Request for Comment Rule 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

 

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

Name of Consultant:

Consultant Company Name:

Role to be Performed by Consultant:

Compensation Arrangement:

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

Total Dollar Amount Paid to Consultant during Reporting Period:

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

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

 

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ENDNOTES

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

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

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

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

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

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

 

 

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