Rule G-38 Questions and Answers Concerning Information About Consultants' Political Contributions and Payments to State and Local Political Parties
GENERAL REQUIREMENTS OF NEW AMENDMENTS
1.
Q: What are the new amendments to rule G-38 about?
A: The amendments will require dealers to collect from their consultants, and to disclose to the Board on revised Form G-37/G-38, information regarding certain contributions to issuer officials and certain payments to state and local political parties made by such consultants.
2.
Q: What political contributions and political party payments are subject to the new reporting requirement?
A: This depends upon whether the consultant is an individual or a company. If the consultant is an individual, then the contributions and payments that are covered (to the extent reportable under the rule) are those of (1) that individual and (2) any political action committee controlled by such individual. If the consultant is a company, then the contributions and payments that are covered (to the extent reportable under the rule) are those of (1) that company, (2) any partner, director, officer or employee of such company who communicates with an issuer to obtain municipal securities business on behalf of the dealer, and (3) any political action committee controlled by such company or any of the individuals identified in the immediately preceding clause (2).
3.
Q: May the dealer enter into a Consultant Agreement with either an individual or a company?
A: Yes, provided that the dealer must enter into a Consultant Agreement with the actual party that is serving as the consultant. For example, if the consultant is in effect a company with several employees making actual contact with issuers on the dealer’s behalf, a Consultant Agreement entered into only with one of these employees may not, depending upon all the relevant facts and circumstances, satisfy the requirement that the dealer enter into a Consultant Agreement with the consultant.
4.
Q: Must a Consultant Agreement include any provisions regarding a consultant’s reportable political contributions and reportable political party payments?
A: Yes. A dealer is required to include within its Consultant Agreement a provision to the effect that the consultant agrees to provide the dealer each calendar quarter with either (1) a listing of reportable political contributions to official(s) of an issuer and reportable payments to political parties of states and political subdivisions during such quarter, or (2) a report that no reportable political contributions or reportable political party payments were made during such quarter, as appropriate.
5.
Q: Which contributions to issuer officials made by consultants are reportable under the rule?
A: Rule G-38(a)(vi) defines the term “reportable political contribution” to mean, if the consultant has had direct or indirect communication with an issuer on behalf of the dealer to obtain or retain municipal securities business for such dealer, a political contribution to an official(s) of such issuer made by any contributor referred to in rule G-38(b)(i) (see Question and Answer number 2) during the period beginning six months prior to such communication and ending six months after such communication.
6.
Q: Which payments to state and local political parties made by consultants are reportable under the rule?
A: Rule G-38(a)(vii) defines the term “reportable political party payment” to mean, if a political party of a state or political subdivision operates within the geographic area (e.g., city, county and state parties) of an issuer with which the consultant has had direct or indirect communication to obtain or retain municipal securities business on behalf of the dealer, a payment to such party made by any contributor referred to in rule G-38(b)(i) (see Question and Answer number 2) during the period beginning six months prior to such communication and ending six months after such communication.
7.
Q: Is there a de minimis exception for the reporting of political contributions and political party payments?
A: Yes. The de minimis exception for contributions to official(s) of an issuer provides that a consultant need not provide to a dealer information about contributions of the consultant (but only if the consultant is an individual) or by any partner, director, officer or employee of the consultant (if the consultant is a company) who communicates with issuers to obtain municipal securities business on behalf of the dealer made to any official of an issuer for whom such individual is entitled to vote if such individual’s contributions, in total, are not in excess of $250 to each official of such issuer, per election.
Similarly, the de minimis exception for political party payments provides that a consultant need not provide to a dealer information about payments of the consultant to political parties of a state or political subdivision (but only if the consultant is an individual) or by any partner, director, officer or employee of the consultant (if the consultant is a company) who communicates with issuers to obtain municipal securities business on behalf of the dealer and who is entitled to vote in such state or political subdivision if the payments made by the individual, in total, are not in excess of $250 per political party, per year.
Again, the de minimis exception applies only to contributions or payments by individuals. There is no de minimis exception for contributions by the consultant if it is a company or for any PAC controlled by the company or individuals covered by the rule.
8.
Q: If a consultant makes political contributions during a particular quarter but these contributions do not meet the definition of “reportable political contribution” as defined in rule G-38, is the consultant required to report any information about its political contributions to the dealer?
A: The consultant is required to report to the dealer that it made no reportable political contributions during the quarter.
9.
Q: With respect to a particular issuer, if a consultant is communicating with one individual but has made a contribution to a different individual, would the consultant report this contribution to the dealer? For example, if the dealer is seeking municipal securities business from City A and its consultant communicates with the Mayor of the City, would a non-de minimis political contribution to the City’s Comptroller (an official of the issuer) have to be reported?
A: Yes. A consultant must report and a dealer must disclose contributions with respect to those “issuers” from which a consultant is seeking municipal securities business on behalf of the dealer, regardless of whether contributions are going to and communications are occurring with the same or different personnel within that particular issuer.
10.
Q: What is the date that establishes the obligation for the collection of reportable political contributions and reportable political party payments?
A: The date of the consultant’s communication with the issuer to obtain or retain municipal securities business on behalf of the dealer is the key date with respect to determining whether a contribution or payment is reportable. For the quarter in which a consultant first communicates with the issuer, the dealer is required to collect from the consultant its reportable political contributions and reportable political party payments for such quarter and, pursuant to the six-month look-back, for the six-month period preceding such first communication.
11.
Q: How do the “look-back” and “look-forward” provisions operate?
A: Pursuant to the look-back provision, a consultant must disclose to the dealer the reportable political contributions and reportable political party payments made by the consultant during the six months prior to the date of the consultant’s communication with the issuer. These contributions and payments become reportable in the calendar quarter in which the consultant first communicates with the issuer. Of course, any reportable political contributions and reportable political party payments made during the period that the consultant continues to communicate with the issuer are required to be disclosed. Once communication with an issuer ceases, the consultant still must disclose information with respect to reportable political contributions and reportable political party payments made during the ensuing six months pursuant to the look-forward provision. Contributions and payments made simultaneously with or after the consultant’s first communication with the issuer are reportable in the calendar quarter in which they are made.
12.
Q: When does the requirement cease for a dealer to collect contribution and payment information from its consultants?
A: The requirement ceases when a consultant agreement has been terminated. Of course, dealers should not attempt to avoid the requirements of rule G-38 by terminating a consultant relationship after directing or soliciting the consultant to make a political contribution to an issuer official after such termination. Rule G-37(d) prohibits a dealer from doing any act indirectly which would result in a violation of rule G-37 if done directly by the dealer. Thus, a dealer may violate rule G-37 by engaging in municipal securities business with an issuer after directing or soliciting any person to make a contribution to an official of such issuer.
“REASONABLE EFFORTS” PROVISION
13.
Q: What is the reasonable efforts provision contained in rule G-38?
A: This provision provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required information about reportable political contributions and reportable political party payments and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information.
14.
Q: What must a dealer do to avail itself of the reasonable efforts provision?
A: A dealer must: (1) state in the Consultant Agreement that Board rules require disclosure of consultant contributions to issuer officials and payments to state and local political parties; (2) send quarterly reminders to its consultants of the deadline for their submissions to the dealer of contribution and payment information; (3) include language in the Consultant Agreement to the effect that: (a) the Consultant Agreement will be terminated if, for any calendar quarter, the consultant fails to provide the dealer with information about its reportable contributions or payments, or a report noting that the consultant made no reportable contributions or payments, and such failure continues up to the date to be determined by the dealer but no later than the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the dealer must send its Form G-37/G-38 to the Board, and (b) the dealer may not make any further payments to the consultant, including payments owed for services performed prior to the date of termination, as of the date of such termination; and (4) enforce the Consultant Agreement provisions described above in a full and timely manner and indicate the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.
15.
Q: If a dealer does not include the termination and non-payment provisions in a Consultant Agreement or enforce any such provision that may be contained in the Consultant Agreement, would this constitute a violation of rule G-38?
A: No. Failure to follow the requirements of the reasonable efforts provision would not result in a violation of rule G-38; however, the dealer would be precluded from invoking the reasonable efforts provision as a defense against a possible violation for failing to disclose consultant contribution information, which the consultant may have withheld from the dealer. Of course, whether or not a dealer would be charged with a violation of rule G-38 for failure to disclose consultant contribution information would depend upon a review of the facts and circumstances of the individual case by the appropriate regulatory agency.
DISCLOSURE ON FORM G-37/G-38
16.
Q: What information concerning consultants’ political contributions and payments to political parties are required to be reported to the Board on Form G-37/G-38?
A: Forms G-37/G-38 shall include the following information to the extent required to be obtained for a calendar quarter: (1) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving reportable political contributions or reportable political party payments, listed by state, and contribution or payment amounts made and the contributor category; or (2) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or (3) if applicable, a statement that the consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.
17.
Q: Does a dealer have a reporting obligation if a consultant fails to provide a report for a particular quarter?
A: Yes. The dealer must disclose on Form G-37/G-38 if the consultant has failed to provide it with a report of its reportable political contributions and reportable political party payments.
18.
Q: In listing consultants’ reportable political contributions and reportable political party payments on Form G-37/G-38, how are the contributors to be identified?
A: By contributor category (i.e., company, individual, company controlled PAC or individual controlled PAC).
19.
Q: How should look-back contributions and payments be disclosed on Form G-37/G-38?
A: Dealers must disclose, in addition to the other required information, the calendar quarter and year of any reportable political contributions and reportable political party payments that were made prior to the calendar quarter for which the form is being completed. Look-back contributions and payments should be disclosed on the Form G-37/G-38 for the quarter in which the consultant has first communicated with an issuer to obtain municipal securities business on behalf of the dealer.
RECORDKEEPING
20.
Q: What records concerning consultants’ political contributions and payments to political parties are required to be maintained?
A: Rule G-8(a)(xviii) requires a dealer to maintain: (1) records of each reportable political contribution, (2) records of each reportable political party payment, (3) records indicating, if applicable, that a consultant made no reportable political contributions or no reportable political party payments, and (4) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.
EFFECTIVE DATE OF REQUIREMENTS CONCERNING CONSULTANTS’ POLITICAL CONTRIBUTIONS AND PAYMENTS TO STATE AND LOCAL POLICIAL PARTIES
21.
Q: What is the effective date of the amendments to rule G-38 concerning the disclosure of consultants’ reportable political contributions and reportable political party payments?
A: The amendments will become effective on April 1, 2000. On the Forms G-37/G-38 for the second quarter of 2000 (required to be sent to the Board by July 31, 2000) dealers are required to disclose their consultants’ reportable political contributions and reportable political party payments for the second quarter of 2000 and include, if applicable, reportable political contributions and reportable political party payments made since October 1, 1999 pursuant to the six-month look-back provision.
March 1, 2000
