Additional Questions and Answers: Rules G-37 and G-38

Today the MSRB filed with the Securities and Exchange Commission interpretative Questions and Answers relating to Rules G-37, on political contributions and prohibitions on municipal securities business, and G-38, on consultants. The Questions and Answers will assist dealers in properly completing their Forms G-37/G-38 by clarifying the information that must be reported.

February 25, 2004

* * * * *

Questions and Answers: Rule G-37

Q. Are dealers required to identify the type of contributor (i.e. dealer, dealer controlled PAC, MFP, MFP controlled PAC, or non-MFP executive officer) when completing Form G-37/G-38?

A. Yes. Rule G-37 (e)(i)(2) requires dealers to report to the Board on its Form G-37/G-38 the contribution or payment amount made and the contributor category of each of the following persons and entities making such contributions or payments during each calendar quarter: the broker, dealer or municipal securities dealer; each municipal finance professional; each non-MFP executive officer; and each political action committee controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional. It is not sufficient to list contributors as “employee” or “registered representative.” For each contribution listed on the Form G-37/G-38, one of the specified contributor categories must be identified.

Q. How should contributions to officials of issuers who are seeking federal office be reported on Form G-37/G-38?

A. Under Rule G-37, contributions given to officials of issuers who are seeking election to federal office, such as the U.S. House of Representatives, Senate or the Presidency, must be reported on the dealer’s quarterly Form G-37/G-38 unless they meet the de minimis exception. When reporting these contributions, dealers must report information identifying the issuer official. Firms may additionally report information identifying the federal office sought. For example, if a sitting Governor of a state were running for a seat in the U.S. House of Representatives, and the Governor is an “official of an issuer,” the form must list the state where the official is serving as Governor, and the Governor’s complete name and title. Dealers may also report the federal office sought by the issuer official.

Questions and Answers: Rule G-38

Q: Pursuant to Rule G-38, what information is a dealer required to disclose regarding money paid to its consultants?

A: Rule G-38 requires that dealers disclose information relating to money paid to consultants in three separate areas on Form G-37/G-38. These disclosures relate to the consultant’s compensation arrangement, dollar amounts paid to the consultant in connection with specific municipal securities business, and the total dollar amount paid to the consultant during the reporting period.

Dealers should describe their consultants’ “compensation arrangements” clearly and with as much specificity as possible. The arrangement should correlate with the information reported on the form concerning the “total dollar amount paid” to the consultant during the reporting period. It is not sufficient to disclose a compensation arrangement in vague or generalized terms, such as “a monthly retainer not related to any specific transaction,” “a percentage of net revenues received for transactions with xyz issuer,” or “a percentage of management fees and takedown from specified transactions.” Dealers must report information on their consultants’ compensation arrangements with specificity, for example, by providing the dollar amount of the monthly retainer or the numeric formulations used to calculate compensation. Dealers should also provide the dollar amount or numeric formulations used to calculate success fees, discretionary bonuses, and similar payments made or to be made to consultants. For example, it is not sufficient to report that a discretionary bonus or success fee will be “equal to a percentage of the net investment banking fees received on certain transactions.” Rather, the dealer should disclose the fee or payment as a specific (numeric) percentage of profits.

Dealers also are required to disclose on Form G-37/G-38 information relating to “municipal securities business obtained or retained” by the consultant. This section of the form requires the dealer to list each item of business separately and, if applicable, to indicate the dollar amount paid to the consultant in connection with each item of municipal securities business listed. Dealers are reminded to list the relevant municipal securities business obtained or retained in this section of Form G-37/G-38 even if payments were not paid to the consultant in connection with the listed municipal securities business during that quarter.

Finally, dealers are required to disclose on Form G-37/G-38 information relating to “total dollar amounts paid to the consultant during the reporting period.” The dealer must report the cumulative total of all payments made to its consultant during the particular quarter. Such payments include compensation paid for that quarter (including reimbursed expenses) and the total dollar amounts paid, if any, in connection with particular municipal securities business (including discretionary bonuses, success fees or similar payments). The dealer also should report any payments made to its consultant even if such payments were not made in connection with a particular item of municipal securities business.

For additional guidance in this area, please review Q&A number 2 (dated November 18, 1996) in the MSRB Rule Book following Rule G-38; this Q&A can also be found on the MSRB’s website at [click here to access Rule G-38 Interpretive Notice (June 8, 2006)].

Q: If a consultant obtains municipal securities business in one quarter, and the dealer pays the consultant in connection with that business during a subsequent quarter, how should the dealer disclose this information on its Form G-37/G-38?

A: The dealer should disclose on its Form G-37/G-38 in the “municipal securities business obtained or retained” section the municipal securities business obtained or retained by its consultant during the relevant quarter whether or not payments connected with that business were made during that quarter. If the dealer subsequently makes a payment to the consultant in connection with that particular business, the dealer should disclose that payment in the “municipal securities business obtained or retained” section for the quarter in which such payment was made and should indicate in this section that the business was previously disclosed and the quarter for which it was disclosed (e.g., second quarter 2003). For additional guidance, please review Q&A number 14 (dated February 28, 1996) in the MSRB Rule Book following Rule G-38; this Q&A can also be found on the MSRB’s website at [click here to access Rule G-38 Interpretive Notice (June 8, 2006)].

Q: If a dealer has a continuing relationship with a consultant, is the dealer required to list the consultant on its Form G-37/G-38 for each quarterly reporting period even if the dealer did not pay the consultant any compensation and/or the consultant did not undertake any affirmative efforts on behalf of the dealer to obtain or retain municipal securities business during that quarter?

A: Yes, the dealer must continue to list the consultant and disclose the required consultant information for each quarterly reporting period during which there is a continuing relationship even if the consultant received no compensation or other payment from the dealer, and even if the consultant did not undertake any affirmative efforts on behalf of the dealer to obtain or retain municipal securities business.

Q: Under the section of Form G-37/G-38 entitled “Role to be Performed by Consultant,” is a dealer required to list the geographic area or areas where the consultant is working on the dealer’s behalf?

A: Yes, the dealer must specifically list each state or geographic area where the consultant is working on behalf of the dealer. For additional guidance in this area, please review Q&A number 1 (dated November 18, 1996) in the MSRB Rule Book following Rule G-38; this Q&A can also be found on the MSRB’s website at [click here to access Rule G-38 Interpretive Notice (June 8, 2006)].