Volume 16, Number 1 JANUARY 1996
Route To: Manager, Muni Department Underwriting Public Finance Compliance
Rule and Amendments Approved Rule G-38 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.
Questions concerning the rule may be directed to Ronald W. Smith, Legal Associate.
On January 17, 1996 the Securities and Exchange Commission (Commission) approved proposed rule G-38, on consultants.1 The proposed rule 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. In order to consolidate dealers' disclosure requirements concerning consultants, the Board also deleted from rule G-37, on political contributions and prohibitions on municipal securities business, the current disclosure requirements concerning consultants. In addition, the Board amended Form G-37 to merge the quarterly reporting requirements of rule G-37 and new rule G-38 into a single form G-37/G-38. Finally, the Board amended rules G-8 and G-9, on recordkeeping and record retention, respectively. Rule G-38 and the amendments to rules G-37, G-8 and G-9, as well as new Form G-37/G-38, will become effective on March 18, 1996.
Rule G-38 now defines 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 The definition specifically excludes "municipal finance professionals," as that term is defined in rule G-37(g)(iv), because such individuals are covered by the requirements of rule G-37. The definition also excludes any person whose sole basis of compensation from the dealer is the actual provision of legal advice, accounting or engineering assistance in connection with the municipal securities business that the dealer is seeking to obtain or retain. The exclusion would apply, for example, to a lawyer retained to conduct a legal analysis on a particular transaction contemplated by the dealer, or to review local regulations; an accountant retained to conduct a tax analysis or to scrutinize financial reports; or an engineer retained to perform a technical review or feasibility study. The exemption is intended to ensure that professionals who are engaged by the dealer to perform substantive work in connection with municipal securities business are not brought within the definition of consultant. However, any attorney or other professional used by the dealer as a "finder" for municipal securities business would be considered a consultant under the rule.
The rule requires dealers who use consultants to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"), and that, at a minimum, the writing must include the name, company, role and compensation arrangement of each consultant used by the dealer. Such written agreements must be entered into before the consultant engages in any direct or indirect communication with an issuer on the dealer's behalf.
Rule G-38 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 sought, regardless of whether the dealer making the disclosure ultimately is the one to obtain or retain that business. Thus, while dealers have an obligation to disclose their consulting arrangements to all issuers from which they are seeking municipal securities business, they have more leeway in the timing of their disclosures as long as the disclosure is made before the issuer selects a dealer for the municipal securities business sought. However, the Board cautions dealers that this timeframe represents the last possible opportunity to comply with the disclosure requirement, and therefore strongly recommends that dealers make such disclosures as early as possible. For example, a dealer seeking certain municipal securities business may not be aware of the issuer's selection of another dealer for that business. So too, an issuer may select a pool or group of dealers from which the issuer intends to choose underwriters for particular issues over the next few years. If a dealer has used a consultant to help secure any of this business, the Board believes that dealers should make their required disclosures to issuers as soon as possible to ensure that the disclosure is received by the issuer prior to the selection of any dealer for the municipal securities business.
Rule G-38 requires dealers to submit to the Board, on a quarterly basis, reports of all consultants used by the dealer. For each consultant, dealers must report, in the prescribed format, 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. 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. In addition, as long as the dealer continues to use the consultant to obtain or retain municipal securities business (i.e., has a continuing arrangement with the consultant), the dealer must report information concerning such consultant every quarter, whether or not compensation is paid to the consultant during the reporting period. The Board believes that the reporting of these continuing consulting arrangements each quarter will assist enforcement agencies and the public in their review of such arrangements.
For ease of compliance and reporting, the Board determined to delete the current reporting requirements regarding consultants from rule G-37. It also determined to merge the reporting requirements for both rules into a single form Form G-37/G-38. Dealers must submit two copies of such reports on new-Form G-37/G-38.3 The quarterly due dates are the same as the due dates required under rule G-37 (i.e., within 30 calendar days after the end of each calendar quarter, which corresponds to each January 31, April 30, July 31, and October 31.) Finally, consistent with rule G-37, dealers are required to submit these reports to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending.4 The Board will then make these documents available to the public for inspection and photocopying at its Public Access Facility in Alexandria, Virginia, and for review by agencies charged with enforcement of Board rules.
To facilitate compliance with, and enforcement of, rule G-38, the Board also amended rules G-8 and G-9, concerning recordkeeping and record retention, respectively. The amendments to rule G-8 require dealers to maintain: (i) a listing of the name, company, role and compensation arrangement with each consultant; (ii) a copy of each Consultant Agreement; (iii) a listing of the compensation paid in connection with each Consultant Agreement; (iv) where applicable, a listing of the municipal securities business obtained or retained through the activities of consultants; (v) a listing of the issuers and a record of disclosures made to such issuers concerning consultants used by the dealer to obtain or retain municipal securities business with each such issuer; and (vi) the date of termination of any consultant arrangement. The amendment to rule G-9 requires dealers to maintain these records for a six-year period.
January 17,1996
*Rule G-38. Consultants*
*(a) Definitions* *(i) The term "consultant" means any person used by a broker, dealer or municipal securities dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on behalf of such broker, dealer or municipal securities dealer where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the broker, dealer or municipal securities dealer or any other person; provided, however, that the following persons shall not be considered consultants for purposes of this rule: (A) a municipal finance professional of the broker, dealer or municipal securities dealer; and (B) any person whose sole basis of compensation from the broker, dealer or municipal securities dealer is the actual provision of legal, accounting or engineering advice, services or assistance in connection with the municipal securities business that the broker, dealer or municipal securities dealer is seeking to obtain or retain.*
*(ii) The term "issuer" shall have the same meaning as in rule G-37(g)(ii).*
*(iii) The term "municipal finance professional" shall have the same meaning as in rule G-37(g)(iv).*
*(iv) The term "municipal securities business" shall have the same meaning as in rule G-37(g)(vii).*
*(v) The term "payment" shall have the same meaning as in rule G-37(g)(viii).*
*(b) Written Agreement. 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"). Such 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) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, 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 prior to the selection of any broker, dealer or municipal securities dealer in connection with such municipal securities business.*
*(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. 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 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.*
(a) through (d) No change.
(e)(i) Each broker, dealer or 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 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) - (D) No change.
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 {in accordance with Board rule G-37 filing procedures.}
(ii) *Two copies of the* {R}*r*eports referred to in paragraph (i) of this section (e) must be submitted to the Board on Form G-37*/G-38* {in accordance with Board rule G-37 filing procedures, quarterly with due dates determined by 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),* 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 and political party receiving contributions or payments; (B) {total number and dollar amount of contributions or payments made by} *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 {and the name, company, role and compensation arrangement of any person, other than a municipal finance professional, employed by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with such issuers.}
(f) The Board will accept additional information related to contributions made to officials of issuers and payments to political parties of states and political subdivisions voluntarily submitted by brokers, dealers, or municipal securities dealers or others provided that such information is submitted in accordance with {Board rule G-37 filing procedures} *section (e) of this rule*.
(g) through (i) No change
{Rule G-37 Filing Procedures} {Each dealer is required to file two copies of Form G-37. Each dealer is required to file Form G-37 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).}
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) through (xv) No change.
(xvi) Records Concerning Political Contributions and Prohibitions on Municipal Securities Business Pursuant to Rule G-37. Records reflecting:
(A) through (C) No change.
(D) a listing of the issuers with which the broker, dealer or municipal securities dealer has engaged in municipal securities business, along with the type of municipal securities business engaged in, during the current year and separate listings for each of the previous two calendar years {Where applicable, a listing of the name, company, role and compensation arrangement of any person employed by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with such issuers also shall be made};
(E) through (I) No change.
(xvii) No change.
(xviii) *Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain: (i) a listing of the name, company, role and compensation arrangement of each consultant, (ii) a copy of each Consultant Agreement referred to in rule G-38(b); (iii) a listing of the compensation paid in connection with each such Consultant Agreement; (iv) where applicable, a listing of the municipal securities business obtained or retained through the activities of consultants; (v) a listing of issuers and a record of disclosures made to such issuers, pursuant to rule G-38(c), concerning consultants used by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with each such issuer; and (vi) the date of termination of any consultant arrangement.*
(b) through (e) No change.
(f) Compliance with Rule 17a-3. Brokers, dealers and municipal securities dealers other than bank dealers which are in compliance with rule 17a-3 of the Commission will be deemed to be in compliance with the requirements of this rule, provided that the information required by subparagraph (a)(iv)(D) of this rule as it relates to uncompleted transactions involving customers; paragraph (a)(viii); paragraph (a)(xi); paragraph (a)(xii); paragraph (a)(xiii); paragraph (a)(xiv); paragraph (a)(xv); paragraph (a)(xvi); {and} paragraph (a)(xvii);*and paragraph (a)(xviii)* shall in any event be maintained.
(a) Records to be Preserved for Six Years. Every broker, dealer and municipal securities dealer shall preserve the following records for a period of not less than six years:
(i) through (ix) No change.
*(x) the records required to be maintained pursuant to rule G-8(a)(xviii).*
(b) through (g) No change.
-DRAFT-
Name of dealer: ______________________________________________
Report period: _______________________________________________
State Complete name, title Contribution by each (including any city/county/ contributor category state or other political (i.e., dealer, dealer subdivision) of issuer controlled PAC, municipal official finance professional controlled PAC, municipal finance professionals and executive officers). For each contribution, list contribution amount and contributors category (For example, $500 contribution by executive officer)
State Complete name (including Payments by each any city/county/state or contributor category other political subdivi- (i.e., dealer, dealer sion ) of political party controlled PAC, municipal finance professional controlled PAC, municipal finance professionals and executive officers). For each payment, list payment amount and contributor category (For example, $500 payment by executive officer)
State Complete name of issuer Type of municipal and city/county securities business (negotiated underwriting, private placement, financial advisor, or remarketing agent)
NAME OF CONSULTANT: CONSULTANT COMPANY NAME:
________________________________ ______________________________
________________________________ ______________________________
________________________________ ______________________________
________________________________ ______________________________
________________________________ ______________________________
________________________________ ______________________________
________________________________ ______________________________
________________________________ ______________________________
________________________________ ______________________________
Signature: ________________________________ Date:______________ (must be officer of dealer)
Name: ___________________________________________________________
Address: ________________________________________________________
_________________________________________________________________
_________________________________________________________________
Phone: __________________________________________________________
Submit two completed forms quarterly by due date (specified by the MSRB) to:
MUNICIPAL SECURITIES RULEMAKING BOARD 1640 King Street Suite 300 Alexandria, Virginia 22314 _________________________________________________________________
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: _______________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
Total Dollar Amount Paid to Consultant during Reporting Period:
_________________________________________________________________
Dollar Amounts Paid to Consultant Connected with Particular Municipal Securities Business (Each such business and amount paid must be separately identified):__________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
-DRAFT-
The purpose of these instructions is to assist dealers in submitting a complete and correct Form G-37/G-38. Rule G-37 requires dealers to submit to the Board certain summary information on their municipal securities business, as well as contributions to issuer officials and payments to political parties by the dealer, municipal finance professionals, executive officers, and PACs controlled by dealers and municipal finance professionals. "Municipal securities business" is defined in rule G-37 to mean: (1) negotiated underwriting (if the dealer was a manager or syndicate member); (2) private placement; (3) financial advisor to an issuer (on a negotiated bid basis); and (4) remarketing agent (on a negotiated bid basis). Rule G-38 requires dealers to submit to the Board information on all consultants, defined in rule G-38(a) 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 behalf of such dealer where such communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from such dealer or any other person; provided, however, that the following persons shall not be considered consultants for the purposes of rule G-38: (A) a municipal finance professional of the dealer; and (B) any person whose sole basis of compensation from the dealer is the actual provision of legal, accounting or engineering advice, services or assistance in connection with the municipal securities business that the dealer is seeking to obtain or retain.
It is important to note that Form G-37/G-38 must be submitted to the Board if ANY one of the following occurred: - reportable political contributions or payments to political parties were made during the reporting period; - the dealer engaged in municipal securities business during the reporting period; - the dealer used consultants during the reporting period (i.e., new or continuing relationships with consultants).
Dealers are not required to submit a Form G-37/G-38 only if the dealer had no reportable political contributions or payments to political parties, the dealer did not engage in municipal securities business during the reporting period, and the dealer did not use consultants during the reporting period.
Rules G-37 and G-38 require dealers to file two copies of Form G-37/G-38, and to submit such forms within 30 calendar days after the end of each calendar quarter. These filing dates are January 31, April 30, July 31 and October 31. The forms must be submitted by certified or registered mail or some other equally prompt means that provides the dealer with a record of sending. Submissions by fax will not be accepted.
It is also important to note that two copies of Form G-37/G-38 must be submitted to the Board and at least one of those copies must contain an original signature.
Indicate the name of the dealer. - Rule A-15(c), on notification of name or address change, requires dealers to notify the Board promptly of any name or address change.
Indicate the quarterly period for the form being submitted. - Dealers must use the calendar quarters for the reporting period; it is not acceptable to create a different time period and submit information only pertaining to that time.
I. CONTRIBUTIONS MADE TO ISSUER OFFICIALS
Contributions required to be reported pursuant to rule G-37 must be listed by state.
Each official receiving the contribution must be listed separately, by state.
For each contribution, the contribution amount and contributor category must be listed. The contributor categories are: dealer, dealer controlled PAC, municipal finance professional controlled PAC, municipal finance professionals and executive officers. A sample listing would be:
VA MARY JONES, CANDIDATE $500 CONTRIBUTION BY FOR GOVERNOR EXECUTIVE OFFICER
- Rule G-37 does not require that dealers list the names of municipal finance professionals and executive officers on Form G-37/G-38.
- "Contribution" is a defined term in rule G-37(g)(i). Rule G-37 does not require dealers to list other gifts or gratuities on Form G-37/G-38.
If there were no contributions required to be reported pursuant to rule G-37 during the reporting period, please indicate "none."
Payments required to be reported pursuant to rule G-37 must be listed by state.
Each state or local political party receiving the payment must be listed separately, by state. - Indicate the complete name of the political party, including any city/county/state or other political subdivision.
For each payment, the payment amount and contributor category must be listed. A sample listing would be:
VA STATE REPUBLICAN $500 PAYMENT BY EXECUTIVE PARTY OFFICER
List, by state, the complete name of the issuer and include the city and county of the issuer in which the dealer engaged in municipal securities business.
List the type of municipal securities business engaged in with that issuer. "Municipal securities business" is defined in rule G-37(g)(vii) to mean: (1) negotiated underwriting (if the dealer was a manager or syndicate member); (2) private placement; (3) financial advisor to an issuer (on a negotiated bid basis);, and (4) remarketing agent (on a negotiated bid basis).
A sample listing would be:
VA SMITH COUNTY NEGOTIATED UNDERWRITING HOUSING AUTHORITY
In determining when to list municipal securities business, a guideline is:
- for negotiated underwritings, indicate the business at least by the settlement date if within the reporting period;
- for remarketing agent activities, indicate the business when there is an initial agreement do not continue to list the remarketings;
- for financial advisory services, indicate the business when an agreement is reached to provide the services (rule G-23, on activities of financial advisors, requires dealers to have a written agreement with issuers); do not continue to list an on-going financial advisory arrangement with an issuer unless the settlement date for a new issue on which the dealer acted as financial advisor was during the reporting period;
- for private placements, indicate the business at least by the settlement date if within the reporting period.
- Rule G-37 does not require dealers to indicate on Form G-37/G-38 the competitive business in which they engaged.
Rule G-37 does not require dealers to indicate those negotiated underwritings in which they were selling group members.
If the dealer did not engage in any municipal securities business during the reporting period, please indicate "none."
List the name of each consultant along with the consultant company name. - "Consultant" is a defined term in rule G-38. Do not list municipal finance professionals employed by the dealer.
Specific information about EACH consultant listed must be described in separate attachment sheets to Form G-37/G-38. - If a dealer has a continuing relationship with a consultant, that consultant must be listed each quarter even if the consultant received no compensation from the dealer.
If the dealer did not use, or have a continuing relationship with, a consultant during the reporting period, please indicate "none."
List the name of the consultant.
List the consultant company name.
Describe the role to be performed by the consultant. - Include the state or geographic area in which the consultant is working on behalf of the dealer.
Describe the compensation arrangement with the consultant.
Indicate the total dollar amount paid to the consultant during the reporting period. - Indicate the dollar amounts paid to the consultant connected with particular municipal securities business. - Each such business and amount paid must be separately identified.
SIGNATURE, DATE, NAME, ADDRESS, PHONE
An officer of the dealer must sign and date Form G-37/G-38. - An officer of the dealer refers to a corporate officer. The fact that someone is a compliance officer does not necessarily mean that person is a corporate officer. - One of the two forms submitted to the Board must contain an original signature. Until at least one form with an original signature is received, the Board's records will not indicate that the dealer has complied with the filing requirements.
Indicate the date the form was signed.
Indicate on the Name line the name of the officer who signed the form.
Include the dealer's address and phone number.
[1] Securities Exchange Act Release No. 36727 (January 17, 1996)
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