SEC Approves Amendments to Rule G-20, on Gifts and Gratuities, and Rule G-8, on Books and Records

On October 3, 2005, the Securities and Exchange Commission (“SEC”) approved amendments to Rule G-20, on gifts, gratuities and non-cash compensation, and the related recordkeeping provisions of Rule G-8.[1]  The amendments, which became effective upon SEC approval, are summarized below.[2]

SUMMARY OF AMENDMENTS

The amendments more fully conform MSRB Rule G-20 to current NASD requirements relating to gifts and gratuities, and add new provisions governing non-cash compensation and sales incentives in connection with primary offerings of municipal securities, based on NASD requirements for non-cash compensation and sales incentives.  The MSRB has determined that similar treatment across the securities markets is appropriate and will facilitate dealer understanding of, and compliance with, requirements relating to sales incentives and non-cash compensation.  The amendments result in the following changes to Rule G-20:

•        Modifies the provision in Rule G-20 that permits occasional gifts of meals or sports and entertainment tickets, and sponsorship of business functions outside of the $100 per year limitation by requiring that dealer personnel host (accompany) such meals, entertainment and business functions in conformity with NASD gift rule limitations, and further modifies the language of the requirement to incorporate NASD language to the effect that such occasional gifts must not call into question the dealer’s ethical standards.[3] 

•        Incorporates definitions of “non-cash compensation,” “cash compensation” and “offeror” based on language in NASD Rules 2710, 2820 and 2830, and expands the definition of offeror to include, with respect to securities held as assets underlying municipal fund securities, any person considered an offeror under relevant NASD rules.

•       Treats non-cash sales incentives relating to primary offerings of municipal securities in a manner similar to NASD’s treatment of non-cash sales incentives relating to mutual funds, variable contracts, and corporate debt and equity offerings, including, among other things, by permitting gifts that do not exceed $100 per individual per year and are not preconditioned on achievement of a sales target; and by permitting the giving and receipt of occasional gifts of meals or tickets to theatrical, sporting and other entertainment, but only if such occasional gifts are not preconditioned on achievement of a sales target.

•        Limits the circumstances under which dealers or offerors may pay or reimburse costs of training or education, based on NASD rules, including ensuring that attendance at, and payment for, such meetings is not preconditioned on achievement of a sales target; reimbursement is not applied to expenses of associated persons’ guests; and that such meetings are held at appropriate locations.

•        Requires that non-cash compensation arrangements include the total production and equal weighting requirements under NASD rules, which are designed to ensure that the arrangement does not favor sales of one municipal security over another.

•        Amends the recordkeeping requirements in Rule G-8 to require that dealers maintain a record of non-cash compensation received in connection with a primary offering from the issuer or its advisers, the underwriter, or any of their affiliates, as well as records regarding any internal sales incentive program for municipal fund securities.

The MSRB intends generally that the provisions of Rule G-20 be read consistently with the analogous NASD provisions, unless the MSRB specifically indicates otherwise.  Thus, relevant NASD interpretations are presumed to apply to the comparable MSRB provision, subject to the MSRB’s right to make distinctions when necessary and appropriate.  Further, the MSRB intends to continue coordinating its requirements relating to gifts, gratuities and non-cash compensation with those of the other relevant self-regulatory organizations in the securities markets.

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Questions concerning this notice should be directed to Ernesto A. Lanza, Senior Associate General Counsel, or Jill C. Finder, Assistant General Counsel, at 703-797-6600.

October 5, 2005

TEXT OF AMENDMENTS [4]

Rule G-20 – Gifts, and Gratuities and Non-Cash Compensation.

(a) General Limitation on Value of Gifts and Gratuities.  No broker, dealer or municipal securities dealer shall, directly or indirectly, give or permit to be given any thing or service of value, including gratuities, in excess of $100 per year to a person other than an employee or partner of such broker, dealer or municipal securities dealer, if such payments or services are in relation to the municipal securities activities of the employer of the recipient of the payment or service.  For purposes of this rule the term “employer” shall include a principal for whom the recipient of a payment or service is acting as agent or representative.

(b) Normal Business Dealings.  Notwithstanding the foregoing, the provisions of section (a) of this rule shall not be deemed to prohibit occasional gifts of meals or tickets to theatrical, sporting, and other entertainments hosted by the broker, dealer or municipal securities dealer; the sponsoring by the broker, dealer or municipal securities dealer of legitimate business functions that are recognized by the Internal Revenue Service as deductible business expenses; or gifts of reminder advertising; provided, that such gifts shall not be so frequent or so expensive extensive as to raise a suggestion of conduct inconsistent with high standards of professional ethics in the municipal securities industry any question of propriety.

(c) No change.

(d) Non-Cash Compensation in Connection with Primary Offerings.  In connection with the sale and distribution of a primary offering of municipal securities, no broker, dealer or municipal securities dealer, or any associated person thereof, shall directly or indirectly accept or make payments or offers of payments of any non-cash compensation.  Notwithstanding the provisions of section (a) of this rule, the following non-cash compensation arrangements are permitted:

(i) gifts that do not exceed $100 per individual per year and are not preconditioned on achievement of a sales target;

(ii) occasional gifts of meals or tickets to theatrical, sporting, and other entertainments; provided that such gifts are not so frequent or so extensive as to raise any question of propriety and are not preconditioned on achievement of a sales target;

(iii) payment or reimbursement by offerors in connection with meetings held by an offeror or by a broker, dealer or municipal securities dealer for the purpose of training or education of associated persons of a broker, dealer or municipal securities dealer, provided that:

(A) associated persons obtain the prior approval of the broker, dealer or municipal securities dealer to attend the meeting and attendance is not preconditioned by the broker, dealer or municipal securities dealer on achievement of a sales target or any other incentives pursuant to a non-cash compensation arrangement permitted by paragraph (d)(iv);

(B) the location is appropriate to the purpose of the meeting, which shall mean an office of the offeror or the broker, dealer or municipal securities dealer, a facility located in the vicinity of such office, a regional location with respect to regional meetings, or a location at which a significant asset, if any, being financed or refinanced in the primary offering is located;

(C) the payment or reimbursement is not applied to the expenses of guests of the associated person; and

(D) the payment or reimbursement is not preconditioned by the offeror on achievement of a sales target or any other non-cash compensation arrangement permitted by paragraph (d)(iv).

(iv) non-cash compensation arrangements between a broker, dealer or municipal securities dealer and its associated persons, or a company that controls the broker, dealer or municipal securities dealer and the associated persons of the broker, dealer or municipal securities dealer, provided that:

(A) the non-cash compensation arrangement is based on the total production of associated persons with respect to all municipal securities within respective product types distributed by the broker, dealer or municipal securities dealer;

(B) the non-cash compensation arrangement requires that the credit received for each municipal security within a municipal security product type is equally weighted; and

(C) no entity that is not an associated person of the broker, dealer or municipal securities dealer participates directly or indirectly in the organization of a permissible non-cash compensation arrangement.

(v) contributions by any person other than the broker, dealer or municipal securities dealer to a non-cash compensation arrangement between a broker, dealer or municipal securities dealer and its associated persons, provided that the arrangement meets the criteria in paragraph (d)(iv). 

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

(i)         The term “non-cash compensation” shall mean any form of compensation received in connection with the sale and distribution of municipal securities that is not cash compensation, including but not limited to merchandise, gifts and prizes, travel expenses, meals and lodging.

(ii)        The term “cash compensation” shall mean any discount, concession, fee, service fee, commission, asset-based sales charge, loan, override or cash employee benefit received in connection with the sale and distribution of municipal securities.

(iii)       The term “offeror” shall mean, with respect to a primary offering of municipal securities, the issuer, any adviser to the issuer (including but not limited to the issuer’s financial adviser, bond or other legal counsel, or investment or program manager in connection with the primary offering), the underwriter of the primary offering, or any person controlling, controlled by, or under common control with any of the foregoing; provided, however, that, with respect to a primary offering of municipal fund securities, “offeror” shall also include any person considered an “offeror” under NASD Rule 2710, NASD Rule 2820 or NASD Rule 2830 in connection with any securities held as assets of or underlying such municipal fund securities.

(iv)       The term “primary offering” shall mean a primary offering defined in Securities Exchange Act Rule 15c2-12(f)(7).

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

(a)(i) – (xvi) No change.

(xvii)  Records Concerning Compliance with Rule G-20.  Each broker, dealer and municipal securities dealer shall maintain:

(A) (i) a separate record of any gift or gratuity referred to in Rule G-20(a); and

(B) (ii) all agreements referred to in Rule G-20(c) and all compensation paid as a result of those agreements; and.

(C) records of all non-cash compensation referred to in Rule G-20(d).  The records shall include the name of the person or entity making the payment, the names of the associated persons receiving the payments (if applicable), and the nature (including the location of meetings described in Rule G-20(d)(iii), if applicable) and value of non-cash compensation received.

 (xviii) – (xxii)  No change.

(b)-(g)  No change.