Callable securities: "catastrophe" calls. This will acknowledge receipt of your letter dated October 20, 1977 which has been referred to me for reply. In your letter you request an interpretation of the provisions in rules G-12 and G-15 requiring that the dollar price for transactions in callable securities effected on a yield basis be priced to the lower of price to call or price to maturity. (See rules G-12(c)(v)(I) and G-15(a)(viii))[*].

At its meeting held October 25-26, 1977, the Board confirmed that the requirements in rules G-12 and G-15 relating to pricing to call do not include "catastrophe" calls, that is, calls which occur as a result of events specified in the bond indenture which are beyond the control of the issuer. MSRB interpretation of November 7, 1977.

 

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[*] [Currently codified at rule G-15(a)(i)(A)(5)]

The Municipal Securities Rulemaking Board (the "Board") has received a number of inquiries concerning Board rules G-8 and G-9. These rules require municipal securities brokers and municipal securities dealers to make and keep current certain specified records concerning their municipal securities business and to preserve such records for specified periods of time. This interpretive notice addresses several of the more frequent inquiries received by the Board regarding these rules.

General Purposes of Recordkeeping Rules

The Board’s recordkeeping rules are designed to require organizations engaged in the municipal securities business to maintain appropriate records concerning their activities in such business. In writing the rules, the Board adopted the approach of specifying in some detail the information to be reflected in the various records. The Board believed that this approach would provide helpful guidance to municipal securities professionals as well as the regulatory agencies charged with the responsibility of examining the records of such firms. At the same time, the Board attempted to provide a degree of flexibility to firms concerning the manner in which their records are to be maintained, recognizing that various recordkeeping systems could provide a complete and accurate record of a firm’s municipal securities activities. The interpretations set forth in this notice are intended to be consistent with the foregoing purposes.

This notice is not intended to address all of the questions which have arisen, or may arise; the Board will continue its policy of responding to written requests for individual interpretations and may issue further interpretive notices on recordkeeping should additional questions of general interest arise.

The following topics are covered in this interpretive notice:General Purposes of Recordkeeping Rules

Election to Follow Board or Commission Recordkeeping Rules

Maintenance of Records on a Trade Date or Settlement Date Basis

Current Posting of Records

Unit System Method of Recordkeeping

Rule G-8(a)(ii)—Account Records

Rule G-8(a)(iii)—Securities Records

Rules G-8(a)(vi) and (vii)—Records for Agency and Principal Transactions

Rule G-8(a)(xi)—Customer Account Information

Rule G-8(c)—Non-Clearing Municipal Securities Brokers and Municipal Securities Dealers

Rule G-9(b)(viii)(C)—Preservation of Written Communications

Election to Follow Board or Commission Recordkeeping Rules

Rules G-8(f) and G-9(g) provide that municipal securities brokers and municipal securities dealers other than bank dealers, who are in compliance with the recordkeeping rules of the Securities and Exchange Commission (the "Commission"), will be deemed to be in compliance with Board rules G-8 and G-9, provided that the following additional records, not specified in the Commission’s rules, are maintained by such firms: records of uncompleted transactions involving customers (subparagraph (a)(iv)(D)); records relating to syndicate transactions (paragraph (a)(viii)); new account information (paragraph (a)(xi)); and information concerning customer complaints (paragraph (a)(xii)). Conversely, Commission rules 17a-3 and 17a-4 provide that securities firms engaged in the municipal securities business will satisfy all regulatory requirements concerning recordkeeping with respect to their municipal securities business if they are in compliance with the Board’s rules.

Securities firms must determine to comply with either the Board or Commission rules, but are not required to file with either the Board or the commission a formal written notice of election. Satisfactory compliance with either set of rules will be subject to determination in the course of periodic compliance examinations conducted by the regulatory organizations charged with enforcement of Board and Commission rules.

Maintenance of Records on a Trade Date or Settlement Date Basis

Under rule G-8, records concerning purchases and sales of municipal securities may be maintained on either a trade date or settlement date basis, provided that all records relating to purchases and sales are maintained on a consistent basis. For example, if a municipal securities broker or municipal securities dealer maintains its records of original entry concerning purchases and sales (rule G-8(a)(i)) on a settlement date basis, the municipal securities broker or municipal securities dealer must also maintain its account records (rule G-8(a)(ii)) and securities records (rule G-8(a)(iii)) on the same basis.

The above records may not be maintained on a clearance date basis, that is, the date the securities are actually delivered or received. Records maintained on a clearance date basis would not accurately reflect obligations of a municipal securities broker or municipal securities dealer to deliver or accept delivery of securities. Of course, the date of clearance should be noted in the records of original entry, account records and securities records, regardless of whether these records are kept on a trade date or settlement date basis.

Current Posting of Records

Rule G-8 provides that every municipal securities broker or municipal securities dealer must make and keep current the records specified in the rule. The Board has received inquiries as to the time within which records must be posted to satisfy the currency requirement.

Blotters or other records of original entry showing purchases and sales of municipal securities should be prepared no later than the end of the business day following the trade date. Transactions involving the purchase and sale of securities should be posted to the account records no later than settlement date and to the securities records no later than the end of the business day following the settlement date. Records relating to securities movements and cash receipts and disbursements should reflect such events on the date they occur and should be posted to the appropriate records no later than the end of the following business day.

Commission rule 17a-11 requires municipal securities dealers, other than bank dealers, to give immediate notice to the Commission and their designated examining authorities of any failure to make and keep current the required records, and to take corrective action within forty-eight hours after the transmittal of such notice.

Unit System Method of Recordkeeping

Under rule G-8, records may be maintained in a variety of ways, including a unit system of recordkeeping. In such a system, records are kept in the form of a group of documents or related groups of documents. For example, customer account records may consist of copies of confirmations and other related source documents, if necessary, arranged by customer.

A unit system of recordkeeping is an acceptable system for purposes of rule G-8 if the information required to be shown is clearly and accurately reflected and there is an adequate basis for audit. This would require in most instances that each record in a unit system be arranged in appropriate sequence, whether chronological or numerical, and fully integrated into the overall recordkeeping system for purposes of posting to general ledger accounts.

Rules G-8(a)(ii)—Account Records

Rule G-8(a)(ii) requires every municipal securities broker and municipal securities dealer to maintain account records for each customer account and the account of the municipal securities broker and municipal securities dealer, showing all purchases and sales, all receipts and deliveries of securities, all receipts and disbursements of cash, and all other debits and credits to such account.

The account records may be kept in several different formats. Ledger entries organized separately for each customer and for the municipal securities broker or municipal securities dealer, showing the requisite information, would clearly satisfy the requirements of rule G-8(a)(ii).

The requirements of rule G-8(a)(ii) can also be satisfied by a unit system of recordkeeping. See discussion above. Under such a system, a municipal securities professional might maintain files, organized by customer, containing copies of confirmations and other pertinent documents, if necessary, which reflect all the information required by rule G-8(a)(ii).

The question has also been raised whether the account records requirement of rule G-8(a)(ii) can be satisfied by an electronic data processing system which can produce account records by tracing through separate transactions. The Board is of the view that such a system is acceptable if the account records should be obtainable without delay, although the records need not be maintained by customer prior to being produced. The account records so produced must also reflect clearly and accurately all the required information, provide an adequate basis for audit and be fully integrated into the overall recordkeeping system. Under rule G-27, on supervision, a municipal securities principal is required to supervise the activities of municipal securities representatives with respect to customer accounts and other matters. In this connection, it may be appropriate to obtain printouts of customer accounts on a periodic basis.

The Board believes that it is important to maintain account records in the fashion described above in view of several of the Board’s fair practice rules, such as the rules on suitability and churning. Account records will be important both as a tool for management to detect violations of these rules and for enforcement of these rules by the regulatory agencies conducting compliance examinations or responding to complaints.

The requirement to maintain account records does not apply to a firm which effects transactions exclusively with other municipal securities professionals and has no customers, as defined in paragraph (e) of rule G-8.

Rule G-8(a)(iii)—Securities Records

Rule G-8(a)(iii) requires that records be kept showing separately for each municipal security all long and short positions carried by a municipal securities broker or municipal securities dealer for its account or for the account of a customer, the location of all such securities long and the offsetting position to all such securities short, and the name or other designation of the account in which each position is carried.

The securities records should reflect not only purchases and sales, but also any movement of securities, such as whether securities have been sent out for validation or transfer. If there is no activity with respect to a particular security, it is not necessary to make daily entries for the security in the securities records. The last entry will be deemed to be carried forward until there is further activity involving the security.

Rule G-8(a)(iii) requires that the securities records show all long security count differences and short count differences classified by the date of physical count and verification on which they were discovered. The Board currently has no rule requiring municipal securities professionals to make periodic securities counts. However, if such counts are made, all count differences must be noted as provided in this section. Commission rule 17a-13 requires municipal securities dealers, other than bank dealers and certain securities firms exempted from the rule, to examine and count securities at least once in each quarter.

The requirement to maintain securities records under rule G-8 does not apply to a firm which effects municipal securities transactions exclusively with other municipal securities professionals and has no customers, as defined in paragraph (e) of rule G-8, provided the firm does not carry positions for its own account and records or fails to deliver, fails to receive and bank loans are reflected in other records of the firm.

Rules G-8(a)(vi) and (vii)—Records for Agency and Principal Transactions

Rules G-8(a)(vi) and (vii) require municipal securities brokers and municipal securities dealers to make and keep records for each agency order and each transaction effected by the municipal securities broker or municipal securities dealer as principal. The records may be in the form of trading tickets or similar documents. In each case, the records must contain certain specified information, including "to the extent feasible, the time of execution."

The phrase "to the extent feasible" is intended to require municipal securities professionals to note the time of execution for each agency and principal transaction except in extraordinary circumstances when it is impossible to determine the exact time of execution. In such cases, the municipal securities professional should note the approximate time of execution and indicate that it is an approximation.

Rule G-8(a)(xi)—Customer Account Information

Rule G-8(a)(xi) requires a municipal securities broker or municipal securities dealer to obtain certain information for each customer. Several distinct questions have been raised with respect to this provision.

The requirement to obtain the requisite information may be satisfied in a number of ways. Some municipal securities brokers and municipal securities dealers have prepared questionnaires which they have had their customers complete and return. Others have instructed their salesmen to obtain the information from customers over the telephone at the time orders are placed. It is not necessary to obtain a written statement from a customer to be in compliance with the provision.

Except for the tax identification or social security number of a customer, the customer account information required by this provision must be obtained prior to the settlement of a transaction. The Board believes that such a requirement is reasonable since the information is basic and important.

The requirement in subparagraph (C) of rule G-8(a)(xi) to obtain the tax identification or social security number of a customer tracks the requirement in section 103.35, Part 103 of Title 31 of the Code of Federal Regulations, which was adopted by the Treasury Department and became effective in June 1972. Under this section, every broker, dealer and bank must obtain the tax identification or social security number of customers. If a broker, dealer or bank is unable to secure such information after reasonable effort, it must maintain a record identifying all such accounts. The Board interprets subparagraph (C) of rule G-8(a)(xi) in a similar fashion to require municipal securities professionals to make a reasonable effort to obtain a customer’s tax identification or social security number and, if they are unable to do so, to keep a record of that fact.

Several inquiries have focused on the scope of subparagraph (G) of rule G-8(a)(xi) which requires that a record be made and kept of the name and address of the beneficial owner or owners of such account if other than the customer and transactions are to be confirmed to such owner or owners.

This provision applies to the situation in which securities are confirmed to an account which has not directly placed the order for the securities. This frequently occurs in connection with investment advisory accounts, where the investment advisor places an order for a client and directs the executing firm to confirm the transaction directly to the investment advisor’s client.

Under rule G-8, the only information which must be obtained in such circumstances for the account to which the transaction is confirmed is the name and address of the account, information which would have to be obtained in any event in order to transmit the confirmation. Since the investment advisor itself is the customer, the other items of customer account information set forth in rule G-8(a)(xi) need not be obtained for the investment advisor’s client. The customer account information applicable to institutional accounts, however, must be obtained with respect to the investment advisor. Also, the account records required by rule G-8(a)(ii) would not be required to be maintained for the investment advisor’s client, although such records would have to be maintained with respect to the account of the investment advisor.

A municipal securities professional is not required to ascertain the name and address of the beneficial owner or owners of an account if such information is not voluntarily furnished. Subparagraph G-8(a)(xi)(G) applies only when an order is entered on behalf of another person and the transaction is to be confirmed directly to the other person.

A recent court decision, Rolf v. Blyth Eastman Dillon & Co. Inc., et al. issued on January 17, 1977, in the United States District Court, Southern District of New York, may have important implications with respect to the obligations generally of securities professionals to beneficial owners of accounts, especially to clients of investment advisors. We commend your attention to this decision, which has been appealed.

Rule G-8(c)—Non-Clearing Municipal Securities Brokers and Municipal Securities Dealers

Rule G-8(c) provides that a non-clearing municipal securities broker or municipal securities dealer is not required to make and keep the books and records prescribed by rule G-8 if they are made and kept by a clearing broker, dealer, bank or clearing agency. Accordingly, to the extent that records required by rule G-8 are maintained for a municipal securities broker or municipal securities dealer by a clearing agent, the municipal securities broker or municipal securities dealer does not have to maintain such records. A non-clearing municipal securities broker or municipal securities dealer is still responsible for the accurate maintenance and preservation of the records if they are maintained by a clearing agent other than a clearing broker or dealer, and should assure itself that the records are being maintained by the clearing agent in accordance with applicable recordkeeping requirements of the Board.

In the case of a bank dealer, clearing arrangements must be approved by the appropriate regulatory agency for the bank dealer. The bank regulatory agencies are each considering the adoption of procedures to approve clearing arrangements. It is contemplated that these procedures will require the inclusion of certain provisions in clearing agreements, such as an undertaking by the clearing agent to maintain the bank dealer’s records in compliance with rules G-8 and G-9, and will specify the mechanics for having such arrangements considered and approved. The bank regulatory agencies indicate that they will advise bank dealers subject to their respective jurisdictions on this matter in the near future.

In the case of a securities firm, Commission approval is required for all clearing arrangements with entities other than a broker, dealer or bank. The Commission has recently proposed an amendment to its rule 17a-4 which would eliminate the need to obtain Commission approval of clearing arrangements with such other entities, provided that certain specified conditions are met. If the proposed rule is adopted, the Board would make a corresponding change in rule G-8.

If an agent clears transactions, but transmits copies of all records to the municipal securities broker or municipal securities dealer, and these records are preserved by the municipal securities broker or municipal securities dealer in accordance with rule G-9, the clearing arrangement is not subject to the rule G-8(c).

Rule G-9(b)(viii)(C)—Preservation of Written Communications

Subparagraph (C) of rule G-9(b)(viii) requires municipal securities brokers and municipal securities dealers to preserve for three years all written communications received or sent, including inter-office memoranda, relating to the conduct of the activities of such municipal securities broker or municipal securities dealer with respect to municipal securities.

The communications required to be preserved by this provision relate to the conduct of a firm’s activities with respect to municipal securities. Accordingly, such documents as internal memoranda regarding offerings or bids, letters to or from customers and other municipal securities professionals regarding municipal securities, and research reports must be preserved. Documents pertaining purely to administrative matters, such as vacation policy and the like, would not have to be preserved for purposes of the rule.

Quotation of municipal securities. This will acknowledge receipt of your letter dated February 9, 1977 concerning the Board’s proposed rule G-13 on quotations relating to municipal securities. In your letter you raise certain questions concerning the intent and application of paragraph (b)(ii) of proposed rule G-13, which prohibits a municipal securities professional from distributing or publishing a municipal securities quotation, or causing such a quotation to be distributed or published, unless the quotation is based upon the professional’s best judgment as to the fair market value of the security.

While the provision in question would undoubtedly apply to situations involving outright fraud, the Board believes the rule to have appropriate application in other circumstances as well.  Thus, the Board has attempted in paragraph (b)(ii) to proscribe conduct which, in the Board’s opinion, constitutes bad business practice but may not, depending on the circumstances, constitute fraud. The Board firmly believes that as a matter of just and equitable principles of trade in the municipal securities industry and with a view to promoting free and open markets in municipal securities, certain practices should not be condoned, even though they do not necessarily rise to the level of fraud or cannot be proven to constitute fraud.

Some examples of how paragraph (b)(ii) would operate may be useful.  First, assume that a dealer submits a bid for bonds, knowing that they have been called by the issuer.  The bonds are not general market bonds and the fact that they have been called is not widely known. While called bonds ordinarily trade at a premium, the dealer’s bid is based on the value of the bonds as though they had not been called and is accepted by the dealer on the other side of the trade who is unaware of the called status of the bonds.  In these circumstances, the bid clearly would not have been based upon the best judgment of the dealer making it as to the fair market value of the bonds. While one might argue that the dealer accepting the bid should have known of the called status of the bonds, the dealer making the bid acted unethically and in a manner not conducive to free and open markets in municipal securities. In the Board’s view, the actions of the dealer making the bid should not be condoned, although a charge of fraud might be difficult to sustain in dealings between professionals and might be inappropriate. The improper nature of the dealer’s conduct would be exacerbated, of course, if the person on the other side of the transaction is a non-professional.  However, difficulties in proof that the conduct of the dealer was fraudulent suggest that the best judgment rule would provide an appropriate alternative basis for enforcement action.

Another situation that would be covered by the best judgment rule is one in which a dealer submits a bid for bonds based on valuations obtained from independent sources, which in turn are based on mistaken assumptions concerning the nature of the securities in question.  The circumstances indicate that the dealer submitting the bid knows that the securities have a substantially greater market value than the price bid, but the fact that independent valuations were obtained, albeit based on mistaken facts, clouds the dealer’s culpability.

A third situation to which the best judgment rule would apply is one in which a dealer makes a bid for or offer of a security without any knowledge as to the value of the security or the value of comparable securities. While the Board does not intend that the best judgment of a dealer as to the fair market value of a security be second-guessed for purposes of the proposed rule, the Board does intend that the dealer be required to act responsibly and to exercise some judgment in submitting a quotation.  In other words, a quotation which has been “pulled out of the air” is not based on the best judgment of the dealer and, in the interests of promoting free and open markets in municipal securities, should not be encouraged.

Given the manner in which the Board intends the “best judgment” rule to operate, the Board concluded that it would not have an anti-competitive impact on the municipal markets. The proposed rule is not intended to prohibit legitimate price discounts or mark-ups, as the case may be, based upon a dealer’s anticipation of the direction of the movement of the markets and other factors. The Board does not intend to interfere with legitimate pricing mechanisms and recognizes that there may be a variety of quotations with respect to a given security, each of which would comply with the terms of the proposed rule.

While it is not possible to anticipate all of the specific fact situations that might run afoul of the “best judgment” rule, I would like to make some general observations concerning the operation of the proposed rule. As you know, one of Congress’ principal purposes in calling for the establishment of the Board was to promote the development of a body of rules for the municipal securities industry that would furnish quidelines for good business conduct. The Senate Committee on Banking, Housing and Urban Affairs observed in its Report on the Securities Acts Amendments of 1975 that prior to the legislation, the conduct of municipal market professionals could be controlled only after the fact through enforcement by the Commission of the fraud prohibitions of the federal securities laws.  The Senate Committee expressed hope that a self-regulatory body like the Board would develop prophylactic rules for the industry which would deter unethical and fraudulent practices in the first instance. See Senate Report 94-75, 94th Cong., 1st Sess., 42-43. MSRB interpretation of February 24, 1977.

On December 23, 1976, the Municipal Securities Rulemaking Board (the "Board") issued an interpretive notice addressing certain questions received by the Board with respect to its professional qualifications rules (rules G-2 through G-7). Since that time, the Board has received additional questions concerning rule G-3 which are discussed in this interpretive notice.

1. Requirements for Financial and Operations Principals.

Under the rule G-3(b)(ii)[*], every municipal securities broker and municipal securities dealer other than a bank dealer is required to have at least one qualified financial and operations principal. As defined in the rule, this person is responsible for the overall supervision and preparation of financial reports to the Securities and Exchange Commission and self-regulatory organizations and for the processing, clearance, safekeeping and recordkeeping activities of the firm. If more than one person shares these overall supervisory responsibilities, each such person must be qualified as a financial and operations principal.

The question has been asked whether a financial and operations principal whose duties relate solely to financial and operational matters and not, for example, to underwriting, trading, or sales functions must qualify also as a municipal securities principal by passing the Board's municipal securities principal examination when it is prescribed. The Board does not intend to impose such a requirement on persons whose functions are limited to those set forth in the definition of a financial and operations principal.

The question has also been asked whether a person performing only the functions of a financial and operations principal on and after December 1, 1975 would be "grandfathered" as a municipal securities principal for purposes of taking the Board's municipal securities principal examination when prescribed if such person begins supervising underwriting, trading or sales functions. Activities relating to financial and operational matters are substantially different from those relating to underwriting, trading and sales or other categories of activities supervised by municipal securities principals. The Board does not intend, therefore, that financial and operations principals be "grandfathered" for purposes of the Board's examination requirements for municipal securities principals, or that a financial and operations principal would be qualified to engage in such other supervisory activities solely by reason of having met the Board's requirements for financial and operations principals.

The Board has also been asked whether senior officers or general partners of a firm, who may bear ultimate legal responsibility for the financial and operational activities of the firm, must be qualified as financial and operations principals under the Board's rules. Although the answer depends on the particular factual situation, officers or partners not directly involved in the financial and operations affairs of a firm generally would not be required to qualify as financial and operations principals.

2. Activities Requiring Qualification as a Municipal Securities Principal.

The question has been asked whether supervisory personnel in the processing and clearance areas must qualify as the municipal securities principals under rule G-3. In a securities firm, the financial and operations principal ordinarily would be the only person supervising operations-related activities who will be required to pass an examination. With respect to bank dealer supervisory personnel, to whom the financial and operations principal classification does not apply, qualification in a principal capacity in the operations area will not be required unless the person in question exercises policy-making authority. Thus, an individual may supervise a bank dealer's processing activities without qualifying as a municipal securities principal, regardless of the number of persons supervised by such individual, if policy-making functions and discretionary authority are delegated to a higher level.

Somewhat different considerations apply in determining which persons are required to be qualified as municipal securities principals in connection with underwriting, trading, sales or other activities referred to in the Board's rules as municipal securities principal activities. In these areas, the qualification requirements apply to persons having supervisory responsibility with respect to the day-to-day conduct of the activities in question, even though such persons may not have a policy-making role. The Board's conclusions in this regard are based on the fact that in these other areas the supervisory person is responsible for the activities of personnel who communicate directly with issuers, traders, and investors.

3. Activities Requiring Qualification as a Municipal Securities Representative.

In certain cases, communications from customers may be received at a time when a duly qualified municipal securities representative or municipal securities principal is unavailable. Similarly, there may be situations in which it becomes important to advise a customer promptly of transactions effected and orders confirmed, even though the individual responsible for the account may not be able to communicate with the customer at that time.

In many cases under the rules of other self-regulatory organizations, communications of this nature, which in essence reflect a mechanical function, may be received and made by properly supervised competent individuals whose clerical and ministerial functions would not otherwise subject them to qualification requirements. The Board believes the principle underlying this practice and the application of other self-regulatory organizations' qualification rules is sound.

Accordingly, the Board interprets rule G-3 to permit the recording and transmission in customary channels of orders, the reading of approved quotations, and the giving of reports of transactions by non-qualified clerical personnel when the duly qualified municipal securities representative or municipal securities principal who normally handles the account or customer is unavailable. The foregoing interpretation is applicable only to clerical personnel who are: (a) deemed capable and competent by a municipal securities principal or general securities principal to engage in such activities; (b) specifically authorized in writing to perform such functions on an occasional basis as necessary or directed to perform such functions in specific instances, in either case by a duly qualified municipal securities principal or general securities principal; (c) familiar with the normal type and size of transaction effected with or for the customer or the account; and (d) closely supervised by duly qualified municipal personnel.

All orders for municipal securities received by clerical personnel under the foregoing interpretation must be reviewed and approved by duly qualified municipal personnel familiar with the customer or account prior to being accepted or effected by the municipal securities broker or municipal securities dealer. Solicitation of orders by clerical personnel is not permitted. Confirmations of transactions may be given and quotations read by clerical personnel only when approved by duly qualified municipal personnel. Individuals subject to the 90-day apprenticeship requirements of rule G-3(i)[†] are not clerical personnel and are not authorized or permitted to engage in such activities with members of the public.

Also, the question has been raised whether a bank's branch office personnel, who are not otherwise required to be qualified under rule G-3, will be required to take and pass the qualification examination for municipal securities representatives in order to respond to a depositor's inquiry concerning possible investments in municipal securities. Insofar as the branch office personnel merely refer the depositor to qualified bank dealer personnel for discussion concerning the merits of an investment in municipal securities and execution of the depositor's order, the branch office personnel would not be required to be qualified under the Board's professional qualifications requirements. However, if branch office personnel seek to advise the depositor concerning the merits of a possible investment, or otherwise perform more than a purely ministerial function, qualification under the Board's rules would be required.

 

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[*] [ Currently codified at rule G-3(d)(iii)]

[†] [ Currently codified at rule G-3(a)(iii)]

Previously registered entitites. Thank you for your letter [name and date deleted] which has been referred to me for response. The letter relates to the Municipal Securities Rulemaking Board's rule A-12, which imposes an initial fee of $100 on municipal securities brokers and municipal securities dealers.

We note that the terms "municipal securities broker" and "municipal securities dealer" are not restricted under the Securities Acts Amendments of 1975 (the "1975 Amendments") to securities firms and banks effecting transactions exclusively in municipal securities. Many municipal securities brokers and municipal securities dealers (other than bank dealers) were registered with the Securities and Exchange Commission (the "Commission") as brokers or dealers prior to the 1975 Amendments. Municipal securities brokers and municipal securities dealers already registered with the Commission were not required to re-register with respect to their municipal securities activities, but nevertheless are subject to payment of the Board's initial fee. In addition, many municipal securities brokers and municipal securities dealers have been and are members of the national securities exchanges and the National Association of Securities Dealers, Inc.

We are unable to conclude from the information set forth in your letter that the initial fee imposed by the Board's rule A-12 is inapplicable to your firm. MSRB interpretation of June 16, 1976.

The Municipal Securities Rulemaking Board (the “Board”) has received several requests for interpretation of rule A-13, which requires each municipal securities broker and municipal securities dealer to pay the Board a fee [on] … the face amount of municipal securities purchased from an issuer as part of a new issue. These requests concern the applicability of the fee to securities which have a stated maturity of [nine months or less], but are part of a new issue having a final stated maturity of [more than nine months]. Rule A-13 is intended to impose the … underwriting assessment on the face amount of all securities purchased from an issuer that are part of a new issue of municipal securities if any part of the issue has a final stated maturity of [nine months or less]… from the date of the securities. Thus, calculation of the fee should be based upon all municipal securities which are part of such new issue, including securities having a stated maturity of [nine months or less]. The assessment is not intended to apply, however, to short-term issues having a final maturity of [nine months or less].
NOTE: Revised to reflect subsequent amendments.

Separately identifiable department or division of a bank. This will acknowledge receipt of your letter of November 12, 1975, in which you request, on behalf of the Dealer Bank Association, an interpretative opinion with respect to the rule of the Municipal Securities Rulemaking Board (the "Board") defining the term "separately identifiable department or division of a bank," as used in section 3(a)(30) of the Securities Exchange Act of 1934, as amended (the "Act"). Such rule was originally numbered rule 4 of the Board and became effective on October 15, 1975. The rule is presently numbered rule G-1 of the Board.

In your letter you pose a series of questions concerning rule G-1, as follows: 

1. A bank has an operations department that performs processing and clearance activities, and maintains records, with respect to the bank's underwriting, trading and sales of municipal securities, as well as with respect to certain other bank activities. Can this bank have a "separately identifiable department or division" as defined in rule G-1?
2. In a bank with numerous branches, an employee or officer in a branch will on occasion accept or solicit an order from a customer for municipal securities. Does this preclude a finding that the bank has a "separately identifiable department or division"?
3. Mr. X is a senior vice president of a bank. He is not a director. Mr. X's only relationship to the bank's municipal securities dealer activities is that he is a member of a management committee within the bank that determines the amount of the bank's funds that will be made available for the bank's municipal securities dealer activities, as well as for other bank activities. The bank has a separately identifiable department or division that otherwise meets the requirements of rule G-1. Is Mr. X a person who must be designated by the board of directors of the bank under rule G-1(a)(1)?
4. A bank has a corporate trust department that, among other things, serves as paying agent for certain municipal securities and performs clearing functions in municipal securities, in addition to the processing and clearance activities performed in connection with the bank's underwriting, trading and sales of municipal securities. Are the persons in the bank's corporate trust department who engage solely in activities that do not relate to the underwriting, trading and sales of municipal securities by the bank performing municipal securities dealer activities?

With respect to question (1) above, paragraph (d) of rule G-1 contemplates that the municipal securities dealer activities of a bank, as such activities are defined in paragraph (b) of the rule, may be conducted in more than one organizational or operational unit of the bank, for example, underwriting, trading and sales activities in the bond department, and processing and clearance activities in the operations department of the bank. Under the rule, all such units can be aggregated to constitute a separately identifiable department or division within the meaning of section 3(a)(30) of the Act, provided that each such unit is identifiable and under the direct supervision of an officer designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities. The officer so designated need not be the same for all such units. For example, the senior officer of the bank's bond department may be designated as responsible for the municipal securities dealer activities conducted by that department, while the senior officer of the bank's operations department may be designated as responsible for the municipal securities dealer activities conducted by that department. In addition, the records of each such unit relating to municipal securities dealer activities must be separately maintained or separately extractable so as to permit independent examination of such records and enforcement of applicable provisions of the Act, the rules and regulations of the Commission thereunder and the rules of the Board. Finally, each such unit comprising the separately identifiable department or division may be engaged in activities other than those relating to municipal securities dealer activities. For example, the bond department may also engage in activities relating to United States government obligations, while the operations department may perform processing and clearance functions for departments of the bank other than the bond department.

With respect to question (2) above, paragraph (d) of rule G-1 also contemplates that the municipal securities dealer activities of a bank may be conducted at more than one geographic location. However, in order for such a bank to have a separately identifiable department or division, the branch employees who accept or solicit orders for municipal securities must, with respect to acceptance or solicitation of such orders, be affiliated with one of the identifiable units of the bank comprising such department or division and must, with respect to acceptance or solicitation of such orders, be responsible to an officer designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities. Further, the bank's records relating to the transactions effected by such branch employees must meet the criteria of paragraph (a) of rule G-1 with respect to separate maintenance and accessibility.

With respect to question (3) above, paragraph (c) of rule G-1 recognizes that senior officers of a bank may make determinations affecting bank policy as a whole which have an indirect effect on the municipal securities dealer activities of the bank. For example, determinations with respect to the deployment of the bank's funds may affect the size of the bank's inventory of municipal securities or volume of underwriting. Ordinarily such determinations would not directly relate to the day-to-day conduct of the bank's municipal securities dealer activities and senior officers making such determinations need not be designated by the board of directors of the bank as responsible for the conduct of such activities. However, if the determinations of senior officers have a direct and immediate impact on the day-to-day conduct of the bank's municipal securities dealer activities, whether by reason of the scope of such determinations, the frequency with which such determinations are made, or by reason of other factors, such officers may be considered to be directly engaged in the conduct of the bank's municipal securities dealer activities and required to be designated by the board of directors of the bank as responsible for the day-to-day conduct of such activities.

With respect to question (4) above, the regulatory focus of section 15B(b)(2)(H) of the Act is on the dealer activities of a bank. Accordingly, subparagraph (b)(2) of rule G-1 was intended to relate to such dealer activities, and not to describe other activities of the bank which might involve municipal securities. Employees of a bank's corporate trust department who perform clearance and other functions with respect to municipal securities, but which do not relate to the underwriting, trading and sales activities of the bank, do not perform municipal securities dealer activities within the meaning of rule G-1.

This opinion is rendered on behalf of the Board, pursuant to authority delegated by the Board. Copies of this opinion are being sent to the Securities and Exchange Commission, the bank regulatory agencies and the National Association of Securities Dealers, Inc. MSRB interpretation of November 17, 1975.

Notice regarding issuer selection of underwriters’ counsel

        In connection with the Board’s review of the underwriting process in 1997,¹ the Board expressed concern, and sought comment from the municipal securities community, regarding the practice of certain issuers in selecting the counsel to be used by underwriters in the offering of the issuer’s bonds. The Board emphasized that underwriters must be free to select counsel in whom they have confidence and who do not have conflicting allegiances that may compromise, or appear to compromise, their capacity to carry out their responsibilities. This is especially true in light of the special role of underwriters’ counsel in assisting underwriters with their due diligence responsibilities and in reviewing with a critical eye the disclosure information provided by issuers.²

        Comments and information received by the Board suggest that problems do exist in this area, but rulemaking does not appear to be an appropriate solution at this time.³ The Board recognizes, for example, that issuers often have a legitimate interest in the selection of underwriters’ counsel.⁴ An issuer may fairly object to the use of counsel where the issuer’s own experience has called into question the counsel’s conduct or competence. The issuer also may wish to promote the efficiencies gained by using counsel whose knowledge, location or prior experience will facilitate prompt and proper completion of the financing. It may encourage underwriters to consider the use of local firms or firms in which minorities and women undertake significant responsibilities. The fees of such counsel also are important since they are paid, directly or indirectly, by the issuer.⁵

        Ultimately, however, underwriters must be free to select their own counsel and to reject the imposition of counsel in circumstances where they lack the basis for placing their complete confidence in such counsel. In particular, underwriters should have a basis for concluding that counsel has the requisite experience and expertise in securities law matters, the resources to assist the underwriters in meeting their due diligence responsibilities and the independence to perform the critical role of such counsel in the disclosure process.⁶

        It is also important to remember the "counseling" role to be played by underwriters’ counsel. Underwriters often need to take their counsel into their confidence on difficult and sensitive questions. Underwriters and therefore their counsel are "adverse" to issuers on a variety of matters, including many related to investor protection. These include decisions regarding bond structure, security provisions, operating and reporting covenants and, above all, disclosure, especially in matters involving negative facts and circumstances. The potential for conflict of interest is inherent in the issuer’s selection of the counsel whose particular responsibilities may include advocating decisions that the issuer may oppose or may perceive as not in its best interest.

        The Board is aware of situations in which underwriters have retained counsel designated by an issuer where the underwriters lacked an adequate basis for placing their confidence in such counsel. The Board recognizes that pressure by issuers may be subtle and indirect and difficult to resist. It is also aware of situations where underwriters have had so little confidence in the designated underwriters’ counsel that they have privately consulted other lawyers regarding disclosure and other issues. While there may be circumstances where underwriters may wish to consult counsel other than their designated counsel for a transaction, such conduct suggests that the practices of some issuers have resulted in the selection of underwriters’ counsel who are not in fact fulfilling all of the obligations inherent in such role.

        In its March 1994 interpretive release on municipal disclosure,⁷ the Securities and Exchange Commission indicated that information "concerning financial and business relationships and arrangements among the parties involved in the issuance of municipal securities may be critical to an evaluation of an offering." Such information, the Commission pointed out, could indicate the "existence of actual or potential conflicts of interest" and "may reflect upon the qualifications, level of diligence and disinterestedness of financial advisors, underwriters, experts and other participants in an offering." The Commission listed selection of counsel as one of the issues to be considered and noted that investors reasonably expect participants in municipal securities offerings to follow appropriate standards and procedures. Any circumstances that might suggest that underwriters’ counsel – or any other party – might not perform its role in the expected and appropriate manner could be material.

        The Board reminds both issuers and underwriters that investors may be harmed in a variety of ways in any offering process that does not properly utilize the review, guidance and counseling of an independent, competent and appropriately critical underwriters’ counsel. The results may compromise the integrity of the securities market and undermine the ability of both issuers and underwriters to rely on the expertise and guidance of underwriters’ counsel.

        The Board urges both issuers and underwriters to ensure that underwriters select and utilize counsel in a manner that promotes investor protection.

September 3, 1998

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ENDNOTES

1. See "Board Review of Underwriting Process," MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.

2.See National Association of Bond Lawyers and Section of Urban, State and Local Government Law, American Bar Association, Disclosure Roles of Counsel in State and Local Government Securities Offerings (2d ed. 1994) ("Disclosure Roles of Counsel") at 17-18.

3.Rulemaking in this area would be problematic because of the difficulty of determining what influence was brought to bear, whether it was improper and whether the underwriters in fact had the appropriate basis for accepting the suggested counsel and placing their confidence in such counsel’s advice and service.

4.See Government Finance Officers Association’s ("GFOA") draft Recommended Practice – Issuer’s Role in Selection of Underwriter’s Counsel (1998) ("Draft GFOA Recommended Practice"). The Draft GFOA Recommended Practice is subject to final approval by the GFOA’s board. See also Disclosure Roles of Counsel at 18-20.

5. Fees are a legitimate concern for both issuers and underwriters and may be subject to controls, caps and other agreements. The Board, however, is concerned that in some circumstances limits imposed directly by an issuer may either prevent the selection of appropriate underwriters’ counsel or pressure such counsel to limit their role. Underwriters, issuers and those who advise them (including financial advisors and in some cases bond counsel) should recognize the potential risks of fee arrangements that may undermine investor protection.

6. The Draft GFOA Recommended Practice recognizes that the underwriter has a reasonable need to rely on the competence and confidential advice of its counsel and that the potential for conflicts of interest exists if an issuer designates a firm to serve as underwriters’ counsel. See also Disclosure Roles of Counsel at 19.

7.Securities Act Release No. 7049, Exchange Act Release No. 33741, Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others (March 9, 1994), 59 FR 12748 (March 17, 1994).

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

PRESS RELEASE

September 9, 1997

BOARD ELECTS OFFICERS

The Municipal Securities Rulemaking Board is pleased to announce the election of its Chairman and Vice Chairman for its 1998 fiscal year. Mr. Terry L. Atkinson will serve as Chairman and Ms. Phyllis E. Currie as Vice Chairman. They will begin their terms on October 1, 1997.

Mr. Atkinson replaces Roger G. Hayes as Chairman. Mr.Hayes is Managing Director of Municipal Finance for NationsBanc Capital Markets, Inc. in Charlotte, North Carolina. Ms. Currie replaces Charles D. Mires as Vice Chairman. Mr. Mires is Assistant Vice President and Manager of the Municipal Bond Division for Allstate Insurance Company in Northbrook, Illinois.

Mr. Atkinson is Managing Director and Director of the Municipal Securities Group for PaineWebber Incorporated in New York and has held this position since 1989. He is a member of the Board of Directors of PaineWebber, Inc. and the PSA The Bond Market Trade Association and was the 1995 Chairman of the Municipal Division of PSA. Mr. Atkinson received a B.A. from San Diego State University and a J.D. from the University of San Diego School of Law.

Ms. Phyllis E. Currie is Chief Financial Officer for the Los Angeles Department of Water and Power. Prior to her current position, she was Assistant City Administrative Officer for the City of Los Angeles. Ms. Currie is a former member of the California Debt Advisory Commission; a member of Government Finance Officers Association; and National Forum of Black Public Administrators. She received her B.A. and MBA from UCLA.

The Board consists of 15 members -- five representatives of bank dealers, five representatives of securities firms, and five public members not associated with any bank dealer or securities firm. At least one public member must be a representative of issuers and one of investors to ensure that all perspectives of the municipal securities market are represented.

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

 

ARBITRATION: RULE G-35

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On May 22, 1997, the Board filed with the Securities and Exchange Commission (SEC) a proposed amendment to rule G-35, the Board's Arbitration Code. [1] The amendment creates two new sections: Section 37 states that the Board will not accept any new arbitration claims filed on or after January 1, 1998; and Section 38 provides that, as of January 1, 1998, every bank dealer (as defined in rule D-8) shall be subject to the Code of Arbitration Procedure of the NASD for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. New Section 38 further provides that each bank dealer shall be subject to, and shall abide by, the NASD's Code of Arbitration Procedure as if the bank dealer were a "member" of the NASD.

The Board's arbitration program, which is limited to the resolution of disputes involving municipal securities, has been in effect since December 1978. The Board's caseload grew steadily for a time (for example, 21 cases were received in 1980; 82 in 1986; and 115 in 1988). Between 1978 and 1993, the NASD automatically transferred to the Board's arbitration program any claims received involving municipal securities, and until approximately 1993 the majority of the Board's cases were received in this manner. [2] In 1993, the NASD amended its arbitration code to require a customer's consent before it could transfer a case to another SRO. The practical effect of this amendment has been to virtually halt the transfer of municipal cases to the Board's arbitration program because customers choose to remain at the NASD. Consequently, the Board's caseload has declined dramatically from 115 cases received in 1988, to 10 cases received in 1996. For 1997, the Board has thus far received one case.

In September 1996, the Board published a notice expressing its concern over the costs of operating the arbitration program in light of the decreasing number of cases filed with the Board.[3] The Board stated that the decline in its caseload makes it difficult to justify the cost of continuing to operate the arbitration program, and that it was considering discontinuing its arbitration program. The Board requested comment on the impact that such action would have on the public and the industry, and specifically requested comment on what effect, if any, the elimination of its arbitration program would have on bank dealers who are not NASD members.

In response to its request, the Board received a comment letter from a dealer and from an individual who serves as an arbitrator for the Board. The dealer expressed its concern that arbitrators serving in other SRO arbitration programs do not have sufficient knowledge of the municipal securities industry. In an attempt to address this concern, the Board, in the next few months, plans to forward its list of arbitrators to the NASD.

With regard to bank dealers, the dealer stated that the Board's program should not be eliminated until an arbitration forum is established for these dealers, and suggested that the Board require bank dealers to use the NASD's arbitration program for resolving disputes involving municipal securities. The proposed rule change accomplishes this.

The other commentator expressed his belief that elimination of the Board's program will not impair the industry's arbitral process.

Accordingly, the Board has determined that, effective January 1, 1998, it will no longer accept any new claims filed with its arbitration program. The Board will, however, continue to operate its program in order to administer its current, open cases and any new claims received prior to January 1, 1998, but will discontinue its arbitration program when all such cases have been closed.

The Board notes that, currently, any customer or securities dealer with a claim, dispute or controversy against a dealer involving its municipal securities activities may submit that claim to the arbitration forum of any SRO of which the dealer is a member, including the NASD. Bank dealers, however, are unique in that they are subject to the Board's rules but are not members of any other SRO. In light of the Board's decision not to accept any new arbitration claims on or after January 1, 1998, it is necessary to amend rule G-35 to state this and to provide an alternative forum for claims involving the municipal securities activities of bank dealers. The proposed rule change accomplishes this by subjecting every bank dealer, as of January 1, 1998, to the NASD's Code of Arbitration Procedure for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. In addition, the proposed rule change requires that bank dealers abide by the NASD's Code just as if they were "members" of the NASD for purposes of arbitration.

May 22, 1997

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TEXT OF PROPOSED AMENDMENT (Language between *asterisks* is proposed new language : language between brackets is proposed deleted language)

Rule G-35. Arbitration Every broker, dealer and municipal securities dealer shall be subject to the Arbitration Code set forth herein.

Arbitration Code Section 1 though Section 36. No change. *Section 37. Arbitration Claims Filed On or After January 1, 1998. The Board will not accept any new arbitration claims filed on or after January 1, 1998.* *Section 38. Arbitration Involving Bank Dealers. As of January 1, 1998, every bank dealer (as defined in rule D-8) shall be subject to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. ("NASD") for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. For purposes of this rule, each bank dealer shall be subject to, and shall abide by, the NASD's Code of Arbitration Procedure as if the bank dealer were a "member" of the NASD.*

 

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ENDNOTES

[1] File No. SR-MSRB-97-4. Comments submitted to the SEC should refer to this file number.

[2] The NASD also transferred cases (other than those involving municipal securities) to other self-regulatory organizations (SROs), such as the New York Stock Exchange and the American Stock Exchange, if the particular claim arose out of a transaction in that SRO's market.

[3] MSRB Reports, Vol. 16, No. 3 (Sept. 1996) at 25.

 

 

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Archive 1997

Operational Start Date for Customer Transaction Reporting, December 29, 1997

The operational start date of the customer transaction phase of the Board's Transaction Reporting Program has been delayed from January 1, 1998 to March 1, 1998.

Proposed amendments to rules G-11, G-12, and G-8, December 23, 1997

The Board has filed with the SEC proposed amendments to rules G-11, on sales of new issue municipal securities, G-12, on uniform practice, and G-8, on books and records, in regard to syndicate practices.

Amendment filed to rule G-23, December 23, 1997

The Board has filed with the SEC an amendment to rule G-23 on activities of financial advisors. The amendment requires a financial advisor, prior to entering into a remarketing agreement for an issue on which it advised, to disclose, in writing, to the issuer the terms of the remuneration the financial advisor could earn as remarketing agent on such issue and that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent.

Proposed amendments to rule G-32, December 22, 1997

The Board has filed proposed amendments to rule G-32, on disclosures in connection with new issues, relating to dissemination of official statements to purchasing dealers and initial offering prices of maturities not reoffered

Series 53 study outline, December 19, 1997

Effective date for revised Series 53 study outline changed to March 1, 1998.

Amendment filed, December 18, 1997

The Board has filed proposed amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, and rule G-38, on consultants

Notice of filing, December 16, 1997

The Board has established a fee relating to the public dissemination on CD-ROM of quarterly Form G-37/G-38 filings

Amendment Filed, revised forms G-36(OS) and G-36(ARD): December 2, 1997

The Board has filed revised Forms G-36(OS) and G-36(ARD) and an amendment to rule G-8(a)(xv), on recordkeeping. The revised Forms G-36(OS) and G-36(ARD) and amendment to rule G-8(a)(xv) become operative on January 1, 1998.

Consultants Rule G-38 November 25, 1997

The Board has filed an amendment to rule G-38, on consultants, that would give 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.

Arbitration Rule G-35 November 13, 1997

The Board has filed an amendment to its File No. SR-MSRB-97-4 relating to rule G-35.

The Board is publishing a third Question and Answer notice concerning consultants. November 13, 1997

Question and Answer notice concerning consultants.

Notice: October 1997

MSRB Transaction  Reporting Program Questions and Answers.

Amendments Filed: September 30, 1997

The Board has filed technical amendments to rule G-37, on political contributions and prohibitions on municipal securities bussiness, rule G-38, on consultants, and G-8, on recordkeeping.

Draft Amendments to Rules G-38 and G-8 and Draft Changes to Form G-37/G-38: September 11, 1997

The Board requests comment on a draft amendment to rule G-38, on consultants, that would require dealers to disclose their consultants' political contributions to officials of an issuer and payments to state and local political parties. The Board also is seeking comment on a related amendment to rule G-8, on recordkeeping, and revisions to Form G-37/G-38. Comments are due no later than December 15, 1997.

Additional Questions and Answers: Rule G-37 on Political Contributions and Prohibitions on Municipal Securities Business:

September 9, 1997

The Board has published an additional question-and-answer notice regarding rule G-37 on political contributions and prohibitions on municipal securities business. The questions and answers address the applicability of the rule to transition and inaugural expenses, the definition of issuer official, the definitions of municipal finance professional and executive officer, and reporting by syndicate members.

Rule G-35: Arbitration: May 22, 1997

The Board has filed an amendment to its Arbitration Code (rule G-35) to state that it will not accept any new arbitration claims filed on or after January 1, 1998, and that as of that date every bank dealer shall be subject to the NASD's Code of Arbitration Procedue.

Rule G-38: Consultants: May 21, 1997

The Board requests comment on a draft amendment to rule G-38 that would give dealers the option of disclosing information on their consulting arrangements to issuers on either an issue-specific or issuer-specific basis.

 

Text of Proposed Rule & Forms G-36 (OS) & G-36(ARD)

 

Proposed Change Filed to Establish a Fee Relating to the OS/ARD Subsystem: May 19, 1997

The Board has filed a proposed change to establish a fee relating to the operation of its OS/ARD subsystem of the MSIL system.

From the Chairman

The Board is publishing Chairman Roger Hayes' letter to the municipal securities industry

 

Rule G-32: Notice of the Draft Amendments

As announced after its February 1997 meeting, the MSRB has determined to withdraw the draft amendment to Rule G-32, on disclosure in connection with new issues.

Rule G-39: Telemarketing Rule Approved

Rule G-39 and amendments to rules G-21, G-8 and G-9 concern telemarketing requirements with respect to the municipal securities activities of brokers, dealers and municipal securities dealers.

 

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Arbitration: Rule G-35

Amendment to Filing

The Board has filed an amendment to its File No. SR-MSRB-97-4 relating to its Arbitration Code (rule G-35). The amendment will make publicly available the names of arbitrators on all customer awards rendered after May 10, 1989. The amendment is intended to conform this aspect of the Board's code to the arbitration codes of other self-regulatory organizations.

On May 22, 1997, the Board filed with the Commission a proposed amendment to

rule G-35, the Board's Arbitration Code, to create two new sections to the rule: new Section 37 provides that the Board will not accept any new arbitration claims filed on or after January 1, 1998; and new Section 38 provides that, as of January 1, 1998, every bank dealer (as defined in Board rule D-8) shall be subject to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. ("NASD") for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. Section 38 further provides that bank dealers shall abide by the NASD's Code just as if they were "members" of the NASD for purposes of arbitration. ⁽¹⁾

In response to its request for public comment on the Board's proposed amendment to rule G-35, the Commission received one comment letter from an individual whose company collects data on arbitration awards and stores the information in a database which it makes available to subscribers and others. The commentator noted that most of the information comes from awards issued subsequent to May 10, 1989. He also noted that in 1993, the NASD began making arbitrators' names available to the public, and retroactively supplied the names of arbitrators for its customer-related awards rendered after May 10, 1989. The commentator suggested that the Board similarly disclose the names of arbitrators on all customer-related awards rendered after May 10, 1989.

The Board has reviewed the commentator's suggestion and has determined to amend its arbitration code to make publicly available the names of arbitrators for all customer awards rendered after May 10, 1989. The Board believes that, upon SEC approval of its filing, this amendment will facilitate the NASD's administration of those arbitration claims received after January 1, 1998 involving the municipal securities activities of brokers, dealers and municipal securities dealers where an arbitrator appointed to such a case previously served as an aribtrator in the Board's program but has never served as an NASD arbitrator.

In its filing, the Board stated that its declining caseload makes it difficult to justify the cost of continuing to operate its arbitration program and, therefore, the Board has determined that, effective January 1, 1998, it will no longer accept any new claims filed with its arbitration program. The Board stated that it will continue to operate its program in order to administer its current, open cases and any new claims received prior to January 1, 1998, but will discontinue its arbitration program when all such cases have been closed.

November 13, 1997

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ENDNOTES

1. File No. SR-MSRB-97-4. See also MSRB Reports, Vol. 17, No. 2 (June 1997) at 19-20.

 

 

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

DATA ELEMENT AND FILE SPECIFICATIONS FOR REPORTING CUSTOMER TRANSACTIONS FOR REPORTING CUSTOMER

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The following file specification applies to customer trade data files submitted directly to the MSRB by means of a personal computer (PC). This is known as the MSRB standard specification. The PC method of file submission is intended for dealers with relatively few transactions who now submit inter-dealer trade data to NSCC exclusively by means of a personal computer dial-up facility.

Other dealers, who submit customer trade data to MSRB through NSCC, must produce files formatted according to NSCC's specifications as described in NSCC's notice entitled "The MSRB's Transaction Reporting Program for Municipal Bond Securities: NSCC Interface Requirement" (Notice No. A-4571 and P&S 4155) dated April 2, 1997.

All dealers, regardless of file submission method, must adhere to the requirements of Tables 1 and 4 below. Table 1 defines the meaning of the data elements to be reported. This should guide managers in selecting information from the dealer's recordkeeping system for use in customer transaction reporting. Table 4 also provides guidance in the MSRB's specifications for transaction control numbers.

The other tables specify the physical formats of files and records, for the guidance of programmers. Again, these specifications apply to files sent directly to the MSRB via a personal computer.

This document is a minor revision of the Notice that appeared in MSRB Reports, Vol. 16, No. 3 (September 1996) at 10-16.

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DATA ITEMS REQUIRED FOR REPORTING A TRANSACTION

Table 1 presents the data items required to report, amend or cancel a single customer transaction. Each item is briefly defined. Fuller definitions are found in the Notice of the proposed rule change (MSRB Reports Vol. 16, No. 3 (September 1996) at 3-16.)

TABLE 1

DATA ITEM DEFINITIONS

 

FILE SPECIFICATIONS

Three types of file are currently specified: (1) Submissions of customer transaction data, sent by dealers to the Customer Transaction Reporting Subsystem(CTRS): (2) Receipt and error message files, sent to dealers by CTRS: and (3) Test files, which may be sent in either direction.

Each file has a header and detail records. The header identifies the submitter, the submission date and time, the version, and the file (detail record) type. The header includes a count of the following detail records. All records in the file must be of the same type (transaction, receipt and error message, or test). A transaction file may contain records for several dealers, and it may include both "first reports" of trades and corrections to or cancellations of previously reported trades. A receipt/error message file will always include at least one receipt for a submission file: if no errors are detected in the submission, there will be no error records. Test files will be defined before the test period.

All data submitted by dial-in connection to the CTRS will be coded as ASCII. Each record will end with a carriage-return/line feed (CR/LF) symbol. Data submitted through NSCC will be coded according to NSCC specifications.

 

HEADER RECORD FORMAT

The header identifies the format version being used. Thus, if MSRB changes the version, both the old and new formats could be used by different dealers during a transition period. The version number applies to all the record types; a change in any record format will require a new version number.

TABLE 2

HEADER RECORD FORMAT

 

TRANSACTION RECORD FORMAT

 

The transaction record format applies to records of trades submitted to the Customer Transaction Reporting Subsystem. A record may be the "first report" of a trade to CTRS or a "cancel/amend" record relating to a previously reported trade.

Dealers should submit "amend" records only when there has been a change in the transaction data items required for customer transaction reporting. Rebills that change account number, etc., should not be reported to MSRB.

The meaning of each data item is described in Table 1 above. Items that may be omitted for a particular trade may be reported as zeroes or left blank.

TABLE 3

TRANSACTION RECORD FORMAT

 

GUIDELINES FOR REPORTING TRANSACTION CONTROL NUMBERS

All records pertaining to a transaction must share the same dealer-assigned control number. This allows the Transaction Reporting System to update the records of a transaction based on dealer input.

When the dealer submits a cancel/amend record (C/A record), it is recommended that the "dealer's transaction control number" field contain the same number as the record that first reported the trade to the system. In such a case, the "previous record reference" field is optional. However, to allow for different dealer practices - such as dealer systems that assign unique numbers to each record - the C/A record may contain a "new" control number, i.e., one not previously reported. In such a case, the "previous record reference" field must contain the control number of the record that first reported the trade. The table below shows valid and invalid input patterns. (Note that

the C/A record cannot be used to change the dealer's original number used in MSRB's database. If an incorrect control number was originally reported, that record must be changed and a new record with a different control number must be submitted.)

TABLE 4

VALID PATTERNS FOR REPORTING TRANSACTION CONTROL NUMBER

 

RECEIPT/ERROR MESSAGE FORMAT

The receipt/error message file is generated by CTRS after a file is received and processed. Normally one receipt record is generated per input file. It is preceded by a file header that indicates the file type is "receipt."

CTRS sends receipt/error message information by fax to the submitter, and in addition makes a receipt/error message file available for downloading to the submitter's computer, at the submitter's option.

The receipt/error message file has three record types. Type 1 is a fixed-length record identifying the input file and stating that the file was or was not received satisfactorily. Type 2 is a variable-length record containing text that describes an error. Type 3 is a fixed-length record containing a copy of the input record in which the error was found. A file of receipt/error messages contains: one header; one type 1 (receipt) record; and a pair of type 2 (text) and type 3 (transaction) records corresponding to each input transaction record that contains an error.

 

TABLE 5

RECEIPT/ERROR RECORD TYPE 1: RECEIPT

 

 

 

TABLE 6

RECEIPT/ERROR RECORD TYPE 2: DESCRIPTION OF ERROR

 

 

TABLE 7

RECEIPT/ERROR RECORD TYPE 3:

COPY OF TRANSACTION RECORD RECEIVED

 

 

SPECIFICATIONS FOR DATA SUBMISSION VIA DIAL-IN CONNECTION

 

Dealers may submit customer trade information to the MSRB in either of two ways: by uploading customer trade files to National Securities Clearing Corporation (NSCC) or by dialing in to the Customer Transaction Reporting Subsystem of the MSRB's Transaction Reporting System. NSCC will forward customer transaction files to the CTRS without making any change to the file contents. Procedures for uploading files to NSCC will be found in NSCC documentation.

 

Dealers with lower volumes of customer trades that choose to dial-in to the CTRS must use software provided, free of charge, by the MSRB for this purpose. The hardware/software requirements for the dealer's facility are:

 

• Software: Any version of Microsoft Windows that is supported by Microsoft Corporation.⁽¹⁾
• Hardware: A personal computer⁽²⁾ capable of running the above software; a modem (9600 baud or faster) and an analog telephone line.
  
  

The MSRB-provided software will include programs to make remote procedure calls with a minimum of dealer staff involvement. In ordinary operations the dealer staff will simply initiate the upload process and check that the process is successfully completed. Dealers will dial-in and transmit files using the Remote Procedure Call (RPC) features of Windows. RPC running on the dealer's computer and the CTRS will use standard protocols to communicate with one another.

The CTRS will send the receipt and any error messages to the submitting dealer by facsimile. Dealers wishing to download the receipt and error messages electronically will have the option to do so, using the MSRB-provided software.

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ENDNOTES

1. I.e., Windows 95, and Windows NT. Shortly after Microsoft discontinues support for an older product, the MSRB may discontinue use of that product for customer data submission.

2. Windows NT runs on workstations and other platforms that are not "personal computers." These are also suitable for file submission.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Operational Start Date for Customer Transaction Reporting

 

The operational start date of the customer transaction phase of the Board's Transaction Reporting Program has been delayed from January 1, 1998 to March 1, 1998. However, the Board's testing program is ongoing and dealers should ensure that they are testing their transaction reporting capabilities with the Board at this time or have scheduled a date to do so.

The Board's Transaction Reporting Program is designed to provide transparency and audit trail capabilities in the municipal securities market. Since 1995, the program has accepted dealer reports of inter-dealer transactions in municipal securities. Using these transaction reports, the Board publishes daily summaries of price and volume information about frequently traded municipal securities. The Board also maintains a surveillance database containing all transactions reported to the Board, and makes this database available to market regulators responsible for market surveillance and enforcement of Board rules.

During the next phase of the Transaction Reporting Program, dealers will report their dealer-customer transactions in municipal securities to the Board. This will allow information on customer transactions to be included in the daily price/volume summaries and in the surveillance database. Toward this end, the Securities and Exchange Commission in November 1996 approved amendments to Board rule G-14 on transaction reporting that require dealers to report their dealer-customer transactions to the Board.⁽¹⁾ When effective, these amendments will require that dealers send to the Board each day an electronic file containing the municipal securities transactions that were effected with customers on that day. An individual dealer may send the electronic file directly to the Board or may use an intermediary such as a clearing broker or a service bureau.⁽²⁾

At the time the amendments to rule G-14 were approved, the Board also announced a mandatory testing program. This program requires that dealers who will submit transactions to the Board under rule G-14 test their transaction reporting capabilities with the Board to ensure that their electronic files of transaction data are in the correct format and otherwise comply with the Board's requirements. The Board began the testing program with dealers in July 1997, and has received test data from over 40 service bureaus and clearing brokers on behalf of over 330 dealers. Most other dealers and service bureaus that will be submitting data to the Board are scheduled to begin testing before year-end.

Because of technical difficulties encountered in the development of computer systems that will operate Transaction Reporting Program, it is necessary for the Board to delay the operational start date for the customer transaction phase of the program -- originally scheduled for January 1, 1998 -- to March 1, 1998. This delay in the effective date for full operation of rule G-14 does not affect dealer obligations under the ongoing testing program. During December 1997, the Board will provide test dates to all dealers that have not yet been scheduled for testing. Dealers that plan to use the "PC dial-up" option for submitting data to the MSRB have now been sent necessary software and user manuals to submit test transactions to the MSRB. Dealers that plan to submit transactions via a clearing broker or service bureau may consider themselves as having tested if the clearing broker or service bureau is submitting (or is scheduled to submit) test data on their behalf. Dealers that plan to submit transactions via National Securities Clearing Corporation should have begun testing or have a test date scheduled and should contact the MSRB immediately if they do not have a test date.

As part of the testing program, dealers will continue to submit data reflecting their actual transactions once their initial test protocols have been successfully completed with the Board. Submission of the transaction data should be done by midnight of trade date -- the same deadline as will exist in the operational system. Testing in this manner will continue until the operational start date for the Program in March. Using live transaction data during the testing period will serve two purposes. It will assist the Board in designing the daily reports of price and volume information that will be provided to increase transparency in the municipal securities market and also will provide dealers and the Board with an opportunity to uncover and address problems that may arise in the reporting of specific types of transactions. This, in turn, will help the Board and the industry to ensure that system operations begin successfully in March 1998.

December 23, 1997

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ENDNOTES

1. Securities Exchange Act Release No. 37998 (November 29, 1996).

2. The format for these electronic files, data element definitions and other requirements concerning the details of customer transaction reporting may be found in MSRB Reports, Volume 16, No.3 (September 1996), at 3. The most current status of the Transaction Reporting Program, frequently asked questions, additional technical details, and other helpful explanatory material can be found on the Board's World Wide Web site at www.msrb.org.

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

 

The Board has filed an amendment to rule G-23, on activities of financial advisors.

 

On December 23, 1997, the Board filed with the Securities and Exchange Commission ("SEC") an amendment to rule G-23, on activities of financial advisors.⁽¹⁾ The amendment requires a financial advisor, prior to entering into a remarketing agreement for an issue on which it advised, to disclose, in writing, to the issuer the terms of the remuneration the financial advisor could earn as remarketing agent on such issue and that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent. The proposed amendment will become effective upon approval by the SEC.

DISCUSSION

Rule G-23, on activities of financial advisors, establishes disclosure and other requirements for dealers that act as financial advisors to issuers of municipal securities. The rule is designed principally to minimize the prima facie conflict of interest that exists when a dealer acts as both financial advisor and underwriter with respect to the same issue. Specifically, rule G-23 requires a financial advisor to alert the issuer to the potential conflict of interest that might lead the dealer to act in its own best interest as underwriter rather than the issuer's best interest.⁽²⁾

The Board recently was made aware that, in certain instances, some financial advisors also have acted as remarketing agents for issues on which they advised the issuer. In May 1997, the Board published a notice (the "Notice") that, among other things, proposed for comment draft amendments to rule G-23 concerning this issue.⁽³⁾ The draft amendment to rule G-23 would have required a dealer acting as both financial advisor and remarketing agent for an issue to meet the same disclosure and other requirements as a dealer acting as financial advisor and later negotiating the underwriting or acting as placement agent for the issue (which includes terminating the financial advisory relationship with regard to the issue and making certain disclosures regarding the potential conflict of interest). The concern was that there may be a potential conflict of interest for the financial advisor because its advice regarding the type of issue (i.e., variable rate) and the issue's timing and terms may be colored by the fees it expects to receive as remarketing agent.

Many of the commentators were opposed to the draft amendment. Some of the commentators felt that issuers should not be precluded from selecting a financial advisor to also serve as a remarketing agent and that the decision should be left to the issuer as to whether there is a conflict of interest involved in this situation. Based upon the comments received, the Board determined not to adopt the draft amendment to rule G-23.

Instead of requiring a broker, dealer or municipal securities dealer to resign as financial advisor for an issue prior to acting as remarketing agent for that issue, the proposed amendment requires the financial advisor, prior to entering into a remarketing agreement, to disclose, in writing, to the issuer the terms of the remuneration the financial advisor could earn as remarketing agent on such issue and that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent for the securities with respect to which the financial advisory relationship exists. The proposed amendment ensures that an issuer is made aware that there may be a conflict of interest for the financial advisor for an issue to change its capacity to that of remarketing agent for such issue and the issuer is made aware of the terms of the remuneration the dealer could earn as remarketing agent on such issue. The issuer can then decide whether to allow the financial advisor for an issue to act as remarketing agent for such issue.

The proposed amendment also requires that the financial advisor receive the issuer's acknowledgment in writing of receipt of such disclosures. The issuer's written acknowledgment of receipt can be accomplished by a variety of methods, including a signed statement from the issuer prepared by the dealer or issuer, or by the issuer signing or initialing the dealer's disclosure letter.

When the requirements contained in the proposed amendment are met, a dealer acting as financial advisor for an issue may also serve as remarketing agent for such issue.

December 23, 1997

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Text of Proposed Amendment⁽⁴⁾

Rule G-23. Activities of Financial Advisors

(a) - (d) No change.

(e) Remarketing Activities. No broker, dealer, or municipal securities dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities shall act as agent for the issuer in remarketing such issue, unless, prior to entering into a remarketing agreement, the broker, dealer, or municipal securities dealer has expressly disclosed in writing to the issuer that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent for the securities with respect to which the financial advisory relationship exists and the terms of the remuneration the broker, dealer or municipal securities dealer could earn as remarketing agent on such issue. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure.

[(e)] (f) No change.

[(f)] (g) Each broker, dealer, and municipal securities dealer subject to the provisions of sections (d), [or] (e) or (f) of this rule shall maintain a copy of the written disclosures, acknowledgments and consents required by these sections in a separate file and in accordance with the provisions of rule G-9.

[(g)] (h) No change.

[(h)] (i) No change.

---

ENDNOTES

1. File No. SR-MSRB-97-16. Comments sent to the SEC should refer to the file number.

2. Rule G-23(d)(i) requires a financial advisor wishing to underwrite or place an issue of municipal securities on a negotiated basis to: (i) terminate in writing the financial advisory relationship with respect to such issue and the issuer has expressly consented in writing to such acquisition or participation; (ii) disclose in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing receipt of such disclosure; and (iii) expressly disclose in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation as financial advisor, and the issuer has expressly acknowledged in writing receipt of such disclosure. If such issue is to be sold by the issuer at competitive bid, the issuer must expressly consent in writing prior to the bid to the financial advisor's acquisition or participation.

3. "Board Review of Underwriting Process," MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.

4. Underlining indicates new language; brackets denote deletions.

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

The Board has filed proposed amendments to rule G-32, on disclosures in connection with new issues

On December 22, 1997, the Board filed with the Securities and Exchange Commission ("SEC") proposed amendments to rule G-32, on disclosures in connection with new issues, that would strengthen the rule's existing requirements regarding dissemination of official statements to dealers purchasing new issue municipal securities during the underwriting period and would incorporate a longstanding Board interpretation regarding disclosure to customers of initial offering prices in negotiated underwritings.⁽¹⁾

Rule G-32 currently provides that no dealer shall sell any new issue municipal securities to a customer unless such dealer delivers to the customer no later than the settlement of the transaction, among other things, a copy of the official statement in final form and, in connection with a negotiated sale of new issue municipal securities, information regarding the initial offering price for each maturity in the new issue (the "Offering Price Disclosure Provision"). The rule also requires that managing underwriters and other dealers that sell new issue municipal securities to purchasing dealers furnish copies of the official statement to such purchasing dealers upon request (the "Dealer Dissemination Provisions"). The proposed amendments to rule G-32 would strengthen the Dealer Dissemination Provisions by requiring that official statements be sent to purchasing dealers within one business day of request and would make explicit in the Offering Price Disclosure Provision that the required disclosure to customers of the initial offering price of each maturity includes any maturities that have not been reoffered.

Amendments to Dealer Dissemination Provisions

All dealers selling new issue municipal securities to customers, not just dealers that participated in the underwriting of the new issue, are required to deliver official statements to their customers by no later than settlement of their transactions. As a result, the Dealer Dissemination Provisions were included in rule G-32 to make official statements for new issues available to all dealers so that they may fulfill their customer delivery obligation under the rule. Because dealers that are not part of the underwriting group have indicated from time to time that they have some difficulty in obtaining official statements from the managing underwriter or other selling dealers on a timely basis, the Board is proposing amendments to the Dealer Dissemination Provisions of rule G-32 to provide a specific time frame and method for delivery of official statements to purchasing dealers.

The proposed amendments would retain the existing responsibility of the managing underwriter under the rule to provide, upon request, one copy of the official statement to purchasing dealers, together with the disclosure information required for negotiated offerings, and one additional official statement per $100,000 par value purchased for resale to customers. The managing underwriter also would continue to be required to provide purchasing dealers, upon request, with instructions on how to order copies of the official statement from the printer.⁽²⁾ The amendments would add a requirement that the official statement be sent by the managing underwriter to the purchasing dealer no later than the business day after the request or, if the official statement has not been received from the issuer or its agent, the business day after receipt. The managing underwriters would be required to send official statements by first class mail or other equally prompt means unless the purchasing dealer arranges some other method of delivery at its own expense. These obligations of the managing underwriter would continue to apply with respect to all purchasing dealers, even where the managing underwriter did not sell the securities to the purchasing dealer.

In addition, the proposed amendments would retain the existing requirement that every dealer selling a new issue municipal security to another dealer must furnish the official statement to such purchasing dealer upon request. The amendments would add a requirement that the selling dealer send the official statement to the purchasing dealer within the same time frame and by the same means as would be required of the managing underwriter.

The Board believes that the proposed amendments to the Dealer Dissemination Provisions would help dealers to comply with their obligation to deliver official statements to their customers by settlement and would improve dissemination of official statements to the marketplace generally during the underwriting period.

Amendment to Offering Price Disclosure Provision

Since January 1983,⁽³⁾ the Board has interpreted the Offering Price Disclosure Provision to require that the initial offering price of all maturities of a new issue of municipal securities in a negotiated offering must be disclosed to customers, even for maturities that are not reoffered. The proposed amendment to the Offering Price Disclosure Provision of rule G-32 would incorporate into the rule language this longstanding Board interpretation. The Board believes that the application of the Offering Price Disclosure Provision to maturities that are not reoffered permits customers to determine whether the price they paid for a new issue municipal security is substantially different from the price being paid by presale purchasers.

December 22, 1997

 

Text of Amendments⁽⁴⁾

Rule G-32. Disclosures in Connection with New Issues

(a) Disclosure Requirements. No broker, dealer or municipal securities dealer shall sell, whether as principal or agent, any new issue municipal securities to a customer unless such broker, dealer or municipal securities dealer delivers to the customer no later than the settlement of the transaction:

(i) No change.

(ii) in connection with a negotiated sale of new issue municipal securities, the following information concerning the underwriting arrangements:

(A)-(B) No change.

(C) the initial offering price for each maturity in the issue that is offered or to be offered in whole or in part by the underwriters, including maturities that are not reoffered.

In the event an official statement in final form will not be prepared by or on behalf of the issuer, an official statement in preliminary form, if any, shall be sent to the customer with a notice that no final official statement is being prepared.

Every broker, dealer or municipal securities dealer shall send, upon request, promptly furnish the documents and information referred to in this section (a) to any broker, dealer or municipal securities dealer to which it sells new issue municipal securities , upon the request of such broker, dealer or municipal securities dealer. no later than the business day following the request or, if an official statement in final form is being prepared but has not been received from the issuer or its agent, no later than the business day following such receipt. Such items shall be sent by first class mail or other equally prompt means, unless the purchasing broker, dealer or municipal securities dealer arranges some other method of delivery and pays or agrees to pay for such delivery.

(b) Responsibility of Managing Underwriters, and Sole Underwriters and Financial Advisors. (i) Managing Underwriters and Sole Underwriters. When a final official statement is prepared by or on behalf of an issuer, the managing underwriter or sole underwriter, upon request, shall send to provide all brokers, dealers and municipal securities dealers that purchase the new issue municipal securities with an official statement and other information required by paragraph (a)(ii) of this rule and not less than one additional official statement in final form per $100,000 par value of the new issue purchased by the broker, dealer or municipal securities dealer and sold to customers. Such items shall be sent no later than the business day following the request or, if an official statement in final form is being prepared but has not been received from the issuer or its agent, no later than the business day following such receipt. Such items shall be sent by first class mail or other equally prompt means, unless the purchasing broker, dealer or municipal securities dealer arranges some other method of delivery and pays or agrees to pay for such delivery. In addition, the managing underwriter or sole underwriter, upon request and shall provide all purchasing brokers, dealers and municipal securities dealers with instructions on how to order additional copies of the final official statement directly from the printer. A managing underwriter or sole underwriter that prepares an official statement on behalf of an issuer shall print the final official statement and other information required by paragraph (a)(ii) of this rule and make them available promptly after the date of sale of the issue but no later than two business days before the date all securities are delivered by the syndicate manager to the syndicate members.

(ii) Finanicial Advisors. A broker, dealer or municipal securities dealer that, acting as financial advisor, prepares a final official statement on behalf of an issuer, shall make that official statement in final form available to the managing underwriter or sole underwriter promptly after the award is made. If the financial advisor is responsible for printing the final official statement, it shall make adequate copies of the final official statement available to the managing underwriter or sole underwriter promptly after the award is made but no later than two business days before the date all securities are delivered by the syndicate manager to the syndicate members to permit their compliance with paragraph (b)(i) of this rule.

(c) No change.

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ENDNOTES

1. File No. SR-MSRB-97-14. Comments sent to the SEC should refer to the file number.

2. Consistent with the position taken by the SEC in connection with its Rule 15c2-12, the Board recognizes that the official statement is the issuer's document. As a result, the proposed amendments would remove references in the existing rule to the preparation of official statements by underwriters and dealers that act as financial advisors.

3. See "Rule G-32 - Frequently Asked Questions Concerning Disclosures in Connection with New Issues," MSRB Reports, Vol. 3, No. 1 (Jan. 1983) at 25-27. See also "Disclosure Requirements for New Issue Securities: Rule G-32," MSRB Reports, Vol. 6, No.4 (Sept. 1986) at 17-20; and "Disclosures in Connection with New Issues: Rule G-32," MSRB Reports, Vol. 16, No. 3 (Sept. 1996) at 19-23.

4. Underlining indicates additions; strikethrough denotes deletions.

 

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

The Board has filed proposed amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, and rule G-38, on consultants

On December 18, 1997, the Board filed with the Securities and Exchange Commission ("SEC") proposed amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, and rule G-38, on consultants, that would (1) exempt dealers that have not engaged in municipal securities business for a period of at least two years from the Form G-37/G-38 submission requirement relating to rule G-37 (but not rule G-38) and related recordkeeping requirements under rule G-8; (2) require dealers that newly engage in municipal securities business to disclose certain political contributions and payments during the preceding two-year period; (3) exempt dealers that have no information to report in any calendar quarter from the Form G-37/G-38 submission requirement for such quarter; and (4) make certain technical and clarifying amendments to rules G-37 and G-38.⁽¹⁾

Rule G-37, on political contributions and prohibitions on municipal securities business, prohibits a dealer that effects transactions in municipal securities from engaging in municipal securities business⁽²⁾ with an issuer within two years after certain contributions to an official of such issuer made by the dealer, any municipal finance professional ("MFP") associated with such dealer (other than certain de minimis contributions) or any political action committee ("PAC") controlled by the dealer or any MFP. In addition, rule G-37 and rule G-38, on consultants, require dealers to make disclosures of certain contributions to issuer officials, payments to political parties of states and political subdivisions, consultant arrangements and municipal securities business on Form G-37/G-38, and rule G-8, on recordkeeping, requires dealers to create records of such contributions, payments, consultants and municipal securities business.

Although the Board continues to be vigilant for any evidence that political contributions may affect the awarding of municipal securities business, the Board believes that the direct connection between political contributions to issuer officials and the awarding of municipal securities business has been substantially reduced during the last three years by rule G-37. The Board also is sensitive to the burden imposed on dealers by the requirements of rules G-37 and G-8 and is committed to reducing this burden whenever possible as long as the effectiveness of the rules is not impaired.

Thus, the Board is proposing amendments to rules G-37 and G-8 that would exempt dealers that have not engaged in municipal securities business for a period of at least two years from the reporting requirements of rule G-37 and from certain related recordkeeping requirements under rule G-8. However, dealers would continue to be subject to the rule G-38 reporting requirements. Although rule G-37 is intended only to regulate dealer engagements in municipal securities business (as defined in the rule), every dealer is currently required to comply with the reporting requirements under rule G-37 and the related recordkeeping requirements under rule G-8, even if a dealer does not engage in any such municipal securities business.

To prevent dealers that do in fact engage in municipal securities business from circumventing rule G-37 - including in particular the ban on municipal securities business - by means of this exemption, the proposed amendments would require any dealer that engages in municipal securities business to record and to disclose on Form G-37/G-38 certain contributions to issuer officials and payments to political parties of states and political subdivisions during the two-year period preceding its engagement in municipal securities business, to the extent not previously disclosed.

In addition, the Board is proposing amendments to rule G-37 to codify a previously recognized exemption to the Form G-37/G-38 submission requirement for any quarter in which a dealer has no information to report. The Board is also proposing certain technical amendments to rules G-37 and G-38 to consolidate the provisions relating to submission of Form G-37/G-38 and to clarify rule G-37 by eliminating certain cross-referencing to rule G-8.

Form G-37/G-38 Submission and Recordkeeping Exemption for Dealers Not Engaged in Municipal Securities Business

As amended, rule G-37(e)(ii)(A)(1) would provide that, if a dealer has not engaged in municipal securities business for a period of at least two years, the dealer would not be required to send Form G-37/G-38 to the Board for so long as it refrains from engaging in municipal securities business, even if the dealer had made political contributions or political party payments that would otherwise be reportable under rule G-37. In addition, new clause (K) of rule G-8(a)(xvi) would provide that such dealer would not be subject to the recordkeeping requirements of paragraph (a)(xvi) of rule G-8, relating to records concerning political contributions and prohibitions on municipal securities business, for so long as it refrains from engaging in municipal securities business.⁽³⁾ The submission exemption and recordkeeping exemption are referred to collectively as the "No Business Exemption." The No Business Exemption would apply both to dealers that have never undertaken municipal securities business and to dealers that have previously undertaken such business but have ceased for the requisite period of time.⁽⁴⁾

If, in any quarter during which a dealer qualifies for the No Business Exemption, such dealer uses a consultant to attempt to obtain municipal securities business, such dealer would be required under amended rule G-37(e)(ii)(B) to submit Form G-37/G-38 to the Board but would only be required to report information relating to such use of consultants as required under rule G-38.

The No Business Exemption would not provide an exemption from the operation of sections (b) and (c) of rule G-37. Thus, under certain circumstances, a political contribution (other than an MFP's de minimis contribution) to an official of an issuer that was not disclosed on Form G-37/G-38 and not recorded under rule G-8(a)(xvi) by virtue of the No Business Exemption could trigger the ban on municipal securities business with such issuer.

In addition, once a dealer does in fact engage in municipal securities business, the dealer would become subject to the new Look Back Disclosure Requirement described below and would be required to send Form G-37/G-38 to the Board for the calendar quarter in which such business was undertaken and for each quarter thereafter unless the dealer qualifies for the No Information Exemption described below or again qualifies for the No Business Exemption. Furthermore, such dealer would be required to create records of political contributions and payments to political parties of states and political subdivisions under rule G-8(a)(xvi) for the then current calendar year and the two preceding calendar years and to continue to create such records thereafter unless the dealer again qualifies for the No Business Exemption. Before engaging in municipal securities business with an issuer, such dealer would need to review the newly created records to ensure that it has not been banned from business with the issuer as a result of a contribution to an official of the issuer during the period that the dealer had invoked the No Business Exemption.⁽⁵⁾

In proposing the elimination of the requirement to disclose political contributions and payments to political parties where the dealer has not engaged in municipal securities business for a period of at least two years, the Board recognizes that the filing of Form G-37/G-38 and compliance with the underlying recordkeeping requirements under such circumstances may not substantially further the purpose of exposing to public scrutiny contributions and payments that may be linked to the awarding of municipal securities business.

Disclosure Requirement With Respect to Dealers Newly Engaging in Municipal Securities Business

In conjunction with the proposed No Business Exemption, the proposed amendments would institute a new "Look Back Disclosure Requirement." If in any calendar quarter a dealer engages in municipal securities business, the dealer would be required under amended rule G-37(e)(iii) to report on Form G-37/G-38 for such quarter all reportable contributions to issuer officials and payments to political parties of states and political subdivisions made during the preceding two years by the dealer, any MFP, any non-MFP executive officer or any dealer-controlled or MFP-controlled PAC, to the extent not previously reported during the two-year period.⁽⁶⁾ A disclosure obligation should arise under the Look Back Disclosure Requirement only if a dealer engages in municipal securities business after either (i) having invoked the No Business Exemption during the preceding two-year period or (ii) having become a new dealer that is for the first time subject to the rules of the Board.

The Look Back Disclosure Requirement is intended to promote public scrutiny of all contributions to issuer officials and payments to political parties of states and political subdivisions (other than qualifying de minimis contributions and payments) that may affect the awarding of municipal securities business to any dealer that is newly engaging in, or is again becoming engaged in, municipal securities business.

Form G-37/G-38 Submission Exemption for Dealers With No Information to Report

Amended rule G-37(e)(ii)(A)(2) would codify a previously recognized exemption to the quarterly Form G-37/G-38 submission requirement by providing that a dealer would not be required to send Form G-37/G-38 to the Board for any calendar quarter in which all of the following conditions apply: (1) the dealer has not engaged in municipal securities business, (2) the dealer has no reportable political contributions to issuer officials or payments to political parties of states and political subdivisions, and (3) the dealer has no reportable use of consultants (the "No Information Exemption"). The No Information Exemption would continue to obviate the need for a dealer to submit a Form G-37/G-38 that reflects no reportable activity under all category headings. However, a dealer would be required to send Form G-37/G-38 to the Board in any subsequent calendar quarter in which it does not qualify for the No Information Exemption, unless the dealer qualifies for the No Business Exemption.

Technical Amendments Relating to Form G-37/G-38 Submission Procedures

Amended rule G-37(e)(i) would consolidate the Form G-37/G-38 submission procedures that are currently set forth separately in paragraphs (i) and (ii) of rule G-37(e) and in rule G-38(d). Amended rule G-38(d) would include certain related amendments.

Clarifying Technical Amendments

The existing exemption from the reporting requirements under rule G-37 for de minimis contributions made by MFPs and non-MFP executive officers to officials of issuers⁽⁷⁾ and to political parties of states and political subdivisions⁽⁸⁾ is effected by a cross-reference to the recording requirements of rule G-8(a)(xvi). To clarify the nature of such de minimis exemption, amended rule G-37(e)(i)(A) incorporates into the language of rule G-37, but does not change, the specific requirements of the de minimis exemption.

December 18, 1997

 

Text of Amendments⁽⁹⁾

Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business

(a) - (d) No change.

(e)(i) Except as otherwise provided in paragraph (e)(ii), each Each broker, dealer or municipal securities dealer shall, 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), 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 on contributions to officials of issuers and on payments to political parties of states and political subdivisions that are required to be recorded pursuant to rule G-8(a)(xvi). Such reports shall include information concerning the amount of, two copies of Form G-37/G-38 setting forth, in the prescribed format, the following information:

(A) for contributions to officials of issuers (other than a contribution made by a municipal finance professional or a non-MFP executive officer to an official of an issuer for whom such person is entitled to vote if all contributions by such person to such official of an issuer, in total, do not exceed $250 per election) and payments to political parties of states and political subdivisions (other than a payment made by a municipal finance professional or a non-MFP executive officer to a political party of a state or political subdivision in which such person is entitled to vote if all payments by such person to such political party, in total, do not exceed $250 per year): and an indication of the contributor category of each contribution or payment made by:

(A) the broker, dealer or municipal securities dealer;

(B) all municipal finance professionals;

(C) all non-MFP executive officers; and

(D) all political action committees controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional.

Such reports also shall include information on municipal securities business engaged in and certain other information specified in this section (e), as well as other identifying information as may be determined by the Board from time to time.

(ii) Two copies of the reports referred to in paragraph (i) of this section (e) 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), and must include, in the prescribed format, by state, the following information on contributions to each official of an issuer and payments to each political party of a state or political subdivision made and municipal securities business engaged in during the reporting period:

(A) (1) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving contributions or payments during such calendar quarter, listed by state;

(B) (2) the contribution or payment amount made and the contributor category of each of the following persons and entities described in paragraph (i) of this section (e); and (C) such other identifying information required by Form G-37/G-38. Such reports also must include making such contributions or payments during such calendar quarter:

(a) the broker, dealer or municipal securities dealer;

(b) each municipal finance professional;

(c) each non-MFP executive officer; and

(d) each political action committee controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional;

(B) a list of issuers with which the broker, dealer or municipal securities dealer has engaged in municipal securities business during such calendar quarter, listed by state, along with the type of municipal securities business;

(C) any information required to be included on Form G-37/G-38 for such calendar quarter pursuant to paragraph (e)(iii);

(D) any information required to be disclosed pursuant to section (d) of rule G-38; and

(E) such other identifying information required by Form G-37/G-38.

The Board shall make public a copy of each Form G-37/G-38 received from any broker, dealer or municipal securities dealer.

(ii)(A) Subject to clause (B) of this paragraph (e)(ii), no broker, dealer or municipal securities dealer shall be required to send Form G-37/G-38 to the Board for any calendar quarter in which either:

(1) such broker, dealer or municipal securities dealer has not engaged in municipal securities business, but only if such broker, dealer or municipal securities dealer had not engaged in municipal securities business during the seven consecutive calendar quarters immediately preceding such calendar quarter; or

(2) such broker, dealer or municipal securities dealer has no information that is required to be reported pursuant to clauses (A) through (D) of paragraph (e)(i) for such calendar quarter.

(B) If for any calendar quarter a broker, dealer or municipal securities dealer has met the requirements of clause (A)(1) of this paragraph (e)(ii) but has information that is required to be reported pursuant to clause (D) of paragraph (e)(i), then such broker, dealer or municipal securities dealer shall be required to send Form G-37/G-38 to the Board for such quarter setting forth only such information as is required to be reported pursuant to clauses (D) and (E) of paragraph (e)(i).

(iii) If a broker, dealer or municipal securities dealer engages in municipal securities business during any calendar quarter, such broker, dealer or municipal securities dealer shall include on Form G-37/G-38 for such calendar quarter, to the extent not previously reported on Form G-37/G-38, the information described in clause (A) of paragraph (e)(i) (including year and calendar quarter of contribution or payment) for each contribution or payment made during the two-year period preceding such calendar quarter. This paragraph (e)(iii) shall not relieve any broker, dealer or municipal securities dealer of its obligation to send Form G-37/G-38 to the Board for any calendar quarter for which such Form G-37/G-38 is required to be sent to the Board and to include in any such Form G-37/G-38 all information required to be set forth therein by this rule.

(f) - (i) No change.

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) - (xv) No change.

(xvi)(A) - (J) No change.

(K) No broker, dealer or municipal securities dealer shall be subject to the requirements of this paragraph (a)(xvi) in any calendar quarter in which such broker, dealer or municipal securities dealer has not engaged in municipal securities business, but only if such broker, dealer or municipal securities dealer had not engaged in municipal securities business during the seven consecutive calendar quarters immediately preceding such calendar quarter. At such time as a broker, dealer or municipal securities dealer that has been exempted by this clause (K) from the requirements of this paragraph (a)(xvi) engages in any municipal securities business, all requirements of this paragraph (a)(xvi) covering the full periods of time set forth herein shall become applicable to such broker, dealer or municipal securities dealer.

(xvii) - (xix) No change.

(b) - (f) No change.

Rule G-38. Consultants

(a) - (c) No change.

(d) Disclosure to Board. Each broker, dealer or and municipal securities dealer shall send to the Board, in the manner and at the times prescribed in paragraph (e)(i) of rule G-37, by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports on Form G-37/G-38 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, role and compensation arrangement. In addition, such reports shall indicate the dollar amount of payments made to each consultant during such calendar quarter the report period and, if any such payments are related to the consultant's efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified.

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ENDNOTES

1. File No. SR-MSRB-97-12. Comments sent to the SEC should refer to the file number.

2. Municipal securities business is defined in rule G-37 to consist of negotiated underwritings or private placements of an issue of municipal securities, or financial advisory, consultant or remarketing agent services with respect to an issue of municipal securities retained on a negotiated basis. The range of activities of a dealer that constitutes effecting transactions in municipal securities may be significantly broader than those activities encompassed by the term municipal securities business.

3. Dealers would be required to continue to preserve any records that had previously been created relating to rule G-37 in the manner and for the period of time set forth in rule G-9, on preservation of records.

4. A dealer that has been subject to the rules of the Board for a period of less than two years (for example, because it came into existence during such period or because it did not previously effect municipal securities transactions) would of necessity not have engaged in municipal securities business prior to becoming a dealer. Therefore, so long as a new dealer has not engaged in any municipal securities business since becoming a dealer, such dealer would automatically satisfy the requirements for the No Business Exemption.

5. This obligation to create records and to review such records prior to engaging in municipal securities business is identical to the current requirement imposed upon new dealers immediately upon becoming subject to the rules of the Board. The proposed amendments would permit a new dealer to defer this obligation until it begins to engage in municipal securities business and would treat an existing dealer that, after not having engaged in municipal securities business for at least two years, again engages in such business in the same manner as a new dealer first engaging in municipal securities business.

6. A dealer would not be required to include in such report contributions or payments made more than two years prior to such quarter, even if not previously reported.

7. A de minimis contribution to an official of an issuer not requiring disclosure consists of a contribution made by an MFP or a non-MFP executive officer to an official of an issuer for whom such person is entitled to vote if all contributions by such person to such official of an issuer, in total, do not exceed $250 per election.

8. A de minimis payment to a political party of a state or political subdivision not requiring disclosure consists of a payment made by an MFP or a non-MFP executive officer to a political party of a state or political subdivision in which such person is entitled to vote if all payments by such person to such political party, in total, do not exceed $250 per year.

9. Underlining indicates additions; strikethrough denotes deletions.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Additional Questions and Answers: Rule G-37 on Political Contributions and Prohibitions on Municipal Securities Business

Transition and Inaugural Expenses

1. Q: May a municipal finance professional who is entitled to vote for an issuer official make contributions to pay for such official's transition or inaugural expenses without causing a prohibition on municipal securities business with the issuer?

A: Yes, under certain conditions. The de minimis exception allows a municipal finance professional to contribute up to $250 per candidate per election if the municipal finance professional is entitled to vote for that issuer official. The de minimis exception is keyed to an election cycle; therefore, if a municipal finance professional contributed $250 to the general election of an issuer official, the municipal finance professional would not be able to make any contributions to pay for transition or inaugural expenses without causing a prohibition on municipal securities business with the issuer. If a municipal finance professional made no contributions to an issuer official prior to the election, then the municipal finance professional may, if entitled to vote for the candidate, contribute up to $250 to pay for transition or inaugural expenses and payment of debt incurred in connection with the election without causing a prohibition on municipal securities business.

Definition of Issuer Official

2. Q: An incumbent was seeking re-election as an issuer official but she lost the election. She is now soliciting money to pay for the debt incurred in connection with this election. Would there be a prohibition on engaging in municipal securities business with the issuer if a dealer or a municipal finance professional provides money for the payment of this debt?

A: No, under certain conditions. If the incumbent is out of office at the time she is soliciting money to pay for the election debt, then she is no longer considered to be within the definition of "official of an issuer" and any monies given for the payment of debt incurred in connection with the election in this instance is not subject to rule G-37. If the incumbent still holds her issuer official position at the time she is soliciting money to pay for the election debt, then, if a municipal finance professional contributed $250 to her during the general election, the municipal finance professional would not be able to make any contributions for the payment of debt without causing a prohibition on municipal securities business with the issuer. If a municipal finance professional made no contributions to the incumbent prior to the election, then the municipal finance professional may, if entitled to vote for the candidate, contribute up to $250 for the payment of debt incurred in connection with the election while the incumbent is still in office without causing a prohibition on municipal securities business. A dealer may not contribute any monies towards the payment of debt while the incumbent is still in office without causing a prohibition on municipal securities business with the issuer.

Definitions of Municipal Finance Professional and Executive Officer

3. Q: In making the determination of which associated persons of a dealer meet the definitions of municipal finance professional and executive officer, is it correct to designate all the executives of the dealer (e.g., President, Executive Vice Presidents) under the category of executive officers?

A: No. In making the determination of whether someone is a municipal finance professional or executive officer, one must review the activities of the individual and not his or her title. Rule G-37(g)(iv) defines the term "municipal finance professional" as:

(A) any associated person primarily engaged in municipal securities representative activities, as defined in rule G-3(a)(i); (B) any associated person who solicits municipal securities business, as defined paragraph (vii); (C) any associated person who is both (i) a municipal securities principal or a municipal securities sales principal and (ii) a supervisor of any persons described in subparagraphs (A) or (B); (D) any associated person who is a supervisor of any person described in subparagraph (C) up through and including, in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer or similarly situated official and, in the case of a bank dealer, the officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities, as required pursuant to rule G-1(a); or (E) any associated person who is a member of the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1) executive or management committee or similarly situated officials, if any; provided, however, that, if the only associated persons meeting the definition of municipal finance professional are those described in this subparagraph (E), the broker, dealer or municipal securities dealer shall be deemed to have no municipal finance professionals.

Rule G-37(g)(v) defines the term "executive officer" as:

an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional, as defined in paragraph (iv) of this section (g); provided, however, that, if no associated person of the broker, dealer or municipal securities dealer meets the definition of municipal finance professional, the broker, dealer or municipal securities dealer shall be deemed to have no executive officers.

Dealers should first review the activities of their associated persons to determine whether they are municipal finance professionals, and then, once that list of individuals has been established, conduct a review of the remaining associated persons to determine whether they are executive officers. Dealers should pay close attention to those associated persons who are soliciting municipal securities business and, thus, will be considered municipal finance professionals. The Board has previously stated that solicitation activities may include, but are not limited to, responding to issuer Requests for Proposals, making presentations of public finance and/or municipal marketing capabilities to issuer officials, and engaging in other activities calculated to appeal to issuer officials for municipal securities business, or which effectively do so. (See "Additional Rule G-37 Questions & Answers," MSRB Reports, Vol. 14, No. 5 (December 1994) at 8).

Reporting by Syndicate Members

4. Q: Rule G-37(e) requires, among other things, that dealers submit information to the Board on Form G-37/G-38 about the municipal securities business in which they engaged. Is information about the municipal securities business engaged in required to be submitted by all syndicate and selling group members, or is it only the responsibility of the manager(s) to submit such information on behalf of the syndicate?

A: All manager(s) and syndicate members (excluding selling group members) must separately report the municipal securities business in which they engaged.

September 9, 1997

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

The Board has filed technical amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-38, on consultants, and G-8, on recordkeeping.

Questions about the amendments may be directed to Ronald W. Smith, Legal Associate.

On September 30, 1997, the Board filed with the Securities and Exchange Commission (SEC) technical amendments to rules G-37, G-38 and G-8.⁽¹⁾ The amendments will become effective on October 30, 1997.

SUMMARY OF AMENDMENTS

During the past year, the Board has received questions regarding certain technical aspects of rules G-37, G-38 and G-8. Specifically, these questions have been concerned with the definitions of municipal finance professional and executive officer, and when Form G-37/G-38 is due to be filed with the Board. The amendments clarify the requirements of the rules in these areas.

Definitions of Municipal Finance Professional and Executive Officer

The Board believes that some dealers are improperly classifying, for rule G-37 purposes, certain individuals within their firms as executive officers when these individuals actually meet the definition of municipal finance professionals and should be classified as such. Contributions by executive officers must be recorded and reported but, unlike certain contributions by municipal finance professionals, would not cause a prohibition on municipal securities business. The definition of executive officer makes clear that municipal finance professionals cannot also be executive officers. To further underscore this point, the amendments revise the name of the category of individuals currently referred to as "executive officers" to "non-MFP executive officers." This change in name should help dealers avoid any misunderstandings that a person who functions as a municipal finance professional cannot be classified, for purposes of rule G-37, as an executive officer.

Due Date for Form G-37/G-38 to be Filed with the Board

Rules G-37 and G-38 state that Form G-37/G-38 must be submitted to the Board "within thirty (30) calendar days after the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31)." Because of the inconsistency in the language for those months with 31 days, the amendments revise the rule language to require that the forms be sent "by the last day of the month following the end of each calendar quarter." The forms do not have to be received by the Board by the last day of the month following the end of each calendar quarter, but the amendments require that dealers must have the forms on their way to the Board by the last day of the month following the end of each calendar quarter in order to be in compliance with the delivery requirements of the rules.

The amendments also contain non-substantive, technical rule language changes to make similar requirements consistent throughout the rules.

TEXT OF AMENDMENTS⁽²⁾

Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business

(a) - (d) No change.

(e)(i) Each broker, dealer or municipal securities dealer shall submit 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 on contributions to officials of issuers and on payments to political parties of states and political subdivisions that are required to be recorded pursuant to rule G-8(a)(xvi). Such reports shall include information concerning the amount of contributions to officials of issuers and payments to political parties of states and political subdivisions and an indication of the contributor category of each contribution or payment made by:

(A) the broker, dealer or municipal securities dealer;

(B) all municipal finance professionals;

(C) all non-MFP executive officers; and

(D) all political action committees controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional.

Such reports also shall include information on municipal securities business engaged in and certain other information specified in this section (e), as well as other identifying information as may be determined by the Board from time to time.

(e)(ii) Two copies of the reports referred to in paragraph (i) of this section (e) must be submitted sent to the Board on Form G-37/G-38 within thirty (30) calendar days after 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), and must include, in the prescribed format, by state, the following information on contributions to each official of an issuer and payments to each political party of a state or political subdivision made and municipal securities business engaged in during the reporting period: (A) name and title (including any city/county/state or political subdivision) of each official of an issuer receiving contributions or payments; (B) contribution or payment amount made and the contributor category of the persons and entities described in paragraph (i) of this section (e); and (C) such other identifying information required by Form G-37/G-38. Such reports also must include a list of issuers with which the broker, dealer or municipal securities dealer has engaged in municipal securities business, along with the type of municipal securities business.

(f) No change.

(g) Definitions.

(i) - (iv) No changes.

(v) The term "non-MFP executive officer" means an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipal securities dealer (or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional, as defined in paragraph (iv) of this section (g); provided, however, that, if no associated person of the broker, dealer or municipal securities dealer meets the definition of municipal finance professional, the broker, dealer or municipal securities dealer shall be deemed to have no non-MFP executive officers.

Each person listed by the broker, dealer or municipal securities dealer as an a non-MFP executive officer pursuant to rule G-8(a)(xvi) is deemed to be an a non-MFP executive officer.

(vi) - (viii) No change.

(h) - (i) No change.

 

Rule G-38. Consultants

(a) - (c) No change.

(d) Disclosure to Board. Each broker, dealer and municipal securities dealer shall submit 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 submitted sent to the Board on Form G-37/G-38 within thirty (30) calendar days after 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, role and compensation arrangement. In addition, such reports shall indicate the dollar amount of payments made to each consultant during the report period and, if any such payments are related tot he consultant's efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified.

 

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)-(xv) No change.

(xvi) Records Concerning Political Contributions and Prohibitions on Municipal Securities Business Pursuant to Rule G-37. Records reflecting:

(A) No change.

(B) a listing of the names, titles, city/county and state of residence of all non-MFP executive officers;

(C) - (E) No change.

(F) the contributions, direct or indirect, to officials of an issuer made by each municipal finance professional and non-MFP executive officer for the current and year and separate listings for each of the previous two calendar years, which records shall include: (i) the names, titles, city/county and state of residence of contributors, (ii) the names, and titles (including any city/county/state or other political subdivision) of the recipients of such contributions, and (iii) the amounts and dates of such contributions; provided, however, that such records need not reflect any contribution made by a municipal finance professional or non-MFP executive officer to officials of an issuer for whom such person is entitled to vote if the contributions made by such person, in total, are not in excess of $250 to any official of an issuer, per election; and

(G) the payments, direct or indirect, to political parties of states and political subdivisions made by all municipal finance professionals and non-MFP executive officers for the current year and separate listings for each of the previous two calendar years, which records shall include: (i) the names, titles, city/county and state of residence of contributors, (ii) the names, and titles (including any city/county/state or other political subdivision) of the recipients of such payments and (iii) the amounts and dates of such payments; provided, however, that such records need not reflect those payments made by any municipal finance professional or non-MFP executive officer to a political party of a state or political subdivision in which such persons are entitled to vote if the payments made by such person, in total, are not in excess of $250 per political party, per year.

(H) Dealers shall maintain copies of the Forms G-37/G-38 submitted sent to the Board along with the certified or registered mail receipt or other record of sending such forms to the Board.

(I) - (J) No change.

(xvii) - (xix) No change.

(b) - (f) No change.

September 30, 1997

 

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Endnotes:

1. File No. SR-MSRB-97-6. Comments sent to the SEC should refer to the file number.

2. Underlining indicates new language; strikethrough denotes deletions.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

 

 

Consultants: Rule G-38

The Board has filed an amendment to rule G-38, on consultants, that would give 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.

On November 24, 1997, the Board filed with the Securities and Exchange Commission ("SEC") a proposed amendment to rule G-38, on consultants. ⁽¹⁾ The proposed amendment would give dealers the option of disclosing their consulting arrangements to issuers, pursuant to section (c) of the rule, on either an issue-specific of issuer-specific basis.

Rule G-38, on consultants, requires broker, 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.

It has come to the Board's attention that this issue-specific nature of the disclosure requirement can create 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, and if a dealer is using a consultant to obtain a syndicate slot in each such issue, the dealer is required to disclose the same information to the same issuer month after month and possibly week after week. In addition, the Board has learned that dealers who use a consultant to help obtain co-manager business sometimes have difficulty complying with rule G-38(c) because, 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.

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 determined to amend 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 amendment, 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 within three business days of the consultant's first direct or indirect communication with that issuer, but in any event prior to the issuer's selection of that dealer for any municipal securities business. ⁽²⁾ To ensure that such information, once disclosed, remains current, the amendment also requires 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⁾ 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).

In June, the Board published the amendment for industry comment. ⁽⁴⁾ In response, the Board received comment letters from three dealers. One of these commentators expressed its belief that the amendment is helpful and may simplify the reporting process. The other two commentators also supported the draft amendment. One commentator stated that "the proposed changes will greatly simplify the disclosure process when multiple transactions develop as the result of a consultant's activities with an issuer." However, this commentator recommended that the draft amendment require dealers to advise the issuer of any material change in the information disclosed; the commentator believes that this will obviate the need for dealers to file amended disclosure reports relating to, for example, an insignificant change to a consultant's role or to a minor change in the name of the consultant's organization. The Board believes that adopting the commentator's recommendation would introduce a subjective element to the disclosure requirement and would result in differing interpretations as to what is "material." For example, by incorporating this subjective standard, the Board could not ensure that issuers would be advised of changes in the consultant's name, company, role and compensation arrangement - information which is required to be disclosed to issuers pursuant to rule G-38(c). Thus, the Board has declined to adopt the commentator's recommendation.

November 24, 1997

 

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Text of the Proposed Amendment ⁽⁵⁾

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) within three business days of the consultant's first direct or indirect communication with the issuer, but in any event prior to the issuer's selection of such broker, dealer or municipal securities dealer 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 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.

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ENDNOTES

1. File No. SR-MSRB-97-9. Comments submitted to the SEC should refer to this file number.

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. MSRB Reports, Vol. 17, No. 2 (June 1997) at 17-18.

5. Underlining indicates additions; [brackets] denote deletions.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Rule G-38 on Consultants

Rule G-38, on consultants, requires 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 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.

It has come to the Board's attention that this issue-specific nature of the disclosure requirement can create 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, and if a dealer is using a consultant to obtain a syndicate slot in each such issue, the dealer is required to disclose the same information to the same issuer month after month and possibly week after week. In addition, the Board has learned that dealers who use a consultant to help obtain co-manager business sometimes have difficulty complying with rule G-38(c) because, 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.

The Board believes that while the timing of this issue-specific requirement is appropriate in the vast majority of cases, it can be a problem in the context of frequent issuers of municipal securities and in the co-manager selection process. Thus, the Board is proposing for comment a draft amendment to 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 draft amendment, 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 within three business days of the consultant's first direct or indirect communication with that issuer, but in any event prior to the issuer's selection of that dealer for any municipal securities business. [1] To ensure that such information, once disclosed, remains current, the draft amendment also would 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. [2] 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).

May 21, 1997

 

TEXT OF DRAFT AMENDMENT (Language between *asterisks* is proposed new language: language between brackets is proposed deleted language)

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) within three business days of the consultant's first direct or indirect communication with the issuer, but in any event prior to the issuer's selection of such broker, dealer or municipal securities dealer 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 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.

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ENDNOTES

[1] 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.

[2] 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 draft amendment.

 

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

 

 

Comments on the draft amendments should be submitted no later than December 15, 1997, and may be directed to Ronald W. Smith, Legal Associate. Written comments will be available for public inspection.

BACKGROUND

Rule G-37, among other things, prohibits a dealer from engaging in municipal securities business with an issuer within two years after certain contributions to an official of such issuer made by the dealer, any municipal finance professional associated with such dealer, or any political action committee ("PAC") controlled by the dealer or any municipal finance professional. Rule G-37(d) prohibits a dealer and any municipal finance professional from doing any act indirectly which would result in a violation of the rule if done directly by the dealer or municipal finance professional. Thus, a dealer would violate rule G-37 by engaging in municipal securities business with an issuer after directing any person to make a contribution to an official of such issuer. Because the Board was concerned that dealers could circumvent rule G-37 by using consultants to make political contributions or that the contributions of consultants might be used by dealers to obtain municipal securities business, the Board believed that additional information about consultant arrangements should be made available to issuers and the public in order to maintain the integrity of the market. Accordingly, the Board adopted rule G-38.

Rule G-38 requires dealers who use consultants [1] to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"). [2] Rule G-38(c) requires each dealer to disclose to an issuer with which it is engaging or seeking to engage in municipal securities business, in writing, information on consulting arrangements relating to such issuer. The written disclosure must include, at a minimum, the name, company, role and compensation arrangement with the consultant or consultants. Dealers are required to make such written disclosures prior to the issuer's selection of any dealer in connection with the municipal securities business being sought, regardless of whether the dealer making the disclosure ultimately is the one to obtain or retain that business. [3] Rule G-38(d) requires dealers to submit to the Board, on a quarterly basis, reports of all consultants used by the dealer. [4] For each consultant, dealers must report the consultant's name, company, role and compensation arrangement, as well as the dollar amount of any payment made to the consultant during the quarterly reporting period. [5]

The rule G-38 reporting and recordkeeping requirements seek to make information public about the consultants dealers have hired and the municipal securities business obtained through such consultants. The Board sought this public disclosure so that reporters and others could investigate further whether there was a connection between contributions given by consultants and the business they obtained for the dealers that hired them.

The Board continues to be concerned about the possibility that dealers could be awarded municipal securities business due to the contributions made by their consultants. Thus, the Board is proposing the draft amendment to rule G-38 to bring more disclosure to the public about political contributions being made by consultants hired by dealers.

SUMMARY OF DRAFT AMENDMENTS

The draft amendment to rule G-38 would require a dealer to include within its Consultant Agreement a requirement that the consultant agrees to provide the dealer each calendar quarter with a listing of any, direct or indirect, political contributions to official(s) of an issuer and payments to political parties of states and political subdivisions during such quarter made by the consultant, the consultant's company and/or any PAC controlled by the consultant or the consultant's company. This is similar to the dealer-associated persons and entities subject to rule G-37 (i.e., dealers, municipal finance professionals, and PACs controlled by a dealer or any municipal finance professionals).

The draft amendment also requires information on the political contributions of consultants to be reported by dealers to the Board on Form G-37/G-38. Dealers would have to rely on consultants to supply this information in a timely fashion so that they may send their Forms G-37/G-38 to the Board within 30 calendar days after the end of each calendar quarter. Dealers may wish to include language within their Consultant Agreements to require their consultants to supply such information within a certain time frame because, as regulated entities, the onus will be on dealers to make their filings in a timely fashion.

The draft amendment states that a dealer is not required to obtain from a consultant information on political contributions to official(s) of an issuer for whom the consultant is entitled to vote and which contributions, in total, are not in excess of $250 by such consultant to each official of such issuer, per election. A dealer also would not be required to obtain from a consultant information on payments to a political party of a state or political subdivision in which such consultant is entitled to vote if the payments by such consultant, in total, are not in excess of $250 per political party, per year. These are the same de minimis exceptions contained in rule G-37 for purposes of reporting contributions and payments made by municipal finance professionals and executive officers.

The draft amendment also limits the disclosure of consultants' contributions only to those contributions to official(s) of an issuer from whom the consultant is seeking municipal securities business on behalf of the dealer. This is different than the requirement in rule G-37 that all contributions to issuer officials by dealers and municipal finance professionals be disclosed. The Board believes this narrower requirement is more appropriate because consultants may work for other non-dealer companies and the Board is only concerned about the work being done on behalf of dealers. Dealers may need to modify their Consultant Agreements to be more specific in indicating which issuers their consultants are seeking business from on the dealer's behalf. [6]

Under rule G-37, dealers also are required to record and report the contributions of executive officers to issuer officials. Rule G-37(g)(v) defines the term "executive officer" as "an associated person in charge of a principal business unit, division or function or any other person who performs similar policy making functions for the broker, dealer or municipal securities dealer(or, in the case of a bank dealer, the separately identifiable department or division of the bank, as defined in rule G-1), but does not include any municipal finance professional." Although not included in the draft amendment, the Board is seeking comment on whether similarly situated persons within a consultant's firm also should be required to disclose their political contributions to the dealer, which the dealer would then report on Form G-37/G-38.

The Board expects dealers to report the entire amount of any contributions made to issuer officials by a consultant, the consultant's company and/or any PAC controlled by the consultant or the consultant's company. Dealers should not pro rate the amount of any contributions among other clients of the consultant who are seeking business from a particular issuer official.

The related draft amendment to rule G-8, on recordkeeping, requires dealers to keep records of contributions by their consultants, the consultant's company, and/or any PAC controlled by the consultant or the consultant's company.

Draft Changes to Form G-37/G-38

The disclosures required by the draft amendment to rule G-38 discussed above have been included in draft changes to Form G-37/G-38. The draft changes require dealers to disclose on the attachment sheet for each consultant used by the dealer the contributions and payments covered by the rule made by the consultant, the consultant's company, and/or any PAC controlled by the consultant or the consultant's company.

The Board also is seeking comment on another draft change to the form. The current form requires dealers to list the total dollar amount paid to a consultant during the reporting period. If any payment during the reporting period is related to a consultant's efforts on behalf of the dealer which resulted in particular municipal securities business, then the dealer must separately identify that business and the dollar amount of the payment. When a consultant is paid a success fee or a percentage of a successful deal, dealers appear to be complying with the requirement to disclose the payment for particular municipal securities business; however, many consultants are not paid based on each successful deal but rather they are compensated by a flat fee, usually on a monthly or quarterly basis. Thus, dealers are not indicating the flat fee as relating to any particular municipal securities business. The Board assumes that such consultants do assist in obtaining municipal securities business. Thus, the draft change to the form requires dealers to list all municipal securities business obtained or retained by their consultants (regardless of whether any payment is directly related to a consultant's efforts which resulted in such business) and, if applicable, to indicate the dollar amounts paid connected with the particular municipal securities business. The Board is seeking comment on whether dealers are able to ascertain this information relating to the municipal securities business obtained based on the efforts of their consultants. If dealers do not believe this information is easily ascertainable, the Board is seeking comment on what information dealers can disclose on the form to provide a more complete overview of the work being provided by, and the related payments being made to, dealers' consultants.

TEXT OF DRAFT AMENDMENTS (Language between *asterisks* is proposed new language: language between brackets is proposed deleted language)

Rule G-38. Consultants (a) Definitions. (i)-(v) No change. *(vi) The term "official of such issuer" or "official of an issuer" shall have the same meaning as in rule G-37(g)(vi).* (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, role and compensation arrangement of each such consultant ("Consultant Agreement"). *(ii) In addition to the information required by subparagraph (b)(i) of this rule, the Consultant Agreement shall include a statement that the consultant agrees to provide the broker, dealer or municipal securities dealer each calendar quarter with a listing of any political contributions, direct or indirect, to official(s) of an issuer and payments, direct or indirect, to political parties of states and political subdivisions during such quarter made by the consultant, the consultant's company and/or any political action committee ("PAC") controlled by the consultant or the consultant's company. With respect to the disclosure of political contributions, only those contributions to official(s) of an issuer from whom the consultant is seeking municipal securities business on behalf of the broker, dealer or municipal securities dealer are required to be provided. A broker, dealer or municipal securities dealer is not required to obtain from a consultant information on political contributions to official(s) of an issuer for whom the consultant is entitled to vote and which contributions, in total, are not in excess of $250 by such consultant to each official of such issuer, per election. A broker, dealer or municipal securities dealer also is not required to obtain from a consultant information on payments to a political party of a state or political subdivision in which such consultant is entitled to vote if the payments by such consultant, in total, are not in excess of $250 per political party, per year.* *(iii)* Such *The* Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer. (c) No change. (d) Disclosure to Board. Each broker, dealer and municipal securities dealer shall submit 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 submitted to the Board on Form G-37/G-38 within thirty (30) calendar days after 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, role*,* and 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.* In addition, s *S*uch reports shall indicate the *total* dollar amount of payments made to each consultant during the report period and, if any such payments are related to the consultant's efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified. *In addition, such reports shall include information concerning any political contributions, direct and indirect, to official(s) of an issuer and any payments, direct and indirect, to political parties of states and political subdivisions made by the consultant, the consultant's company and/or any PAC controlled by the consultant or the consultant's company as required to be obtained by the broker, dealer or municipal securities dealer pursuant to subparagraph (b)(ii) of this rule.*

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: (i) *(A)* a listing of the name, company, role and compensation arrangement of each consultant; (ii) *(B)* a copy of each Consultant Agreement referred to in rule G-38(b); (iii)*(C)* a listing of the compensation paid in connection with each such Consultant Agreement; (iv) *(D)* where applicable, a listing of the municipal securities business obtained or retained through the activities of each consultant; (v) *(E)* a listing of issuers and a record of disclosures made to such issuers, pursuant to rule G-38(c), concerning each consultant used by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with each such issuer; and (vi) *(F) the contributions, direct or indirect, to officials of an issuer made by each consultant, which records shall include: (i) the names, city/county and state of residence of contributors; (ii) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions, and (iii) the amounts and dates of such contributions; provided, however, that only those contributions to official(s) of an issuer from whom the consultant is seeking municipal securities business on behalf of the broker, dealer or municipal securities dealer need be obtained, and that such records need not reflect any contribution made by a consultant to officials of an issuer for whom such person is entitled to vote if the contributions by such person, in total, are not in excess of $250 to any official of an issuer, per election;* *(G) the payments, direct or indirect, to political parties of states and political subdivisions made by each consultant, which records shall include: (i) the names, city/county and state of residence of contributors; (ii) the names and titles(including any city/county/state or other political subdivision) of the recipients of such payments; and (iii) the amounts and dates of such payments; provided, however, that such records need not reflect those payments made by any consultant to a political party of a state or political subdivision in which such person is entitled to vote if the payments by such person, in total, are not in excess of $250 per political party, per year;* *(H) the contributions, direct or indirect, to officials of an issuer and payments, direct or indirect, made to political parties of states and political subdivisions, by the consultant's company or any political action committee controlled by the consultant or the consultant's company, which records shall include: (i) the identity of the contributors, (ii) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions and payments; and (iii) the amounts and dates of such contributions and payments; and* *(I)* the date of termination of any consultant arrangement. (xix) No change. (b) - (f) No change.

September 11, 1997

 

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ATTACHMENT TO FORM G-37/G-38 submit a separate attachment sheet for each consultant listed under IV)

Name of Consultant:

Consultant Company Name:

Role to be Performed by Consultant:

Compensation Arrangement:

*Municipal Securities Business Obtained or Retained by Consultant (list each such business separately and, if applicable, indicate dollar amounts paid to consultant connected with particular municipal securities business):*

Total Dollar Amount Paid to Consultant during Reporting Period:

*Contributions Made to Issuer Officials by Consultant:* *State* *Complete name, title *For each contribution, (including any city/ list contribution amount county/state or other and contributor category political subdivision) (i.e., consultant, of issuer official* consultant's company or PAC controlled by consultant or consultant's company)*

*Payments Made to Political Parties of States and Political Subdivision by Consultant:* *State* *Complete name *For each payment, list payment (including any city/ amount and contributor category county/state or other (i.e., consultant, consultant's political subdivision) company or PAC controlled by of political party* consultant or consultant's company)*

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ENDNOTES

[1] Rule G-38(a)(i) defines the term "consultant" as any person used by a dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on the dealer's behalf where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the dealer or any other person.

[2] Rule G-38(b) requires that the Consultant Agreement, at a minimum, include the name, company, role and compensation arrangement of each consultant used by the dealer. The Consultant Agreement must be entered into before a consultant engages in any direct or indirect communication with an issuer on the dealer's behalf.

[3] The Board published a request for comments on a draft amendment to rule G-38(c) that would give dealers the option of disclosing information on their consulting arrangements to issuers on either an issue-specific or issuer-specific basis. See MSRB Reports, Vol. 17, No.2 (June 1997) at 17-18.

[4] Such reports must be filed on Form G-37/G-38.

[5] In addition, if any payment made during the reporting period is related to the consultant's efforts on behalf of the dealer which resulted in particular municipal securities business, whether the municipal securities business was completed during that or a prior reporting period, then the dealer must separately identify that business and the dollar amount of the payment.

[6] The Board is sued a rule G-38 Question and Answer notice dated November 18, 1996 in which it stated that dealers must indicate on Form G-37/G-38 the state or geographic area in which the consultant is working on behalf of the dealer. See MSRB Reports, Vol. 17, No. 1 (January 1997) at 15.

 

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Proposed Change Filed to Establish a Fee Relating to the OS/ARD Subsystem

Notice of Filing The Board has filed a proposed change to establish a fee relating to the operation of its OS/ARD subsystem of the MSIL(R) system.

Questions about the filing may be directed to Thomas A. Hutton, Director of MSIL.

On May 19, 1997, the Board filed with the Securities and Exchange Commission (Commission) a proposed change to establish a fee relating to the operation of its Official Statement/Advance Refunding Document (OS/ARD) subsystem of the Municipal Securities Information Library(R) ("MSIL(R)") system.[1] The Board is establishing a price of $7,000 (plus delivery or postage charges) for its 1996 document collection of official statements and refunding documents, sold as a "backlog" collection. This fee change was effective upon filing with the Commission.[2]

The OS/ARD subsystem, which was activated on April 20, 1992, is a central electronic facility through which information collected and stored pursuant to MSRB rule G-36 is made available electronically and in paper form to market participants and information vendors. [3]

May 19, 1997

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ENDNOTES

[1] Municipal Securities Information Library and MSIL are registered trademarks of the Board. The MSIL system, which was approved in Securities Exchange Act Release No. 29298 (June 13, 1991), is a central facility through which information about municipal securities is collected, stored and disseminated.

[2] File No. SR-MSRB-97-3. Comments submitted to the Commission should refer to this file number.

[3] Rule G-36 requires underwriters to provide copies of final official statements and advance refunding documents within certain specified time frames for most new issues issued since January 1, 1990.

 

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Revised Effective Date Filed: Revised Series 53 Study Outline

On December 18, 1997, the Municipal Securities Rulemaking Board filed with the Securities and Exchange Commission a revision to the effective date for the revised study outline for the Board’s Municipal Securities Principal Qualification Examination (Test Series 53). The effective date of the study outline is being changed from January 1, 1998, to March 1, 1998. This additional time will allow the Board to ensure that all the procedures and materials are in place in order to administer the revised Series 53 examination and for information concerning the revised effective date to be circulated to the industry. Copies of the revised study outline for the Series 53 examination are currently available from the Board.

 

December 18, 1997

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Amendments Filed regarding Syndicate Practices: Rules G-11, G-12 and G-8

The Board has filed proposed amendments to rules G-11, on sales of new issue municipal securities during the underwriting period, G-12, on uniform practice, and G-8, on books and records to be made by brokers, dealers and municipal securities dealers, in regard to syndicate practices.

On December 23, 1997, the Board filed with the Securities and Exchange Commission ("SEC") amendments to rules G-11, on sales of new issue municipal securities during the underwriting period, G-12, on uniform practice, and G-8, on books and records to be made by brokers, dealers and municipal securities dealers, in regard to syndicate practices.⁽¹⁾ The proposed amendments will become effective upon approval by the SEC.

DISCUSSION

As part of its review of the underwriting process, in May 1997, the Board published a notice (the "Notice") that, among other things, proposed for comment draft amendments to rules G-11, G-12 and G-8 in three areas: (1) recordkeeping and disclosure of issuer syndicate requirements; (2) timing and disclosure of allocations and designations: and (3) timing of settlement of syndicate accounts.⁽²⁾

The proposed amendments adopted by the Board are summarized below.

Issuer syndicate requirements

The proposed amendments revise rules G-8(a)(viii) and G-11(f) to require the managing underwriter to maintain a record of all issuer syndicate requirements. Issuer requirements involving syndicate formation, order review, designation policies and bond allocations have become much more prevalent in the municipal securities market. Such requirements are significant because they help to determine which dealers, and ultimately which investors, obtain the bonds. If the requirements are in a published guideline, such guidelines should be maintained by the dealer and supplemented by a statement of any additional requirements that arise prior to settlement. If the requirements are not in published form, the managing underwriter must create a written detailed statement of such requirements and maintain such statement in its records. The managing underwriter must provide a copy of the published guidelines or underwriter prepared statement of issuer syndicate requirements to syndicate members prior to the first offer of any securities by the syndicate. Syndicate members must furnish this summary promptly to others, upon request. In addition, the managing underwriter must provide the issuer with a copy of any such statement for its review.

Most commentators agreed that recording and disclosing issuer policies and requirements would be beneficial, but some of the commentators were opposed to requiring the managing underwriter to create a written detailed statement of issuer syndicate requirements if they are not in published form. Managing underwriters currently take issuer direction on syndicate matters and relate such information to the members. The Board believes the formalization of this process should not be a burden; therefore, the Board determined to adopt the proposed amendments.

Allocation of securities

The proposed amendments to rule G-11(g) to require the managing underwriter to complete the allocation of securities within 24 hours of the sending of the commitment wire. Delays in allocations seem to be a growing problem in the municipal securities market. Many delays in allocations appear to be the result of issuers and financial advisors failing to review orders and proposed allocations in a timely fashion. Investors complain that they have difficulty finalizing their portfolio positions when their orders remain unfilled for as long as two or more days after the end of the order period. During volatile market conditions, delays in allocations hurt the prospect for a successful underwriting.

While some commentators noted their support for the prompt completion of allocations, they also noted that a dealer's compliance with the amendment is dependent upon the timely actions of others (i.e., issuers and financial advisors) and thus recommended that the amendment not be adopted. The Board adopted the proposed amendments to ensure a timely allocation process in the industry. The Board believes that, in order to ensure compliance with the proposed amendments, underwriters will include a provision in the bond purchase agreement that allocations must be completed within the 24-hour time frame. If issuers or financial advisors wish to review orders and proposed allocations, they will have to do so within this 24-hour period.

Disclosure of designation information

There currently is no Board rule requiring the disclosure to syndicate members of all designations to members. The proposed amendments revise rule G-11(g) to require the managing underwriter to disclose to syndicate members all available designation information within 10 business days following the date of sale and all information with the sending of the designation checks.

The draft amendments contained in the Notice required disclosure to syndicate members of all designations to members within five business days following the date of sale. Some of the commentators recommended a longer time frame to provide more time for the process to be completed. The Board determined to change the time frame to require disclosure to syndicate members of all available designation information within 10 business days following the date of sale and all information with the sending of the designation checks pursuant to rule G-12(k). The Board believes almost all of the information will be available by 10 business days, but the additional time is provided in order to receive any late information.

Disclosure of take-down

A small number of issuers are setting aside, or holding back, a portion of the take-down to direct to syndicate members at their discretion. Because this issuer "set-aside" is part of the take-down, the Board believes this should be disclosed to syndicate members in the same manner as customer designations. Accordingly, the proposed amendments revise rule G-11(g) to require the managing underwriter to disclose to members of the syndicate, in writing, the amount of any portion of the take-down that is directed to each member of the syndicate by the issuer. Such disclosure must be made by the later of 15 business days following the date of sale or three business days following receipt by the managing underwriter of notification of such set-asides.

The draft amendments contained in the Notice required disclosure to members of the syndicate within 10 business days following the date of sale. Based upon comments received suggesting that the proposed time frame was too short, the Board extended the time frame in the proposed amendments to the later of 15 business days following the date of sale or three business days following receipt by the managing underwriter of notification of such set asides.

Payment of designations

The proposed amendments to rule G-12(k) move the deadline for payment of designations from 30 business days following delivery of the securities to the customer to 30 calendar days after the issuer delivers the securities to the syndicate. The Board adopted this amendment in order to provide for more efficient operation of syndicate accounts.

December 23, 1997

Text of Proposed Amendments⁽³⁾

Rule G-11. Sales of New Issue Municipal Securities During the Underwriting Period

(a) - (e) No change.

(f) Communications Relating to Issuer Syndicate Requirements, Priority Provisions and Order Period. Prior to the first offer of any securities by a syndicate, the senior syndicate manager shall furnish in writing to the other members of the syndicate (i) a written statement of all terms and conditions required by the issuer, (ii) the priority provisions, (iii) [(ii)] the procedure, if any, by which such priority provisions may be changed, (iv) [(iii)] if the senior syndicate manager or managers are to be permitted on a case-by-case basis to allocate securities in a manner other than in accordance with the priority provisions, the fact that they are to be permitted to do so, and (v) [(iv)] if there is to be an order period, whether orders may be confirmed prior to the end of the order period. Any change in the priority provisions shall be promptly furnished in writing by the senior syndicate manager to the other members of the syndicate. Syndicate members shall promptly furnish in writing the information described in this section to others, upon request. If the senior syndicate manager, rather than the issuer, prepares the written statement of all terms and conditions required by the issuer, such statement shall be provided to the issuer.

(g) [Disclosure of] Designations and Allocations of Securities. The senior syndicate manager shall:

(i) within 24 hours of the sending of the commitment wire, complete the allocation of securities;

(ii) within two business days following the date of sale, disclose to the other members of the syndicate, in writing, a summary, by priority category, of all allocations of securities which are accorded priority over members' take-down orders, indicating the aggregate par value, maturity date and price of each maturity so allocated, including any allocation to an order confirmed at a price other than the original list price. The summary shall include allocations of securities to orders submitted through the end of the order period or, if the syndicate does not have an order period, through the first business day following the date of sale; [.]

(iii) disclose to the members of the syndicate, in writing, all available designation information to members within 10 business days following the date of sale and all information with the sending of the designation checks pursuant to rule G-12(k); and

(iv) disclose to the members of the syndicate, in writing, the amount of any portion of the take-down directed to each member by the issuer. Such disclosure is to be made by the later of 15 business days following the date of sale or three business days following receipt by the senior syndicate manager of notification of such set asides of the take- down.

(h) No change.

 

Rule G-12. Uniform Practice

(a) - (j) No change.

(k) Any credit designated by a customer in connection with the purchase of securities as due to a member of a syndicate or similar account shall be distributed to such member by the [municipal securities] broker, dealer or municipal securities dealer handling such order within 30 calendar [business] days following the date the issuer delivers the securities to the syndicate [delivery of the securities to the customer].

(l) No change.

 

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) - (vii) No change.

(viii) Records of Syndicate Transactions. With respect to each syndicate or similar account formed for the purchase of municipal securities, records shall be maintained by a managing underwriter designated by the syndicate or account to maintain the books and records of the syndicate or account, showing the description and aggregate par value of the securities, the name and percentage of participation of each member of the syndicate or account, the terms and conditions governing the formation and operation of the syndicate or account (including a separate statement of all terms and conditions required by the issuer) all orders received for the purchase of the securities from the syndicate or account (except bids at other than syndicate price), all allotments of securities and the price at which sold, the date and amount of any good faith deposit made to the issuer, the date of settlement with the issuer, the date of closing of the account, and a reconciliation of profits and expenses of the account.

(ix) - (xix) No change.

(b) - (f) No change.

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ENDNOTES

1. File No. SR-MSRB-97-15. Comments sent to the SEC should refer to the file number.

2. "Board Review of Underwriting Process," MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.

3. Underlining indicates new language; brackets denote deletions.

 

 

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