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.

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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.

 

 

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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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MSRB TRANSACTION REPORTING PROGRAM

QUESTIONS AND ANSWERS

October 1997

 

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Most of these questions and answers were included in an MSRB mailing sent to each broker, dealer and municipal securities dealer on March 31, 1997. Questions numbered 60 and higher have been added since that mailing.

These questions and answers touch upon the following topics:

GENERAL QUESTIONS

CUSTOMER TRANSACTION REPORTING

• Preparing for Customer Transaction Reporting
• Completing the Customer Transaction Reporting Form
• Price and Yield
• Settlement Date
• Agency and Principal Transactions
• Control Numbers
• Records Amending and Cancelling Trades
• Submission of Files
• File Forwarding by NSCC
• Transaction Reporting to MSRB Using MSRB's Dial-Up Facility
• Testing Customer Transaction Reporting with the MSRB
• Record and File Format Questions
• Other Questions

 

INTER-DEALER TRANSACTION REPORTING

• Accrued Interest
• Executing Broker Symbol
• Time of Trade
• Problems in Inter-Dealer Transaction Reporting

 

QUESTIONS ADDED AFTER MARCH 1997

• Yield
• Commission
• File Format

 

GENERAL QUESTIONS

 

1. Q: What is the purpose of the requirement in MSRB rule G-14 to report each municipal securities transaction to the MSRB?

A: One purpose of the requirement is to make transaction information (e.g., prices and volumes) available to market participants. This is generally known as the "transparency" function of the MSRB Transaction Reporting Program. It is being accomplished at this time through a daily report that shows information such as the high, low and average prices of municipal securities that were traded four or more times on the previous day. A second, equally important, function of the program is market surveillance. Each transaction reported is entered into a database that essentially is an audit trail of transactions. This database is available only to the SEC, the NASD and other regulators charged with surveillance of the market. Transparency and surveillance functions have long been in existence in other major U.S. securities markets. The MSRB is responsible to bring these functions to full implementation in the municipal securities market.

2. Q: Have the requirements of G-14 been approved by the Securities and Exchange Commission?

A: Yes. The Commission approved the transaction reporting requirements described here on November 29, 1996 (Securities and Exchange Act Release No. 37998; see also MSRB Reports, Vol. 17, No. 1 [January 1997] at 3-8).

3. Q: When does compliance with these functions have to take place?

A: Inter-dealer transaction reporting began on January 23, 1995, with an amendment to rule G-14. (See MSRB Reports, Vol. 14, No. 5 [December 1994] at 3-6.) Each dealer should now be well aware of the specific requirements of reporting inter-dealer transactions. A number of notices have appeared in MSRB Reports indicating areas where attention is specifically needed to improve reporting. (See, e.g., MSRB Reports, Vol. 16, No. 2 [June 1996] at 9-12.) Customer transaction reporting begins with mandatory testing in July 1997 and full program operations are planned for early 1998.

4. Q: How does a dealer report municipal securities transactions to the MSRB?

A: The answer to the question differs depending upon whether the transaction is with another dealer ("inter-dealer transaction") or with an entity that is not a dealer ("customer transaction"). Inter-dealer transactions are reported by submitting the required transaction information, in proper form, to the automated comparison system for municipal securities. Dealers achieve both the automated comparison function and the transaction reporting function by submitting a single file to the comparison system. For customer transactions, dealers must produce a computer-readable file specifically for the MSRB and transmit that file to the MSRB each night.

 

CUSTOMER TRANSACTION REPORTING

Preparing for Customer Transaction Reporting

5. Q: What should dealers be doing now to prepare for customer transaction reporting?

A: After becoming familiar with the G-14 requirements, dealers should either be making changes to their computer systems necessary to produce and transmit customer transaction files, or making arrangements with clearing brokers or service bureaus who will do this on their behalf. Although the mandatory testing period does not begin until summer 1997, preparations should be made now.

6. Q: Is there anything else that a dealer can do now to prepare?

A: Each dealer should complete and return a Customer Transaction Reporting Form.

 

Completing the Customer Transaction Reporting Form

7. Q: In completing the information form for customer transaction reporting, whom should I identify as the "primary contact with the MSRB for purposes of customer transaction reporting"? Should I name our Municipal Securities Department Director or our Compliance Officer?

A: The primary contact should be the individual who will be ultimately responsible for ensuring that MSRB mailings and other communications (e.g., phone calls) on this subject will reach the appropriate persons in the firm. The primary contact will be the MSRB's initial contact regarding tests of customer transaction reporting.

8. Q: Who should be identified as the "point-of-contact regarding technical matters"?

A: The MSRB will contact this person on computer-related matters such as the firm's telecommunications and methods for transmitting files, how many characters each field should have in the record of a trade, what headers must be included in the files, etc.

9. Q: How do the above topics differ from the person designated for questions about the "correctness of trade details"?

A: A question about trade details might arise, for example, if MSRB calculates a yield that differs substantially from the dealer-reported yield for the same trade. MSRB staff may ask the dealer what it used to derive yield from dollar price to account for the difference. In general, the contact for "correctness of trade details" will be the person called if the question is about the substantive information being provided about a transaction.

10. Q: In response to the question on page one of the form, my firm does not effect municipal securities transactions, does not intend to do so and does not intend to submit transactions to the MSRB for other dealers. I will check the appropriate box and return the form. What should I do if my firm's plans later change?

A: Since all transactions in municipal securities will have to be reported to the MSRB, if a firm decides to begin effecting transactions or to submit transaction data, it should immediately contact the MSRB to obtain and complete this form.

11. Q: What is the "dial-up transmission facility" referred to in the form?

A: Most dealers will send customer trade data to the MSRB through National Securities Clearing Corporation (NSCC), but some low-volume transmissions may be done by dialing the MSRB's computer directly using a personal computer and telephone modem. By checking the appropriate box on the form, you may request more information about the dial-up facility from the MSRB. In response, the MSRB will mail information before testing begins that describes how the dial-up facility can be installed and used to report customer trades. (More detailed questions and answers about the dial-up facility are found below.)

12. Q: Where can I find a description of the data elements that must be included in transaction records?

A: The MSRB document entitled "File and Record Specifications for Reporting Customer Transactions" defines the data elements and provides format specifications for transaction records and files.

 

Price and Yield

13. Q: Both price and yield are required to be included for transactions on which the settlement date is known. Why is that?

A: One of the most difficult problems in collecting and disseminating accurate information on municipal securities transactions is that there are approximately 1.3 million different municipal securities. Typographical errors in trade input, for example, are always possible, and since there is generally not a stream of transaction data coming in on a specific issue, it is difficult for the system collecting the information to mechanically check reported information to ensure that it is not a likely input error. This is particularly important when it is recognized that the price information collected will be disseminated and reviewed by market participants on the next day and may be used as part of trading or investment decisions. Requiring both yield and price, along with the CUSIP number of the issue being reported, will allow the MSRB to mechanically perform mathematical checks that will help to ensure that the information being reported makes sense, given the coupon, maturity date and call features of the security. Other means of checking data accuracy also will be employed. For example, the CUSIP check digit is required to guard against typographical errors in the entry of CUSIP numbers. (More questions and answers about error correction are found below.)

14. Q: What if a yield cannot not be computed for a transaction done on a dollar price basis, for example, because the trade is in a variable rate security or in a defaulted security?

A: The trade may be submitted using a dollar price only in these cases. Note, however, that if the security is not known to the MSRB system as one which is a variable rate instrument or in default, the MSRB may contact you to ensure that its information about the security is correct and so that subsequent transaction input in the security will not be questioned in the future.

See also questions 60 and 61.

Settlement Date

15. Q: What if settlement for a transaction is not known because the transaction is in a new issue and settlement date has not been set?

A: The transaction should be reported with a yield or a dollar price and without a settlement date.

16. Q: If the settlement date for the transaction is determined after a submission is made without a settlement date, should the dealer report revised trade information to the MSRB?

A: No. If the only change in the transaction information is the settlement date on a new issue, the dealer should not send an amended transaction report. Once the settlement date for the new issue becomes known to the MSRB, that settlement date will be included in the transaction data automatically.

Agency and Principal Transactions

17. Q: When reporting dollar prices on agency transactions, should the effect of commissions be included in the dollar price submitted?

A: No. There is a separate field for submitting the commission amount on agency transactions. The MSRB will include the effect of the commission in the dollar price when aggregating principal and agency transactions and reporting price information on the daily report. There should be no "commissions" on principal transactions so that the dollar price given on principal transactions should be the net transaction dollar price to the customer.

18. Q: How should commissions be reported?

A: Commission is reported in dollars per $100 par value.

See also questions 62 and 63.

 

Control Numbers

19. Q: The file format requires each transaction submitted by a dealer to have a unique "control number" (unique for the dealer) that is no longer than 20 characters and that may be composed of alpha and/or numeric characters. Why is this necessary?

A: The control number given by the dealer is the mechanism by which the dealer identifies a specific transaction to the Transaction Reporting System. The dealer chooses its own numbering system; however, the control number for a transaction must be unique for the dealer within a three-year period. For example, if a dealer submits two different transactions with the same control number, the system may reject the second transaction. Use of the control number is critical so that the dealer may correct information submitted in error to the system. The MSRB also will use the dealer's control number to report back information to the dealer about the transaction.

 

Records Amending and Cancelling Trades

20. Q: Under what circumstances would a dealer need to correct information about a transaction submitted to the system?

A: An example might be a dealer who has made an input error resulting in the wrong price or yield being submitted for a transaction. Note that it is important for these errors to be corrected as soon as possible so that the audit trail and surveillance database is correct. Note also that it is important for errors like these to be minimized since the prices reported on trade date will be used for the daily reports appearing on the next business day.

21. Q: What will the MSRB do if it discovers a probable input error that has resulted in submitted transaction information?

A: As part of the daily process of collecting transaction information from dealers, the MSRB will send to each dealer that submitted transaction information a receipt with messages identifying errors in transactions that failed to meet acceptance testing, together with a copy of all such input records.

22 Q: What should happen next?

A: If the dealer finds that the record should be amended -- for example, because of a typographical error in the price -- he or she will submit an "Amend" record as soon as possible (i.e., a record with "A" as the "Cancel/Amend Code"). The "Amend" record must include the same dealer control number as the first report of the trade and must include all of the correct information about the trade. If the dealer finds that the questioned record was correct -- as might happen if the dealer knows features about the bond that affect the price/yield calculation and that are not in the MSRB's database -- a "Verify" record should be submitted, including the original dealer control number, to indicate that it is correct.

23. Q: What happens if I try to amend a transaction with a control number that I have not previously reported?

A: If a transaction is submitted with a "Cancel/Amend Code" of "A" and there is not an existing transaction in the database with that control number, the transaction information will be rejected -- that is, returned to the dealer for correction.

24. Q: Can I amend any information about a trade that I have previously reported?

A: No. The following fields cannot be amended: dealer identity, CUSIP number, and transaction control number. If you report a trade with an error in one of these fields, you should cancel the transaction report, as described below, and then report the trade using a new control number.

25. Q: Under what circumstances would a transaction be "cancelled" in the system and how is that done?

A: There may be limited numbers of instances in which customer transactions are reported, but the transactions later must be cancelled with customers due to circumstances beyond the dealer's control (for example, a new issue is cancelled). In this case, the dealer must submit a record with the control number of the transaction and with the "Cancel/Amend Code" set to "C" for "Cancel." Doing so will allow MSRB to indicate the transaction as cancelled in the surveillance database so that the database is accurate.

26. Q: For how long after initial submission is it possible for dealers to amend or cancel transactions that have been entered into the system?

A: This can be done for a period of three months after initial submission. However, for new issues for which there is no settlement date, it will be possible to submit cancellations until three months after the settlement date of the issue. Note that, while some numbers of cancellations and corrections are inevitable, it is important for dealers to minimize the need for these types of corrections by making sure that procedures are in place for reporting necessary information correctly in the initial submission.

 

Submission of Files

27. Q: When must a transaction be reported to the MSRB?

A: A transaction record, in the correct format, must reach the MSRB by midnight on trade date.

28. Q: How are these transaction records sent to the MSRB?

A: The records are put into a file with appropriate header information. The resulting file is sent to the MSRB.

29. Q: My firm is a clearing broker and will be submitting a file each day on behalf of many of our correspondents. Is there any special way in which the records in the file should be organized?

A: No. As long as the header information is correct and the information in each record is correct, the records within the file can be in any order. The header identifies the party submitting the file; the records may pertain to any number of executing dealers.

 

File Forwarding by NSCC

30. Q: My organization processes thousands of customer transactions in municipal transactions each day. How can such a large file be sent to the MSRB?

A: National Securities Clearing Corporation is providing its participants the ability to send the MSRB customer transaction file to NSCC along with other types of files that are sent to NSCC each day. NSCC will forward the MSRB customer transaction file to the MSRB.

31. Q: My firm uses another broker-dealer for clearing and processing municipal securities transactions. The clearing broker submits my inter-dealer transactions to NSCC on my behalf. Can the clearing broker submit my customer transaction reports to NSCC for forwarding on to the MSRB on my behalf?

A: Yes. The clearing broker can submit transaction reports for dealers for which it clears transactions. Note that the dealer effecting transactions is responsible for the clearing broker's performance in this regard. You should talk with your clearing broker now to ensure that it will provide this service.

32. Q: My firm uses a service bureau to submit inter-dealer transaction information to NSCC. Can the service bureau also submit customer transaction files to NSCC for forwarding to the MSRB?

A: Yes. As in the previous answer, the dealer effecting transactions is responsible to report the transactions correctly.

33. Q: Are there any special requirements for formatting the file to NSCC and getting the file to NSCC?

A: Yes. You should review NSCC's April 2, 1997 Important Notice on the interface requirements for customer transaction reporting (Notice No. A-4571 and P&S 4155). Similarly, if a clearing broker or service bureau will be sending your MSRB customer transaction files to NSCC for forwarding to the MSRB, they should ensure that the files can be sent in the correct format.

34. Q: Will customer transaction records submitted to NSCC for forwarding to the MSRB be included in the automated comparison system?

A: No. The MSRB customer transaction file sent to NSCC for forwarding to the MSRB is a totally separate file than the inter-dealer transactions and other files sent to NSCC for clearance and settlement purposes. NSCC will not process data in the MSRB customer transaction files, but will only forward the files to the MSRB. The use of NSCC for this purpose will allow dealers and service bureaus to use existing telecommunication channels set up between dealers and NSCC and between NSCC and the MSRB. Thus, it should provide efficiencies, especially for dealers that have many customer transactions each day. (An additional question on this subject is given below, under "Other Questions.")

 

Transaction Reporting to MSRB Using MSRB's Dial-Up Facility

35. Q: My firm submits its inter-dealer transactions to NSCC through a dial-up terminal or personal computer. Can I use this method of file transfer to transmit customer transaction files to NSCC for forwarding to the MSRB?

A: No; as noted in NSCC's Important Notice, all dial-up connections will be directly to the MSRB.

36. Q: How will this be done?

A: MSRB will offer a facility whereby dealers may send relatively small files directly to the MSRB by using a personal computer and a standard telephone modem, such as those made by Hayes, U.S. Robotics and others. The MSRB will provide telecommunications software by summer 1997 to dealers who ask for this service. Please note that this software will run only on computers using the Windows 95 or Windows NT operating systems. Also note that dealers using this method of transmitting files directly to the MSRB will still need a means to generate files from their own records that meet MSRB file and record format requirements.

 

Testing Customer Transaction Reporting with the MSRB

37. Q: What is the purpose of the mandatory testing?

A: The purpose of testing is to ensure each dealer that its own system can produce files containing the required information in the proper format, that it is able to correct erroneous input, and so forth. Testing is mandatory so that all dealers will be ready before the reporting requirement becomes effective in January 1998.

38. Q: What is the date for dealers to test their customer transaction reporting capabilities with the MSRB?

A: Mandatory testing will begin in July 1997. The MSRB plans to schedule the first tests with the dealers that have the greatest volume of customer trades and with service bureaus, followed by the lower-volume dealers. The MSRB will publicize the testing schedule before testing begins.

39. Q: What will happen during the test?

A: First, the MSRB will contact the designated primary contact person listed on your organization's MSRB Transaction Reporting form. Information will be obtained on how the organization will be submitting data, a fax number for the dealer to receive receipt/error logs from the MSRB, and technical details. Dates will be chosen to run your test. The contact person will arrange to send test files to the MSRB, using either NSCC or the MSRB dial-up facility, to establish that the telecommunications link is working, and that the trade records meet the format specifications.

40. Q: How long will the test last?

A: Each test cycle should take approximately five days. However, it may take more than one test cycle for a dealer to validate its methodology for creating files in the proper formats and for handling trade data corrections.

41. Q: Will there be special formats and test procedures for submission through NSCC?

A: Yes. As part of testing the communications, dealers and service bureaus will go through NSCC's usual procedures for setting up transmission of a new data stream or "SysID" - verifying that the file header meets Datatrak specifications, etc. Details are provided in the NSCC Important Notice previously mentioned (Notice No. A-4571 and P&S 4155).

 

Record and File Format Questions

42. Q: What is the format for the computer-readable file that must be sent to the MSRB each day to comply with the customer transaction reporting requirement?

A: For files sent directly to the MSRB via the MSRB dial-up facility, the physical formats for transaction records, and for the file header record that must precede them, are specified in the MSRB document entitled "File and Record Specifications for Reporting Customer Transactions." Files sent to NSCC will need to be in the format specified by NSCC. See NSCC's April 1997 Important Notice.

See also questions 64 through 66.

 

Other Questions

43. Q: Is the customer's identity included anywhere in the information reported?

A: No. The customer's identity is never submitted in reports of customer transactions. Each record must correctly indicate whether the transaction was a sale to a customer or a purchase from a customer, whether it is a principal or agency transaction, and certain other information.

44. Q: Are institutional and retail customer transactions reported in the same way?

A: Yes.

45. Q: How should the "Buy/Sell" code be reported?

A: If the dealer has sold securities to the customer, report this as "S" (sell). If the dealer has purchased securities from the customer, report this as "B" (buy).

46. Q: May I include my inter-dealer trades in the customer trade file I send to the MSRB?

A: No. All files submitted as part of a dealer's customer transaction file must report only customer transactions -- no inter-dealer transactions may be included.

 

 

INTER-DEALER TRANSACTION REPORTING

47. Q: How are inter-dealer transactions reported to the MSRB?

A: By submitting the transactions on trade date, to the automated comparison system, in the format and manner required by that system to obtain a comparison on the night of trade date. NSCC provides this information to the MSRB to accomplish transaction reporting for those trades. (Please note that these requirements are currently in effect under MSRB rule G-14.)

48. Q: What items are required by rule G-14, in addition to the items necessary to obtain an automated comparison of an inter-dealer trade on the night of trade date?

A: Specific items that are mandatory, in addition, to the information required for automated comparison, are: (i) accrued interest, on any transaction in which the settlement date is known; (ii) executing broker identity; and (iii) time of trade.

 

Accrued Interest

49. Q: Why does the MSRB need accrued interest in inter-dealer transaction reports?

A: For most transactions reported through the automated comparison system, dealers report a final money figure in lieu of a dollar price or yield. The MSRB derives a dollar price for these transactions by subtracting the reported accrued interest and dividing the result by the par amount traded. Therefore, if accrued interest is not reported correctly, the resulting dollar price may not be accurate.

 

Executing Broker Symbol

50. Q: Why does the MSRB need an "executing broker symbol"?

A: This symbol is used for the audit trail function. It identifies the dealer that actually effected the transactions (in contrast to the dealer that submitted the trade to NSCC or who cleared the trade). It is particularly important for dealer identification when one dealer clears for several other dealers. The dealer that actually effected the transaction should be the one identified with this symbol.

51. Q: What symbol should be used for executing broker identity?

A: The four-character symbol of the firm or bank assigned by the NASD, for example, ABCD.

52. Q: Is it permissible for my firm to use our NSCC clearing number (e.g., 1234) instead of this symbol? In our case, this would serve the same purpose since we only clear for ourselves.

A: No. The four-character alphabetic symbol is required, as it is the standard identifier used in the surveillance database. Note that, when the customer reporting phase of the Program becomes operational, this NASD-assigned symbol will be the primary identifier.

53. Q: My organization does not have one of these symbols. Should we just use the symbol of the dealer that we clear through?

A: No, if your organization is a broker, dealer or municipal securities dealer and it is effecting trades in municipal securities (with other dealers or with customers), it must use its own symbol.

54. Q: How does a dealer obtain an NASD-assigned symbol if it does not already have one?

A: Call NASD Subscriber Services at (800) 777-5606 and explain that you need a symbol for reporting municipal securities transactions.

55. Q: Will the NASD assign a symbol, even though my organization is a dealer bank?

A: Yes.

 

Time of Trade

56. Q: Why does the MSRB need the time of trade?

A: This information is also needed for audit trail purposes. It is not currently used in the transparency component of the program.

57. Q: How is time of trade submitted for inter-dealer transactions?

A: It is submitted in military format (e.g., 1400 for 2:00 p.m.) and in terms of Eastern time.

 

Problems in Inter-Dealer Transaction Reporting

58. Q: What kind of problems has the MSRB seen in the inter-dealer transaction information submitted under rule G-14?

A: For the daily report generated by the Program, only compared transactions can be used for generating price and volume information. It accordingly is very important for dealers to ensure that their procedures for reporting inter-dealer transactions are designed to submit correct information reliably to the automated comparison system. A significant number of the following types of transaction in the automated comparison system indicates that a dealer is having problems that require a review of its procedures and corrective action: (i) stamped advisories; (ii) "as of" submissions; (iii) "demand-as-of" submissions coming in against the dealer; (iv) compared transactions that are deleted using either the "one-sided delete" function or using the "withhold" function.

59. Q: My firm clears through a clearing broker. When my firm does trades with another firm that also uses that same clearing broker, must that transaction be reported to the MSRB by submitting the trade to the automated comparison system?

A: Yes. Note that the submission to the automated comparison system is also required in this instance by rule G-12(f) on automated comparison.

 

QUESTIONS ADDED AFTER MARCH 1997

 

Yield

60. Q: Should I report to the MSRB the transactions's yield to maturity or another yield -- yield to first call, yield to par call, etc.? My system calculates several yields for use in customer confirmations.

A: Report the yield as required by MSRB rule G-15(a) for customer confirmations. Rule G-15(a) in most cases requires the yield to be computed to the lower of call or nominal maturity date. Exception: If the transaction was effected at par, the yield (coupon rate) should be reported on the customer trade record, even though rule G-15(a) allows the yield to be omitted from the confirmation in such a case.

If reporting the yield is not possible because the transaction was done on a dollar price basis and no settlement date has been set for a "when-issued" security, leave the yield blank or enter zero.

61. Q: How should I report negative yield?

A: Enter a negative number in the "yield" field. The minus sign may precede or follow the number, as long as it is inside the defined field area.

 

Commission

62. Q: Should the effect of the commission be reported in the yield?

A: Yes. You should report as yield the same "net" yield that is reported on customer confirmations. Therefore, the reported yield should include the effect of any commission (see MSRB rule G-15(a)).

63. Q: Should miscellaneous fees such as transaction fees be included in the commission field or elsewhere? If the sales representative receives a portion of the firm's profit, should that portion be reported?

A: No. Neither miscellaneous fees nor sales representatives' portions should be reported.

 

File format

64. Q: Can I include binary data in the customer transaction file, along with ASCII data?

A: No. Binary data should not be included, even in the unused portions of the record. Including binary data will likely cause errors such as skipped records when MSRB processes the file.

Q: The MSRB file header record requires a "version number." What should be put here?

A: This field identifies the version of the MSRB format specification that applies to the file. Initially, use '0010' here.

65. Q: The header record requires a "record count" field. What should be put here?

A: Put here the count of the number of transactions being reported in this file. Do not count the header record(s). Depending on the format used, the record count is the same as the number of physical transaction records or one-half the number of physical transaction records.

66. Q: If the header record of a transaction file contains errors, how will MSRB inform the submitter of this fact?

A: If the header of a file forwarded by NSCC does not identify a submitter and site known to the MSRB, then MSRB staff will ask NSCC to follow up. (MSRB will not accept any direct submissions by dial-up from unknown parties.) Otherwise, MSRB will send a receipt/error message file or fax to the submitter. The header errors will be identified in the file in the first two records following the receipt record, using the same format as for transaction detail errors.

 

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

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.

 

 

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

Amendment Approved

The SEC has approved amendments to exempt certain dealers from disclosure and recordkeeping requirements relating to political contributions and municipal securities business – Rules G-37, G-8, G-9 and G-38.

On February 8, 1999, the Securities and Exchange Commission approved certain amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, rule G-9, on preservation of records, and rule G-38, on consultants. The amendments (1) exempt brokers, dealers and municipal securities dealers ("dealers") that have not engaged in municipal securities business for a period of at least two years and that have filed new Form G-37x with the Board from the disclosure requirements under rule G-37 and the related recordkeeping requirements under rule G-8; (2) require dealers that engage in municipal securities business after invoking such exemption to disclose and record certain political contributions and payments during the preceding two-year period; (3) codify the previously recognized Form G-37/G-38 submission exemption for dealers that have no information to report in a calendar quarter; and (4) make certain technical, clarifying and recordkeeping amendments to rules G-8, G-9, G-37 and G-38. The amendments became effective upon approval.

For a detailed discussion of these amendments, see the Notice of Filing dated December 3, 1998. New Form G-37x may be downloaded for completion and submission to the Board.

February 9, 1999

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Preliminary Program Schedule^*

* Please note that this is a preliminary program schedule. Additional forum speakers will be announced at a later date.

Home Page  |   Notice  |  Registration form

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Registration for
MSRB FORUMS ON LAND-SECURED DISCLOSURE

Please print this form and mail it with your $100 payment.

Indicate below the forum you will be attending:

_____ Washington, D.C.—September 14, 1999

Sheraton Crystal City, 1800 Jefferson Davis Highway
Arlington, VA
(703) 486-1111

_____ Houston, TX—September 15, 1999

Sheraton North Houston, George Bush Intercontinental Airport
15700 John F. Kennedy Blvd.
Houston, TX
(281) 442-5100

_____ Costa Mesa, CA—September 16, 1999

Westin South Coast Plaza, 686 Anton Blvd.
Costa Mesa, CA
(714) 540-2500

Name
Last                                                 First                                                MI
Title
Company
Address
City                                                State                                    Zip Code
Phone	(     )	Fax	(     )
E-mail

Registration fee is $100.
Preregistration is required.
Registrations accepted with fee through the mail on a first come basis.
Please make checks payable to the MSRB and send to:
MUNICIPAL SECURITIES RULEMAKING BOARD
ATTENTION: PAT MACK
1150 18^TH STREET, NW, SUITE 400
WASHINGTON, DC 20036-3816

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SEC Approves Amendment on Automated Confirmation/Acknowledgement: Rule G-15(d)(ii)

On May 7, 1999, the Securities and Exchange Commission ("Commission") approved an amendment to rule G-15(d)(ii) on automated confirmation/acknowledgment of customer transactions.¹ The amendment allows dealers to comply with rule G-15(d)(ii) by using the services of "qualified vendors" for confirmation/acknowledgment of Delivery Versus Payment/Receipt Versus Payment (DVP/RVP) customer transactions. Previously, without the amendment, only clearing agencies that were registered with the Commission could be used to obtain the required confirmation/acknowledgment. The amendment became effective upon approval.

May 10, 1999

 

TEXT OF AMENDMENT²

Rule G-15. Confirmation, Clearance and Settlement of Transactions with Customers

(a) - (c) No change

(d) Delivery/Receipt vs. Payment Transactions.

(i) No change.

(ii) Requirement for Confirmation/Acknowledgment.

(A) Use of Registered Clearing Agency or Qualified Vendor. Except as provided in this paragraph (ii) of rule G-15(d), no broker, dealer or municipal securities dealer shall effect a customer transaction for settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP) basis unless the facilities of a Cclearing Aagency registered with the Securities and Exchange Commission (registered clearing agency) or Qualified Vendor are used for automated confirmation and acknowledgment of the transaction. Each broker, dealer and municipal securities dealer executing a customer transaction on a DVP/RVP basis shall: (A) ensure that the customer has the capability, either directly or through its clearing agent, to acknowledge transactions in an automated confirmation/acknowledgment system operated by a registered Cclearing Aagency or Qualified Vendor; (B) submit or cause to be submitted to a registered Cclearing Aagency or Qualified Vendor all information and instructions required by the registered Cclearing Aagency or Qualified Vendor for the production of a confirmation that can be acknowledged by the customer or the customer’s clearing agent; and (C) submit such transaction information to the automated confirmation/acknowledgment system on the date of execution of such transaction; provided that a transaction that is not eligible for automated confirmation and acknowledgment through the facilities of a registered Cclearing Aagency shall not be subject to this paragraph (ii).

(B) Definitions for Rule G-15(d)(ii).

(1) "Clearing Agency" shall mean a clearing agency as defined in Section 3(a)(23) of the Act that is registered with the Commission pursuant to Section 17A(b)(2) of the Act or has obtained from the Commission an exemption from registration granted specifically to allow the clearing agency to provide confirmation/acknowledgment services.

(2) "Qualified Vendor" shall mean a vendor of electronic confirmation and acknowledgment services that:

(A) for each transaction subject to this rule: (i) delivers a trade record to a Clearing Agency in the Clearing Agency’s format; (ii) obtains a control number for the trade record from the Clearing Agency; (iii) cross-references the control number to the confirmation and subsequent acknowledgment of the trade; and (iv) electronically delivers any acknowledgment received on the trade to the Clearing Agency and includes the control number when delivering the acknowledgment of the trade to the Clearing Agency;
(B) certifies to its customers: (i) with respect to its electronic trade confirmation/acknowledgment system, that it has a capacity requirements evaluation and monitoring process that allows the vendor to formulate current and anticipated estimated capacity requirements; (ii) that its electronic trade confirmation/acknowledgment system has sufficient capacity to process the volume of data that it reasonably anticipates to be entered into its electronic trade confirmation/acknowledgment service during the upcoming year; (iii) that its electronic trade confirmation/acknowledgment system has formal contingency procedures, that the entity has followed a formal process for reviewing the likelihood of contingency occurrences, and that the contingency protocols are reviewed, tested, and updated on a regular basis; (iv) that its electronic confirmation/acknowledgment system has a process for preventing, detecting, and controlling any potential or actual systems or computer operations failures, including any failure to interface with a Clearing Agency as described in rule G-15(d)(ii)(B)(2)(A), above, and that its procedures designed to protect against security breaches are followed; and (v) that its current assets exceed its current liabilities by at least five hundred thousand dollars;
(C) when it begins providing such services, and annually thereafter, submits an Auditor’s Report to the Commission staff which is not deemed unacceptable by the Commission staff. (An Auditor’s Report will be deemed unacceptable if it contains any findings of material weakness.);
(D) notifies the Commission staff immediately in writing of any material change to its confirmation/affirmation systems. (For purposes of this subparagraph (D) "material change" means any changes to the vendor’s systems that significantly affect or have the potential to significantly affect its electronic trade confirmation/acknowledgment systems, including: changes that: (i) affect or potentially affect the capacity or security of its electronic trade confirmation/acknowledgment system; (ii) rely on new or substantially different technology; (iii) provide a new service as part of the Qualified Vendor’s electronic trade confirmation/acknowledgment system; or (iv) affect or have the potential to adversely affect the vendor’s confirmation/acknowledgment system’s interface with a Clearing Agency.);
(E) notifies the Commission staff in writing if it intends to cease providing services;
(F) provides the Board with copies of any submissions to the Commission staff made pursuant to subparagraphs (C), (D), and (E) of this rule G-15(d)(ii)(B)(2) within ten business days.
(G) promptly supplies supplemental information regarding its confirmation/acknowledgment system when requested by the Commission staff or the Board.

(3) "Auditor’s Report" shall mean a written report which is prepared by competent, independent, external audit personnel in accordance with the standards of the American Institute of Certified Public Accountants and the Information Systems Audit and Control Association and which: (A) verifies the certifications described in subparagraph (d)(ii)(B)(2)(B) of this rule G-15; (B) contains a risk analysis of all aspects of the entity’s information technology systems including, computer operations, telecommunications, data security, systems development, capacity planning and testing, and contingency planning and testing; and (C) contains the written response of the entity’s management to the information provided pursuant to (A) and (B) of this subparagraph (d)(ii)(B)(3) of rule G-15.

(C) Disqualification of Vendor. A broker, dealer or municipal securities dealer using a Qualified Vendor that ceases to be qualified under the definition in rule G-15(d)(ii)(B)(2) shall not be deemed in violation of this rule G-15(d)(ii) if it ceases using such vendor promptly upon receiving notice that the vendor is no longer qualified.

(iii) No change

(e) No change.

---

ENDNOTES

1. Securities Exchange Act Release No. 41378 (May 7, 1999).

2. Underlining indicates additions; strikethrough denotes deletions.

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Amendment Filed to Rule G-16, on Periodic Compliance Examination

On August 13, 1999 the Board filed with the Securities and Exchange Commission ("SEC") a proposed amendment to rule G-16, on periodic compliance examination.¹ The amendment is to revise the 24-month examination requirement in rule G-16 to a two calendar year requirement.

Section 15B(c)(7)(A) of the Securities Exchange Act of 1934 provides that periodic examinations of dealers for compliance with Board rules are to be conducted by the National Association of Securities Dealers, Inc. ("NASD") with respect to securities firms and by the appropriate federal bank regulatory agencies with respect to bank dealers. Rule G-16 permits such examinations to be combined with other periodic examinations of securities firms and bank dealers in order to avoid unnecessary regulatory duplication and undue regulatory burdens for such firms and bank dealers.

By letter dated April 28, 1999, NASD Regulation, Inc. ("NASDR") requested that the Board revise rule G-16. The letter states that because of NASDR’s efforts to coordinate examination schedules, NASDR believes there is a need for a change in rule G-16. NASDR requested that the Board change the 24-month requirement in rule G-16 to a two calendar year requirement. NASDR stated that without the rule change it might be necessary to remove municipal securities examinations from the coordinated examination program.

The Board discussed the proposed amendment with representatives from the Federal Deposit Insurance Corporation, the Federal Reserve Board, and the Office of the Comptroller of the Currency ("the bank regulators"). The bank regulators also examine dealers for compliance with Board rules pursuant to rule G-16. All of the bank regulators responded favorably to the NASDR’s request, stating that the requested change would help bank regulators better coordinate examinations.

Coordination of on-site examinations eliminates unnecessary regulatory duplication and is less intrusive for dealers without negatively impacting investor protection. A formal Memorandum of Understanding among the North American Securities Administrators Association, Inc., SEC, NASDR and other securities industry self-regulatory organizations reflects the joint commitment to coordinated examinations. The Board believes that the proposed amendment will permit more effective coordination of examinations with other regulatory and self-regulatory organizations. It will also provide operating flexibility in planning and scheduling NASDR’s and the bank regulators’ overall examination programs.

August 13, 1999

 

TEXT OF PROPOSED AMENDMENT²

Rule G-16. Periodic Compliance Examination

At least once each [twenty-four months] two calendar years, each broker, dealer and municipal securities dealer shall be examined in accordance with Section 15B(c)(7) of the Act to determine, at a minimum, whether such broker, dealer or municipal securities dealer and its associated persons are in compliance with all applicable rules of the Board and all applicable provisions of the Act and rules and regulations of the Commission thereunder.

---

ENDNOTES

1. File No. SR-MSRB-99-7. Comments submitted to the Commission should refer to this file number.

2. Underlining indicates new language; brackets denote deletions.

 

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

SEC Approves Amendment to Rule G-16, on Periodic Compliance Examination

On October 15, 1999 the Securities and Exchange Commission approved an amendment to rule G-16, on periodic compliance examination.¹The amendment alters rule G-16’s requirement that compliance examinations be conducted once every 24 months to once every two years. The rule change is intended to facilitate coordination of on-site examinations to eliminate unnecessary regulatory duplication without negatively affecting investor protection. The amendment became effective upon approval.

October 20, 1999

TEXT OF AMENDMENT²

Rule G-16. Periodic Compliance Examination

At least once each twenty-four monthstwo calendar years, each broker, dealer and municipal securities dealer shall be examined in accordance with Section 15B(c)(7) of the Act to determine, at a minimum, whether such broker, dealer or municipal securities dealer and its associated persons are in compliance with all applicable rules of the Board and all applicable provisions of the Act and rules and regulations of the Commission thereunder. 

---

 ENDNOTES

1. Securities Exchange Act Release No. 42019 (October 15, 1999).

2. Underlining indicates new language; strikethrough denotes deletions.

 

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

Proposed Amendment to Previously Filed Amendments to Rule G-23, on Activities of Financial Advisors

On January 14, 1999, the Board filed with the Securities and Exchange Commission a proposed amendment to previously filed amendments to rule G-23, on activities of financial advisors. The proposed amendments to rule G-23 concern financial advisors who wish to act as remarketing agents for issues on which they advised the issuer.

BACKGROUND

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.⁽¹⁾ 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. To address this situation and its potential conflict of interest, the Board filed with the Commission amendments to rule G-23 to require 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 amendments required that the financial advisor receive the issuer=s acknowledgment in writing of receipt of such disclosures. When these requirements were met, a dealer acting as financial advisor for an issue also could serve as remarketing agent for such issue.

SUMMARY OF PROPOSED AMENMDENTS

Commission staff requested that the Board revise the proposed amendments to rule G-23 to include a provision requiring issuer consent to the dealer=s dual role, along with certain other technical language changes. Amendment No. 2 revises the proposed amendments to require a dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities, prior to acting as a remarketing agent for such issue, to disclose in writing to the issuer that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists and the source and basis of the remuneration the dealer could earn as remarketing agent on such issue. This written disclosure to the issuer can be in a separate writing provided to the issuer prior to the execution of the remarketing agreement or the disclosure can be in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration. If the disclosure is made prior to the execution of the remarketing agreement, the amount of the specific fee paid by the issuer to the remarketing agent still can be negotiated in the remarketing agreement. If the disclosure is made in the remarketing agreement, the dealer will have negotiated the amount of its fee with the issuer.

January 14, 1999

 

TEXT OF PROPOSED AMENDMENTS⁽²⁾

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 the broker, dealer, or municipal securities dealer has expressly disclosed in writing to the issuer:

        (i) that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists; and

        (ii) the source and basis of the remuneration the broker, dealer or municipal securities dealer could earn as remarketing agent on such issue.

This written disclosure to the issuer may be included either in a separate writing provided to the issuer prior to the execution of the remarketing agreement or in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration.

[(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. 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.

2. Underlining indicates new language; brackets denote deletions.

 

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

        Financial Advisors Acting as Remarketing Agents: Rule G-23

 

        On March 26, 1999, the Securities and Exchange Commission approved amendments to rule G-23, on activities of financial advisors. The amendments concern financial advisors who wish to act as remarketing agents for issues on which they advised the issuer. The amendments became effective upon SEC approval.

BACKGROUND

        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.¹

SUMMARY OF AMENDMENTS

        The amendments require a dealer that has a financial advisory relationship with an issuer with respect to a new issue of municipal securities to disclose in writing to the issuer, prior to acting as a remarketing agent for such issue, that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists and the source and basis of the remuneration the dealer could earn as remarketing agent on such issue. This written disclosure to the issuer can be in a separate writing provided to the issuer prior to the execution of the remarketing agreement or the disclosure can be in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration. If the disclosure is made prior to the execution of the remarketing agreement, the amount of the specific fee paid by the issuer to the remarketing agent still can be negotiated in the remarketing agreement. If the disclosure is made in the remarketing agreement, the dealer will have negotiated the amount of its fee with the issuer.

March 31, 1999

TEXT OF AMENDMENTS²

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 the broker, dealer, or municipal securities dealer has expressly disclosed in writing to the issuer:

        (i) that there may be a conflict of interest in acting as both financial advisor and remarketing agent for the securities with respect to which the financial advisory relationship exists; and

        (ii) the source and basis of the remuneration the broker, dealer or municipal securities dealer could earn as remarketing agent on such issue.

This written disclosure to the issuer may be included either in a separate writing provided to the issuer prior to the execution of the remarketing agreement or in the remarketing agreement. The issuer must expressly acknowledge in writing to the broker, dealer, or municipal securities dealer receipt of such disclosure and consent to the financial advisor acting in both capacities and to the source and basis of the remuneration.

(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. 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.

2. Underlining indicates new language; strikethrough denotes deletions.

 

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

Amendment to Rule G-36(c)(i) Filed with the Securities and Exchange Commission

The Municipal Securities Rulemaking Board has filed with the Securities and Exchange Commission an amendment to rule G-36(c)(i) relating to official statements prepared in connection with most primary offerings exempt from Exchange Act Rule 15c2-12.

        On December 9, 1999, the Municipal Securities Rulemaking Board (the "MSRB" or the "Board") filed with the Securities and Exchange Commission (the "SEC") an amendment to rule G-36, on delivery of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to Board or its designee.¹ The amendment modifies the existing time frame for brokers, dealers or municipal securities dealers ("dealers") acting as underwriters of primary offerings subject to rule G-36(c)(i) (i.e., offerings exempt from Exchange Act Rule 15c2-12) to send official statements to the MSRB.² The amendment provides that an underwriter in a primary offering subject to rule G-36(c)(i) for which an official statement in final form is prepared by the issuer must send two copies of the official statement in final form, together with two copies of Form G-36(OS), to the MSRB by the later of (i) one business day after the bond closing or (ii) one business day after receipt of the official statement from the issuer.

        Rule G-36 was adopted by the MSRB for the purpose of creating a repository for official statements that would function much like a public library that stores, indexes and provides copies of official statements.³ This library, known as the Municipal Securities Information Library^� (or MSIL^�) system,⁴ is intended to serve as a central source for information regarding municipal securities trading in the primary and secondary markets. As originally adopted by the MSRB and approved by the SEC, rule G-36 applied to all primary offerings of municipal securities regardless of principal amount, other than primary offerings that qualified for exemption under section (d)(1) of Securities Exchange Act Rule 15c2-12.⁵ The MSRB subsequently amended rule G-36 to subject to its requirements certain categories of primary offerings that are exempt under Rule 15c2-12(d)(1), thereby further extending the reach of rule G-36 beyond the scope of Rule 15c2-12.⁶ The MSRB felt that, by expanding the scope of the rule to include such offerings, a more complete collection of disclosure documents would result and the overall integrity, efficiency and liquidity of the municipal securities market would be increased.

        For any primary offering subject to rule G-36(c)(i), the underwriter currently is required to send two copies of the official statement in final form, if one is prepared, together with two copies of Form G-36(OS), to the MSRB by the business day after the issuer delivers the municipal securities to the underwriter (the "bond closing"). The MSRB reviewed certain information included by underwriters on Forms G-36(OS) submitted to the MSIL^� system in 1998, including approximately 2,000 such forms submitted in connection with primary offerings subject to rule G-36(c)(i).⁷ For these offerings, the MSRB found that 96% of the official statements in final form were reported to have been delivered by issuers to underwriters within one business day after closing. The 4% of official statement deliveries by issuers to underwriters that were reported as being made more than one business day after closing and therefore too late to permit underwriters to comply with rule G-36(c)(i) constituted more than half (approximately 54%) of all underwriter failures to meet the time frame of that section.⁸

        The MSRB believes that there is significant room for improvement with respect to underwriter compliance with rule G-36(c)(i) in those situations in which the official statement is received in sufficient time to send to the MSRB on a timely basis. Underwriters experiencing problems in this area should review their internal procedures for ensuring that official statements delivered by issuers are handled in a manner that permits the accurate completion of Form G-36(OS) and the prompt sending of such form and the official statement to the MSRB.

        However, the MSRB is concerned that more than half of the instances in which underwriters have not met the time frame of rule G-36(c)(i) resulted from official statements that were reported to have been delivered by issuers more than one business day after closing. Of course, the MSRB has no authority to require that an issuer prepare an official statement or that any official statement that is prepared be delivered to underwriters within a specified time frame. In addition, the SEC excepted those primary offerings that are subject to rule G-36(c)(i) from Rule 15c2-12 and therefore no regulatory framework exists to compel, directly or indirectly, the preparation and delivery of an official statement in such offerings.

        The MSRB notes that in approximately 36% of the offerings subject to rule G-36(c)(i), the number of business days between the sale date and the business day following closing is less than ten. As a result, for these offerings, the requirement in rule G-36(c)(i) that the underwriter send the official statement to the MSRB within one business day after the bond closing provides the underwriter with less time to comply with its official statement submission requirement than the 10 business day outside time frame of rule G-36(b)(i), were such time frame applicable to these offerings.⁹ At the same time, however, issuers in these offerings generally have not contracted with underwriters to deliver official statements within seven business days of the sale date, as provided in section (b)(3) of Rule 15c2-12, since such offerings are exempt from that Rule. Thus, in more than one-third of all offerings subject to rule G-36(c)(i), underwriters are required to act more quickly than they would under rule G-36(b)(i) even though there is no concomitant obligation on the part of issuers to deliver an official statement within any particular time frame.

        As a result, the MSRB published the MSRB Notice seeking comment on, among other things, a draft amendment to rule G-36(c)(i) which the MSRB believed would address this situation. After reviewing the comments received on the MSRB Notice, the MSRB determined to adopt the draft amendment, with a minor clarifying change.¹⁰ As amended, the rule would provide that an underwriter in a primary offering subject to rule G-36(c)(i) for which an official statement in final form is prepared by the issuer must send two copies of the official statement in final form, together with two copies of Form G-36(OS), to the MSRB by the later of (i) one business day after the bond closing or (ii) one business day after receipt of the official statement from the issuer.¹¹ The amendment is intended solely to provide relief to underwriters that face violation of rule G-36(c)(i) as a result of circumstances beyond their control and is not intended to imply that underwriters and other dealers may ignore their continuing obligation to deliver official statements for new issue municipal securities to customers by settlement, as required under rule G-32.

        The MSRB received two comment letters in response to the MSRB Notice, only one of which addressed the draft amendment. TBMA states that it "strongly supports" the draft amendment.¹² TBMA further states that the change in the timing requirement "means that underwriters and issuers could schedule closings on the basis of the needs of the transaction, rather than for the purpose of allowing a sufficient number of days to increase the odds that the official statement will be ready in time for the closing."

        The MSRB strongly believes that this second statement of TBMA demonstrates a misunderstanding of the nature of the proposed amendment, the purpose of official statements in the municipal securities market and the other obligations of dealers with respect to delivery of official statements. In the MSRB Notice, the MSRB observed that, for new issue municipal securities, dealers typically seek, and customers generally expect, to settle their trades on the same day as the closing of the underwriting. As a result, underwriters need to receive the official statement from the issuer in sufficient time to ensure that the official statement can be delivered to customers by settlement of their transactions, as required under rule G-32. If an issuer is preparing an official statement in final form but does not deliver it to the underwriter by the bond closing, dealers would continue to be prohibited from settling their transactions with customers until they have delivered the official statement to the customers, with certain very limited exceptions.¹³ Thus, other than offerings falling within the narrow exceptions provided under rule G-32, the only offerings in which "the needs of the transaction" would not include delivery of the official statement by closing would be those in which underwriters expect to hold the securities in inventory until the official statement is in fact delivered and therefore made available for redelivery to customers.

        The completion and delivery of an official statement by the closing of the underwriting is not a technical requirement imposed by the MSRB. If an official statement serves no purpose in an offering that is exempt from Rule 15c2-12, then the issuer need not prepare one. Unless an issuer is preparing an official statement for reasons entirely unrelated to the offering that it describes, it is difficult to understand how completion of an official statement after the underwriters and initial customers have received delivery of their securities can be rationalized.¹⁴ Although it is possible that the submission requirement under current rule G-36(c)(i) may in some cases influence an issuer to give completion of the official statement in final form a higher priority, it is also possible that in some cases this requirement serves as a disincentive for the actual preparation of the official statement in final form since an underwriter currently can avoid a rule G-36(c)(i) violation by prevailing upon the issuer not to prepare an official statement in final form at all (e.g., an underwriter that has purchased an issue based on a preliminary official statement could advise an issuer that it need not finalize the official statement). Changing the time frame of the rule G-36(c)(i) submission requirement would eliminate this disincentive while providing relief for underwriters that may face a potential rule violation for reasons beyond their control. The official statement delivery requirement under rule G-32 would continue to provide a powerful incentive to underwriters to urge issuers to complete the official statement in final form in sufficient time to permit the underwriters and the other dealers to which they sell such new issue municipal securities to deliver the official statement to customers by settlement.

        Although TBMA supports the draft amendment to rule G-36(c)(i), it suggests that the MSRB further amend rule G-36(c)(i) to extend the one-business day time frame to two-business days. TBMA argues that "it is often logistically difficult to meet the one-day requirement" and that the MSIL^� system serves "archival rather than real-time disclosure purposes."¹⁵ In adopting rule G-36 and creating the MSIL^� system, the MSRB undertook to make available to the industry a comprehensive repository of official statements for use in both the primary and secondary markets. In addition to serving the vital archival purpose of ensuring that information regarding municipal securities is available throughout the life of the securities, the MSIL^� system serves an important function in the primary market as an alternate source (through its subscribers) of official statements for dealers seeking to fulfill their rule G-32 customer delivery obligation. Delaying the submission of official statements to the MSRB could impair the MSIL^� system’s usefulness in the primary market.¹⁶ Without a more substantial showing of hardship to the dealer community, the MSRB believes that extension of the time frame for underwriters to turn the official statement around to the MSRB is not justified at this time. The ability to meet this requirement is entirely within the control of dealers, and they should review their procedures to ensure that this task is assigned to the appropriate personnel having a clear understanding of the procedural and substantive requirements of rule G-36. To the extent that dealers experience difficulty in coordinating the actions of various personnel involved in the handling of official statements, they should consider whether they have instituted procedures that adequately provide for compliance with the rule.

December 9, 1999

 

* * * * * * * * * *

 

 

TEXT OF AMENDMENT¹⁷

Rule G-36. Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee

(a)-(b) No change.

(c) Delivery Requirements for Issues not Subject to Securities Exchange Act Rule 15c2-12.

        (i) Subject to paragraph (iii) below, each broker, dealer, or municipal securities dealer that acts as an underwriter in a primary offering of municipal securities not subject to Securities Exchange Act rule 15c2-12 for which an official statement in final form is prepared by or on behalf of the issuer shall send to the Board or its designee, by certified or registered mail, or some other equally prompt means that provides a record of sending, within by the later of one business day of after delivery of the securities by the issuer to the broker, dealer, or municipal securities dealer or one business day after receipt of the official statement in final form from the issuer or its designated agent, the following documents and written information: two copies of the official statement in final form, if prepared by or on behalf of the issuer; and, if an official statement in final form is prepared, two copies of completed Form G-36(OS) prescribed by the Board, including the CUSIP number or numbers for the issue.

        (ii) No change.

(d)-(f) No change.

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ENDNOTES

1. File No. SR-MSRB-99-11. Comments submitted to the SEC should refer to this file number.

2. Those primary offerings that are subject to rule G-36(c)(i) consist of offerings of municipal securities for which an official statement in final form has been prepared by or on behalf of the issuer and having (i) an aggregate principal amount of less than $1,000,000 ("Small Issue Securities"); (ii) authorized denominations of $100,000 or more if the securities have a maturity of nine months or less ("Short-Term Securities"); and (iii) authorized denominations of $100,000 or more if, at the option of the holder, the securities may be tendered to the issuer or its agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by the issuer or its agent ("Puttable Securities").

3. See Securities Exchange Act Rel. No. 28081 (June 1, 1990), 55 FR 23333 (June 7, 1990); "Delivery of Official Statements to the Board: Rules G-36 and G-8," MSRB Reports, Vol. 9, No. 3 (Nov. 1989) at 3.

4. Municipal Securities Information Library and MSIL are registered trademarks of the MSRB.

5. In primary offerings subject to Rule 15c2-12, the underwriter is required under section (b)(3) of the Rule to contract with the issuer to receive the final official statement within seven business days after any final agreement to purchase, offer or sell the municipal securities (the "sale date") and in sufficient time to accompany any confirmation that requests payment from any customer. Rule 15c2-12 does not apply to Small Issue Securities. In addition, section (d)(1) of the Rule exempts primary offerings of municipal securities if the securities are (i) in authorized denominations of $100,000 or more and are sold to no more than 35 persons with knowledge and experience in financial and business matters, capable of evaluating the merits and risks of the investment and not purchasing for more than one account or with a view to distribution ("Limited Offering Securities"); (ii) Short-Term Securities; or (iii) Puttable Securities. Thus, as originally adopted, rule G-36 applied to all primary offerings subject to Rule 15c2-12 as well as to Small Issue Securities for which an official statement in final form was prepared, but did not apply to Limited Offering Securities, Short-Term Securities and Puttable Securities.

6. See Securities Exchange Act Rel. No. 32086 (March 31, 1993), 58 FR 18290 (April 8, 1993); "Delivery of Official Statements to the Board: Rule G-36," MSRB Reports, Vol. 12, No. 3 (Sept. 1992) at 11. Thus, only primary offerings exempt from Rule 15c2-12 for which no official statement in final form is prepared and Limited Offering Securities remain exempt from rule G-36.

7. The MSRB reviewed all Forms G-36(OS) for primary offerings having sale dates in 1998 received in acceptable form by the MSIL^� system on or prior to December 31, 1998. Excluded from this review were any Forms G-36(OS) that omitted the sale date, date of receipt by the underwriter of the official statement from the issuer or date that the underwriter sent the official statement to the MSIL� system. Information provided by underwriters on Form G-36(OS) is not independently verified by the MSRB but is provided to the appropriate enforcement agency on a regular basis. Underwriters are required to certify that all information contained in each Form G-36(OS) submitted to the MSIL^� system is true and correct. Inaccuracies in the information reported by underwriters on Form G-36(OS) could subject such underwriter to appropriate enforcement action. The results of the MSRB’s review could be affected by any such inaccuracies. The full results of this review, including results relating to other provisions of rule G-36 and to the provisions of rule G-32 and Rule 15c2-12, were published in "Official Statement Deliveries Under Rules G-32 and G-36 and Exchange Act Rule 15c2-12," MSRB Reports, Vol. 19, No. 3 (Sept. 1999) at 29 (the "MSRB Notice").

8. The remaining failures consisted of situations where the issuer was reported to have delivered the official statement to the underwriter in sufficient time for the underwriter to comply with rule G-36(c)(i) but the underwriter delayed sending the official statement to the MSRB until later than the business day after the bond closing.

9. Section (b)(i) of rule G-36 requires the underwriter of a primary offering subject to Rule 15c2-12 to send two copies of the final official statement, together with two copies of Form G-36(OS), to the MSRB within one business day after receipt of the final official statement from the issuer but no later than 10 business days after the sale date.

10. The change in language makes clearer the fact that section (c)(i) will continue to apply to a primary offering only if an official statement in final form is prepared.

11. In contrast, rule G-36(c)(i) currently requires that the underwriter send the official statement to the MSRB by the business day after the bond closing, regardless of whether the underwriter has in fact received the official statement by such day.

12. The comment letter from The Bond Market Association ("TBMA") addressed the draft amendment as well as certain other issues relating to MSRB rules G-36 and G-32 and Exchange Act Rule 15c2-12. The comment letter from Charles Schwab & Co. Inc. ("Schwab") addressed certain issues relating to rule G-32. The MSRB is considering the comments received on these other matters but has not determined to take any rulemaking action with respect to rule G-32 or any provisions of rule G-36 other than section (c)(i) thereof at this time.

13. Commercial paper is wholly exempt from the rule G-32 customer delivery requirement and preliminary official statements may be delivered by settlement (with official statements in final form sent when they become available) for Puttable Securities.

14. Of course, the MSRB believes that there is significant value to the secondary market in having official statements available throughout the life of the issue. Nonetheless, the MSRB sees no way of justifying the existence of an official statement based on the needs of the secondary market while ignoring the needs of the primary market.

15. TBMA states "that it is difficult to ensure the desirable level of coordination between the underwriter personnel who are best-positioned to authenticate the official statement as the final official statement and the personnel who are responsible for filings with the Board."

16. Schwab notes that it has "found that if the dealers [from which it purchases new issue municipal securities] do not have copies of the final official statement, such copies are also generally unavailable from the managing underwriter, financial printer, Bloomberg or another Nationally Recognized Municipal Securities Information Repository." Delays in receiving official statements by the MSIL� system would further reduce their availability from these other sources.

17. Underlining indicates additions; strikethrough indicates deletions.

 

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

Notice Regarding the Application of Rule G-37 to Presidential Campaigns of Issuer Officials

        In response to numerous calls on this subject, the Board wishes to reiterate its position on the application of rule G-37, on political contributions and prohibitions on municipal securities business, to Presidential campaigns of issuer officials. The Board directs persons interested in contributing to an issuer official's Presidential campaign to the MSRB Interpretation of May 31, 1995 ("the 1995 Interpretive Letter").⁽¹⁾

        Rule G-37, among other things, prohibits a broker, dealer or municipal securities dealer (dealer) from engaging in municipal securities business with an issuer within two years after any contribution to an official of an issuer made by the dealer; any municipal finance professional associated with the dealer; or any political action committee controlled by the dealer or any municipal finance professional. In the 1995 Interpretive Letter, the Board noted that rule G-37 is applicable to contributions given to officials of issuers who seek election to federal office, such as the Presidency. The Board also explained that the only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals.⁽²⁾ Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. In the example of an issuer official running for President, any municipal finance professional in the country can contribute the de minimis amount to the official's Presidential campaign without causing a ban on municipal securities business with that issuer.

        The Board previously has stated that, if an issuer official is involved in a primary election prior to the general election, a municipal finance professional who is entitled to vote for such official may contribute up to $250 for the primary election and $250 for the general election to each such official.⁽³⁾ In the context of a Presidential campaign, the Board notes that the $250 de minimis amount applies to the entire primary process, up through and including the national party convention. While rule G-37 allows a municipal finance professional to then contribute another $250 to the party candidate's general election campaign fund, the Board understands that a Presidential candidate who has accepted public funding for the general election is prohibited under federal law from accepting any contributions to further his or her general election campaign.

        Finally, the Board also notes that rule G-37(c) provides that no dealer or municipal finance professional shall solicit any person or political action committee to make any contributions, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business.

March 23, 1999

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ENDNOTES

1. The 1995 Interpretive Letter is reprinted in MSRB Rule Book (January 1, 1999) at 201-203. It also is available from the MSRB Rules/Interpretive Letters section of the Board's Web site at www.msrb.org.

2. The term "municipal finance professional" is a defined term in rule G-37 (g)(iv). The Board wishes to remind dealers that the term is broader than persons directly involved in municipal securities activities and may include certain supervisors, including in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer, 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. It also may include members of the dealer's executive or management committee or similarly situated officials. See Question and Answer number 2 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports, Vol. 14, No. 3 (June 1994) at 13; Question and Answer number 3 dated September 9, 1997, reprinted in MSRB Rule Book (January 1, 1999) at 199. The Questions and Answers also are available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.

3. See Question and Answer number 10 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports, Vol. 14, No. 3 (June 1994) at 13. The Question and Answer also is available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.

 

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

Amendments Approved Requiring Dealers to Obtain from Their Consultants Information on Political Contributions and Payments to Political Parties and for Dealers to Report Such Information to the Board: Rules G-38, G-37 and G-8

        On December 7, 1999, the Securities and Exchange Commission approved amendments to rules G-38, on consultants, G-37, on political contributions and prohibitions on municipal securities business, and G-8, on books and records, as well as revisions to the attachment page to Form G-37/G-38.¹ The amendments require dealers to obtain from their consultants information on the consultants’ political contributions and payments to state and local political parties and to report such information to the Board on Form G-37/G-38. The amendments will become effective on April 1, 2000.

SUMMARY OF AMENDMENTS

        The amendments require a dealer to receive and report certain contribution and payment information from the consultant;² any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the dealer; and any political action committee ("PAC") controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer.³ A dealer is required to obtain information from its consultants about the contributions made to issuer officials only if the consultant has had direct or indirect communication with such issuer to obtain municipal securities business on behalf of the dealer.⁴ The political party payments required to be reported are limited to those made to political parties of states and political subdivisions that operate within the geographic area of the issuer with whom the consultant communicates on behalf of the dealer (e.g., city, county and state parties). The date that establishes the obligation for the collection of contribution information is the date of the consultant’s communication with the issuer to obtain municipal securities business on behalf of the dealer.

Consultant Agreement

        A dealer is required to include within its Consultant Agreement⁵ a statement that the consultant agrees to provide the dealer each calendar quarter with a listing of reportable political contributions to official(s) of an issuer and reportable payments to political parties of states and political subdivisions during such quarter, or a report that no reportable political contributions or reportable political party payments were made, as appropriate.⁶

"Look-Back" and "Look-Forward" Provisions

        With respect to the collection of contribution and payment information, the amendments contain a six-month "look-back" provision as well as a six-month "look-forward" provision from the date of communication with an issuer. Thus, a consultant must disclose to the dealer the contributions and payments made by the consultant during the six months prior to the date of the consultant's communication with the issuer.⁷ So too, if the consultant's communication with an issuer continues, any reportable contributions and payments are required to be disclosed. Once communication ceases, the consultant still must disclose contribution and payment information for six months.⁸ The Board believes these provisions are important in providing information for a minimum period of one year about any consultant contributions to officials of an issuer with whom the consultant communicated on behalf of a dealer to obtain municipal securities business. This should help to identify any situations in which contributions could have influenced the awarding of municipal securities business.

        A dealer’s requirement to collect contribution and payment information from its consultants ends when a Consultant Agreement has been terminated.⁹ Of course, dealers should not attempt to avoid the requirements of rule G-38 by terminating a consultant relationship after directing or soliciting the consultant to make a political contribution to an issuer official after such termination. Rule G-37(d) prohibits a dealer from doing any act indirectly which would result in a violation of rule G-37 if done directly by the dealer. Thus, a dealer may violate rule G-37 by engaging in municipal securities business with an issuer after directing or soliciting any person to make a contribution to an official of such issuer.

Disclosure on Form G-37/G-38

        The amendments require that the information obtained by dealers concerning their consultants' contributions and payments be submitted by dealers to the Board on Form G-37/G-38.¹⁰ The disclosures required by the amendments are reflected in the changes to Form G-37/G-38. The amendments require dealers to disclose on the attachment sheet for each consultant used by the dealer the contributions and payments covered by the rule or that the consultant reported that no such contributions or payments were made for such quarter. Furthermore, a dealer must disclose if a consultant has failed to provide it with a report concerning its contributions and payments. When completing a form, a dealer must disclose, in addition to the other required information, the calendar quarter and year of any reportable political contributions and reportable political party payments that were made prior to the calendar quarter of the form being completed (e.g., contributions and payments made in a prior quarter that are reportable as a result of the six-month look-back). "Look-back" contributions should be disclosed on the Form G-37/G-38 for the quarter in which the consultant has communicated with an issuer to obtain municipal securities business on behalf of a dealer.

        As noted above, the amendments will become effective on April 1, 2000. On the reports for the second quarter of 2000 (required to be sent to the Board by July 31, 2000) dealers will be required to disclose their consultants’ reportable political contributions and reportable political party payments for the second quarter of 2000 and include, pursuant to the six-month look-back, reportable political contributions and reportable political party payments since October 1, 1999. Once a contribution or payment has been disclosed on a report, a dealer should not continue to disclose that particular contribution or payment on subsequent reports.

The attachment page to Form G-37/G-38 also has been revised to require dealers to separately identify all of the municipal securities business obtained or retained by the consultant for the dealer.

"Reasonable Efforts" Provision

        The amendments contain a "reasonable efforts" provision that allows dealers to rely in good faith on information received from their consultants regarding contributions. This provision provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. To avail itself of the reasonable efforts, a dealer must:

        (1) state in the Consultant Agreement that Board rules require disclosure of consultant contributions;

        (2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information;

        (3) include language in the Consultant Agreement to the effect that: (a) the Consultant Agreement will be terminated if, for any calendar quarter, the consultant fails to provide the dealer with information about its reportable contributions or payments, or a report noting that the consultant made no reportable contributions or payments, and such failure continues up to the date to be determined by the dealer but no later than the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the dealer must send its Form G-37/G-38 to the Board, and (b) the dealer may not make any further payments to the consultant, including payments owed for services performed prior to the date of termination, as of the date of such termination; and

        (4) enforce the Consultant Agreement provisions described above in a full and timely manner and indicate the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

        The failure by a dealer to include the termination and non-payment provisions in a Consultant Agreement or to enforce any such provisions that may be contained in the Consultant Agreement, would not, in and of itself, constitute a violation of rule G-38 but would instead preclude the dealer from invoking the reasonable efforts provision as a defense against a possible violation for failing to disclose consultant contribution information, which the consultant may have withheld from the dealer.

Recordkeeping

        The amendments to rule G-8 require a dealer to maintain: (1) records of each reportable political contribution; (2) records of each reportable political party payment; (3) records indicating, if applicable, that a consultant made no reportable political contributions or no reportable political party payments; and (4) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.

Technical amendments

    Finally, the amendments contain a clarifying amendment to rule G-38(b)(i)(B), and a technical amendment to rule G-37(e)(i)(D) to conform to the amendments to rule G-38.¹¹

December 9, 1999

 

TEXT OF AMENDMENTS¹²

Rule G-38. Consultants

(a) Definitions.

        (i)-(v) No change.

        (vi) The term "reportable political contribution" means:

       (A) if the consultant has had direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer, a political contribution to an official(s) of such issuer made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those political contributions to official(s) of an issuer made by any individual referred to in subparagraph (b)(i)(A) or (B) of this rule who is entitled to vote for such official if the contributions made by such individual, in total, are not in excess of $250 to any official of such issuer, per election.

(vii) The term "reportable political party payment" means:

        (A) if a political party of a state or political subdivision operates within the geographic area of an issuer with which the consultant has had direct or indirect communication to obtain or retain municipal securities business on behalf of the broker, dealer or municipal securities dealer, a payment to such party made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those payments to political parties of a state or political subdivision made by any individual referred to in subparagraph (b)(i)(A) or (B) of this rule who is entitled to vote in such state or political subdivision if the payments made by such individual, in total, are not in excess of $250 per political party, per year.

(viii) 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, business address, role and compensation arrangement of each such consultant ("Consultant Agreement"). In addition, the Consultant Agreement shall include a statement that the consultant agrees to provide the broker, dealer or municipal securities dealer with a list by contributor category, in writing, of any reportable political contributions and any reportable political party payments during each calendar quarter made by:

        (A) the consultant;

        (B) if the consultant is not an individual, any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and

        (C) any political action committee controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer.

        (ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.

        (iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.

        (iv) 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) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.

        (i) A broker, dealer or municipal securities dealer is required to obtain information on its consultant’s reportable political contributions and reportable political party payments beginning with a consultant's first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).

        (ii) The requirement to obtain the information referred to in paragraph (c)(i) of this rule shall end upon the termination of the Consultant Agreement.

        (iii) A broker, dealer or municipal securities dealer will not violate this section if it fails to receive from its consultant all required information on reportable political contributions and reportable political party payments and thus fails to report such information to the Board if the broker, dealer or municipal securities dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. Reasonable efforts shall include:

        (A) a statement in the Consultant Agreement that Board rules require disclosure of consultant contributions to issuer officials and payments to state and local political parties;

        (B) the broker, dealer or municipal securities dealer sending quarterly reminders to its consultants of the deadline for their submissions to the broker, dealer or municipal securities dealer of the information concerning their reportable political contributions and reportable political party payments;

        (C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:

        (1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and

        (2) no further payments, including payments owed for services performed prior to the date of termination, shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and

        (D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

(d) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, business address, role and compensation arrangement of any consultant used, directly or indirectly, by the broker, dealer or municipal securities dealer to attempt to obtain or retain municipal securities business with each such issuer. Such information shall be submitted to the issuer either:

        (i) – (ii) No change.

(d) (e) Disclosure to Board. Each broker, dealer and municipal securities dealer shall send to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports of all consultants used by the broker, dealer or municipal securities dealer during each calendar quarter. Two copies of the reports must be sent to the Board on Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31, and October 31). Such reports shall include, for each consultant, in the prescribed format, the consultant's name, company, business address, role, 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 Such 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 the following information to the extent required to be obtained during such calendar quarter pursuant to paragraph (c)(i) of this rule:

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

        (B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or

        (ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or

        (iii) if applicable, a statement that the consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.

Once a contribution or payment has been disclosed on a report, the dealer should not continue to disclose that particular contribution or payment on subsequent reports.

Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

        (i) - (xvii) No change.

        (xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:

        (i) (A) a listing of the name, company, business address, 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)(d), 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) records of each reportable political contribution (as defined in rule G-38(a)(vi)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions; and

(3) the amounts and dates of such contributions;

    (G) records of each reportable political party payment (as defined in rule G-38(a)(vii)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such payments; and

(3) the amounts and dates of such payments;

    (H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));

    (I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and

    (J) the date of termination of any consultant arrangement.

(xix) No change.

(b) - (f) No change.

 

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

(a)–(d) No change.

(e)(i)(A) – (C) No change.

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

(E) No change.

        (ii) – (iii) No change.

(f) – (i) No change.

---

ENDNOTES

1. Securities Exchange Act Release No. 42205 (December 7, 1999).

2. 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.

3. A "consultant" in rule G-38 can refer to an individual or a company. For example, if an individual is a consultant, this individual would report to the dealer only his or her contributions and payments and the contributions of any PAC controlled by such individual. If the consultant is a company, the company would report its contributions and payments to the dealer, as well as those made by any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer, and any PAC controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer.

4. A dealer must disclose contributions with respect to those issuers from which a consultant is seeking municipal securities business on behalf of the dealer, regardless of whether contributions are going to and communications are occurring with the same or different personnel within that particular issuer.

5. Rule G-38 requires dealers that use consultants to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"). The Consultant Agreement, at a minimum, must 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.

6. The de minimis exception for contributions to official(s) of an issuer provides that a consultant need not provide to a dealer information about contributions of the consultant (but only if the consultant is an individual) or by any partner, director, officer or employee of the consultant (if the consultant is a company) who communicates with issuers to obtain municipal securities business on behalf of the dealer made to any official of an issuer for whom such individual is entitled to vote if such individual’s contributions, in total, are not in excess of $250 to each official of such issuer, per election. Similarly, the de minimis exception for payments provides that a consultant need not provide to a dealer information about payments of the consultant to political parties of a state or political subdivision (but only if the consultant is an individual) or by any partner, director, officer or employee of the consultant (if the consultant is a company) who communicates with issuers to obtain municipal securities business on behalf of the dealer and who is entitled to vote in such state or political subdivision if the payments made by the individual, in total, are not in excess of $250 per political party, per year.

7. Such contributions and payments become reportable in the calendar quarter in which the consultant first communicates with the issuer. Thus, for the quarter in which a consultant first communicates with the issuer, the dealer would be required to collect from the consultant its reportable political contributions and reportable political party payments for such quarter and, pursuant to the six-month look-back, for the six-month period preceding such first communication.

8. Contributions and payments made simultaneously with or after the consultant’s first communication with the issuer are reportable in the calendar quarter in which they are made.

9. A dealer that terminates a Consultant Agreement would of course be obligated to obtain information regarding contributions and payments made up to the date of termination.

10. The amendments also require dealers to report the consultant’s business address on Form G-37/G-38.

11. Rule G-8(a)(xviii) was also amended to require a dealer to maintain a record of a consultant’s business address.

12. Underlining indicates new language; strikethrough denotes deletions.

 

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

Proposed Amendments Filed to Pending Amendments at the SEC: Rules G-38, G-37 and G-8

        On August 26, 1999, the Board filed additional amendments to the pending amendments at the Securities and Exchange Commission ("SEC") concerning the disclosure of consultants’ contributions.¹ The pending amendments to rules G-38, on consultants, and G-8, on books and records, and revisions to the attachment page to Form G-37/G-38 would require dealers to obtain from their consultants² information on the consultants’ political contributions to official(s) of an issuer and payments to state and local political parties (hereafter collectively referred to as "contributions") and to require dealers to report such information to the Board on Form G-37/G-38.³ The pending amendments contain a reasonable efforts provision which provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. The proposed amendments, among other things, add two additional requirements to the reasonable efforts provision. The Board has requested that the SEC delay the effective date of the amendments until April 1, 2000.

BACKGROUND

        The Board believes it is reasonable to allow dealers to rely in good faith on information received from their consultants regarding contributions and that it would be almost impossible and unduly burdensome for dealers to investigate for contributions that were not reported by their consultants. As noted above, the pending amendments contain a reasonable efforts provision. This provision states that reasonable efforts include having a dealer: (1) state in the Consultant Agreement⁴ that Board rules require disclosure of consultant contributions, and (2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information.

        After the Board filed the pending amendments with the SEC, the SEC staff recommended to Board staff that the reasonable efforts provision contain two additional requirements: (1) the dealer must disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule, and (2) the dealer must terminate the contract should the consultant fail to provide such report by the next calendar quarter after it was due, and the dealer must not make any further payments pursuant to the Consultant Agreement. The SEC staff stated that these additional requirements to the reasonable efforts provision should help ensure that all required information on contributions is obtained from consultants.

        On April 19, 1999, the Board published the SEC’s additional requirements so that dealers could be given the opportunity to comment to the Board about the practical implications of the requirements.⁵ The Board has reviewed the comments received on the notice and has determined to adopt the SEC’s additional requirements and file rule language to include these requirements in the amendments pending at the SEC.

SUMMARY OF COMMENTS

        The Board received five comments in response to its request for comments about the draft amendments incorporating the SEC’s additional requirements. Most of the commentators did not limit their comments specifically to the draft amendments, which were the subject of the notice requesting comment. The commentators addressed various aspects of both the draft amendments and those amendments pending approval at the SEC. In general, none of the commentators offered support for the draft amendments.

        There was concern expressed by commentators about terminating the Consultant Agreement for failure by consultants to provide the required information. In addition, commentators were concerned about the prohibition from paying a consultant once the Consultant Agreement has been terminated because the consultant could be owed payment for work performed prior to the date of termination. The Board feels strongly that rule G-38 should require the disclosure of consultants’ contributions and dealers should be able to avail themselves of a reasonable efforts defense if they wish to do so. The provision relating to termination of the Consultant Agreement with a consultant that does not provide the required information is a pre-condition to invoking the reasonable efforts defense. A dealer that does not terminate the Consultant Agreement in these instances does not violate rule G-38, but it does lose its ability to invoke the reasonable efforts defense.

        The Board believes that the issue of a prohibition on further payments to a consultant at the time of termination of the Consultant Agreement can be addressed by dealers including a specific provision in their Consultant Agreements. This provision can indicate that, on the date of termination of the Consultant Agreement by the dealer because of the consultant’s failure to report the required information, no further payments will be provided by the dealer to the consultant, including payments for services performed by the consultant prior to the date of termination. In addition, to address any uncertainty in the rule language about payments for prior services, the proposed amendments filed with the SEC revise rule G-38 to note specifically that the prohibition on further payments at the time of termination of the Consultant Agreement includes payments for services performed prior to the date of termination.

SUMMARY OF PROPOSED AMENDMENTS

        As noted above, the SEC staff recommended that the reasonable efforts provision require that a dealer disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule. The pending amendments require dealers to receive from their consultants reports on any reportable contributions but do not contain a requirement for dealers to receive reports if no such contributions were made. In order to establish a complete record of the information being reported by consultants, the proposed amendments revise the pending amendments to require all dealers using consultants to receive reports every quarter from their consultants listing all reportable contributions or stating that the consultants made no reportable contributions, as appropriate. The dealer would then indicate the contributions reported or that the consultant had no contributions to report, as appropriate, on its Form G-37/G-38 for the applicable quarter. Pursuant to the SEC staff’s recommendation, the proposed amendments also require dealers to disclose if they did not receive a report from a consultant during a particular quarter. Thus, if a consultant does not submit a report to the dealer for a particular quarter, the dealer must report that fact on its Form G-37/G-38. These additional requirements would constitute affirmative obligations on all dealers submitting Forms G-37/G-38 who use consultants, not merely pre-conditions to invoking the reasonable efforts defense.

        The SEC staff’s second suggested requirement for the reasonable efforts provision is that a dealer must terminate the Consultant Agreement should a consultant fail to provide the required information by the next calendar quarter after it was due, and the dealer must not make any further payments to the consultant pursuant to the Consultant Agreement.

        The proposed amendments revise the pending amendments to require dealers that wish to rely on a reasonable efforts defense to include language in their Consultant Agreements to the effect that the Consultant Agreement will be terminated if the consultant fails to provide the dealer a report of the required information within the required time frame and that no further payments will be made to the consultant from the date of termination of the Consultant Agreement if the Consultant Agreement is terminated because the consultant did not provide the required information.

        If, for any calendar quarter, a consultant fails to provide the dealer with a report of its contributions or a report noting that the consultant made no reportable contributions and such failure continues up to the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, the proposed amendments requires the dealer, if it wishes to rely on the reasonable efforts defense, to terminate the Consultant Agreement by the date the form for such second quarter must be sent to the Board (i.e., January 31, April 30, July 31 or October 31).6 When a Consultant Agreement is terminated by the dealer because of a consultant’s failure to provide reports about its reportable contributions, the proposed amendments require a dealer that wishes to rely on a reasonable efforts defense to note on its Form G-37/G-38 that the Consultant Agreement has been terminated for this reason and the date of termination. The proposed amendments also clarify that dealers that wish to rely on a reasonable efforts defense will not be permitted to make any further payments pursuant to the Consultant Agreement from the date of termination, even if money is owed to the consultant for services already rendered.

        The failure by a dealer to include the termination and non-payment provisions in a Consultant Agreement or to enforce any such provisions that may be contained in the Consultant Agreement would not, in and of itself, constitute a violation of rule G-38. Such failure would instead preclude the dealer from invoking the reasonable efforts provision as a defense against a possible violation for failing to disclose consultant contribution information which the consultant may have withheld from the dealer.

        The proposed amendments also contain a clarifying amendment to rule G-38(b)(i)(B), and a technical amendment to rule G-37(e)(i)(D) to conform to the amendments to rule G-38.

        Finally, as noted above, the Board has requested that the SEC delay the effective date of the amendments until April 1, 2000. This delayed effective date should provide dealers with time to amend their Consultant Agreements to conform to the amendments and to revise their procedures for compliance with rules G-38 and G-8. Dealers should be aware that the amendments pending at the SEC contain a six-month "look-back" provision from the date of communication with an issuer. Thus, if a consultant communicates with an issuer on April 1, 2000, the consultant must disclose to the dealer the reportable contributions made by the consultant to the issuer from October 1, 1999, and the dealer must then disclose these contributions on the Form G-37/G-38 it files for the second quarter of 2000.

August 26, 1999

 

Text of Proposed Amendments Incorporated into Pending Amendments⁷

Rule G-38. Consultants

(a) No additional changes.

(b) Written Agreement

(i) No additional changes.

(A) No additional changes.

(B) if the consultant is not an individual, any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and

(C) No additional changes.

(ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.

(iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.

(iv) No additional changes.

(c) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.

(i) A broker, dealer or municipal securities dealer is required to obtain information on its consultant’s reportable political contributions and reportable political party payments beginning with a consultant=s first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).

(ii) No additional changes.

(iii) No additional changes.

(A) – (B) No additional changes.

(C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:

(1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and

(2) no further payments, including payments owed for services performed prior to the date of termination, shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and

(D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

(d) No additional changes.

(e) No additional changes.

(i)(A) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving reportable political contributions or reportable political party payments, listed by state; and (B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or

(ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or

(iii) No additional changes.

 

Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a) No change.

(i) - (xvii) No change.

(xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:

(A) – (G) No additional changes.

(H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));

(I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and

(J) the date of termination of any consultant arrangement.

(xix) No change.

(b) - (f) No change.

 

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

(a)– (d) No change.

(e)(i)(A) – (C) No change.

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

(E) No change.

(ii) – (iii) No change.

(f) – (i) No change.

---

ENDNOTES

1. File No. SR-MSRB-98-8, Amendment No. 1. Comments submitted to the SEC should refer to this file number.

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

3. For more information about the pending amendments at the SEC, see "Requirements for Dealers to Report Their Consultants’ Political Contributions and Payments to Political Parties: Rules G-38 and G-8," MSRB Reports, Vol. 18, No. 2 (August 1998) at 3-10. The notice is also posted on the Board’s web site at www.msrb.org.

4. Rule G-38 requires dealers who use consultants to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"). The rule 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.

5. See "Additional Requirements for Pending Amendments on Disclosure of Consultants’ Contributions: Rule G-38," MSRB Reports, Vol. 19, No. 2 (April 1999) at 3-7.

6. Rule G-37(e)(i) provides that each dealer must send to the Board two copies of 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).

7. Underlining indicates new language; strikethrough denotes deletions.

Rule G-38 Question and Answer

Agreement to Jointly Seek Underwriting Assignments

Q: Dealer Firm A and Dealer Firm B have entered into an agreement to jointly seek underwriting assignments. As part of this agreement, the two dealers have jointly submitted proposals to issuers. Dealer Firm A ultimately is selected to underwrite a negotiated sale of a primary offering of municipal securities (i.e., "municipal securities business" as defined in rule G-37). Dealer Firm B will not act as an underwriter on this offering but will assist Dealer Firm A in structuring the transaction. Dealer Firm A will compensate Dealer Firm B for the work it provides on the transaction. Is Dealer Firm B a consultant to Dealer Firm A pursuant to rule G-38, on consultants?

A: Yes. Dealer Firm B is a consultant to Dealer Firm A because, pursuant to the definition of consultant in rule G-38(a)(i), Dealer Firm B is: (1) used by Dealer Firm A to obtain municipal securities business, (2) through direct or indirect communication with an issuer on behalf of Dealer Firm A, and (3) the communication is undertaken by Dealer Firm B in exchange for, or with the understanding of receiving, payment from Dealer Firm A. Moreover, Dealer Firm B is not exempt from the definition of consultant since it is not a municipal finance professional, and its sole basis of compensation is not the actual provision of legal, accounting or engineering advice, services or assistance. In addition, the Board believes that, even though Dealer Firm B is providing substantive work on the transaction, any dealer used by another dealer (other than a member of the syndicate) to assist in obtaining or retaining municipal securities business is acting as a consultant pursuant to rule G-38.

 March 4, 1999

 

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

Comments Requested on Additional Requirements for Pending Amendments on Disclosure of Consultants’ Contributions

* * *

        The Board is requesting comments regarding draft amendments to the reasonable efforts provision contained in proposed amendments to rule G-38, on consultants, pending at the SEC. Comments should be submitted to the Board no later than May 28, 1999, and may be directed to Ronald W. Smith, Senior Legal Associate. Written comments will be available for public inspection.

* * *

        On June 16, 1998, the Board filed with the Securities and Exchange Commission ("SEC") proposed amendments to rules G-38 and G-8, and revisions to the attachment page to Form G-37/G-38, to require dealers to obtain from their consultants¹ information on the consultants’ political contributions to official(s) of an issuer and payments to state and local political parties (hereafter collectively referred to as "contributions") and to require dealers to report such information to the Board on Form G-37/G-38.²

"REASONABLE EFFORTS" PROVISION

        The proposed amendments contain a "reasonable efforts" provision. The Board believes it is reasonable to allow dealers to rely in good faith on information received from their consultants regarding contributions and that it would be almost impossible and unduly burdensome for dealers to investigate for contributions that were not reported by their consultants. The reasonable efforts provision provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. The proposed amendments state that reasonable efforts include having a dealer: (1) state in the Consultant Agreement that Board rules require disclosure of consultant contributions, and (2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information. The Board stated in its filing of the amendments that, while the Board does not believe dealers have a duty to investigate whether the contribution information provided is accurate or complete, the Board would expect a dealer to vigorously enforce its contract with a consultant if the dealer becomes aware that the consultant is not providing it with materially complete or accurate information concerning contributions on a timely basis.

DRAFT AMENDMENTS

        The SEC staff has recommended that the reasonable efforts provision contain two additional requirements: (1) the dealer must disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule, and (2) the dealer must terminate the contract should the consultant fail to provide such report by the next calendar quarter after it was due, and the dealer must not make any further payments pursuant to the Consultant Agreement. The SEC staff has stated that these additional requirements to the reasonable efforts provision should help ensure that all required information on contributions is obtained from consultants.

Disclosure of Any Consultant that Does Not Provide the Required Report

        As noted above, the SEC staff has recommended that the reasonable efforts provision require that a dealer disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule. The pending proposed amendments currently require dealers to receive from their consultants reports on any reportable contributions but the amendments do not contain a requirement for dealers to receive reports if no such contributions were made. In order to establish a complete record of the information being reported by consultants, the draft amendments would revise the pending proposed amendments to require all dealers to receive reports every quarter from their consultants listing all reportable contributions or stating that the consultants made no reportable contributions, as appropriate. The dealer would then indicate the contributions reported or that the consultant had no contributions to report, as appropriate, on its Form G-37/G-38 for the applicable quarter. The Board believes it would be helpful for the general requirements in the rule language (and not the reasonable efforts provision) also to require dealers to disclose if they did not receive a report from a consultant during a particular quarter. Thus, if a consultant does not submit a report to the dealer for a particular quarter, the dealer must report that fact on its Form G-37/G-38.

Termination of Contract and No Further Payments

        The SEC staff’s second suggested requirement for the reasonable efforts provision is that a dealer must terminate the contract should a consultant fail to provide the required information by the next calendar quarter after it was due, and the dealer must not make any further payments to the consultant pursuant to the Consultant Agreement.

        The draft amendments would revise the pending proposed amendments to require dealers that wish to rely on a reasonable efforts defense to include language in their Consultant Agreements to the effect that the Consultant Agreement will be terminated if the consultant fails to provide the dealer a report of the required information within the required time frame and that no further payments will be made to the consultant from the date of termination of the Consultant Agreement if the Consultant Agreement is terminated because the consultant did not provide the required information. When a Consultant Agreement is terminated by the dealer because of a consultant’s failure to provide reports about its reportable contributions, the draft amendments would require a dealer that wishes to rely on a reasonable efforts defense to note on its Form G-37/G-38 that the Consultant Agreement has been terminated for this reason and the date of termination.

        If, for any calendar quarter, a consultant fails to provide the dealer with a report of its contributions or a report noting that the consultant made no reportable contributions and such failure continues up to the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, the dealer must terminate the Consultant Agreement by the date the form for such second quarter must be sent to the Board (i.e., January 31, April 30, July 31 or October 31) in order to rely on the reasonable efforts provision.³ Dealers that wish to rely on a reasonable efforts defense would not be permitted to make any further payments pursuant to the Consultant Agreement from the date of termination, even if money is owed to the consultant for services already rendered.

REQUEST FOR COMMENTS

        The Board is requesting comments from interested parties about the draft amendments, including the requirements to require consultants to report to dealers that no reportable contributions were made, if applicable, and to require dealers to disclose to the Board when no reports have been received from their consultants.⁴ While dealers do not have to rely on the reasonable efforts provision, most dealers that have contacted the Board regarding the proposed amendments have indicated that they would try to do so. As to the additional requirements to the reasonable efforts provision, the Board asks for comments particularly on the contractual provision that would require termination if a consultant fails to provide the required report after two quarters. In addition, the Board asks for comments on the requirement to cease paying the consultant pursuant to the Consultant Agreement as of the termination date.

April 19, 1999

Text of Amendments⁵

Rule G-38. Consultants

(a) Definitions.

(i)-(v) No change.

(vi) The term Areportable political contribution@ means:

        (A) if the consultant has had direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer, a political contribution to an official(s) of such issuer made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those political contributions to official(s) of an issuer made by any individual referred to in subparagraphs (b)(i)(A) or (B) of this rule who is entitled to vote for such official if the contributions made by such individual, in total, are not in excess of $250 to any official of such issuer, per election.

(vii) The term Areportable political party payment@ means:

        (A) if a political party of a state or political subdivision operates within the geographic area of an issuer with which the consultant has had direct or indirect communication to obtain or retain municipal securities business on behalf of the broker, dealer or municipal securities dealer, a payment to such party made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those payments to political parties of a state or political subdivision made by any individual referred to in subparagraphs (b)(i)(A) or (B) of this rule who is entitled to vote in such state or political subdivision if the payments made by such individual, in total, are not in excess of $250 per political party, per year.

(viii) The term Aofficial of such issuer@ or Aofficial 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, business address, role and compensation arrangement of each such consultant (AConsultant Agreement@). In addition, the Consultant Agreement shall include a statement that the consultant agrees to provide the broker, dealer or municipal securities dealer with a list by contributor category, in writing, of any reportable political contributions and any reportable political party payments during each calendar quarter made by:

        (A) the consultant;

        (B) any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and

        (C) any political action committee controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer.

       (ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.

        (iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.

        (iv) 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) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.

        (i) A broker, dealer or municipal securities dealer is required to obtain information on its consultant’s reportable political contributions and reportable political party payments beginning with a consultant=s first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).

        (ii) The requirement to obtain the information referred to in paragraph (c)(i) of this rule shall end upon the termination of the Consultant Agreement.

        (iii) A broker, dealer or municipal securities dealer will not violate this section if it fails to receive from its consultant all required information on reportable political contributions and reportable political party payments and thus fails to report such information to the Board if the broker, dealer or municipal securities dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. Reasonable efforts shall include:

        (A) a statement in the Consultant Agreement that Board rules require disclosure of consultant contributions to issuer officials and payments to state and local political parties; and

        (B) the broker, dealer or municipal securities dealer sending quarterly reminders to its consultants of the deadline for their submissions to the broker, dealer or municipal securities dealer of the information concerning their reportable political contributions and reportable political party payments;

        (C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:

        (1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and

        (2) no further payments shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and

        (D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

(d) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, business address, role and compensation arrangement of any consultant used, directly or indirectly, by the broker, dealer or municipal securities dealer to attempt to obtain or retain municipal securities business with each such issuer. Such information shall be submitted to the issuer either:

        (i) – (ii) No change.

(d) (e) Disclosure to Board. Each broker, dealer and municipal securities dealer shall send to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports of all consultants used by the broker, dealer or municipal securities dealer during each calendar quarter. Two copies of the reports must be sent to the Board on Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31, and October 31). Such reports shall include, for each consultant, in the prescribed format, the consultant=s name, company, business address, role, 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 Such 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 the following information to the extent required to be obtained during such calendar quarter pursuant to paragraph (c)(i) of this rule:

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

        (B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or

        (ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or

        (iii) if applicable, a statement that the consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.

Once a contribution or payment has been disclosed on a report, the dealer should not continue to disclose that particular contribution or payment on subsequent reports.

 

Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

        (i) - (xvii) No change.

        (xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:

        (i) (A) a listing of the name, company, business address, 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) (d), 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) records of each reportable political contribution (as defined in rule G-38(a)(vi)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions; and

(3) the amounts and dates of such contributions;

        (G) records of each reportable political party payment (as defined in rule G-38(a)(vii)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such payments; and

(3) the amounts and dates of such payments;

        (H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));

        (I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and

        (J) the date of termination of any consultant arrangement.

(xix) No change.

(b) - (f) No change.

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

(a) – (d) No change.

(e)(i)(A) – (C) No change.

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

        (E) No change.

(ii) – (iii) No change.

(f) – (i) No change.

---

ENDNOTES

1. Rule G-38 defines a consultant as "any person used by a broker, dealer or municipal securities dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on behalf of such broker, dealer or municipal securities dealer where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the broker, dealer or municipal securities dealer or any other person." Specifically excluded from the definition of "consultant" in rule G-38 are municipal finance professionals of the broker, dealer or municipal securities dealer and "any person whose sole basis of compensation from the broker, dealer or municipal securities dealer is the actual provision of legal, accounting or engineering advice, services or assistance in connection with the municipal securities business that the broker, dealer or municipal securities dealer is seeking to obtain or retain." The definition does not exclude any dealer used by another dealer (other than a member of the syndicate) that assists in obtaining or retaining municipal securities business. See Question and Answer to rule G-38 dated March 4, 1999, MSRB Manual (CCH), � 3686.

2. Rule G-38(b) requires each dealer that uses a consultant to 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"). The Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on behalf of the dealer. The proposed amendments require a dealer to include within its Consultant Agreement a statement that the consultant agrees to provide the dealer each quarter with a listing of reportable political contributions to official(s) of an issuer and report payments to political parties of states and political subdivisions during such quarter. The Consultant Agreement must require the consultant to provide the required information to the dealer in sufficient time for the dealer to meet its reporting obligations under rule G-38. For a more complete description of the proposed amendments, see "Requirements for Dealers to Report Their Consultants’ Political Contributions and Payments to Political Parties: Rules G-38 and G-8," MSRB Reports, Vol. 18, No. 2 (August 1998) at 3-10. This notice is also available on the Board’s Web site at www.msrb.org.

3. Rule G-37(e)(i) provides that each dealer must send to the Board two copies of 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).

4. The draft amendments also include a technical amendment to rule G-37(e)(i)(D) to conform to the draft amendments to rule G-38.

5. Underlining indicates proposed amendments pending at the SEC; strikethrough indicates deletions; and bold with underlining indicates draft amendments.

 

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

Press Release for Health Care Financing Steering Committee

On January 21, 1999, the Municipal Securities Rulemaking Board sponsored a meeting in Chicago for issuers and analysts to discuss improving disclosure in connection with health care financings. The meeting was part of a series of discussions hosted by the Board and designed to facilitate disclosure improvements in the land-based, health care and housing financing areas. MSRB Chairman Scott C. Sollers hosted the meeting. Attending the meeting were, MSRB Vice-Chairman Dean Pope, Board member Lynn Hampton, Kit Taylor and Carolyn Walsh from the MSRB staff and representatives from the National Federation of Municipal Analysts, the National Council of Health Facilities Financing Authorities, Healthcare Financial Management Association, American Hospital Association and Van Kampen Funds. This group will be known as the Health Care Financing Steering Committee.

MSRB Chairman Scott C. Sollers stated, "We are pleased to see that in the health care financing sector issuer and investor groups already are making progress in the area of improving disclosure practices. The Steering Committee consensus was that the disclosure guidelines developed by the Healthcare Financial Management Association are a significant starting point. Representatives from the National Federation of Municipal Analysts intend to work with the Healthcare Financial Management Association, the American Hospital Association, and the National Council of Health Facilities Financing Authorities, to build upon these guidelines to develop voluntary national standards for disclosure and best practices. These groups are willing to work together to develop a consensus on the appropriate levels and types of disclosures in both the primary and secondary market."

The Steering Committee intends to monitor the developments and discuss progress in late spring. The MSRB will continue to assist the market participants in the development of these standards primarily through the hosting of discussion forums and/or education efforts. The MSRB also will work with industry participants toward the goal of achieving market-place adherence to the standards once they are developed.

January 25, 1999

 

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

BOARD WILL HOST FORUMS ON LAND-SECURED DISCLOSURE

        The Board will be hosting three forums on land–secured disclosure in September. The decision to host a series of forums focused on land-secured financing transaction disclosure is an outgrowth of the MSRB Forum on Disclosure held last November in Washington, D.C. During that forum, many participants urged the Board to promote similar forums focused on specific market sectors.

        The Board has been working with numerous land-secured market participants to put together these forums. The forums, which will be held in Washington, D.C., Houston, Texas, and Costa Mesa, California, will provide an opportunity for all participants in land-secured financing transactions to discuss issues of concern and possible mechanisms to improve land-secured disclosure.

        The forums will consist of sections discussing: (1) the recently released NFMA Draft Best Practices for Land-Secured Disclosure; (2) the role of developers in providing disclosure; (3) how to best represent value in land-secured transactions; and (4) issues involving dissemination of disclosure information. Paul Maco, Director of the SEC’s Office of Municipal Securities, will be the luncheon speaker at the forums.

        The specific dates and locations for the forums are:

Tuesday, September 14, 1999 � Washington, D.C. forum to be held at the Sheraton Crystal City, 1800 Jefferson Davis Highway, Arlington, Virginia.

Wednesday, September 15, 1999 � Houston, Texas forum to be held at the Sheraton North Houston, George Bush Intercontinental Airport, 15700 John F. Kennedy Blvd., Houston, Texas.

Thursday, September 16, 1999 � Costa Mesa, California forum to be held at the Westin South Coast Plaza, 686 Anton Blvd., Costa Mesa, California.

        The Board is charging a $100 registration fee for attendance. Participants must complete a registration form and submit the form along with the registration fee in advance. A registration form may be obtained by calling the Board’s office at (202) 223-9347 or by downloading from below. Also, a tentative schedule for the forums may be downloaded from below.

July 15, 1999

Registration Form      Tentative Schedule

 

 

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

Release Regarding the Land-Secured Financing Steering Committee

On January 26, 1999 the Land-Secured Financing Steering Committee met by conference call and had an extensive discussion about the ongoing process of developing national disclosure guidelines for land-secured financing. The Steering Committee agreed that an appropriate first step is to have the NFMA produce a working draft statement of disclosure guidelines. The working draft, which the NFMA hopes to create by the end of May, can then be circulated and used as a starting point for in-depth disclosure discussions that will be open to all interested industry participants. The Steering Committee will reconvene in March to discuss an appropriate timetable for the MSRB to host forums geared to solicit nationwide industry comment on the working draft. The forums will seek input on the substance of the draft guidelines from industry participants involved in the many aspects of land-secured financing.

January 29, 1999

 

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

MUNICIPAL FUND SECURITIES - REVISED DRAFT RULE CHANGES

The Board is requesting further comments on revised draft rule changes relating to municipal fund securities. Comments are due by November 1, 1999.

        On March 17, 1999, the Municipal Securities Rulemaking Board (the "Board") published a notice (the "March Notice") requesting comments on draft rule changes relating to transactions effected by or through brokers, dealers and municipal securities dealers ("dealers") in municipal fund securities (as defined below).⁽¹⁾ The Board received comments from eleven commentators. After reviewing these comments, the Board has determined to republish the draft rule changes, with certain modifications and additions (including a revision to exempt municipal fund securities from underwriting assessments), for further comment from industry participants.

        The Board believes that many of the comments reflect a misunderstanding of the nature of the Board's rulemaking proposals and therefore the Board is taking this opportunity to clarify the scope and intent of these proposals. Specifically, the Board wishes to emphasize that the draft rule changes would not extend the reach of Board rules. Rather, they seek to make Board rules that are already applicable to municipal fund securities more accommodating to the unique features of such securities. Dealers should understand that Board rules apply to their transactions in any security that is a municipal security, regardless of whether the dealer is aware of the security's status. Although the Board does not have authority to direct enforcement of its rules, it is statutorily charged with determining the best means of protecting investors and the public interest in regard to dealer transactions in municipal securities. As such, the Board believes that, under the unique circumstances relating to municipal fund securities, enforcement of its rules with regard to transactions in such securities that occurred prior to the industry having been put on notice of their applicability would serve no substantial investor protection purpose, absent extraordinary circumstances or a showing of investor harm resulting from a material departure from standards of fairness generally applicable under the federal securities laws.

SCOPE AND INTENT OF BOARD RULEMAKING WITH RESPECT TO MUNICIPAL FUND SECURITIES

        Dealers that effect transactions in municipal securities are subject to the Board's jurisdiction pursuant to Section 15B of the Securities Exchange Act of 1934 (the "Exchange Act"). In particular, Section 15B(c)(1) prohibits dealers from effecting transactions in, or inducing or attempting to induce the purchase or sale of, a municipal security in contravention of any Board rule. Thus, since enactment of Section 15B and the creation of the Board in the Securities Acts Amendments of 1975 (the "Securities Acts Amendments"), a transaction effected by a dealer in a municipal security must be effected in conformity with Board rules.

        In the March Notice, the Board reviewed two types of state or local governmental programs involving investment interests in which dealers may effect transactions: pooled investment funds under trusts established by state or local governmental entities ("local government pools")⁽²⁾ and higher education savings plan trusts established by states ("higher education trusts").⁽³⁾ These programs had been brought to the Board's attention by staff of the Securities and Exchange Commission (the "SEC"). In response to a Board inquiry as to the SEC's position on whether interests in such programs were municipal securities, SEC staff stated that "at least some interests in local government pools and higher education trusts may be, depending on the facts and circumstances, 'municipal securities' for purposes of the Exchange Act."⁽⁴⁾

        Board rules do not apply to any interest in a local government pool or higher education trust that is not a municipal security. In addition, Board rules apply only to activities of dealers that effect municipal securities transactions. Thus, Board rules do not apply to an issuer of, or a non-dealer entity providing advice to issuers in regard to, municipal securities, including municipal fund securities. However, to the extent that interests in a local government pool or a higher education trust are municipal securities and dealers are effecting transactions in them, Board rules automatically govern such dealer transactions, without the necessity of further Board rulemaking^.(5) On several previous occasions, the Board has alerted the industry to the applicability of Board rules to (and has proposed rule changes to accommodate) transactions in new forms of municipal securities or pre-existing forms of securities that many in the industry had not previously recognized as municipal securities.⁽⁶⁾

        A municipal fund security is defined as a municipal security issued by an issuer that, but for Section 2(b) of the Investment Company Act of 1940 (the "Investment Company Act"),⁽⁷⁾ would constitute an investment company under that Act. Thus, Board rules on municipal fund securities would apply to interests in a state or local governmental trust, such as local government pools and higher education trusts,⁽⁸⁾ only if the following three conditions are met:

1. A dealer is engaging in transactions in such interests;
2. Such interests, in fact, constitute municipal securities; and
3. Such interests are issued by an issuer that, but for the exemption under Section 2(b) of the Investment Company Act, would be considered an investment company within the meaning of that Act.

        The Board understands that municipal fund securities may not have features typically associated with more traditional municipal securities. Instead, their features are similar to those of investment company securities.⁽⁹⁾ In the March Notice, the Board stated that, although its rules generally have been drafted to accommodate the characteristics of debt securities, it believes that most current rules can appropriately be applied to municipal fund securities. Nonetheless, the Board felt that certain rules should be amended to recognize the unique characteristics of municipal fund securities. The draft rule changes did not seek to extend the reach of Board rules, since the rules already apply to municipal fund securities, but sought to tailor certain Board rules to the nature of municipal fund securities.

DISCUSSION OF COMMENTS AND DRAFT RULE CHANGES

Authority of Board to Adopt Draft Rule Changes

        Comments Received. Some commentators state that the Board has no authority to regulate municipal fund securities, particularly local government pool interests.⁽¹⁰⁾ They state that such interests are not municipal securities under the Exchange Act. They argue that the term "municipal securities" is limited to debt obligations of municipal issuers and that interests in local government pools represent equity interests in trust assets, not debt obligations.⁽¹¹⁾ Another commentator questions whether Congress intended that the Board regulate local government pools when it created the Board.

        Board Response. As previously stated, a security must first be a municipal security in order to be a municipal fund security. The draft rule changes would not, and existing Board rules do not, apply to local government pool or higher education trust interests that are not municipal securities. Thus, the Board does not overstep its authority by regulating dealer transactions in municipal fund securities since, by definition, regulation is limited to interests that are municipal securities.

        A firm wishing to determine if Board rules apply to services it provides to an issuer of local government pool or higher education trust interests may seek advice of counsel as to whether (1) such services constitute broker-dealer activities, or (2) such interests are municipal securities. It may seek comfort on counsel's opinion from SEC staff through the SEC's no-action procedure. If a non-dealer firm's activities do not constitute broker-dealer activities, the firm need not be a registered broker or dealer subject to Board rules, even if the interests are municipal securities.⁽¹²⁾ If the interests are not municipal securities, the dealer need not comply with Board rules; however, the dealer's activities may be subject to Exchange Act provisions and SEC and National Association of Securities Dealers ("NASD") rules, unless the interests otherwise qualify for an exemption (e.g., as exempted securities other than municipal securities) under the Exchange Act.

        Of course, the Board's rulemaking proposal is meaningful only if municipal fund securities, in fact, exist. As noted above, the Board sought comfort from SEC staff that local government pool and higher education trust interests are municipal securities. SEC staff replied that "at least some interests in local government pools and higher education trusts may be, depending on the facts and circumstances, 'municipal securities' for purposes of the Exchange Act."⁽¹³⁾ Although the Board is not empowered to determine whether a security is a municipal security within the meaning of Section 3(a)(29) of the Exchange Act, the Board believes that, based on this SEC response as well as a close review of existing no-action letters and legislative history of the Securities Acts Amendments, the Exchange Act and the Securities Act of 1933 (the "Securities Act"), as discussed below, at least some interests in local government pools and higher education trusts are municipal securities.

        For example, in agreeing not to recommend enforcement action in several no-action letters, SEC staff relied on opinions of counsel that interests in state or local governmental trusts were municipal securities under the Exchange Act.⁽¹⁴⁾ In one instance, SEC staff agreed not to recommend enforcement action if a dealer, in offering and selling interests in a higher education trust, were to comply with Board rules as they have been proposed to be amended in the March Notice, in lieu of complying with such rules as currently in effect.⁽¹⁵⁾ In another no-action letter, SEC staff agreed not to recommend enforcement action if dealers (1) sold interests in a higher education trust through persons qualified to sell investment company products but who did not meet the Board's professional qualification requirements⁽¹⁶⁾ and (2) complied with Rule 15c2-12(b)(5) through a continuing disclosure undertaking from a dealer affiliate, rather than from the issuer. In reaching this position, SEC staff noted that the higher education trust interests were "atypical municipal securities."⁽¹⁷⁾

        In other instances, SEC staff agreed not to recommend enforcement action if state entities and their employees sold higher education trust interests without registering as brokers.⁽¹⁸⁾ The applicants opined in these cases that the interests were municipal securities under the Exchange Act, thereby exempting the issuers from registering as brokers by virtue of the exemption for issuers of municipal securities set forth in Section 3(d).⁽¹⁹⁾ SEC staff also agreed not to recommend enforcement action if interests in a state trust were not registered under the Exchange Act, in reliance on an opinion that the exemption under Section 3(a)(12) of the Exchange Act for exempted securities was available.⁽²⁰⁾

        SEC staff also has taken the position that non-debt securities may be municipal securities under the Exchange Act.⁽²¹⁾ In one case, SEC staff was unable to conclude that receipts/certificates evidencing developers' payments to a city of fees for the issuance of building permits could not be considered municipal securities under the Exchange Act.⁽²²⁾ SEC staff also has advised the Board that warrants sold by a municipal corporation entitling the holders to purchase other municipal securities of that corporation are themselves municipal securities under the Exchange Act.⁽²³⁾ Finally, in those cases in which SEC staff concluded that an "obligation" within the meaning of the Internal Revenue Code would also constitute an "obligation" for purposes of Section 3(a)(29) of the Exchange Act, SEC staff did not conclude that the failure of a security to be an obligation for purposes of the Internal Revenue Code would mean that such security was not a municipal security for purposes of the Exchange Act.⁽²⁴⁾ In these cases, SEC staff was not presented with the issue of whether a non-debt security could be a municipal security. As noted above, on the last two occasions when SEC staff was confronted with this issue, it concluded that a non-debt security may be a municipal security for purposes of the Exchange Act.⁽²⁵⁾

        A review of legislative history also suggests that the commentators' position that the term "municipal securities" in the Exchange Act excludes non-debt securities is not justified. The Senate report on the Securities Acts Amendments notes that the legislation created a definition of municipal securities in new Section 3(a)(29) that, for all relevant purposes, used the same language as in the original version of the definition of exempted securities in Section 3(a)(12) of the Exchange Act.⁽²⁶⁾ It also states that no substantive changes in meaning would be effected by creating Section 3(a)(29).⁽²⁷⁾ Thus, the import of the term "municipal securities" must be viewed through the eyes of the original drafters of the Exchange Act in 1934 rather than the drafters of the Securities Acts Amendments in 1975.

        The purpose of including municipal securities in the definition of exempted securities in the Exchange Act was to provide an exemption from most provisions of that Act. Although commentators suggest that Board regulation of dealer transactions in non-debt securities of municipal issuers is inconsistent with the intent of the drafters of the Securities Acts Amendments, the appropriate inquiry is whether the drafters of the original Exchange Act would have intended that only debt securities of municipal issuers be exempted from most provisions of the Exchange Act. That is, would the drafters of the original Exchange Act have intended that non-debt securities of state or local governmental entities - had such securities existed at the time - be subject to the entire range of regulation of the Exchange Act applicable to other equity securities, including in some instances a requirement for registration of such securities with the SEC? A review of Congressional debates, committee reports and hearing testimony relating to enactment of the Securities Act and the Exchange Act reveals that, in spite of differences in statutory language, both Acts were expected to exempt the same universe of municipal securities.

        For example, the 1933 House report on the Securities Act speaks of exempted state and local government securities almost exclusively in terms of "obligations" and "bonds," not "securities."⁽²⁸⁾ The report explains the exemption set forth in Section 3(a) of the Securities Act as follows:

        Paragraph (2) exempts United States, Territorial and State obligations, or obligations of any political subdivision of these governmental units. The term "political subdivision" carries with it the exemption of such securities as county, town, or municipal obligations, as well as school district, drainage district, and levee district, and other similar bonds. The line drawn by the expression "political subdivision" corresponds generally with the line drawn by the courts as to what obligations of States, their units and instrumentalities created by them, are exempted from Federal taxation. By such delineation, any constitutional difficulties that might arise with reference to the inclusion of State and municipal obligations are avoided.⁽²⁹⁾

        Furthermore, during Congressional debate and hearings held in 1933 on the Securities Act, members of Congress used the terms "securities," "obligations" and "bonds" interchangeably.⁽³⁰⁾ Thus, although the statutory language in the Securities Act uses only the term "securities" and not the term "obligations" when describing municipal securities, there is no suggestion that Congress had anything in mind when enacting the Securities Act other than the tax-exempt bonds and other debt obligations of state and local governments that are customarily associated with municipal securities. Nonetheless, the commentators all have agreed that local government pool and higher education trust interests are exempt from the Securities Act and none has suggested that this exemption is limited to tax-exempt debt obligations.

        The initial Exchange Act draft introduced in Congress the following year exempted federal government securities but not municipal securities. Members of Congress expressed concern regarding the appropriateness of federal regulation of state and local governmental matters,⁽³¹⁾ the burden that Exchange Act provisions would place on state and local issuers⁽³²⁾ and the relative detriment in the market to municipal securities if they were not exempted but federal government securities were exempted.⁽³³⁾ Some discussion focused on whether a distinction should be drawn between defaulted and non-defaulted municipal securities.⁽³⁴⁾ Ultimately, the language that was added to the Exchange Act to exempt municipal securities made no such distinction but instead was drafted in non-exclusive terms that paralleled the language used in the Exchange Act to describe federal government securities. This language also employed the same type of terminology that the drafters of the Securities Act had used in the legislative history to explain the statutory language on municipal securities in that Act.⁽³⁵⁾ Legislative history does not reflect any intent or understanding that the municipal securities contemplated in the Exchange Act were any different than those that were already exempted under the Securities Act.⁽³⁶⁾ It would be inconsistent with legislative intent to limit the exemption under the Exchange Act solely to debt securities of state and local governments without similarly limiting the reach of the exemption provided in the Securities Act.

        Finally, in using the same term - "municipal securities" - that sets out the exemption from most Exchange Act provisions to also delineate the Board's rulemaking authority under Section 15B of the Exchange Act, Congress elected in the Securities Acts Amendments to grant the Board jurisdiction over dealer transactions in the identical universe of securities as were otherwise exempted from the Exchange Act as municipal securities. Thus, even if Congress did not have interests in local government pools or higher education trusts in mind when enacting the Securities Acts Amendments, it did have a specific intent that the Board would have authority over dealer transactions in any security that would constitute an exempted security by virtue of being a municipal security. In creating the Board, the Senate report on the Securities Acts Amendments stated that it would not "be desirable to restrict the Board's authority by a specific enumeration of subject matters. The ingenuity of the financial community and the impossibility of anticipating all future circumstances are obvious reasons for allowing the Board a measure of flexibility in laying down the rules for the municipal securities industry."⁽³⁷⁾ The fact that certain types of instruments (such as non-debt securities of state or local governments) were essentially non-existent at the time of enactment of the Securities Acts Amendments did not, in the minds of the drafters, mean that regulations relating to newly created instruments would not be within the Board's power.⁽³⁸⁾

Appropriateness of Regulating Dealer Transactions in Municipal Fund Securities

        Comments Received. Commentators state that, even if the Board has authority to adopt the draft rule changes, the Board should refrain from doing so. They argue that no need has been demonstrated for regulation to protect investors or the public interest in connection with local government pool interests. They state that investors are local governments and not the typical public investor in municipal securities.⁽³⁹⁾ They also argue that offerings of interests in local government pools do not pose risks that are similar to those identified in the legislative history of the Securities Acts Amendments.⁽⁴⁰⁾ One commentator argues that safeguards already exist to provide investor protections comparable to those in the draft rule changes.⁽⁴¹⁾

        Some commentators state that Board rulemaking would adversely impact state and local governments. In particular, they believe that underwriting assessments would be passed on, directly or indirectly, to issuers and issuers would face additional administrative burdens as a result of the application of Board rules. They note that any increased costs to issuers likely would be passed on to investors in the form of lower returns on their investments.

        Commentators also state that interests in local government pools involve transactions between the state or local government-sponsored pools and participating local governmental entities of that same state. One commentator believes that Board rulemaking would be inconsistent with the Tenth Amendment and transactions in local government pool interests do not constitute interstate commerce. Furthermore, noting that the Exchange Act does not require registration of a broker or dealer whose business is exclusively intrastate, this commentator suggests that the Board "follow Congress's restraint in approaching intrastate transactions in securities." Finally, it states that regulation of transactions in these interests would "improperly intrude on state sovereignty" by indirectly regulating states by mandating actions by their agents.

        Board Response. As the Board has previously observed, the current rulemaking proposal would not subject dealer transactions in municipal fund securities to Board rules but instead would make certain Board rules, to which such transactions are already subject, better accommodate the nature of these securities. Making Board rules fit the characteristics of municipal fund securities is an appropriate Board undertaking. Also, Board rules do not govern the actions of issuers; instead, they impose standards on dealers effecting transactions in the securities of such issuers. In establishing the Board, Congress determined that dealer regulation was the appropriate manner of providing investor protection in the municipal securities market while maintaining the existing exemption for issuers.⁽⁴²⁾

        The definition of customer under rule D-9 includes issuers, except in connection with sales of an issuer's new issue municipal securities, and therefore Board rules contemplate that governmental entities acting as investors are entitled to the protections afforded by such rules to all customers.⁽⁴³⁾ The Board understands that local government pools exist in nearly every state and that, in many states, more than one pool may be available to a local government.⁽⁴⁴⁾ One market observer states that these pools "can differ in their level of risk taking, internal oversight, shareholder services, and external reporting."⁽⁴⁵⁾ Although a number of pools have been rated, the vast majority remain unrated. Most local government pools appear to be designed to maintain, as nearly as possible, a constant net asset value (similar to regulated money market mutual funds), but some operate as variable net asset value pools that do not seek to maintain a constant share value. Furthermore, a number of local government pools have experienced financial difficulties.⁽⁴⁶⁾ These factors suggest that investor protection issues may be raised in connection with the sale by dealers of interests in local government pools.⁽⁴⁷⁾ The Board believes that investor protection issues also may arise with respect to sales by dealers of interests in higher education trusts.⁽⁴⁸⁾ For example, the Board believes that dealers have suitability obligations if they recommend a transaction in a local government pool or higher education trust interest to a local government or an individual, respectively, if such interest constitutes a municipal security.⁽⁴⁹⁾

        Commentators describe local government pools as being operated "consistent with" the federal securities laws applicable to investment companies and managed and administered in a manner "similar" to money market mutual funds, "where practicable." These comments imply that many programs in fact deviate to some degree from their voluntary compliance with existing federal regulations that would be applicable to these programs if they were not operated by state or local governmental entities. However, the Board notes that its proposed rulemaking would not impose requirements on issuers and in fact has been drafted with the understanding that dealers may be effecting transactions in securities that are similar, but not identical, to investment company securities. In that respect, the Board believes that its proposed rulemaking is more suitable for dealers effecting transactions in municipal fund securities than existing SEC and NASD rules applicable to dealer transactions in investment company securities since some such rules impose obligations on dealers based on the assumption that issuers, as registered investment companies, must comply with federal investment company laws and regulations. Thus, a dealer might have difficulty in complying with the letter of existing regulations relating to securities of registered investment companies where the issuer of a local government pool or higher education trust interest has chosen not to voluntarily comply with the provisions that would be obligatory if it were a registered investment company. As is the case with all existing Board rules, the current rulemaking proposal recognizes that issuers, as largely unregulated entities, may act in widely divergent manners. Thus, obligations placed on dealers should be sufficiently flexible to permit dealers to act in a lawful manner in view of this wide divergence of circumstances while maintaining an adequate level of customer protection.

        The Board believes that state regulation, federal rules applicable to investment advisors and Governmental Accounting Standards Board statements, although providing important protections in the areas governed by such rules and standards, do not serve as a substitute for regulation tailored specifically toward dealer activities in municipal fund securities. Furthermore, the Board believes that voluntary adherence to the substance of existing rules applicable to investment company securities and/or other equity securities provides inadequate protection to investors since dealers are free to deviate from these rules in any manner and at any time they choose without any apparent legal consequence. The existence of these collateral safeguards do not justify the Board refraining from making its rules more rational with respect to such securities.

        Finally, with regard to the argument that interests in local government pools are strictly intrastate in nature and therefore are not the appropriate subject of federal regulation, Board rules currently do not apply to any entity that, by virtue of the fact that its business is exclusively intrastate, is not registered as a broker or dealer under Section 15 of the Exchange Act. Beyond this, the federal securities laws provide that, once an entity engages in some interstate activities that require it to register under the Exchange Act, the broker-dealer rules applicable to such entity apply to both its interstate and intrastate transactions. We believe that Congress has made clear its policy determination that intrastate transactions of registered broker-dealers should be subject to broker-dealer regulation.⁽⁵⁰⁾

Applicability of Existing Board Rules to Transactions in Municipal Fund Securities Effected Prior to Effectiveness of Draft Rule Changes

        Comments Received. Two commentators argue that, to the extent that the Board may have authority to regulate dealer transactions in these interests, existing Board rules relating to municipal securities do not currently apply to transactions in local government pool interests. They state that existing Board rules were never intended to apply to securities other than debt obligations, as evidenced by the Board's statement in the March Notice that its rules "generally have been drafted to accommodate the characteristics of debt obligations and not investment interests such as municipal fund securities." As a result, they believe that any interpretation by the Board to the effect that existing rules apply to municipal fund securities can only be effected through the rulemaking process.

        Board Response. As stated above, the Board believes that Section 15B(c)(1) of the Exchange Act automatically subjects any dealer transactions in municipal fund securities to Board rules. This is true regardless of whether dealers effecting such transactions are aware that municipal fund securities are, in fact, municipal securities. It is incumbent upon dealers to be aware of the nature of the securities in which they undertake transactions and it is not a defense against the applicability of Board rules that the dealer did not know that the securities were municipal securities. Thus, the Board's statement that any interest in a local government pool or a higher education trust that is a municipal security currently is subject to Board rules was a statement of fact rather than an interpretation.⁽⁵¹⁾

        The Board recognizes, however, that, prior to publication of the March Notice, it may not have been readily apparent to the vast majority of dealers, as well as to most regulatory agencies, that interests that constitute municipal fund securities were municipal securities. Although the Board does not have authority to direct enforcement of its rules, it is statutorily charged with determining the best means of protecting investors and the public interest in regard to dealer transactions in municipal securities. As such, the Board believes that, under the unique circumstances relating to municipal fund securities, enforcement of its rules with regard to transactions in such securities that occurred prior to the industry having been put on notice of their applicability would serve no substantial investor protection purpose, absent extraordinary circumstances or a showing of investor harm resulting from a material departure from standards of fairness generally applicable under the federal securities laws.

Structure of Draft Rule Changes

        Comments Received. Some commentators express concern that the Board's rulemaking proposal contemplates amendments to existing rules rather than creation of a separate body of regulations. One commentator states that the "attempt to fit a totally new product or way of doing business into existing regulation that was created to address fundamentally different products and a different market structure is fraught with danger." Commentators also state that transactions in municipal fund securities should be regulated in a manner as similar as possible to the existing regulatory scheme for investment company securities.

        Board Response. The Board reviewed its existing rules and compared them, where relevant, to rules that govern dealer transactions in securities of registered investment companies. In many respects, Board rules are functionally identical to such existing rules. In other cases, existing SEC or NASD rules provide a more appropriate method of regulating municipal fund securities and the Board sought to modify its rules in a manner that was consistent with such other rules. In yet other cases, the regulation of the structure and marketing of securities of registered investment companies has been effected by regulations applicable to issuers, an approach which the Board cannot, and does not seek to, duplicate. Finally, certain NASD and SEC rule provisions arise out of specific Congressional authorization in the Investment Company Act applicable to securities of registered investment companies but not applicable to unregistered municipal fund securities.

        Under the circumstances, the Board believes that its approach is appropriate. The Board sought industry comment on the draft rule changes and, in those circumstances where commentators noted specific shortcomings, the Board considered the merits of the comments and made revisions where appropriate. The Board was disappointed that several commentators chose to comment almost exclusively on jurisdictional issues and hopes that they will now address the details of, and any concerns raised by, the revised draft rule changes.

Specific Rule Provisions

        Rule A-13, on Underwriting Assessments. In the March Notice, the Board states that sales of municipal fund securities are made in a primary offering subject to the underwriting assessment in rule A-13.⁽⁵²⁾ The draft amendment to rule A-13 would have provided for the imposition of an underwriting assessment with respect to such sales of municipal fund securities.

        Most commentators express concern regarding the assessment of underwriting fees on sales of municipal fund securities. Some suggest that such sales should be exempted from the underwriting assessment. They state that the fee structure for dealers involved in the distribution of municipal fund securities is more like an administrative fee than an underwriting discount or commission since these dealers do not undertake underwriting risks. As a result, they state that fees generally are fixed and are low relative to traditional underwriting fees. Because of these small margins, a number of commentators state that underwriting assessments would be passed on to issuers and therefore would represent a financial burden on the issuers' programs.⁽⁵³⁾

        Some commentators state that, given the volume of investments and redemptions in many municipal fund securities programs,⁽⁵⁴⁾ the level of fees generated by the Board from underwriting assessments would be disproportionate to the resulting regulatory costs. One commentator states that, if assessments are imposed, they should be at a significantly lower level than the assessments charged in connection with more traditional municipal securities offerings.⁽⁵⁵⁾

        Based on the comments, the Board has revised the draft amendment to rule A-13 to exempt sales of municipal fund securities from the underwriting assessment. The continuous nature of offerings in municipal fund securities, the programmatic nature of most customer investments and the heightened potential that underwriting assessments could create significant financial burdens on issuers to their customers' detriment justify caution in imposing the underwriting assessment. The Board also wishes to make clear that it does not intend to seek payment of any previously accrued underwriting assessments that may technically be due and owing on prior sales of municipal fund securities.

        Draft Rule D-12, on Definition of "Municipal Fund Security". Draft rule D-12 defines municipal fund security as a municipal security that would be an investment company security under the Investment Company Act but for the fact that the issuer is a state or local governmental entity or instrumentality. For a security to constitute a municipal fund security, the security must first constitute a municipal security. The draft amendments would not apply to any local government pool or higher education trust interest that is not a municipal security. The Board has not revised the draft definition.⁽⁵⁶⁾

        Rule G-3, on Professional Qualifications. The draft amendment to rule G-3 would permit an associated person qualified as an investment company limited representative to effect transactions in municipal fund securities (but no other municipal securities).⁽⁵⁷⁾ A dealer must have municipal securities principals as required under rule G-3(b), even if the dealer's only municipal securities transactions are sales of municipal fund securities. The Board has not revised this draft amendment.⁽⁵⁸⁾

        Rule G-8, on Recordkeeping. The draft amendment to rule G-8 would recognize that municipal fund securities do not have par values, dollar prices, yields and accrued interest and that some investment company limited representatives would be permitted to effect transactions in municipal fund securities. The Board did not receive comments on its draft amendment to rule G-8. However, in conjunction with revisions to the draft amendment to rule G-15 described below, the Board is proposing an additional revision to rule G-8 to require that dealers retain copies of all periodic statements delivered to customers in lieu of individual confirmations.

        Rule G-14, on Transaction Reporting. The draft rule change would make a technical modification in rule G-14(b)(i) to make clear that certain types of municipal securities transactions may be excluded from transaction reporting as provided in the Rule G-14 Transaction Reporting Procedures. In the Procedures, the language change would expressly exempt any transaction in municipal fund securities from the customer transaction reporting system.⁽⁵⁹⁾ The Board did not receive comments on, and has not revised, these draft amendments.

        Rule G-15, on Customer Confirmations. The draft amendment to rule G-15 would effect changes relating to the concepts of par value, yield, dollar price, maturity date and interest, none of which would appropriately apply to a municipal fund security. Thus, on a confirmation of a municipal fund securities transaction, a dealer would use the purchase or sale price of the securities (as appropriate) rather than par value and would omit yield, dollar price, accrued interest, extended principal, maturity date and interest rate. Dealers selling municipal fund securities would be required to include the denomination or purchase price of each share or unit as well as the number of shares or units to be delivered. Confirmations of municipal fund securities transactions would require a disclosure to the effect that a deferred commission or other charge may be imposed upon redemption, if applicable.⁽⁶⁰⁾ The amendment also would make clear that dealers must confirm redemptions of municipal fund securities. Finally, the amendment would permit dealers to use quarterly statements, rather than transaction-by-transaction confirmations, if customers are purchasing such securities in an agreed amount on a periodic basis, in a manner similar to the periodic reporting provision under Exchange Act Rule 10b-10.

The Board received a number of technical comments on various provisions in rule G-15:⁽⁶¹⁾

        Periodic Statements - Rule G-15(a)(vi)(G) and (a)(viii) - Some commentators state that the draft amendments would require individual confirmations for each transaction in local government pool interests and suggest that dealers be permitted to use monthly statements.⁽⁶²⁾ Another commentator states that transactions in higher education trust interests that are not effected pursuant to a periodic plan should nonetheless qualify for periodic statements in lieu of individual transaction confirmations.⁽⁶³⁾

        The Board has decided to revise the draft amendment to rule G-15 to provide that information regarding transactions in municipal fund securities effected in connection with a program that does not provide for periodic purchases or redemptions of municipal fund securities may be disclosed to customers on a monthly statement in lieu of transaction confirmations.⁽⁶⁴⁾ With respect to natural persons who participate in a non-periodic program, this monthly reporting would require the written consent of such individual or of the issuer. If the issuer directs that monthly statements be used in lieu of transaction confirmations, the revised draft amendment to rule G-15(a)(viii) would permit dealers effecting transactions in such municipal fund securities to use monthly statements without obtaining the consent of any customers. In addition, the draft amendment has been revised to eliminate the requirement that customers participating in a group plan consent to the use of periodic statements in lieu of transaction confirmations.⁽⁶⁵⁾

        Rule G-15(a)(i)(A)(7) - In order to avoid the potential for ambiguity, this subparagraph has been revised to eliminate reference to denomination and to refer solely to the share purchase price.⁽⁶⁶⁾

        Rule G-15(a)(i)(C) and (a)(i)(B)(1) - A commentator notes that the Board did not provide guidance regarding the securities descriptive information required to be included under paragraph (a)(i)(C) and states that such paragraph should not be applicable to municipal fund securities. In the alternative, it suggests that confirmations should not be required to state that municipal fund securities are unrated.⁽⁶⁷⁾ The Board has revised the draft amendment to (i) provide that a confirmation of a municipal fund security transaction need not show the information required under paragraph (a)(i)(C) other than whether the security is puttable and (ii) include a requirement in subparagraph (a)(i)(B)(1) that the confirmation include the name used by the issuer to identify the security and, to the extent necessary to differentiate the security from other municipal fund securities of the issuer, any separate program series, portfolio or fund designation. A statement to the effect that the security is unrated would not be required.

        Rule G-21, on Advertising. The Board did not propose amending rule G-21 in the March Notice. One commentator states that this rule should be revised to eliminate references to price and yield for purposes of municipal fund securities. Section (d)(i) provides that an advertisement for new issue municipal securities may show the initial reoffering price or yield, even if they have changed, so long as the date of sale is shown. In addition, it provides that if the price or yield shown in the advertisement is other than the initial price or yield, the price or yield shown must have been accurate at the time the advertisement was submitted for publication. The Board believes that these provisions do not unnecessarily restrict the manner in which municipal fund securities may be advertised nor do they mandate that an advertisement for a municipal fund security specify a price or yield.⁽⁶⁸⁾ Therefore, no change has been proposed to rule G-21.

        Rule G-26, on Customer Account Transfers. The draft amendment to rule G-26 amends the definition of "nontransferable asset" to reflect the fact that the issuer of municipal fund securities may limit which dealers may carry accounts for customers in such securities. The Board did not receive comments on, and has not revised, this draft amendment.

        Rule G-32, on New Issue Disclosures. No amendments to rule G-32 were proposed in the March Notice. However, the Board stated that municipal fund securities sold in a primary offering would constitute new issue municipal securities for purposes of rule G-32 so long as the securities are in the underwriting period. Since the Board understands that issuers of municipal fund securities are continuously issuing and delivering the securities as customers make purchases, the Board believes that municipal fund securities would remain in their underwriting period so long as such issuance and delivery continues.⁽⁶⁹⁾ Thus, a dealer effecting a transaction in a municipal fund security would be required to deliver to the customer the official statement, if one exists, by settlement of the transaction. However, in the case of a customer purchasing such securities who is a repeat purchaser, no new delivery of the official statement would be required so long as the customer has previously received it in connection with a prior purchase and the official statement has not been changed from the one previously delivered to that customer.⁽⁷⁰⁾

        One commentator expresses concern regarding the timing requirement of rule G-32 in the limited circumstances where a revision has just been made to the official statement and a customer that participates in a periodic plan makes an automatic purchase of additional shares of municipal fund securities. In spite of the best efforts of the dealer and the issuer, it may be impossible for the revised official statement to be delivered to the customer by settlement. The commentator suggests that, under these circumstances, the timing requirement under rule G-32 should be based on the sending rather than the delivery of the official statement.

        The Board is proposing a draft amendment to rule G-32 that would permit a dealer to sell, pursuant to a periodic plan, a municipal fund security to a customer who has previously received the official statement so long as it sends to the customer a copy of any new, supplemented, amended or stickered official statement promptly upon receipt from the issuer. The draft amendment also would except municipal fund securities for which periodic statements in lieu of transaction confirmations are provided from the requirement that information on the underwriting arrangements (which information would be limited to the fees paid to the dealer by the issuer) be provided to customers by settlement so long as such information is disclosed at least annually and information on any fee changes paid by the issuer to the dealer be sent to customers simultaneously with or prior to the sending of the next periodic statement.

        Rule G-33, on Calculations. The Board did not propose amending rule G-33 in the March Notice. One commentator states that this rule should be revised to eliminate references to par value, yield dollar price, maturity date and interest for purposes of municipal fund securities. By its terms, rule G-33 applies only to municipal securities that bear interest or are sold at a discount. Since municipal fund securities do not bear interest and are not sold at a discount, rule G-33 would by its nature not apply. Therefore, no change has been made to rule G-33.

        Rule G-34, on CUSIP Numbers and Depository Eligibility. The draft amendments would exempt municipal fund securities from the requirements of rule G-34 since no secondary market is expected to develop.⁽⁷¹⁾ The Board did not receive comments on, and has not revised, this draft amendment.

        Rule G-36, on Delivery of Official Statements and Form G-36(OS) to the Board. The Board did not propose amending rule G-36 in the March Notice but did state that, consistent with SEC staff's view regarding the sale in primary offerings of municipal fund securities, dealers acting as underwriters in primary offerings of municipal fund securities would be subject to the requirements of rule G-36. Thus, unless such primary offering falls within one of the stated exemptions in Rule 15c2-12, the Board expects that the dealer would receive a final official statement from the issuer or its agent under its contractual agreement entered into pursuant to Rule 15c2-12(b)(3). Such official statement should be received from the issuer in sufficient time for the dealer to send the official statement, together with Form G-36(OS), to the Board within one business day of receipt but no later than 10 business days after any final agreement to purchase, offer, or sell the municipal fund securities.⁽⁷²⁾ Since municipal fund securities remain in their underwriting period so long as they continue to be sold and delivered, the dealer would remain obligated under rule G-36(d) to send to the Board, within one business day of receipt, any amendments made to the official statement during such extended underwriting period.⁽⁷³⁾ No change has been made to rule G-36.

        Rule G-37, on Political Contributions and Prohibitions on Municipal Securities Business, and Rule G-38, on Consultants. The Board did not propose amending rules G-37 and G-38 in the March Notice but did reminded dealers that the definition of municipal securities business under such rules includes the purchase of a primary offering from the issuer on other than a competitive bid basis or the offer or sale of a primary offering on behalf of any issuer. Thus, a dealer's transactions in municipal fund securities may impact upon such dealer's obligations under rules G-37 and G-38. No changes have been made to rules G-37 and G-38.

* * * * *

Comments from all interested parties are welcome. Comments should be submitted no later than November 1, 1999, and may be directed to Ernesto A. Lanza, Associate General Counsel. Written comments will be available for public inspection.

August 27, 1999

 

TEXT OF DRAFT AMENDMENTS⁽⁷⁴⁾

Rule A-13. Underwriting and Transaction Assessments for Brokers, Dealers and Municipal Securities Dealers

(a) Underwriting Assessments - Scope. Each broker, dealer and municipal securities dealer shall pay to the Board an underwriting fee as set forth in section (b) for all municipal securities purchased from an issuer by or through such broker, dealer or municipal securities dealer, whether acting as principal or agent, as part of a primary offering, provided that section (b) of this rule shall not apply to a primary offering of securities if all such securities in the primary offering:

        (i)-(ii) No change.

        (iii) at the option of the holder thereof, may be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent; or

        (iv) have authorized denominations of $100,000 or more and are sold to no more than thirty-five persons each of whom the broker, dealer or municipal securities dealer reasonably believes: (A) has the knowledge and experience necessary to evaluate the merits and risks of the investment; and (B) is not purchasing for more than one account, with a view toward distributing the securities; or

        (v) constitute municipal fund securities.

If a syndicate or similar account has been formed for the purchase of the securities, the underwriting fee shall be paid by the managing underwriter on behalf of each participant in the syndicate or similar account.

(b)-(f) No change.

Rule D-12. "Municipal Fund Security"

The term "municipal fund security" shall mean a municipal security issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940, would constitute an investment company within the meaning of Section 3 of the Investment Company Act of 1940.

Rule G-3. Classification of Principals and Representatives; Numerical Requirements; Testing; Continuing Education Requirements

No broker, dealer or municipal securities dealer or person who is a municipal securities representative, municipal securities principal, municipal securities sales principal or financial and operations principal (as hereafter defined) shall be qualified for purposes of rule G-2 unless such broker, dealer or municipal securities dealer or person meets the requirements of this rule.

(a) Municipal Securities Representative.

        (i) No change.

        (ii) Qualification Requirements.

        (A)-(B) No change.

        (C) The requirements of subparagraph (a)(ii)(A) of this rule shall not apply to any person who is duly qualified as a limited representative - investment company and variable contracts products by reason of having taken and passed the Limited Representative - Investment Company and Variable Contracts Products Examination, but only if such person's activities with respect to municipal securities described in paragraph (a)(i) of this rule are limited solely to municipal fund securities.

        (D) Any person who ceases to be associated with a broker, dealer or municipal securities dealer (whether as a municipal securities representative or otherwise) for two or more years at any time after having qualified as a municipal securities representative in accordance with subparagraphs (a)(ii)(A), (B) or (C) or (B) shall again meet the requirements of subparagraphs (a)(ii)(A), (B) or (C) or (B) prior to being qualified as a municipal securities representative.

        (iii) Apprenticeship.

        (A) Any person who first becomes associated with a broker, dealer or municipal securities dealer in a representative capacity (whether as a municipal securities representative, or general securities representative or limited representative - investment company and variable contracts products) without having previously qualified as a municipal securities representative, or general securities representative or limited representative - investment company and variable contracts products shall be permitted to function in a representative capacity without qualifying pursuant to subparagraphs (a)(ii)(A), (B) or (C) or (B) for a period of at least 90 days following the date such person becomes associated with a broker, dealer or municipal securities dealer, provided, however, that such person shall not transact business with any member of the public with respect to, or be compensated for transactions in, municipal securities during such 90 day period, regardless of such person's having qualified in accordance with the examination requirements of this rule. A person subject to the requirements of this paragraph (a)(iii) shall in no event continue to perform any of the functions of a municipal securities representative after 180 days following the commencement of such person's association with such broker, dealer or municipal securities dealer, unless such person qualifies as a municipal securities representative pursuant to subparagraphs (a)(ii)(A), (B) or (C) or (B).

        (B) Prior experience, of at least 90 days, as a general securities representative, limited representative - investment company and variable contracts products mutual fund salesperson or limited representative - government securities representative, will meet the requirements of this paragraph (a)(iii).

(b)-(h) 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) Records of Original Entry. "Blotters" or other records of original entry containing an itemized daily record of all purchases and sales of municipal securities, all receipts and deliveries of municipal securities (including certificate numbers and, if the securities are in registered form, an indication to such effect), all receipts and disbursement of cash with respect to transactions in municipal securities, all other debits and credits pertaining to transactions in municipal securities, and in the case of brokers, dealers and municipal securities dealers other than bank dealers, all other cash receipts and disbursements if not contained in the records required by any other provision of this rule. The records of original entry shall show the name or other designation of the account for which each such transaction was effected (whether effected for the account of such broker, dealer or municipal securities dealer, the account of a customer, or otherwise), the description of the securities, the aggregate par value of the securities, the dollar price or yield and aggregate purchase or sale price of the securities, accrued interest, the trade date, and the name or other designation of the person from whom purchased or received or to whom sold or delivered. With respect to accrued interest and information relating to "when issued" transactions which may not be available at the time a transaction is effected, entries setting forth such information shall be made promptly as such information becomes available. Dollar price, yield and accrued interest relating to any transaction shall be required to be shown only to the extent required to be included in the confirmation delivered by the broker, dealer or municipal securities dealer in connection with such transaction under rule G-12 or rule G-15.

        (ii)-(viii) No change.

        (ix) Copies of Confirmations, Periodic Statements and Certain Other Notices to Customers. A copy of all confirmations of purchase or sale of municipal securities, of all periodic written statements disclosing purchases, sales or redemptions of municipal fund securities pursuant to rule G-15(a)(viii) and, in the case of a broker, dealer or municipal securities dealer other than a bank dealer, of all other notices sent to customers concerning debits and credits to customer accounts or, in the case of a bank dealer, notices of debits and credits for municipal securities, cash and other items with respect to transactions in municipal securities.

        (x) No change.

        (xi) Customer Account Information. A record for each customer, other than an institutional account, setting forth the following information to the extent applicable to such customer:

        (A)-(G) No change.

        (H) signature of municipal securities representative, and general securities representative or limited representative - investment company and variable contracts products introducing the account and signature of a municipal securities principal, municipal securities sales principal or general securities principal indicating acceptance of the account;

        (I)-(K) No change.

For purposes of this subparagraph, the terms "general securities representative," and "general securities principal" and "limited representative - investment company and variable contracts products" shall mean such persons as so defined by the rules of a national securities exchange or registered securities association. For purposes of this subparagraph, the term "institutional account" shall mean the account of (i) a bank, savings and loan association, insurance company, or registered investment company; (ii) an investment adviser registered either with the Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (iii) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million. Anything in this subparagraph to the contrary notwithstanding, every broker, dealer and municipal securities dealer shall maintain a record of the information required by items (A), (C), (F), (H), (I) and (K) of this subparagraph with respect to each customer which is an institutional account.

        (xii)-(xix) No change.

(b)-(f) No change.

(g) Price substituted for par value of municipal fund securities. For purposes of this rule, each reference to the term "par value," when applied to a municipal fund security, shall be substituted with (i) in the case of a purchase of a municipal fund security by a customer, the purchase price paid by the customer, exclusive of any commission, and (ii) in the case of a sale or tender for redemption of a municipal fund security by a customer, the sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.

Rule G-14. Reports of Sales or Purchases

(a) No change.

(b) Transactions Reporting Requirements.

        (i) Each broker, dealer or municipal securities dealer shall report to the Board or its designee information about its transactions in municipal securities to the extent required by, and using the formats and within the timeframes specified in, Rule G-14 Transaction Reporting Procedures. Transaction information collected by the Board under this rule will be used to make public reports of market activity and prices and to assess transaction fees. The transaction information will be made available by the Board to the Commission, securities associations registered under Section 15A of the Act and other appropriate regulatory agencies defined in Section 3(a)(34)(A) of the Act to assist in the inspection for compliance with and the enforcement of Board rules.

        (ii)-(iii) No change.

Rule G-14 Transaction Reporting Procedures

(a) No change.

(b) Customer Transactions.

        (i)-(ii) No change.

        (iii) The following transactions shall not be required to be reported under this section (b):

        (A) A a transaction in a municipal security that is ineligible for assignment of a CUSIP number by the Board or its designee; and shall not be required to be reported under this section (b).

        (B) a transaction in a municipal fund security.

        (iv) No change.

Rule G-15. Confirmation, Clearance and Settlement of Transactions with Customers

(a) Customer Confirmations

        (i) At or before the completion of a transaction in municipal securities with or for the account of a customer, each broker, dealer or municipal securities dealer shall give or send to the customer a written confirmation that complies with the requirements of this paragraph (i):

        (A) Transaction information. The confirmation shall include information regarding the terms of the transaction as set forth in this subparagraph (A):

        (1)-(2) No change.

        (3) Par value. The par value of the securities shall be shown, with special requirements for the following securities:

        (a) No change.

        (b) Municipal fund securities. For municipal fund securities, in place of par value, the confirmation shall show (i) in the case of a purchase of a municipal fund security by a customer, the total purchase price paid by the customer, exclusive of any commission, and (ii) in the case of a sale or tender for redemption of a municipal fund security by a customer, the total sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.

        (4) No change.

        (5) Yield and dollar price. Yields and dollar prices shall be computed and shown in the following manner, subject to the exceptions stated in subparagraph (A)(5)(d) of this paragraph:

        (a)-(c) No change.

        (d) Notwithstanding the requirements noted in subparagraphs (A)(5)(a) through (c) of this paragraph, above:

        (i)-(v) No change.

        (vi) Municipal fund securities. For municipal fund securities, neither yield nor dollar price shall be shown.

        (6) Final Monies. The following information relating to the calculation and display of final monies shall be shown:

        (a) No change.

        (b) amount of accrued interest, with special requirements for the following securities:

        (i)-(ii) No change.

        (iii) Municipal fund securities. For municipal fund securities, no figure for accrued interest shall be shown;

        (c) if the securities pay interest on a current basis but are traded without interest, a notation of "flat;"

        (d) extended principal amount, with special requirements for the following securities:

        (i) No change.

        (ii) Municipal fund securities. For municipal fund securities, no extended principal amount shall be shown;

        (e)-(h) No change.

        (7) Delivery of securities. The following information regarding the delivery of securities shall be shown:

        (a) Securities other than bonds or municipal fund securities. For securities other than bonds or municipal fund securities, denominations to be delivered;

        (b) No change.

        (c) Municipal fund securities. For municipal fund securities, the purchase price, exclusive of commission, of each share or unit and the number of shares or units to be delivered;

        (d) Delivery instructions. Instructions, if available, regarding receipt or delivery of securities, and form of payment, if other than as usual and customary between the parties.

        (8) No change.

        (B) Securities identification information. The confirmation shall include a securities identification which includes, at a minimum:

        (1) the name of the issuer, with special requirements for the following securities:

        (a) For stripped coupon securities, the trade name and series designation assigned to the stripped coupon municipal security by the broker, dealer or municipal securities dealer sponsoring the program must be shown;

        (b) Municipal fund securities. For municipal fund securities, the name used by the issuer to identify such securities and, to the extent necessary to differentiate the securities from other municipal fund securities of the issuer, any separate program series, portfolio or fund designation for such securities must be shown;

        (2) No change.

        (3) maturity date, if any, with special requirements for the following securities:

        (a) No change.

        (b) Municipal fund securities. For municipal fund securities, no maturity date shall be shown;

        (4) interest rate, if any, with special requirements for the following securities:

        (a)-(e) No change.

        (f) Municipal fund securities. For municipal fund securities, no interest rate shall be shown;

        (C) Securities descriptive information. The confirmation shall include descriptive information about the securities which includes, at a minimum:

        (1)-(4) No change.

        (5) Municipal fund securities. For municipal fund securities, the information described in clauses (1) through (4) of this subparagraph (C) is not required to be shown; provided, however, that if the municipal fund securities are puttable or otherwise redeemable by the customer, the confirmation shall include a designation to that effect.

        (D) Disclosure statements:

        (1)-(2) No change.

        (3) The confirmation for securities for which a deferred commission or other charge is imposed upon redemption or as a condition for payment of principal or interest thereon shall include a statement that the customer may be required to make a payment of such deferred commission or other charge upon redemption of such securities or as a condition for payment of principal or interest thereon, as appropriate, and that information concerning such deferred commission or other charge will be furnished upon written request.

        (ii)-(iii) No change.

        (iv) Confirmation to customers who tender put option bonds or municipal fund securities. A broker, dealer, or municipal securities dealer that has an interest in put option bonds (including acting as remarketing agent) and accepts for tender put option bonds from a customer, or that has an interest in municipal fund securities (including acting as agent for the issuer thereof) and accepts for redemption municipal fund securities tendered by a customer, is engaging in a transaction in such municipal securities and shall send a confirmation under paragraph (i) of this section.

        (v) No change.

        (vi) Definitions. For purposes of this rule, the following terms shall have the following meanings:

        (A)-(F) No change.

        (G) The term "periodic municipal fund security plan" shall mean any written authorization or arrangement for a broker, dealer or municipal securities dealer, acting as agent, to purchase, sell or redeem for a customer or group of customers one or more specific municipal fund securities, in specific amounts (calculated in security units or dollars), at specific time intervals and setting forth the commissions or charges to be paid by the customer in connection therewith (or the manner of calculating them).

        (H) The term "non-periodic municipal fund security program" shall mean any written authorization or arrangement for a broker, dealer or municipal securities dealer, acting as agent, to purchase, sell or redeem for a customer or group of customers one or more specific municipal fund securities, setting forth the commissions or charges to be paid by the customer in connection therewith (or the manner of calculating them) and either (1) providing for the purchase, sale or redemption of such municipal fund securities at the direction of the customer or customers or (2) providing for the purchase, sale or redemption of such municipal fund securities at the direction of the customer or customers as well as authorizing the purchase, sale or redemption of such municipal fund securities in specific amounts (calculated in security units or dollars) at specific time intervals.

        (vii) Price substituted for par value of municipal fund securities. For purposes of this rule, each reference to the term "par value," when applied to a municipal fund security, shall be substituted with (i) in the case of a purchase of a municipal fund security by a customer, the purchase price paid by the customer, exclusive of any commission, and (ii) in the case of a sale or tender for redemption of a municipal fund security by a customer, the sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.

        (viii) Alternative periodic reporting for certain transactions in municipal fund securities. Notwithstanding any other provision of this section (a), a broker, dealer or municipal securities dealer may effect transactions in municipal fund securities with customers without giving or sending to such customer the written confirmation required by paragraph (i) of this section (a) at or before completion of each such transaction if:

        (A) such transactions are effected pursuant to a periodic municipal fund security plan or a non-periodic municipal fund security program; and

        (B) such broker, dealer or municipal securities dealer gives or sends to such customer within five business days after the end of each quarterly period, in the case of a customer participating in a periodic municipal fund security plan, or each monthly period, in the case of a customer participating in a non-periodic municipal fund security program, a written statement disclosing, for each purchase, sale or redemption effected for or with, and each payment of investment earnings credited to or reinvested for, the account of such customer during the reporting period, the information required to be disclosed to customers pursuant to subparagraphs (A) through (D) of paragraph (i) of this section (a), with the information regarding each transaction clearly segregated; provided that it is permissible for the name and address of the broker, dealer or municipal securities dealer and the customer to appear once at the beginning of the document; and

        (C) in the case of a periodic municipal fund security plan that consists of an arrangement involving a group of two or more customers and contemplating periodic purchases of municipal fund securities by each customer through a person designated by the group, such broker, dealer or municipal securities dealer:

        (1) gives or sends to the designated person, at or before the completion of the transaction for the purchase of such municipal fund securities, a written notification of the receipt of the total amount paid by the group;

        (2) sends to anyone in the group who was a customer in the prior quarter and on whose behalf payment has not been received in the current quarter a quarterly written statement reflecting that a payment was not received on such customer's behalf; and

        (3) advises each customer in the group if a payment is not received from the designated person on behalf of the group within 10 days of a date certain specified in the arrangement for delivery of that payment by the designated person and either (a) thereafter sends to each customer the written confirmation described in paragraph (i) of this section (a) for the next three succeeding payments, or (b) includes in the quarterly statement referred to in subparagraph (B) of this paragraph (viii) each date certain specified in the arrangement for delivery of a payment by the designated person and each date on which a payment received from the designated person is applied to the purchase of municipal fund securities;

        (D) such customer is provided with prior notification in writing disclosing the intention to send the written information referred to in subparagraph (B) of this paragraph (viii) on a periodic basis in lieu of an immediate confirmation for each transaction; and

        (E) such customer has consented in writing to receipt of the written information referred to in subparagraph (B) of this paragraph (viii) on a periodic basis in lieu of an immediate confirmation for each transaction; provided, however, that such customer consent shall not be required if (1) the customer participates in a periodic municipal fund security plan described in subparagraph (C) of this paragraph (viii), (2) the customer is not a natural person and participates in a non-periodic municipal fund security program or (3) the customer is a natural person that participates in a non-periodic municipal fund security program and the issuer has consented in writing to the use by the broker, dealer or municipal securities dealer of the periodic written information referred to in subparagraph (B) of this paragraph (viii) in lieu of an immediate confirmation for each transaction with each customer participating in the non-periodic municipal fund security program.

(b)-(e) No change.

Rule G-26. Customer Account Transfers

(a) Definitions. For purposes of this rule, the following terms have the following meanings:

        (i)-(ii) No change.

        (iii) The term "nontransferable asset" means an asset that is incapable of being transferred from the carrying party to the receiving party because (A) it is an issue in default for which the carrying party does not possess the proper denominations to effect delivery and no transfer agent is available to re-register the securities, or (B) it is a municipal fund security which the issuer requires to be held in an account carried by one or more specified brokers, dealers or municipal securities dealers that does not include the receiving party.

(b) No change.

(c) Transfer Instructions.

        (i) No change.

        (ii) If an account includes any nontransferable assets, the carrying party must request, in writing and prior to or at the time of validation of the transfer instruction, further instructions from the customer with respect to the disposition of such assets. Such request shall provide the customer with the following alternative methods of disposition of nontransferable assets, if applicable:

        (A) No change.

        (B) retention by the carrying party for the customer's benefit; or

        (C) in the case of a nontransferable asset described in section (a)(iii)(B), transfer to another broker, dealer or municipal securities dealer, if any, which the issuer has specified as being permitted to carry such asset.

(d)-(i) No change.

Rule G-32. Disclosures in Connection with New Issues

(a) Customer 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) a copy of the official statement in final form prepared by or on behalf of the issuer or, if an official statement in final form is not being prepared by or on behalf of the issuer, a written notice to that effect together with a copy of an official statement in preliminary form, if any; provided, however, that:

        (A) if a customer who participates in a periodic municipal fund security plan has previously received a copy of the official statement in final form in connection with the purchase of municipal fund securities under such plan, a broker, dealer or municipal securities dealer may sell additional shares or units of the municipal fund securities under such plan to the customer if such broker, dealer or municipal securities dealer sends to the customer a copy of any new, supplemented, amended or "stickered" official statement in final form, by first class mail or other equally prompt means, promptly upon receipt thereof; or

        (B) if an official statement in final form is being prepared for new issue municipal securities issued in a primary offering that qualifies for the exemption set forth in paragraph (iii) of section (d)(1) of Securities Exchange Act Rule 15c2-12, a broker, dealer or municipal securities dealer may sell such new issue municipal securities to a customer if such broker, dealer or municipal securities dealer:

        (A)-(B) Renumbered as (1)-(2).

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

        (A) the underwriting spread, if any;

        (B) the amount of any fee received by the broker, dealer or municipal securities dealer as agent for the issuer in the distribution of the securities; provided, however, that if a broker, dealer or municipal securities dealer selling municipal fund securities provides periodic statements to the customer pursuant to rule G-15(a)(viii) in lieu of individual transaction confirmations, this paragraph (ii)(B) shall be deemed to be satisfied if the broker, dealer or municipal securities dealer provides this information to the customer at least annually and provides information regarding any change in such fee on or prior to the sending of the next succeeding periodic statement to the customer; and

        (C) except with respect to an issue of municipal fund securities, 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.

(b) Inter-Dealer Disclosure Requirements. Every broker, dealer or municipal securities dealer shall send, upon request, 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 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 call 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)-(c) Relettered as (c)-(d).

Rule G-34. CUSIP Numbers and New Issue Requirements

(a)-(b) No change.

(c) CUSIP Number Eligibility Exemptions. The provisions of this rule shall not apply to an issue of municipal securities (or for the purpose of section (b) any part of an outstanding maturity of an issue) which (i) does not meet the eligibility criteria for CUSIP number assignment or (ii) consists entirely of municipal fund securities.

 

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ENDNOTES

1. See "Municipal Fund Securities," MSRB Reports, Vol. 19, No. 2 (April 1999) at 9.

2. The Board understands that local government pools are established by state or local governmental entities as trusts that serve as vehicles for the pooled investment of public moneys of participating governmental entities. Participants purchase interests in the trust and trust assets are invested in a manner consistent with the trust's stated investment objectives. Investors generally do not have a right to control investment of trust assets. See generally National Association of State Treasurers ("NAST"), Special Report: Local Government Investment Pools (July 1995) (the "NAST Report"); Standard & Poor's Fund Services, Local Government Investment Pools (May 1999) (the "S&P Report").

3. The Board understands that higher education trusts generally are established by states under section 529(b) of the Internal Revenue Code as "qualified state tuition programs" through which individuals make investments for the purpose of accumulating savings for qualifying higher education costs of beneficiaries. Individuals purchase interests in the trust and trust assets are invested in a manner consistent with the trust's stated investment objectives. Investors do not have a right to control investment of trust assets. See generally College Savings Plans Network, Special Report on State and College Savings Plans (1998) (the "CSPN Report").

4. Letter dated February 26, 1999 from Catherine McGuire, Chief Counsel, Division of Market Regulation, SEC, to Diane G. Klinke, General Counsel of the Board, in response to letter dated June 2, 1998 from Diane G. Klinke to Catherine McGuire, published as Municipal Securities Rulemaking Board, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 032299033 (Feb. 26, 1999) (the "SEC Letter").

5. Dealers also should consider the applicability of Exchange Act Rule 15c2-12. SEC staff has stated:

[W]e note that Rule 15c2-12(f)(7) under the Exchange Act defines a "primary offering" as including an offering of municipal securities directly or indirectly by or on behalf of an issuer of such securities. Based upon an analysis of programs that have been brought to our attention, it appears that interests in local government pools or higher education trusts generally are offered only by direct purchase from the issuer. Accordingly, we would view those interests as having been sold in a "primary offering" as that term is defined in Rule 15c2-12. If a dealer is acting as an "underwriter" (as defined in Rule 15c2-12(f)(8)) in connection with that primary offering, the dealer may be subject to the requirements of Rule 15c2-12.

SEC Letter, supra note 4. Questions on Rule 15c2-12 should be directed to SEC staff.

6. See "Transactions in Municipal Collateralized Mortgage Obligations: Rule G-15," MSRB Reports, Vol. 12, No. 1 (April 1992) at 21; "Stripped Coupon Municipal Securities," MSRB Reports, Vol. 9, No. 1 (March 1989) at 3; "Taxable Securities," MSRB Reports, Vol. 6, No. 5 (Oct. 1986) at 5; "Tender Option Programs: SEC Response to Board Letter," MSRB Reports, Vol. 5, No. 2 (Feb. 1985) at 3; "Tax-Exempt Notes: Notice Concerning Application of Board Rules to Such Notes and of Filing of Rule Change," MSRB Reports, Vol. 2, No. 7 (Oct./Nov. 1982) at 17; "Application of Board's Rules to Municipal Commercial Paper," MSRB Reports, Vol. 2, No. 1 (Jan. 1982) at 9 (the "CP Notice"); "Application of Board's Rules to Participation Interests in Municipal Tax-Exempt Financing Arrangements," MSRB Reports, Vol. 2, No. 1 (Jan. 1982) at 13; "Notice Concerning Application of Board's Rules to MAC Warrants," [1977-1987 Transfer Binder] MSRB Manual (CCH) � 10,171 (Jan. 22, 1981) (the "Warrant Notice").

7. Section 2(b) provides that the Investment Company Act shall not apply to a state, or any political subdivision of a state, or any agency, authority, or instrumentality thereof.

8. As noted in the March Notice, the definition of municipal fund security is not limited to local government pool or higher education trust interests that are municipal securities but also would apply to any municipal security of an issuer that, but for the identity of the issuer as a state or local governmental entity, would constitute an investment company under the Investment Company Act.

9. Municipal fund securities generally provide investment return and are valued based on the investment performance of an underlying pool of assets having an aggregate value that may increase or decrease from day to day, rather than providing interest payments at a stated rate or discount, as is the case for more traditional municipal securities. In addition, unlike traditional municipal securities, these interests do not have stated par values or maturity dates and cannot be priced based on yield or dollar price. See generally NAST Report, supra note 2; S&P Report, supra note 2; CSPN Report, supra note 3.

10. A commentator states that, although the Board has no authority to regulate either local government pool or higher education trust interests, it believes that interested parties would not resist "appropriate regulation" of higher education trust interests. It states that regulation of transactions in such interests is "arguably both more important and less controversial" than regulation of local government pool interests, noting that higher education trust interests "clearly affect public investors and the public interest."

11. Commentators observe that municipal securities are defined in Section 3(a)(29) of the Exchange Act as "securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof," in contrast to the language used in Section 3(a)(2) of the Securities Act of 1933 regarding any "security issued or guaranteed ... by any State of the United States, or by any political subdivision of a State or Territory." They quote a Senate report statement on the Securities Acts Amendments that "'municipal securities' refers to debt obligations of state and local government issuers." Senate Comm. on Banking, Housing and Urban Affairs, Securities Acts Amendments of 1975, S.Rep. No. 75, 94th Cong., 1st Sess. 38 (1975) (the "1975 Senate Report"); but cf. Securities Acts Amendments of 1975, H.R. Conf. Rep. No. 229, 94th Cong., 1st Sess. 101 (1975) (the "1975 Conference Report") (amendments "provide a comprehensive pattern for the registration and regulation of securities firms and banks which underwrite and trade securities issued by States and municipalities") (emphasis added). They note references in SEC no-action letters to obligations under the Internal Revenue Code to support their position that municipal securities are limited to debt obligations. See Itel Corp., SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 100581018 (Oct. 1, 1981) (the "Itel Letter"); Bedford-Watt Enterprises, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 062678019 (June 9, 1978) (the "Bedford-Watt Letter"). In addition, an SEC no-action letter is cited to suggest that an equity security may not be a municipal security. See City Employees' Retirement System of the City of Los Angeles, SEC No-Action Letter, [1977-1978 Dec.] Fed. Sec. L. Rep. (CCH) � 81,194 (May 12, 1977) (the "CERS Letter").

12. Thus, non-dealer firms may act as investment advisers to local government pool or higher education trust programs and not become subject to Board rules.

13. SEC Letter, supra note 4.

14. See, e.g., Maine College Savings Program Fund, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 080999001 (Aug. 2, 1999) (the "Maine Letter");Teachers Personal Investors Services, Inc., SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 092898006 (Sept. 10, 1998) (the "TPIS Letter"); New Hampshire Higher Education Savings Plan Trust, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 070698010 (June 30, 1998) (the "New Hampshire Letter"); Public Employees Retirement Board of the State of Oregon, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 041398009 (March 3, 1998) (the "Oregon Letter"); North Carolina State Education Assistance Authority, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 032497016 (March 24, 1997) (the "North Carolina Letter"); Missouri Family Trust Fund, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 101392001 (Sept. 22, 1992) (the "Missouri Letter").

15. Maine Letter, supra note 14. SEC staff's position was conditioned on the dealer complying with all existing Board rules, other than those proposed to be amended in the March Notice, and complying with all Board rules upon completion of the current Board rulemaking process. Counsel had opined that the interests were direct obligations of an instrumentality of a state and therefore were municipal securities within the meaning of Section 3(a)(29) of the Exchange Act. See id. and accompanying letter of inquiry.

16. TPIS Letter, supra note 14. SEC staff stated that this no-action position expires six months after rule G-3 is amended to establish qualification requirements for persons selling such interests.

17. Id. Counsel had opined that the interests were direct obligations of an instrumentality of a state and, therefore, were municipal securities under the Exchange Act. See id. and accompanying letter of inquiry. See also New York State College Choice Tuition Savings Trust, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 091498008 (Sept. 10, 1998) and accompanying letter of inquiry.

18. See, e.g., Maine Letter, supra note 14; New Hampshire Letter, supra note 14; North Carolina Letter, supra note 14.

19. See Maine Letter, supra note 14, and accompanying letter of inquiry; New Hampshire Letter, supra note 14, and accompanying letter of inquiry; North Carolina Letter, supra note 14, and accompanying letter of inquiry. See also Missouri Letter, supra note 14, and accompanying letter of inquiry.

20. See Oregon Letter, supra note 14. Counsel opined that the interests would be exempt from the registration requirements of the Exchange Act as securities issued by a state instrumentality. See id. and accompanying letter of inquiry. See also Pennsylvania Local Government Investment Trust, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 022283009 (Feb. 21, 1983) (the "Pennsylvania Letter") and accompanying letter of inquiry, in which counsel opined that interests in a local government pool were municipal securities under the Exchange Act that qualified for the exemption from the registration requirements of Section 12(g) of the Exchange Act. SEC staff did not expressly rely on this opinion in arriving at its no-action position.

21. See, e.g., City of El Paso de Robles, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 111285020 (June 18, 1985) (the "El Paso de Robles Letter"); MAC Warrant Notice, supra note 6. The SEC's position with respect to these two types of non-debt securities stands in contrast to SEC staff's earlier position regarding call options in the CERS Letter, supra note 11.

22. See El Paso de Robles Letter, supra note 21.

23. MAC Warrant Notice, supra note 6. The MAC Warrant Notice was cited with approval by SEC staff in a letter to the Office of the Comptroller of the Currency. See letter dated August 12, 1981 (note 7) from Thomas G. Lovett, Attorney, SEC, to Owen Carney, Director, Investment Securities Division, Office of the Comptroller of the Currency (the "CP Letter"), reprinted in CP Notice, supra note 6, at 11.

24. See Itel Letter, supra note 11 (term "obligation" in Exchange Act definition of municipal security "would generally include" obligations under the Internal Revenue Code); Bedford-Watt Letter, supra note 11 (Internal Revenue Code "provides a useful analogy"). In the Bedford-Watt Letter, SEC staff recognized that "obligation" under Section 3(a)(29) of the Exchange Act could include non-financial obligations to take actions needed for payment of the security. See also Pennsylvania Letter and accompanying letter of inquiry, supra note 20. In arriving at its opinion that the local government pool interests described in the Pennsylvania Letter were municipal securities, counsel suggested, in reference to the definition of municipal securities in the Exchange Act, "that the word 'obligations' need not be read as 'debt' in this context. The Trust is under obligation to redeem all Shares of Beneficial Interest presented for redemption." In addition, the Chairman of the College Savings Plans Network noted in Congressional testimony that "state-sponsored college tuition programs are secured by the moral or political obligation of the states." Marshall Bennett, Testimony Before the House Committee on Ways and Means, Hearing on Reducing the Tax Burden: II. Providing Tax Relief to Strengthen the Family and Sustain a Strong Economy, 106th Cong., 1st Sess. (June 23, 1999), available at <http://www.house.gov/ways_means/fullcomm/106cong/6-23-99/6-23benn.htm> (visited Aug. 26, 1999) (emphasis added).

25. See El Paso de Robles Letter, supra note 21; MAC Warrant Notice, supra note 6.

26. See 1975 Senate Report, supra note 11, at 90, 92.

27. Id. at 92.

28. See, e.g., House Comm. on Interstate and Foreign Commerce, Federal Supervision of Traffic in Investment Securities in Interstate Commerce, H.R.Rep. No. 85, 73d Cong., 1st Sess. 6, 14 (1933) (the "1933 House Report").

29. Id. at 14. This view was confirmed the following year during House committee hearings on the Exchange Act by the Commissioner of the Federal Trade Commission, which was charged with enforcing the Securities Act. See Stock Exchange Regulation: Hearing on H.R. 7852 and H.R. 8720 Before the House Comm. on Interstate and Foreign Commerce, 73d Cong., 2d Sess. 899 (1934) (the "1934 House Hearings") (statement of James M. Landis, Commissioner, Federal Trade Commission). Commissioner Landis stated:

We had that same problem up in the Securities Act, where the exemption that is given to what might be called municipal bonds, and bonds of States and their instrumentalities, and is drawn according to a line that parallels the line that is drawn which makes tax-exempt municipal bonds, State instrumentalities, and so on. In other words, every instrumentality of a State which, like a municipality, or a political subdivision of a State, was exempted from taxation, would be exempted from registration upon an issue of securities. That is the line drawn in the Securities Act. If exempt from taxation they are also exempted from the necessity of registration under that act.

30. See, e.g., Securities Act: Hearings on S. 875 Before the Senate Comm. on Banking and Currency on S. 875, 73d Cong., 1st. Sess. 65 (1933) (the "1933 Senate Hearings") (statement of Sen. Reynolds); id. at 228, 232 (statement of Sen. Kean); id. at 232 (statement of Sen. Costigan); id. at 303 (statement of Sen. Norbeck); 77 Cong. Rec. 2925 (1933) (statement of Rep. Studley).

31. See 1934 House Hearings, supra note 29, at 822 (statement of Rep. Pettingill); id. at 898-9 (statements of James M. Landis, Commissioner, Federal Trade Commission; Rep. Pettingill). This concern also served as a primary basis for the exemption of municipal securities under the Securities Act. See 1933 House Report, supra note 28, at 14, and text accompanying note 29 above.

32. See 1934 House Hearings, supra note 29, at 721, 911-3 (statement of Rep. Holmes); Stock Exchange Practices: Hearings on S. Res. 84 and S. Res. 56 and S. Res. 97 Before the Senate Comm. on Banking and Currency, 73d Cong., 1st Sess. 7441-52 (1934) (the "1934 Senate Hearings") (statements of Archibald B. Roosevelt, Roosevelt & Weifold, Inc.; George B. Gibbons, George B. Gibbons & Co.; Sen. Gore; Sen. Goldsborough).

33. See 1934 House Hearings, supra note 29, at 720 (statement of Rep. Holmes).

34. See 1934 Senate Hearings, supra note 32, at 7413 (statements of H.H. Cotton, Investment Bank of Los Angeles; Ferdinand Pecora, Counsel to the Committee; Sen. Fletcher); id. at 7477 (statements of Tom K. Smith, Assistant to the Secretary of the Treasury; Sen. Adams; Sen. Walcott); 1934 House Hearings, supra note 29, at 7201(statements of Tom K. Smith, Assistant to the Secretary of the Treasury; Rep. Holmes); id. at 819-23 (statements of George B. Gibbons, George B. Gibbons & Co.; Rep. Merritt; Rep. Rayburn; Rep. Pettengill).

35. See note 29 above and accompanying text.

36. The phrase "security issued or guaranteed by" used in Section 3(a)(2) of the Securities Act introduces bank securities (including bank equity securities) as well as government and municipal securities. In contrast, the phrase "securities which are direct obligations of or obligations guaranteed as to principal or interest by" used in Section 3(a)(12) of the Exchange Act introduced only municipal and government securities. Thus, even though the drafters of both the Securities Act and the Exchange Act thought of municipal and government securities solely as debt securities, the term "obligation" (to the extent such term is limited to debt securities) could only be used in the Exchange Act.

37. 1975 Senate Report, supra note 11, at 47. See also CP Letter (note 7), supra note 23.

38. In testimony at a 1975 Senate committee hearing on the Securities Acts Amendments, a representative of the Municipal Finance Officers Association stated that the municipal securities market "is completely a debt market." Securities Acts Amendments of 1975: Hearings on S. 249 Before the Senate Comm. on Banking, Housing and Urban Affairs, 94th Cong., 1st Sess. 479 (1975) (statement of Michael S. Zarin, Member, Comm. on Governmental Debt Administration, Municipal Finance Officers Association). Having been so informed, the Senate's description in the 1975 Senate Report, supra note 11, at 38, of municipal securities as "debt obligations of state and local government issuers," as noted by some commentators on the March Notice, in fact merely reflected an understanding of the nature of the municipal securities market at such time, not an understanding that the Exchange Act definition of municipal securities was to be limited only to the debt segment of a broader municipal market that might also include equity securities.

39. As noted above, one commentator concedes that interests in higher education trusts "clearly affect public investors and the public interest."

40. Commentators list Congressional concern about unconscionable markups, churning of accounts, misrepresentations, disregard of suitability standards, high-pressure sales techniques, fraudulent trading practices resulting in substantial losses to public investors, and threats to the integrity of the local government capital-raising system. They argue that there is no opportunity for unconscionable markups and little incentive for churning of accounts or use of high-pressure sales techniques for these interests because they are purchased and redeemed at the current net asset value and purchasers do not pay commissions. Commentators also argue that suitability concerns are not raised since local government pools are operated like money market funds and invest solely in the types of investments that their participants are permitted by state law to purchase.

41. One commentator states that protections exist under the Investment Advisers Act of 1940, state regulations, voluntary adherence to the Investment Company Act and related federal regulations applicable to investment company securities, and Governmental Accounting Standards Board Statement No. 31 relating to accounting and financial reporting for certain investments and for external investment pools.

42. See 1975 Conference Report, supra note 11, at 101.

43. As originally proposed, rule D-9 would have excluded from the definition of customer "the issuer of securities which are the subject of the transaction in question." See "Notice of Filing of Fair Practice Rules," [1977-1987 Transfer Binder] MSRB Manual (CCH) � 10,030 (Sept. 20, 1977). In amending the original proposed rule language to limit this exclusion solely to "the issuer in connection with the sale of a new issue of its securities," the Board stated that it believed "that the protections afforded customers by its rules should be extended to issuers when they act in secondary market transactions." See "Notice of Filing of Amendments to Fair Practice Rules," [1977-1987 Transfer Binder] MSRB Manual (CCH) � 10,058 (Feb. 28, 1978). Given that the Board has always felt that issuers should be considered customers even in secondary market transactions involving their own securities, issuers certainly should be considered customers in transactions involving securities of other issuers. Furthermore, in Congressional testimony on the bankruptcy filing of Orange County, California and its local government pool, SEC Chairman Arthur Levitt discussed customer protection rules of self-regulatory organizations as they may apply to state or local governmental entities acting as customers. See Derivative Financial Instruments Relating to Banks and Financial Institutions: Hearings Before the Senate Comm. on Banking, Housing and Urban Affairs, 104th Cong., 1st Sess. (1995) ("SEC Testimony").

44. S&P Report, supra note 2, at 3, 6-11. The Board takes no position as to which of these local government pools may issue interests that would constitute municipal fund securities.

45. Id. at 3.

46. One commentator identifies several state-run and county-run pools (including the Orange County, California pool) as having had recent financial difficulties. See also NAST Report, supra note 2, at 2, 5, 38; S&P Report, supra note 2, at 5.

47. NAST has stated that it:

recognizes that potential pool participants have numerous alternative investment vehicles from which to choose. The goal of the … [NAST Guidelines for Local Government Investment Pools] is to insure that local government investment officials, when choosing among their available investment options, are fully aware of significant investment and administrative policies, practices and restrictions of the pool and are thereby able to make informed investment decisions on behalf of the local governments. … NAST further recommends that the broker/dealer community govern itself to follow the same standards of conduct NAST has recommended for treasurers.

NAST Report, supra note 2, at 8. As the self-regulatory organization established by Congress to adopt rules for dealer transactions in municipal securities, the Board has created a body of rules which, together with these proposed rule changes, constitute the self-governance and standards of conduct which NAST has recommended be established.

48. The Board understands that investment strategies, pay-out restrictions, and fees and redemption charges or penalties of the existing higher education trusts vary. At least some higher education trusts permit sales of interests to persons living in other states and permit redemption proceeds to be used to pay higher education expenses in any state. In other cases, redemption proceeds may be limited for use within a specific state. See generally CSPN Report, supra note 3. Thus, a single customer may have a choice of investments in various higher education trusts having widely differing investment strategies and terms. The Board takes no position as to which of these higher education trusts may issue interests that would constitute municipal fund securities.

49. See NAST Report, supra note 2, at 8 ("The investment alternatives offered by brokers/dealers to public finance officials should be suitable for the public entity's objectives."). The fact that a local government pool's assets are invested in investments that are legally available as direct investments by local governments does not resolve suitability issues. See note 39 above. As with transactions in any other municipal security, rule G-19 would require a dealer recommending a transaction in a municipal fund security to have reasonable grounds for believing that the recommendation is suitable, based upon information available from the issuer or otherwise and the facts disclosed by or otherwise known about the customer. These suitability requirements do not differ in substance from those of the NASD, to which dealers effecting transactions in such interests might otherwise be subject if these interests are not municipal securities. See also SEC Testimony, supra note 43.

50. See, e.g., Sections 15(b)(3) and 15B(a)(3) of the Exchange Act.

51. Actual interpretations relating to how certain rules would be applied to transactions in municipal fund securities would be filed with the SEC to the extent required under Section 19(b) of the Exchange Act and Exchange Act Rule 19b-4.

52. This view regarding sales of municipal fund securities as part of a primary offering is based on SEC staff's statement in the SEC Letter, supra note 4, that it would view such securities as having been sold in a primary offering for purposes of Rule 15c2-12.

53. Two commentators suggest that the Board exempt municipal fund securities from the prohibition in rule A-13(e) from passing through underwriting assessments to issuers.

54. Commentators note that many local government pools have annual share turn-over rates of 3 to 4 times their assets, due to the fact that many participants are investing short-term funds that move in and out of the pools frequently during the course of the year. Another commentator believes that this multiplier may reach as high as 10 times assets. One commentator estimates that total issuances of interests in local government pools may be on the same order of magnitude as issuances of traditional municipal securities.

55. In the alternative, some commentators suggest that underwriting assessments should be based on net issuances of municipal fund securities, taking into account all securities retired. Another commentator suggests a flat annual or monthly fee set at a modest level.

56. Two commentators suggest that local government pool interests be excluded from this definition. The Board declines to do so for the reasons noted above.

57. Thus, an associated person who sells both municipal fund securities and other types of municipal securities would be required to qualify as a municipal securities representative or general securities representative.

58. One commentator suggests exempting dealers in local government pool interests from the requirement of having municipal securities principals, provided that they meet the requirements regarding principals established by the NASD. The Board believes that dealers effecting transactions in municipal fund securities must have a municipal securities principal who is required to be familiar with Board rules.

59. Several factors influenced the Board's determination to exempt such securities from rule G-14, as set forth in the March Notice. If the Board receives information in the future that practices have developed in the municipal fund security market that merit reporting of transaction information, it will consider whether to revisit the exemption from rule G-14.

60. Disclosure of deferred commissions or other charges would cover, for example, any deferred sales load or, in the case of interests in certain higher education trusts, any penalty imposed on a redemption that is not for a qualifying higher education expense.

61. In addition to the comments described below, one commentator suggests that the draft amendment relating to disclosure of deferred commissions or redemption charges be clarified to indicate that information may be disclosed in a program description document together with the confirmation or periodic statement. The Board believes that this provision does not require revision since it already permits disclosure of such information in a document separate from the confirmation or periodic statement, although the confirmation or periodic statement must disclose that such deferred commission or charge may exist and that information will be furnished upon written request.

62. They note that individual confirmations for the frequent purchases and redemptions of local government pool interests would impose high administrative and cost burdens.

63. It states that this would be "analogous to and consistent with" the provisions of Rule 10b-10 permitting periodic statements in lieu of confirmations for non-periodic transactions in tax-qualified individual retirement and individual pension plans.

64. In addition, the Board has made a minor language change to paragraph (a)(vi)(G) to make clearer that quarterly statements in lieu of individual confirmations also would be available for arrangements involving a group of two or more customers.

65. A commentator states that requiring customer consent to receive quarterly statements would impose administrative burdens on dealers that are not justified by any investor protection interest. It notes practical difficulties with sending confirmations to some members of a group plan and quarterly statements to others, stating that if the dealer fails to receive consent from any customer, it might be forced to send individual confirmations to all customers. The commentator states that, in adopting the investment company plan exception to the confirmation requirements in Rule 10b-10, the SEC recognized that securities sold through such plans do not require the same level of reporting as other securities transactions since their regularized nature raised fewer concerns about whether a particular transaction was executed consistent with the expectations of the customer.

66. A commentator states that municipal fund securities will not be issued in certificated form and therefore the delivery provisions under subparagraph (a)(i)(A)(7) would not be relevant. Subparagraph (a)(i)(A)(7) would require that the confirmation for a municipal fund security transaction indicate the purchase price (exclusive of commission) of each share or unit and the number of shares or units to be delivered, regardless of whether a physical or book-entry delivery of the securities will occur.

67. The commentator states that such securities are ineligible for ratings and such notation might be misleading. However, the Board notes that a relatively small number of local government pools have in fact been rated. See NAST Report, supra note 2, at 36. See generally S&P Report, supra note 2.

68. The Board understands that, in the context of local government pools, the term "yield" may be used to refer to historical returns that may be used as a basis for comparing investment performance. See NAST Report, supra note 2, at 8. References in rule G-21 to yield, consistent with its use in other Board rules, refer to a future rate of return on securities and do not refer to historical yields. The Board notes that any use of historical yields would be subject to section (c) of rule G-21, which provides that no dealer shall publish or cause to be published any advertisement concerning municipal securities which such dealer knows or has reason to know is materially false or misleading. Thus, a dealer advertisement of municipal fund securities that refers to yield typically would require a description of the nature and significance of the yield shown in the advertisement in order to assure that such advertisement is not false or misleading.

69. Rule G-32 defines underwriting period for securities purchased by a dealer (not in a syndicate) as the period commencing with the first submission to the dealer of an order for the purchase of the securities or the purchase of the securities from the issuer, whichever first occurs, and ending at such time as the following two conditions both are met: (1) the issuer delivers the securities to the dealer, and (2) the dealer no longer retains an unsold balance of the securities purchased from the issuer or 21 calendar days elapse after the date of the first submission of an order for the securities, whichever first occurs. However, since the issuer continuously delivers municipal fund securities, the first condition for the termination of the underwriting period remains unmet.

70. In addition, in the case of a repeat purchaser of municipal fund securities for which no official statement in final form is being prepared, no new delivery of the written notice to that effect or of any official statement in preliminary form would be required so long as the customer has previously received it in connection with a prior purchase. However, if an official statement in final form is subsequently prepared, the customer's next purchase would trigger the delivery requirement with respect to such official statement.

71. Dealers may still elect to acquire CUSIP numbers for municipal fund securities and to make such securities depository eligible, subject to meeting all of the eligibility requirements of the CUSIP Service Bureau and of any securities depository, respectively.

72. If the primary offering is exempt from Rule 15c2-12 (other than as a result of being a limited offering as described in section (d)(1)(i) of the Rule) and an official statement has been prepared by the issuer, then the dealer would be expected to send the official statement, together with Form G-36(OS), to the Board under rule G-36(c)(i).

73. Rule G-36(d) provides that a dealer that has previously sent an official statement to the Board also is required to send to the Board any amendments made by the issuer during the underwriting period. In view of the extended underwriting period for municipal fund securities and the possibility that the issuer may change the dealer that participates in the sale of the securities during the life of the program, the Board would interpret this provision of the rule to obligate any dealer that is at the time of an amendment then serving as underwriter for the municipal fund securities to send the amendment to the Board, regardless of whether that dealer or another dealer sent the original official statement to the Board.

74. Underlining indicates additions to existing Board rules; strikethrough indicates deletions from existing Board rules.

 

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