Question & Answer Notice: Rule G-38

Question & Answer Notice: Rule G-38

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Rule G-38 Question and Answer

On May 20, 1998, the Securities and Exchange Commission approved this revised rule G-38 Question and Answer.

Q: A bank and its employees communicate with an issuer on behalf of an affiliated dealer to obtain municipal securities business for that dealer. In return, the bank and its employees receive certain "credits" from the dealer. These credits, which do not involve any direct or indirect cash payments from the dealer to the bank or its employees, are used for internal purposes to identify the source of business referrals. Are the credits considered a "payment" under rule G-38 thereby requiring the dealer to designate the bank or its employees as consultants and comply with the requirements of rule G-38?

A: Rule G-38 defines a 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 behalf of the dealer where the communication is undertaken by the person in exchange for, or with the understanding of receiving, payment from the dealer or any other person.⁽¹⁾ The term payment, as used in rule G-38, means any gift, subscription, loan, advance, or deposit of money or anything of value. The absence of an immediate transfer of funds or anything of value to an affiliate or individual employed by the affiliate would not exclude the credits from the definition of payment if such credits eventually (e.g., at the end of the fiscal year) result in compensation to the affiliate or individual employed by the affiliate for referring municipal securities business to the dealer. In this regard, the compensation may be in the form of cash (e.g., a bonus) or non-cash. In either case, if the dealer or any other person⁽²⁾ eventually gives anything of value (e.g., makes a "payment") to the affiliate or individual based, even in part, on the referral, then the affiliate or individual is a consultant for purposes of rule G-38. In this regard, each dealer (bank or securities firm) should determine whether the affiliate or individual employee(s) of the affiliate is its consultant(s), and must then ensure compliance with rule G-38, including the contractual arrangements and disclosures required by the rule. For additional guidance in this area, you may wish to review Q&A numbers 6 and 7 in the MSRB Manual following rule G-38, as well as Q&A number 4 (dated December 7, 1994) in the MSRB Manual following rule G-37.

1. Municipal finance professionals and any person whose sole basis of compensation is the actual provision of legal, accounting or engineering advice, services or assistance are excepted from the definition of consultant.

2. The Securities Exchange Act of 1934 (the "Act") defines the term "person" as a

"natural person, company, government, or political subdivision, agency, or instrumentality of a government." Board rule D-1 provides that unless the context otherwise specifically requires, the terms used in Board rules shall have the same meanings as set forth in the Act.