MSRB Reports Feb 1998 -- Amendments to Exempt Certain Dealers from the Form G-37/G-38 Submission

Amendments to Exempt Certain Dealers from the Form G-37/G-38 Submission Requirement and Other Amendments Filed: Rules G-37, G-38 and G-8

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Manager, Muni Department
Underwriting
Public Finance
Compliance

Amendments Filed

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.

Questions about the proposed amendments may be directed to Ernesto A. Lanza, Assistant General Counsel.

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.

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.

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.

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

(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:~~

~~(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:

(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;

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

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.

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:

(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.

(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.

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.