Volume 17 Number 2 -- JUNE 1997

        COMMENTS DUE BY: AUGUST 15, 1997

Rule G-38 on Consultants

Rule G-38, on consultants, requires dealers¹ to have written agreements with certain individuals who are used by a dealer, directly or indirectly, to obtain or retain municipal securities business (consultants), and² to disclose such consulting arrangements directly to issuers and to the public through disclosure to the Board.

Section (c) of the rule requires that each dealer disclose, in writing, to each issuer with which the dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer. The information to be disclosed includes the name, company, role and compensation arrangement of any consultant used, directly or indirectly, to obtain or retain municipal securities business with each such issuer. Dealers are required to make such disclosures prior to the issuer's selection of any dealer in connection with the particular municipal securities business sought.

It has come to the Board's attention that this issue-specific nature of the disclosure requirement can create compliance problems for dealers in the case of frequent issuers of municipal securities as well as in the co-manager selection process. For example, an issuer may bring new issues to market several times a month, and if a dealer is using a consultant to obtain a syndicate slot in each such issue, the dealer is required to disclose the same information to the same issuer month after month and possibly week after week. In addition, the Board has learned that dealers who use a consultant to help obtain co-manager business sometimes have difficulty complying with rule G-38(c) because, unlike the lead manager, a co-manager may learn of its selection for that business after the selection of the lead manager, thereby making it impossible for the dealer to disclose its consulting arrangements prior to the issuer's selection of any dealer, as required by the rule.

The Board believes that while the timing of this issue-specific requirement is appropriate in the vast majority of cases, it can be a problem in the context of frequent issuers of municipal securities and in the co-manager selection process. Thus, the Board is proposing for comment a draft amendment to rule G-38(c) to give dealers the option of disclosing their consulting arrangements to issuers on either an issue-specific or issuer-specific basis. Pursuant to the draft amendment, if a dealer chooses to disclose information regarding a consulting arrangement on an issuer-specific basis, the dealer must submit the information, in writing, to the issuer within three business days of the consultant's first direct or indirect communication with that issuer, but in any event prior to the issuer's selection of that dealer for any municipal securities business. ¹ To ensure that such information, once disclosed, remains current, the draft amendment also would require dealers to (1) promptly notify the issuer in writing of any change in the information disclosed; and (2) update issuers on an annual basis concerning any information previously disclosed, even where the information has not changed.² Of course, this annual updating requirement would cease to apply if the dealer is no longer using the consultant, directly or indirectly, to attempt to obtain or retain municipal securities business with a particular issuer(s).

May 21, 1997

TEXT OF DRAFT AMENDMENT

(Language between *asterisks* is proposed new language, language between {brackets} is proposed deleted language)

Rule G-38. Consultants

(a) - (b) No change.

(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 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 either:

• (i) prior to the selection of any broker, dealer or municipal securities dealer in connection with such the particular municipal securities business being sought; or
  (ii) within three business days of the consultant's first direct or indirect communication with the issuer, but in any event prior to the issuer's selection of such broker, dealer or municipal securities dealer for any municipal securities business. Each broker, dealer or municipal securities dealer shall promptly advise the issuer, in writing, of any change in the information disclosed, pursuant to this subsection (ii), on each consulting arrangement relating to such issuer. In addition, each broker, dealer or municipal securities dealer disclosing information pursuant to this subsection (ii) shall update such information by notifying each issuer in writing within one year of the previous disclosure made to such issuer even where the information has not changed; provided, however, that this annual requirement shall not apply where the broker, dealer or municipal securities dealer has ceased to use the consultant, directly or indirectly, to attempt to obtain or retain municipal securities business with the particular issuer.

(d) No change.

ENDNOTES

[1] In contrast, the Board believes that disclosures made by a dealer on an issue-specific basis should continue to be required prior to the issuer's selection of any dealer for the particular municipal securities business being sought.

[2] Pursuant to rule G-8(a)(xvii) on recordkeeping, dealers are required to maintain records of all disclosures made pursuant to rule G-38(c). This would apply to disclosures made pursuant to the draft amendment.

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