Amendments Filed to Rules G-38 and G-8 Regarding the Reporting of Consultants’ Names and Roles

On January 24, 2000, the Board filed with the Securities and Exchange Commission (“SEC” or “Commission”) amendments to rules G-38, on consultants, and G-8, on books and records. [1] The amendments clarify the requirements for the reporting of consultants’ names and roles. The Board has requested that the SEC delay the effectiveness of the amendments until April 1, 2000, which is the effective date for recently approved amendments to rules G-38, G-37 and G-8 as well as the attachment page to Form G-37/G-38. [2]

Summary of Amendments

The Board has received inquiries from dealers that have indicated that there is confusion about certain information required to be reported in Section IV of Form G-37/G-38 as well as the attachment page to the form. [3] One area of confusion concerns whether an individual’s name must be disclosed on Form G-37/G-38 in each instance in which the dealer lists a consultant. Part of this confusion is due to the format of Section IV of the form as well as the attachment page. Dealers list their consultants in Section IV of Form G-37/G-38 and they must provide additional information about each consultant on separate attachment pages. Under Section IV, there is one column labeled “Name of Consultant” and another column labeled “Consultant Company Name.” On the attachment page to the form, the first line indicates that a dealer is to report the “Name of Consultant” and the next line indicates the reporting of the “Consultant Company Name.” The Instructions for Completing and Filing Form G-37/G-38 [4] state that a dealer should list the name of each consultant along with the consultant company name under Section IV and on the attachment page a dealer should list the name of the consultant as well as the consultant company name.

A dealer must determine whether its consultant is an individual or a company based upon its Consultant Agreement [5] with the consultant. [6] If the Consultant Agreement is with an individual, then only the individual’s name should be reported on the form and not a company name. Conversely, if the Consultant Agreement is with a company, only the company’s name should be reported and not an individual’s name.

The identification of a dealer’s consultants has become even more significant with the recent amendments to rules G-38, G-8 and G-37 that will become effective on April 1, 2000. [7] Pursuant to those amendments, if an individual is a consultant, this individual will relay to the dealer his or her reportable political contributions and reportable political party payments and the reportable contributions and reportable payments of any political action committee (“PAC”) controlled by such individual. If the consultant is a company, the company will relay its reportable contributions and reportable 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. Dealers will report this contribution and payment information to the Board on Form G-37/G-38 by contributor category (i.e., company, individual, company controlled PAC or individual controlled PAC). [8]

The current language of rules G-38 and G-8 and the formats of Form G-37/G-38 and the attachment page, as well as the Instructions, are not as clear as they could be about the information required for identifying a consultant. The proposed amendments will amend rule G-38 to remove the separate references to the consultant’s company name from the requirements regarding the Consultant Agreement, the disclosure to issuers and the disclosure to the Board. In addition, the proposed amendments will remove the requirement in rule G-8 for dealers to maintain a separate record of the company name. The proposed amendments will also revise the formats of Section IV of Form G-37/G-38 and the attachment page to state “Name of Consultant (pursuant to Consultant Agreement)” and the reference to the “Consultant Company Name” will be deleted. Thus, a dealer will provide the name of an individual, if the consultant is an individual, or of a company, if the consultant is a company, depending upon whether the dealer has entered into a Consultant Agreement with such individual or such company. These revisions will eliminate existing ambiguities under the rules resulting from the stated requirement that information regarding both an individual and a company be provided. This also will make it clearer to dealers and the public about who or what is responsible for relaying information about reportable contributions and payments to the dealers.

Another area addressed by the proposed amendments concerns the role of the consultant. Pursuant to rule G-38, a dealer is required to include within the Consultant Agreement the role of the consultant, to disclose this role to the issuer and to the Board and, pursuant to rule G-8, to maintain a record of the role. The Instructions for Completing and Filing Form G-37/G-38 state that, in describing a consultant’s role, a dealer should include the state or geographic area in which the consultant is working on behalf of the dealer. In addition, the Board issued a Question and Answer notice on rule G-38 in which it stated that the role to be performed by a consultant may be described in general terms on Form G-37/G-38; however, dealers must include the state or geographic area in which the consultant is working on behalf of the dealer. [9]

From a review of the Forms G-37/G-38 submitted by dealers, there are a number of instances in which dealers have not reported the state or geographic area in which their consultants are working for them. The proposed amendments will revise rules G-38 and G-8 to explicitly require the reporting of the state or geographic area in which a consultant is working on behalf of a dealer in the description of the consultant’s role. The proposed amendments will also revise the attachment page to Form G-37/G-38 to include a parenthetical phrase in the section for reporting the role to be performed by the consultant to note that dealers should report the state or geographic area in which the consultant is working on behalf of the dealer.

February 1, 2000

TEXT OF PROPOSED AMENDMENTS [10]

Rule G-38. Consultants

(a) No change.

(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 (including the state or geographic area in which the consultant is working on behalf of the broker, dealer or municipal securities dealer) 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) – (C) No change.

(ii) – (iv) No change.

(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 (including the state or geographic area in which the consultant is working on behalf of the broker, dealer or municipal securities dealer) 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.

(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 (including the state or geographic area in which the consultant is working on behalf of the broker, dealer or municipal securities dealer), 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. Such reports shall indicate the total dollar amount of payments made to each consultant during the report period. 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) – (iii) No change.

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:

(A) a listing of the name, [company,] business address, role (including the state or geographic area in which the consultant is working on behalf of the broker, dealer or municipal securities dealer) and compensation arrangement of each consultant;

(B) – (J) No change.

(xix) No change.

(b) - (f) No change.

* * *

ENDNOTES

[1] File No. SR-MSRB-00-2. Comments submitted to the Commission should refer to this file number.

[2] See Securities Exchange Act Release No. 42205 (December 7, 1999), 64 FR 69808 (December 14, 1999) (“SEC Approval Order”).

[3] Rule G-38(d) states that each dealer shall send to the Board reports on Form G-37/G-38 of all consultants used by the dealer during each calendar quarter. Such reports must include, among other things, for each consultant, the consultant’s name, company, role and compensation arrangement.

[4] The Instructions for Completing and Filing Form G-37/G-38 are printed in the MSRB Rule Book (January 1, 2000) at 191-193 and the Instructions are posted on the Board’s web site (www.msrb.org) under the links for rules G-37 and G-38.

[5] Rule G-38(b) states that each dealer that uses a consultant shall evidence the consulting arrangement by a writing (the “Consultant Agreement”) that sets forth, at a minimum, the name, company, role and compensation arrangement of each such consultant.

[6] See Question and Answer Notice: Rule G-38 dated May 20, 1998, MSRB Rule Book (January 1, 2000) at 210. In this notice, concerning bank affiliates and the definition of payment, the Board stated that “each dealer (bank or securities firm) should determine whether the affiliate or individual employee(s) of the affiliate is its consultant(s), and must then ensure compliance with rule G-38, including the contractual arrangements and disclosures required by the rule.”

[7] See SEC Approval Order, supra note 1.

[8] Pursuant to rule G-37, on political contributions and prohibitions on municipal securities business, dealers are also required to report their contributions and payments in Sections I and II of Form G-37/G-38 by contributor category (i.e., dealer, dealer controlled PAC, municipal finance professional controlled PAC, municipal finance professionals and executive officers).

[9] See rule G-38 Question and Answer number 1 dated November 18, 1996, MSRB Rule Book (January 1, 2000) at 210. The rule G-38 Questions and Answers are also posted on the Board’s web site at www.msrb.org.

[10] Underlining indicates new language; brackets denote deletions.