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 Requirements and Other Amendments: Rules G-37, G-8, G-9 and G-38

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Amendments Approved

The Securities and Exchange Commission has approved amendments to rules G-37, G-8, G-9 and G-38 to exempt certain dealers from disclosure and recordkeeping requirements relating to political contributions and municipal securities business, and to effect certain other changes

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

On February 8, 1999, the Securities and Exchange Commission (Commission) approved amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, rule G-9, on preservation of records, and rule G-38, on consultants. The amendments (1) exempt brokers, dealers and municipal securities dealers (dealers) that have not engaged in municipal securities business for a period of at least two years and that have filed new Form G-37x with the Board from the disclosure requirements under rule G-37 and the related recordkeeping requirements under rule G-8; (2) require dealers that engage in municipal securities business after invoking such exemption to disclose and record certain political contributions and payments during the preceding two-year period; (3) codify the previously recognized Form G-37/G-38 submission exemption for dealers that have no information to report in a calendar quarter; and (4) make certain technical, clarifying and recordkeeping amendments to rules G-37, G-8, G-9 and G-38.⁽¹⁾The amendments became effective upon approval.

Rule G-37 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, rules G-37 and G-38 require dealers to make disclosures of certain contributions to issuer officials, payments to state and local political parties, consultant arrangements and municipal securities business on Form G-37/G-38. Rule G-8 requires dealers to create records of such contributions, payments, consultants and municipal securities business and rule G-9 requires dealers to preserve these records for a period of at least six years.

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 four years by rule G-37. However, the Board 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.

Prior to these amendments, every dealer was obligated to comply with the reporting requirements of rule G-37 by submitting Form G-37/G-38 to the Board on a quarterly basis and to undertake the related recordkeeping obligations under rule G-8, even if a dealer did not engage in municipal securities business.⁽³⁾ Upon reviewing the first four years of operation of rule G-37, the Board concluded that requiring dealers that do not engage in municipal securities business to comply with these disclosure and recordkeeping obligations did not substantially further rule G-37's stated purpose of exposing to public scrutiny contributions and payments that may be linked to the awarding of municipal securities business.

Thus, the Board amended rules G-37 and G-8 to sharpen the focus of the reporting and recordkeeping obligations by exempting dealers that do not engage in municipal securities business from these obligations.⁽⁴⁾ Dealers invoking this new exemption (hereinafter referred to as the "No Business Exemption") are required to meet two preconditions and are subject to a third requirement if they later begin engaging in municipal securities business. As more fully described below, in order to invoke this No Business Exemption, a dealer (1) must not have engaged in municipal securities business for a period of at least two years and (2) must submit to the Board new Form G-37x. If such dealer thereafter begins to engage in municipal securities business, it also becomes subject to a disclosure and recordkeeping look back requirement (hereinafter referred to as the "Look Back Requirement") that obligates the dealer to create records of, and to disclose on Form G-37/G-38, certain contributions to issuer officials and payments to state and local political parties made during the preceding two-year period, as more fully described below.

In addition, the Board amended 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 (hereinafter referred to as the "No Information Exemption"). The Board also made certain technical amendments to consolidate the provisions appearing separately in rules G-37 and G-38 relating to submission of Form G-37/G-38, to clarify rule G-37 by eliminating certain cross-referencing to rule G-8 and to provide for the maintenance and preservation under rules G-8 and G-9 of any Forms G-37x submitted to the Board.

NO BUSINESS EXEMPTION FOR DEALERS NOT ENGAGED IN MUNICIPAL SECURITIES BUSINESS

A dealer that qualifies for the No Business Exemption under amended rule G-37(e)(ii)(A)(2) is not required to report information to the Board on Form G-37/G-38 regarding contributions to issuer officials and payments to state and local political parties and is not required to create records of such contributions and payments pursuant to new clause (K) of rule G-8(a)(xvi).⁽⁵⁾ If a dealer that has invoked the No Business Exemption later engages in municipal securities business, such dealer will become subject to the Look Back Requirement under new paragraph (iii) of rule G-37(e).

No Municipal Securities Business for at Least Two Years. The first condition for invoking the No Business Exemption in any calendar quarter, as set forth in amended rule G-37(e)(ii)(A)(2)(a), is that the dealer must not have engaged in municipal securities business during such calendar quarter and during the seven consecutive calendar quarters immediately preceding such calendar quarter. Any dealer that has previously engaged in municipal securities business may qualify for the No Business Exemption if it has ceased such business for the requisite period of time. In addition, any dealer that has never engaged in municipal securities business may also qualify for the No Business Exemption, regardless of how long such dealer has been in existence.⁽⁶⁾

Submission of Form G-37x. The second condition for invoking the No Business Exemption, as set forth in amended rule G-37(e)(ii)(A)(2)(b), is that the dealer must have sent, by certified or registered mail or some other equally prompt means that provides a record of sending, two copies of new Form G-37x to the Board. Form G-37x includes a certification that such dealer did not engage in municipal securities business during the eight consecutive calendar quarters immediately preceding the date of such certification. A Form G-37x submitted to the Board would remain in effect for so long as the dealer continues to refrain from engaging in municipal securities business.⁽⁷⁾ Notwithstanding the submission of Form G-37x, a dealer remains responsible for determining whether it continues to qualify for an exemption from the Form G-37/G-38 submission requirement for each calendar quarter.⁽⁸⁾ Form G-37x contains an acknowledgment of the dealer to this effect and a further acknowledgement that it will be required to undertake the recordkeeping and disclosure obligations under the Look Back Requirement at such time as it again engages in municipal securities business.

Forms G-37x submitted to the Board will be made available to the public on the same basis as are Forms G-37/G-38. Thus, Forms G-37x will be available for review and photocopying at the Board's Public Access Facility in Alexandria, Virginia. In addition, copies will be posted on the Board's Internet Web site (http://www.msrb.org), where members of the public may download such forms to their computers for review and printing free of charge. Such forms also will be made available to the public, along with Forms G-37/G-38, in computer CD-ROM format on a quarterly basis.⁽⁹⁾

Look Back Requirement Upon Engaging in Municipal Securities Business. A dealer that has invoked the No Business Exemption but that later begins engaging in municipal securities business will become subject to the two-pronged Look Back Requirement under new paragraph (iii) of rule G-37(e). With respect to recordkeeping, the Look Back Requirement provides that a dealer that engages in municipal securities business after having invoked the No Business Exemption must create records of political contributions and payments to state and local political parties under rule G-8(a)(xvi) for the then current calendar year and the two preceding calendar years and must continue to create such records thereafter unless the dealer again qualifies for, and invokes, the No Business Exemption.⁽¹⁰⁾ 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.

In addition, a dealer that engages in municipal securities business after having invoked the No Business Exemption must disclose on Form G-37/G-38 for the calendar quarter in which it first engages in municipal securities business all reportable contributions to issuer officials and payments to state and local political parties 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 as a result of the No Business Exemption.⁽¹¹⁾ Such dealer also is required to send Form G-37/G-38 to the Board for each calendar quarter thereafter unless the dealer qualifies for the No Information Exemption described below or again qualifies for, and invokes, the No Business Exemption.

The Look Back Requirement is intended to prevent circumvention of the rule and to promote public scrutiny of all contributions to issuer officials and payments to state and local political parties (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.

The Board strongly believes that the No Business Exemption is best suited to dealers that do not intend on engaging in municipal securities business for the foreseeable future. Thus, a dealer that qualifies for the No Business Exemption in any particular calendar quarter but intends to engage in municipal securities business in subsequent quarters should consider carefully whether the burden of having to comply with the Look Back Requirement - in particular, the burden of recreating at least two full years of records under rule G-8(a)(xvi) - and the risk of unknowingly becoming banned from municipal securities business as a result of a contribution made to an issuer official during such exemption period outweigh the short-term benefit of not having to create and maintain such records and not having to submit Form G-37/G-38 on a current basis. The Board advises any dealer that engages in municipal securities business after having invoked the No Business Exemption that it should be prepared to evidence to the appropriate regulatory agency charged with enforcing Board rules that it has fully complied with its strict obligations to create the required records and to disclose on a timely basis the required information under the Look Back Requirement.

No Effect on Disclosure and Recordkeeping Obligations Relating to Consultants. 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 is required under amended rule G-37(e)(ii)(B) to submit Form G-37/G-38 to the Board but is only required to report information relating to such use of consultants as required under rule G-38. Such a required submission of Form G-37/G-38 in any quarter would not cause the No Business Exemption or the related Form G-37x submission to lapse unless the dealer in fact engages in municipal securities business. Of course, a dealer that has engaged a consultant in an attempt to obtain municipal securities business from an issuer should consider carefully the advisability of invoking (or continuing to invoke) the No Business Exemption since, if the dealer is successful in obtaining such business, it would need to comply with the strict requirements of the Look Back Requirement and, in particular, would need to confirm that it has not been banned from undertaking municipal securities business with such issuer prior to undertaking that business.

No Effect on Two-Year Ban on Municipal Securities Business or Prohibition of Certain Solicitations and Coordination of Contributions Under Rule G-37(b) and (c). The No Business Exemption does not provide an exemption from the operation of sections (b) and (c) of rule G-37.⁽¹²⁾ 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 under section (b). In addition, solicitation or coordination of contributions to an official of an issuer with which the dealer is seeking to engage in municipal securities business continues to be prohibited under section (c) even if the No Business Exemption is then in effect. Dealers that qualify for the No Business Exemption but that are considering future engagements in municipal securities business should be cognizant of the continuing applicability of sections (b) and (c) of the rule.

NO INFORMATION EXEMPTION FOR DEALERS WITH NO INFORMATION TO REPORT IN A QUARTER

Amended rule G-37(e)(ii)(A)(1) codifies the previously recognized No Information Exemption to the quarterly Form G-37/G-38 submission requirement.⁽¹³⁾ The amendment provides that a dealer is not 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 state and local political parties, and (3) the dealer has no reportable use of consultants. The No Information Exemption obviates 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 is 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, and invokes, the No Business Exemption.

Amended rule G-37(e)(i) consolidates the Form G-37/G-38 submission procedures that were previously set forth separately in paragraphs (i) and (ii) of rule G-37(e) and in rule G-38(d). Amended rule G-38(d) includes certain related amendments.

In addition, the 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⁽¹⁴⁾ and to state and local political parties⁽¹⁵⁾ was previously effected by a cross-reference to the recordkeeping 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.

Clause (H) of rule G-8(a)(xvi) is amended to require that dealers maintain copies of any Forms G-37x submitted to the Board and the corresponding records of sending. Amended rule G-9(a)(viii) requires that copies of Forms G-37x be preserved for the period during which they are effective and for at least six years following the end of such effectiveness.

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 the persons and entities described in subclause (2) of this clause (A):

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:

The Board shall make public a copy of each Form G-37/G-38 received from any broker, dealer or municipal securities dealer.

(iii) If a broker, dealer or municipal securities dealer engages in municipal securities business during any calendar quarter after not having reported on Form G-37/G-38 the information described in clause (A) of paragraph (e)(i) for one or more contributions or payments made during the two-year period preceding such calendar quarter solely as a result of clause (A)(2) of paragraph (e)(ii), such broker, dealer or municipal securities dealer shall include on Form G-37/G-38 for such calendar quarter all such information (including year and calendar quarter of such contributions or payments) not so reported during such two-year period.

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:

(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:

(viii) the records to be maintained pursuant to rule G-8(a)(xvi); provided, however, that copies of Forms G-37x shall be preserved for the period during which such Forms G-37x are effective and for at least six years following the end of such effectiveness.

(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.

2. Municipal securities business is defined in rule G-37 to encompass certain activities of dealers in connection with primary offerings of municipal securities, such as acting as underwriter in a negotiated sale, as placement agent, or as financial advisor, consultant or remarketing agent to an issuer in which the dealer was chosen on a negotiated basis.

3. The range of activities encompassed by the term municipal securities business is significantly narrower than the types of activities that can cause a dealer to be subject to the obligation to comply with Board rules. For example, a dealer that effects municipal securities transactions that are limited to secondary market trades for its customers or underwritings of new issues solely through competitive sales is not, by effecting such transactions, engaging in municipal securities business within the meaning of rule G-37. However, such dealer was still required to undertake the disclosure and recordkeeping obligations under rules G-37 and G-8 with respect to contributions and payments.

4. This exemption does not extend to the reporting requirements under rule G-38. Therefore, as amended, Board rules continue to require the submission of information on Form G-37/G-38 concerning the use of consultants pursuant to rule G-38, as described below.

5. However, dealers still are required to maintain copies of any Forms G-37/G-38 submitted to the Board during the period of exemption (e.g., in connection with information relating to use of consultants) and of any Forms G-37x submitted to the Board to invoke the No Business Exemption. In addition, the recordkeeping exemption does not entitle a dealer to discontinue preservation of any records previously created under rule G-8(a)(xvi) unless the period for preserving such records under rule G-9(a)(viii) has lapsed.

6. For this purpose, the Board deems that 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 previously effected only non-municipal securities transactions) and has not engaged in any municipal securities business since becoming subject to Board rules automatically satisfies this two-year requirement of the No Business Exemption.

7. Thus, if after submitting Form G-37x the dealer undertakes any municipal securities business (thereby subjecting itself to the Look Back Requirement described below) and thereafter again seeks to invoke the No Business Exemption after a new period of two years without engaging in any further municipal securities business, such dealer is required to submit a new Form G-37x. However, dealers should carefully consider the advisability of alternating between periods of undertaking municipal securities business and periods of invoking the No Business Exemption, particularly in view of the strict requirements of the Look Back Requirement described below and the potential difficulties in complying with such strict requirements.

8. Thus, the dealer must determine whether it has met all of the requirements for the No Business Exemption or the No Information Exemption described below for such quarter. In addition, the dealer is required to submit Form G-37/G-38 for any calendar quarter in which it has information to report regarding consultants under rule G-38, as discussed below, even if the dealer continues to qualify for the No Business Exemption.

9. CD-ROMs are currently priced at $10.00 (plus delivery or postage charges and any applicable sales tax) for each CD-ROM containing copies of Form G-37/G-38 and at $11.50 (plus delivery or postage charges and any applicable sales tax) for each such CD-ROM that is bundled with a CD-ROM containing the software necessary to access and read the forms on a computer. See Exchange Act Release No. 39488 (December 23, 1997), 63 FR 280 (January 5, 1998). The Board anticipates that Forms G-37x will be included on these CD-ROMs at no additional cost.

10. A dealer that is creating records under the Look Back Requirement must re-create the records that would have been made during the then current calendar year and the two preceding calendar years but for the No Business Exemption. This includes the political contributions and payments to state and local political parties made by any individual who was an MFP or a non-MFP executive officer during this look back period. The dealer must also create records of the contributions and payments of individuals who became MFPs or non-MFP executive officers during the look back period made prior to becoming an MFP or a non-MFP executive officer of such dealer. A dealer is not required to create records of contributions or payments made prior to such look back period.

11. In reporting prior contributions and payments on such calendar quarter's Form G-37/G-38, a dealer is required to include the year and calendar quarter in which each such prior contribution or payment was made. However, a dealer is not required to include in such report contributions or payments made more than two years prior to such quarter, even if not previously reported.

12. Section (b) provides that no dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by the dealer, an MFP or a PAC controlled by the dealer or an MFP. Section (c) provides that no dealer or MFP shall solicit any person or PAC to make any contribution, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or seeking to engage in municipal securities business.

13. See Exchange Act Release No. 34161 (June 6, 1994), 59 FR 30379 (June 14, 1994), Question and Answer No. 34. See also MSRB Reports, Vol. 14, No. 3 (June 1994) at 15-16, and "Instructions for Completing and Filing Form G-37/G-38," reprinted in MSRB Reports, Vol. 16, No. 1 (January 1996) at 11.

14. 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.

15. 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.