[Federal Register Volume 63, Number 193 (Tuesday, October 6, 1998)]
[Notices]
[Pages 53739-53740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26722]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40499; File No. SR-MSRB-97-9]
Self-Regulatory Organizations; Order Granting Approval of
Proposed Rule Change and Amendment No. 1 by the Municipal Securities
Rulemaking Board Relating to Rule G-38 on Consultants
September 29, 1998.
On March 18, 1998,\1\ the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\2\ and Rule 19b-4
thereunder,\3\ a proposed rule change and Amendment No. 1 (SR-MSRB-97-
9) hereafter referred to collectively as the ``proposed rule change.''
The proposed rule change would give brokers, dealers and municipal
securities dealers (collectively referred to as ``dealers'') the option
of disclosing their consulting arrangements to issuers, pursuant to
section (c) of the rule, on either an issue-specific or issuer-specific
basis. Notice of the proposed rule change appeared in the Federal
Register on May 18, 1998.\4\ The Commission received no comment letters
concerning the proposed rule change. The Commission is approving the
proposed rule change.
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\1\ The Board initially submitted this proposal on November 24,
1997. However, a substantive amendment was requested to modify and
clarify ambiguous timing issues in the proposed rule language. The
Board filed Amendment No. 1 on March 18, 1998.
\2\ 15 U.S.C. 78s(b)(1).
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 39983 (May 12,
1998), 63 FR 27337.
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I. Description of Proposal
Rule G-38, on consultants, requires 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. 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.
The Board amended this rule to give brokers, dealers and municipal
securities dealers (collectively referred to as ``dealers'') the option
of disclosing their consulting arrangements to issuers, pursuant to
section (c) of the rule, on either an issue-specific or issuer-specific
basis.
According to the Board, this issue-specific disclosure requirement
has created compliance problems for dealers in cases where issuers of
municipal securities frequently bring new issues to market 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. Furthermore, 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.
While the timing of the issue-specific disclosure requirement in
Rule G-38(c) is appropriate in the 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, Rule G-38(c) has been
amended to give dealers the option of disclosing their consulting
arrangements to issuers on either an issue-specific or issuer-specific
basis. Pursuant to the amendment, if a dealer chooses to disclose
information regarding a consulting arrangement on an issuer-specific
basis,\5\ the dealer must submit the information, 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.''
\6\
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\5\ In contrast, disclosures made by a dealer on an issue-
specific basis continue to be required prior to the issuer's
selection of any dealer for the particular municipal securities
business being sought.
\6\ The initial proposal would have required that such
disclosures be made ``within three business days of the consultant's
first direct or indirect communication with the issuer.'' However,
the Commission requested that the timing requirement be more
stringent. Thus, the Board filed Amendment No. 1, eliminating the
dealers' three day disclosure window and replacing it with the
current language. See note 1, supra.
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[[Page 53740]]
To ensure that information on consultant arrangements, once
disclosed, remains current, the amendment also requires dealers to (1)
promptly notify the issuer, in writing, of any change in the
information disclosed; and (2) update issuers, in writing, within one
year of the previous disclosure of each consultant's name, company,
role and compensation arrangement, even where such information has not
changed.\7\ Amendment No. 1 clarifies that the annual updating
requirement for dealers disclosing information on an issuer-specific
basis is triggered by the previous full disclosure of the consultant's
name, company, role and compensation arrangement (and not any interim
disclosure of changes to such information). However, 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.
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\7\ Pursuant to Rule G-8(a)(xviii) 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.
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II. Discussion
The Commission believes the proposed rule change is consistent with
the Act and the rules and regulations promulgated thereunder.\8\
Specifically, the Commission believes that approval of the proposed
rule change is consistent with Section 15B(b)(2)(C) \9\ of the Act. The
Commission is satisfied that the amendments to Rule G-38(c) provide the
necessary relief to dealers from the heretofore stringent application
of the rule while still essentially maintaining the rule's original
intent and purpose. Prior to this proposed rule change, some dealers
had difficulty meeting the ``any dealer'' requirement of the rule,
because they had no way of knowing when the lead manager was selected.
In cases where it is difficult to determine when a dealer is chosen
(i.e., co-manager selection), the amended rule provides an option for
the dealer to disclose its consulting relationship before the specific
dealer is selected.
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\8\ The Commission has considered the proposed rule's impact on
efficiency, competition and capital formation. As a result of this
amendment, municipal securities dealers should experience a decline
in the number of disclosures required to be made to issuers
regarding their consulting arrangements. A decline in required
disclosure should translate to a decline in costs associated with
these filings, thus allowing dealers to allocate resources to other
areas. The implementation of this amendment should also enhance
dealers' efficiency as recordkeeping and compliance become less
burdensome. 15 U.S.C. 78c(f).
\9\ Section 15B(b)(2)(C) requires the Commission to determine
that the Board's rules are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
municipal securities, to remove impediments to and perfect the
mechanism of a free and open market in municipal securities, and, in
general, to protect investors and the public interest.
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The Commission understands that the timing of disclosure
requirements had to be changed to make the rule more workable. However,
the Commission was concerned that the initial amendment weakened the
original goal of the rule (i.e., for dealers to provide complete,
timely disclosure concerning their consulting arrangements to issuers
so that issuers can evaluate all potential underwriters before making a
final decision). Given the rule's goal, the Commission believed that
the initial proposal, allowing the dealer to make its disclosures
within three days after the consultant had contacted the issuer,\10\
would have greatly lessened the effectiveness of the rule. Thus, the
Commission requested Amendment No. 1 to close potential compliance
loopholes in the dealers' disclosure requirements and align the
proposal with the rule's intent. The Commission believes Amendment No.
1 preserves the original intent and purpose of the rule and stymies any
potential collusive activity by dealers and their consultants to
circumvent Rule G-37.
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\10\ See note 6, supra.
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III. Conclusion
For the above reasons, the Commission believes that the proposed
rule change is consistent with the provisions of the Act, and in
particular with Section 15B(b)(2)(C).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-MSRB-97-9) is hereby
approved.
\11\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-26722 Filed 10-5-98; 8:45 am]
BILLING CODE 8010-01-M