Questions about the proposed amendments may be directed to Ronald W. Smith, Senior Legal Associate.

Rule G-38, on consultants, requires broker, dealers and municipal securities dealers (collectively referred to as "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. Section (c) of the rule currently 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.

On November 24, 1997, the Board filed with the Securities and Exchange Commission (SEC) a proposed 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.⁽¹⁾ The Board adopted the proposed amendment to address certain issues that have arisen in the context of frequent issuers of municipal securities and in the co-manager selection process. Pursuant to the proposed amendment, a dealer that chooses to disclose information regarding a consulting arrangement on an issue-specific basis would continue to be required to make such disclosures prior to the issuer's selection of any dealer for the particular municipal securities business being sought. If a dealer chooses to disclose such information on an issuer-specific basis, the dealer would be required to 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. To ensure that such information, once disclosed, remains current, the proposed amendment also would require a dealer disclosing information on this latter, issuer-specific basis 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).

In response to concerns expressed by SEC staff, the Board has determined to further amend the proposed amendment with respect to the timing of the disclosures required by a dealer using the issuer-specific disclosure option. The further amendment would provide that, if a dealer chooses to disclose information regarding a consulting arrangement on an issuer-specific basis, the dealer would be required to make such disclosures, in writing, to the issuer at or prior to the consultant's first direct or indirect communication with that issuer for any municipal securities business being sought (and not within three business days, as originally required). This further amendment also clarifies that the annual updating requirement for dealers disclosing information on an issuer-specific basis is keyed off the previous full disclosure of the consultant's name, company, role and compensation arrangement (and not any interim disclosure of changes to such information).

March 18, 1998

TEXT OF FURTHER AMENDMENT TO PROPOSED AMENDMENT⁽³⁾

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 the particular municipal securities business being sought; or

(ii) within three business days of at or prior to 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 concerning each consultant's name, company, role and compensation arrangement, 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 with the particular issuer.

(d) No change.

ENDNOTES

1. File No. SR-MSRB-97-9. Comments submitted to the SEC should refer to this file number. See MSRB Reports, Vol. 18, No. 1 (Feb. 1998).

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 amendment.

3. Underlining indicates additions; strikethrough denotes deletions.

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