The Definition of Solicitation Under Rules G-37 and G-38 with the SEC

INTERPRETIVE NOTICE ON THE DEFINITION OF SOLICITATION UNDER RULES G-37 AND G-38

Revised Rule G-38, on solicitation of municipal securities business, recently adopted by the Municipal Securities Rulemaking Board (“MSRB”) defines “solicitation” as any direct or indirect communication with an issuer for the purpose of obtaining or retaining municipal securities business.  This definition is important for purposes of determining whether payments made by a broker, dealer or municipal securities dealer (“dealer”) to persons who are not affiliated persons of the dealer would be prohibited under revised Rule G-38.[1]  In addition, the definition is central to determining whether communications by dealer personnel would result in such personnel being considered municipal finance professionals (“MFPs”) of the dealer for purposes of Rule G-37.  This notice provides interpretive guidance relating to the status of certain types of communications as solicitations for purposes of Rules G-37 and G-38.

Intent

The concept of solicitation under Rules G-37 and G-38 includes the element of intent in that the communication must have a purpose of obtaining municipal securities business.  The determination of whether a particular communication is a solicitation is dependent upon the specific facts and circumstances relating to such communication.  The examples described below are illustrative and are not the only instances in which a solicitation may be deemed to have or have not occurred.

Limited Communications with Issuer Representative

If an issuer representative asks an affiliated person of a dealer whether the dealer has municipal securities capabilities, such affiliated person generally would not be viewed as having solicited municipal securities business if he or she provides a limited affirmative response, together with either providing the issuer representative with contact information for an MFP of the dealer or informing the issuer representative that dealer personnel who handle municipal securities business will contact him or her.   Similarly, if an issuer representative is discussing governmental cash flow management issues with an affiliated person of a dealer who concludes, in his or her professional judgment, that an appropriate means of addressing the issuer’s needs may be through an issue of municipal securities, the affiliated person generally would not be viewed as having solicited business if he or she provides a limited communication to the issuer representative that such alternative may be appropriate, together with either providing the issuer representative with contact information for an MFP or informing the issuer representative that dealer personnel who handle municipal securities business will contact him or her.

In the examples above, if the affiliated person receives compensation such as a finder’s or referral fee for such business or if the affiliated person engages in other activities that could be deemed a solicitation with respect to such business (for example, attending presentations of the dealer’s municipal finance capabilities or responding to a request for proposals), the affiliated person generally would be viewed as having solicited the municipal securities business.[2]

Promotional Communication

The MSRB understands that an affiliated person of a dealer may provide information to potential clients and others regarding the general capabilities of the dealer through either oral or written communications.   Any such communication that is not made with the purpose of obtaining or retaining municipal securities business would not be considered a solicitation.  Thus, depending upon the specific facts and circumstances, a communication that merely lists the significant business lines of a dealer without further descriptive information and which does not give the dealer’s municipal securities practice a place of prominence within such listing generally would not be considered a solicitation unless the facts and circumstances indicate that it was aimed at obtaining or retaining municipal securities business.  To the extent that a communication, such as a dealer brochure or other promotional materials, contains more than a mere listing of business lines, such as brief descriptions of each business line (including its municipal securities capabilities), determining whether such communication is a solicitation depends upon whether the facts and circumstances indicate that it was undertaken for the purpose of obtaining or retaining municipal securities business.  The nature of the information provided and the manner in which it is presented are relevant factors to consider.  Although no single factor is necessarily controlling in determining intent, the following considerations, among others, may often be relevant:   (i) whether the municipal securities practice is the only business line included in the communication that would reasonably be of interest to an issuer representative; (ii) whether the portions of the communication describing the dealer’s municipal securities capabilities are designed to garner more attention than other portions describing different business lines; (iii) whether the communication contains quantitative or qualitative information on the nature or extent of the dealer’s municipal securities capabilities that is promotional in nature (e.g., quantitative or qualitative rankings, claims of expertise, identification of specific transactions, language associated with “puffery,” etc.); and (iv) whether the dealer is currently seeking to obtain or retain municipal securities business from the issuer.

Work-Related Communications

Communications that are incidental to undertaking tasks to complete municipal securities business for which the dealer has already been engaged generally would not be solicitations.  For example, if a dealer has engaged an independent contractor as a cash flow consultant to provide expert services on a negotiated underwriting for which the dealer has already been selected and the contractor communicates with the issuer on cash flow matters relevant to the financing, such communication would not be a solicitation under revised Rule G-38.  Similarly, if a dealer has already been selected to serve as the underwriter for an airport financing and a non-MFP affiliated person of the dealer who normally works on airline corporate matters is used to provide his or her expertise to complete the financing, communications in this regard by the affiliated person with the issuer would not be a solicitation under revised Rule G-38.  In addition, the fact that the work product of persons such as those described above may be used by MFPs of the dealer in their solicitation activities would not make the producer of the work product a solicitor unless such person personally presents his or her work to the issuer in connection with soliciting the municipal securities business.

Communications with Conduit Borrowers

The MSRB understands that dealers often work closely with private entities on their capital and other financing needs.  In many cases, this work may evolve into a conduit borrowing through a conduit issuer.  Although the ultimate obligor on such a financing is the private entity, if the dealer acts as underwriter for a financing undertaken through a conduit issuer on other than a competitive bid basis, it is engaging in municipal securities business for purposes of Rule G-37. The selection of the underwriter for such a financing frequently is made by the conduit borrower. While in many cases conduit issuers have either formal procedures or an informal historical practice of accepting the dealer selected by the conduit borrower, some conduit issuers may set minimum standards that dealers must meet to qualify to underwrite a conduit issue, and other conduit issuers may have a slate of dealers selected by the conduit issuer from which the conduit borrower chooses the underwriter for its issue.  Still other conduit issuers may defer to the conduit borrower’s selection of lead underwriter but may require the underwriting syndicate to include additional dealers selected by the issuer or selected by the conduit borrower from a slate of issuer-approved underwriters, often with the purpose of ensuring participation by local dealers or historically disadvantaged dealers.  A smaller number of conduit issuers retain more significant control over which dealers act as underwriters, either by making the selection for the conduit borrower or by considering the conduit borrower’s selection to be merely a suggestion which in some cases the conduit issuer does not follow.  However, in virtually all cases, the conduit issuer will maintain ultimate power to control which dealer underwrites a conduit issue since the conduit issuer has discretion to withhold its agreement to issue the securities through any particular dealer.

From a literal perspective, any communication by a dealer with a conduit borrower that is intended to cause the borrower to select the dealer to serve as underwriter for a conduit issue could be considered a solicitation of municipal securities business.  This is because the conduit borrower eventually communicates its selection of the dealer to act as underwriter to the conduit issuer for approval.  This series of communications would, by its terms, constitute an indirect communication by the dealer through the conduit borrower to the conduit issuer with the intent of obtaining municipal securities business.

However, the MSRB believes that a dealer’s communication with a conduit borrower generally should not be deemed an indirect solicitation of the issuer unless a reasonable nexus can be established between the making of contributions to officials of the conduit issuer within the meaning of Rule G-37 and the selection of the underwriter for such conduit financing. A determination of whether such a reasonable and material nexus could exist depends on the specific facts and circumstances.

Further, if an affiliated person of a dealer who is providing investment banking services and corporate financing advice to a private company concludes, in his or her professional judgment, that an appropriate financing alternative may be a conduit financing, a limited communication to the company by the affiliated person that such financing alternative may be appropriate, together with the provision to the company of contact information for an MFP of the dealer, generally would not be presumed to be a solicitation.  Alternatively, the affiliated person could inform the company that dealer personnel who handle municipal securities business will contact it.  In addition, if a dealer has already been selected by the conduit borrower to serve as the underwriter for a conduit financing and a non-MFP affiliated person of the dealer communicates with the conduit borrower in furtherance of the financing, such communications by the affiliated person would not be a solicitation under revised Rule G-38.

Communications by Joint Venturers and Other Professionals

So long as non-affiliated persons providing legal, accounting, engineering or other professional services in connection with specific municipal securities business are not being paid directly or indirectly for their solicitation activities (i.e., they are paid solely for their provision of legal, accounting, engineering or other professional services with respect to the business), they would not become subject to revised draft Rule G-38.  Similarly, in the case of joint ventures created by a dealer with other professionals seeking to engage in municipal securities business, so long as the members of the joint venture are making good faith efforts to be engaged to undertake bona fide roles in the business, the MSRB would view any communications by a member of the joint venture with the issuer as being made on its own behalf and not on behalf of the dealer.  However, if payments are being made by or on behalf of the dealer to such other professionals separate from the payments they may receive for actual professional services rendered in connection with an issue, their communications with the issuer could be considered solicitations on behalf of the dealer.

Footnotes to Notice of Filing