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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Clarifying Technical Amendments

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

December 18, 1997

Text of Amendments⁽⁹⁾

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

(a) - (d) No change.

(e)(i) Except as otherwise provided in paragraph (e)(ii), each Each broker, dealer or municipal securities dealer shall, by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31), send to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports on contributions to officials of issuers and on payments to political parties of states and political subdivisions that are required to be recorded pursuant to rule G-8(a)(xvi). Such reports shall include information concerning the amount of, two copies of Form G-37/G-38 setting forth, in the prescribed format, the following information:

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

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

(B) all municipal finance professionals;

(C) all non-MFP executive officers; and

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

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

(ii) Two copies of the reports referred to in paragraph (i) of this section (e) must be sent to the Board on Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31), and must include, in the prescribed format, by state, the following information on contributions to each official of an issuer and payments to each political party of a state or political subdivision made and municipal securities business engaged in during the reporting period:

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

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

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

(b) each municipal finance professional;

(c) each non-MFP executive officer; and

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

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

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

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

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

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

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

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

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

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

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

(f) - (i) No change.

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

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

(i) - (xv) No change.

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

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

(xvii) - (xix) No change.

(b) - (f) No change.

Rule G-38. Consultants

(a) - (c) No change.

(d) Disclosure to Board. Each broker, dealer or and municipal securities dealer shall send to the Board, in the manner and at the times prescribed in paragraph (e)(i) of rule G-37, by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports on Form G-37/G-38 of all consultants used by the broker, dealer or municipal securities dealer during each calendar quarter. Two copies of the reports must be sent to the Board on Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31, and October 31). Such reports shall include, for each consultant, in the prescribed format, the consultant's name, company, role and compensation arrangement. In addition, such reports shall indicate the dollar amount of payments made to each consultant during such calendar quarter the report period and, if any such payments are related to the consultant's efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified.

ENDNOTES

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

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

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

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

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

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

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

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

9. Underlining indicates additions; strikethrough denotes deletions.

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

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

Transition and Inaugural Expenses

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

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

Definition of Issuer Official

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

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

Definitions of Municipal Finance Professional and Executive Officer

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

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

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

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

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

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

Reporting by Syndicate Members

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

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

September 9, 1997

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

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

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

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

SUMMARY OF AMENDMENTS

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

Definitions of Municipal Finance Professional and Executive Officer

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

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

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

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

TEXT OF AMENDMENTS⁽²⁾

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

(a) - (d) No change.

(e)(i) Each broker, dealer or municipal securities dealer shall submit send to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports on contributions to officials of issuers and on payments to political parties of states and political subdivisions that are required to be recorded pursuant to rule G-8(a)(xvi). Such reports shall include information concerning the amount of contributions to officials of issuers and payments to political parties of states and political subdivisions and an indication of the contributor category of each contribution or payment made by:

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

(B) all municipal finance professionals;

(C) all non-MFP executive officers; and

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

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

(e)(ii) Two copies of the reports referred to in paragraph (i) of this section (e) must be submitted sent to the Board on Form G-37/G-38 within thirty (30) calendar days after by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31), and must include, in the prescribed format, by state, the following information on contributions to each official of an issuer and payments to each political party of a state or political subdivision made and municipal securities business engaged in during the reporting period: (A) name and title (including any city/county/state or political subdivision) of each official of an issuer receiving contributions or payments; (B) contribution or payment amount made and the contributor category of the persons and entities described in paragraph (i) of this section (e); and (C) such other identifying information required by Form G-37/G-38. Such reports also must include a list of issuers with which the broker, dealer or municipal securities dealer has engaged in municipal securities business, along with the type of municipal securities business.

(f) No change.

(g) Definitions.

(i) - (iv) No changes.

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

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

(vi) - (viii) No change.

(h) - (i) No change.

Rule G-38. Consultants

(a) - (c) No change.

(d) Disclosure to Board. Each broker, dealer and municipal securities dealer shall submit send to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports of all consultants used by the broker, dealer or municipal securities dealer during each calendar quarter. Two copies of the reports must be submitted sent to the Board on Form G-37/G-38 within thirty (30) calendar days after by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31, and October 31). Such reports shall include, for each consultant, in the prescribed format, the consultant's name, company, role and compensation arrangement. In addition, such reports shall indicate the dollar amount of payments made to each consultant during the report period and, if any such payments are related tot he consultant's efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified.

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

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

(i)-(xv) No change.

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

(A) No change.

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

(C) - (E) No change.

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

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

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

(I) - (J) No change.

(xvii) - (xix) No change.

(b) - (f) No change.

September 30, 1997

Endnotes:

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

2. Underlining indicates new language; strikethrough denotes deletions.

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

Consultants: Rule G-38

The Board has filed an amendment to rule G-38, on consultants, that would give dealers the option of disclosing their consulting arrangements to issuers, pursuant to section (c) of the rule, on either an issue-specific or issuer-specific basis.

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

Rule G-38, on consultants, requires broker, dealers and municipal securities dealers (collectively referred to as "dealers"): (1) to have written agreements with certain individuals who are used by a dealer, directly or indirectly, to obtain or retain municipal securities business ("consultants"), and (2) to disclose such consulting arrangements directly to issuers and to the public through disclosure to the Board. Section (c) of the rule currently requires that each dealer disclose, in writing, to each issuer with which the dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer. The information to be disclosed includes the name, company, role and compensation arrangement of any consultant used, directly or indirectly, to obtain or retain municipal securities business with each such issuer. Dealers are required to make such disclosures prior to the issuer's selection of any dealer in connection with the particular municipal securities business sought.

It has come to the Board's attention that this issue-specific nature of the disclosure requirement can create compliance problems for dealers in the case of frequent issuers of municipal securities as well as in the co-manager selection process. For example, an issuer may bring new issues to market several times a month, and if a dealer is using a consultant to obtain a syndicate slot in each such issue, the dealer is required to disclose the same information to the same issuer month after month and possibly week after week. In addition, the Board has learned that dealers who use a consultant to help obtain co-manager business sometimes have difficulty complying with rule G-38(c) because, unlike the lead manager, a co-manager may learn of its selection for that business after the selection of the lead manager, thereby making it impossible for the dealer to disclose its consulting arrangements prior to the issuer's selection of any dealer, as required by the rule.

While the Board believes that the timing of the issue-specific disclosure requirement in rule G-38(c) is appropriate in the vast majority of cases, the Board recognizes that it can be a problem in the context of frequent issuers of municipal securities and in the co-manager selection process. Thus, the Board has determined to amend rule G-38(c) to give dealers the option of disclosing their consulting arrangements to issuers on either an issue-specific or issuer-specific basis. Pursuant to the amendment, if a dealer chooses to disclose information regarding a consulting arrangement on an issuer-specific basis, the dealer must submit the information, in writing, to the issuer within three business days of the consultant's first direct or indirect communication with that issuer, but in any event prior to the issuer's selection of that dealer for any municipal securities business. ⁽²⁾ To ensure that such information, once disclosed, remains current, the amendment also requires dealers to (1) promptly notify the issuer in writing of any change in the information disclosed; and (2) update issuers on an annual basis concerning any information previously disclosed, even where the information has not changed. ⁽³⁾ Of course, this annual updating requirement would cease to apply if the dealer is no longer using the consultant, directly or indirectly, to attempt to obtain or retain municipal securities business with a particular issuer(s).

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

November 24, 1997

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.

ENDNOTES

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

2. In contrast, the Board believes that disclosures made by a dealer on an issue-specific basis should continue to be required prior to the issuer's selection of any dealer for the particular municipal securities business being sought.

3. Pursuant to rule G-8(a)(xvii) on recordkeeping, dealers are required to maintain records of all disclosures made pursuant to rule G-38(c). This would apply to disclosures made pursuant to the amendment.

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

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

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

Rule G-38 on Consultants

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

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.

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.

Request for Comments The Board requests comment on a draft amendment to rule G-38, on consultants, that would require dealers to disclose their consultants' political contributions to officials of an issuer and payments to state and local political parties. The Board also is seeking comment on a related amendment to rule G-8, on recordkeeping, and revisions to Form G-37/G-38.

Comments 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

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)*

ENDNOTES

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

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

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

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

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

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

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

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

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

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

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

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

May 19, 1997

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.

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.

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.

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

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

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

Home Page  |   Notice  |  Registration form

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

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

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

Home Page  |   Notice  |  Tentative Schedule

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

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.

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

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

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.

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

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.

        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.

        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 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

(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.

(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.

Notice regarding issuer selection of underwriters’ counsel

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

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

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

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

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

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

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

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

September 3, 1998

ENDNOTES

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

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

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

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

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

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

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

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