Question and Answer Notice: Rules G-37 and G-38

Bank Affiliates: Individuals as Municipal Finance Professionals or Consultants

Q: In a Question and Answer Notice relating to rule G-38 dated May 20, 1998, the MSRB discussed a scenario in which a bank and its employees communicate with an issuer on behalf of an affiliated broker, dealer or municipal securities dealer (a “dealer”) to obtain municipal securities business for that dealer in return for certain “credits.” These credits, which do not involve any direct or indirect cash payments from the dealer to the bank or its employees, are used for internal purposes to identify the source of business referrals. The MSRB observed that, even if there is no immediate transfer of funds or anything of value to an affiliate or individual employed by the affiliate, the referral credits would still be considered payment for purposes of rule G-38 if such credits eventually (e.g., at the end of the fiscal year) result in compensation to the affiliate or individual employed by the affiliate for referring municipal securities business to the dealer. The MSRB concluded that if the dealer or any other person eventually gives anything of value (e.g., makes a “payment”) to the affiliate or individual based, even in part, on the referral, then the affiliate or individual is a consultant for purposes of rule G-38. Does this mean that in all cases where a bank’s employee refers municipal securities business to an affiliated dealer, such bank employee is necessarily a consultant under rule G-38 rather than a municipal finance professional of the dealer under rule G-37?

A: No. The purpose of the Question and Answer Notice was to illustrate that the term “payment” as used in rule G-38 is not limited to cash payments but also includes anything of value, such as referral credits, that ultimately results in cash or non-cash compensation to the bank employee. The MSRB was not providing guidance as to whether such bank employee should be considered a consultant rather than a municipal finance professional of the dealer. As the MSRB noted in footnote 1 to the Question and Answer Notice, municipal finance professionals are excluded from the definition of consultant. If a dealer has an arrangement whereby referral credits are given to an employee of a bank affiliate in exchange for a referral of municipal securities business, the dealer should first determine whether the bank employee is a municipal finance professional of the dealer. As a threshold question, the dealer must determine whether such bank employee is a person associated with the dealer within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).[1] If the bank employee is an associated person of the dealer and has solicited municipal securities business on behalf of the dealer, the employee would be a municipal finance professional of the dealer subject to the provisions of rule G-37, regardless of whether such employee has received a referral credit or any other payment.[2] Such employee, as a municipal finance professional of the dealer, is excluded from being a consultant of the dealer under rule G-38. If the bank employee is not an associated person of the dealer and has received such referral credits as a result of a solicitation of municipal securities business for the dealer, the employee would be a consultant of the dealer subject to the provisions of rule G-38.

June 6, 2001