Amendment Approved To Rule G-38(c), On Consultants, To Give Dealers The Option Of Disclosing Their Consulting Arrangements To Issuers On Either An Issue-Specific Or Issuer-Specific Basis
On September 29, 1998, the Securities and Exchange Commission (SEC) approved an amendment to rule G-38, on consultants, that gives 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.1
Rule G-38, on consultants, requires brokers, 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.
The Board adopted the amendment to rule G-38 (c) to address certain issues that have arisen in the context of frequent issuers of municipal securities and in the co-manager selection process. The amendment gives 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.
Prior to the amendment, the issue-specific nature of the disclosure requirement created 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. Prior to the amendment, if a dealer was using a consultant to obtain a syndicate slot in each such issue, then the dealer was required to disclose the same information to the same issuer month after month and possibly week after week. In addition, the Board learned that dealers who used a consultant to help obtain co-manager business sometimes had difficulty complying with rule G-38(c). 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 prior to amendment.
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 amended 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 amendments, 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 at or prior to the consultant’s first direct or indirect communication with that issuer for any municipal securities business being sought.2 To ensure that such information, once disclosed, remains current, the amendments also 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.3 This amendment also clarifies that the annual updating requirement for dealers disclosing information on an issuer-specific basis is keyed off the previous full disclosure of the consultant’s name, company, role and compensation arrangement (and not any interim disclosure of changes to such information). 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).
October 13, 1998
TEXT OF PROPOSED AMENDMENTS4
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) at or prior to the consultant’s first direct or indirect communication with the issuer 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 concerning each consultant’s name, company, role and compensation arrangement, 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 See Securities Exchange Act Release No. 40499 (Oct. 1, 1998), 63 FR 53739 (1998).
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 Underlining indicates additions; strikethrough denotes deletions.
