reporting period.
16. Q: What are the due dates for the submission of Form G-37/G-38?
A: The quarterly due dates are within 30 calendar days after the end of each calendar quarter (i.e., January 31, April 30, July 31 and October 31).
17. Q: Will the Board accept fax transmissions of Form G-37/G-38?
A: No. Dealers are required to submit Forms G-37/G-38 to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending.
18. Q: Are Forms G-37/G-38 submitted by dealers available to the public for review?
A: Yes. These forms are available to the public for inspection and photocopying at the Board's Public Access Facility in Alexandria, Virginia, and for review by the agencies charged with enforcement of Board rules.
19. Q: If a dealer has adopted a voluntary ban on political contributions and/or does not use consultants, is the dealer still required to submit a Form G-37/G-38?
A: Dealers are required to submit a Form G-37/G-38 to the Board if ANY one of the following occurred: (i) reportable political contributions or payments to political parties were made during the reporting period; (ii) the dealer engaged in municipal securities business (as defined in rule G-37(g)(vii)) during the reporting period; or (iii) the dealer used consultants during the reporting period (i.e., new or continuing relationships with consultants). Dealers are not required to submit a Form G-37/G-38 for a reporting period if all three of the following conditions are met for that particular reporting period: (i) there were no reportable political contributions or payments made to political parties; (ii) the dealer did not engage in municipal securities business; and (iii) the dealer did not use consultants.
20. Q: What records concerning consultants must dealers maintain?
A: Rule G-8, on books and records, requires dealers to maintain: (i) a listing of the name, company, role and compensation arrangement of each consultant; (ii) a copy of each Consultant Agreement referred to in rule G-38(b); (iii) a listing of the compensation paid in connection with each such Consultant Agreement; (iv) where applicable, a listing of the municipal securities business obtained or retained through the activities of each consultant; (v) 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 dealer to obtain or retain municipal securities business with each such issuer; and (vi) the date of termination of any consultant arrangement.
21. Q: How long must dealers maintain their records concerning consultants?
A: Rule G-9, on preservation of records, requires dealers to maintain their records concerning consultants for a six-year period.
February 28, 1996
[1] Securities Exchange Act Release No. 36727 (Jan. 17, 1996).
[2] "Municipal securities business" as used in rule G-38 has the same meaning as in rule G-37(g)(vii): (i) negotiated underwriting (if the dealer is a manager or syndicate member);(ii) private placement; (iii) the provision of financial advisory or consultant services to or on behalf of an issuer (on a negotiated bid basis); or (iv) the provision of remarketing agent services (on a negotiated bid basis).
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