Federal Register / Vol. 63, No. 95 / Monday, May 18, 1998 / Notices 27337

1The 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.

Dated: May 14, 1998.

Jonathan G. Katz,

Secretary.

[FR Doc. 98–13343 Filed 5–14–98; 3:54 pm]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39983; File No. SR–MSRB–

97–9]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 by the Municipal

Securities Rulemaking Board Relating

to Rule G–38 on Consultants

May 12, 1998.

On March 18, 1998,1 the Municipal

Securities Rulemaking Board (‘‘Board’’

or ‘‘MSRB’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) a proposed

rule change (File No. SR–MSRB–97–9),

pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),2 and Rule 19b–4 thereunder.3

The proposed rule change and

Amendment No. 1 are hereafter referred

to collectively as the ‘‘proposed rule

change.’’ The proposed rule change is

described in Items I, II, and III below,

which Items have been prepared by the

Board. The Commission is publishing

this notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Board is filing herewith a

proposed rule change consisting of an

amendment to Rule G–38 on

consultants. 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.

Below is the text of the proposed rule

change. Additions are italicized;

deletions are in brackets.

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) at or prior to the consultant’s first

direct or indirect communication with

the issuer for any municipal securities

business being sought. 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

update 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.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of And

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

Board included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The Board has

prepared summaries, set forth in

Sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

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. 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.

While the Board believes that the

timing of the issue-specific disclosure

requirement in Rule G–38(c) is

appropriate in the vast majority of cases,

the Board recognizes that it can be a

problem in the context of frequent

issuers of municipal securities and in

the co-manager selection process. Thus,

the Board has determined to amend

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.
27338 Federal Register / Vol. 63, No. 95 / Monday, May 18, 1998 / Notices

4 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.

5Pursuant 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.

6The amendment originally would have required

that such disclosures be made ‘‘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 being sought.’’ See

supra note 1.

7Section 15B(b)(2)(C) states that the Board’s rules

shall be 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.

8MSRB Reports, Vol. 17, No. 2 (June 1997) at 17–

18. The draft amendment would have required

dealers that disclose information on their

consulting arrangements on an issuer-specific bases

to make such disclosures ‘‘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 being sought.’’ As discussed

above, the Board submitted Amendment No. 1 in

response to concerns expressed by Commission

staff regarding the timing of this provision. Thus,

the proposed rule change provides that dealers

disclosing information on issuer-specific basis shall

do so ‘‘at or prior to the consultant’s first direct or

indirect communication with the issuer for any

municipal securities business being sought.’’

9A.G. Edwards, Rauscher Pierce Refsnes, Inc.,

and Smith Barney.

10Rauscher Pierce Refsnes, Inc.

11A.G. Edwards and Smith Barney.

12A.G. Edwards. 13 17 CFR 200.30–3(a)(12).

Pursuant to the 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 at or prior to the consultant’s

first direct or indirect communication

with that issuer for any municipal

securities business.4 To ensure that such

information, 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.5 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).

The Board submitted Amendment No.

1 in response to concerns expressed by

Commission staff to provide that dealers

disclosing information on an issuerspecific basis shall do so ‘‘at or prior to

the consultant’s first direct or indirect

communication with the issuer for any

municipal securities business being

sought.’’ 6 Amendment No. 1 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).

The Board believes the proposed rule

change is consistent with Section

15B(b)(2)(C) of the Act.7 The Board

believes that the proposed rule change

will facilitate compliance with Rule G–

38, thereby protecting investors and the

public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Board does not believe that the

proposed rule change would impose any

burden on competition not necessary or

appropriate in furtherance of the

purposes of the Act, because it would

apply equally to all brokers, dealers and

municipal securities dealers.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

In June 1997, the Board published a

draft amendment to Rule G–38(c) for

industry comment.8 In response, the

Board received comment letters from

three dealers.9 One of these commenters

expressed its belief that the amendment

‘‘is helpful and may simplify the

reporting process.’’ 10 The other two

commenters also supported the draft

amendment.11 One commenter stated

that ‘‘the proposed changes will greatly

simplify the disclosure process when

multiple transactions develop as the

result of a consultant’s activities with an

issuer.’’12 However, this commenter

recommended that the draft amendment

require dealers to advise the issuer of

any material change in the information

disclosed; the commenter believes that

this will obviate the need for dealers to

file amended disclosure reports relating

to, for example, an insignificant change

to a consultant’s role or to a minor

change in the name of the consultant’s

organization. The Board believes that

adopting the commenter’s

recommendation would introduce a

subjective element to the disclosure

requirement and would result in

differing interpretations as to what is

‘‘material.’’ For example, by

incorporating this subjective standard,

the Board could not ensure that issuers

would be advised of changes in the

consultant’s name, company, role and

compensation arrangement—

information which is required to be

disclosed to issuers pursuant to Rule

G–38(c). Thus, the Board has declined

to adopt the commenter’s

recommendation.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding, or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

A. By order approve such proposed

rule change, or

B. Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of the filing will also be

available for inspection and copying at

the Board’s principal offices. All

submissions should refer to File No.

SR–MSRB–97–9 and should be

submitted by June 8, 1998.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.13
Federal Register / Vol. 63, No. 95 / Monday, May 18, 1998 / Notices 27339

1 15 U.S.C. 78s(b)(1).

2Amendment No. 1 corrects errors in exhibits to

the Exchange’s filing. See Letter from James E.

Buck, Senior Vice President and Secretary,

Exchange, to Michael Walinskas, Senior Special

Counsel, Division of Market Regulation,

Commission, dated March 10, 1998.

3Amendment No. 2 clarifies that the Exchange, in

those instances in which an Exchange disciplinary

action is not warranted, will issue a summary fine

instead of a cautionary letter as its first regulatory

action against a specialist organization. Such fine

will be issued against the specialist member

organization, which, according to the schedule of

fines contained in Rule 476A, would be result in

a fine of $1,000; the second and third regulatory

actions within a rolling 12-month period would

result in fines of $2,500 and $5,000 respectively. If

a specialist member organization is issued a fine

relating to Rule 79A.15 twice within a rolling 12-

month period, the Exchange will pursue formal

disciplinary proceedings under Rule 476 when

continued poor performance during that rolling 12-

month period warrants such action. See letter from

Robert J. McSweeny, Senior Vice President, Market

Surveillance, NYSE, to Katherine A. England,

Division of Market Regulation, SEC, dated April 16,

1998.

4Concurrently with the proposed rule change, the

Exchange is seeking to amend its Rule 19d–1

reporting plan for Rule 476A violations to include

the items proposed for addition to the list of rules

subject to Rule 467A. See letter from James E. Buck,

Senior Vice President and Secretary, NYSE, to

Michael Walinskas, Senior Special Counsel,

Division of Market Regulation, SEC, dated January

16, 1998.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–13096 Filed 5–15–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34 39980; File No. SR–NYSE–

98–02]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the New York Stock Exchange, Inc. To

Include Rules 392, 460.30, 80A(b),

79A.15 and 105 in Its Minor

Disciplinary Fine System under

Exchange Rule 476A

May 8, 1998.

Pursuaant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

January 20, 1998, the New York Stock

Exchange, Inc. (‘‘NYSE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the NYSE. On

March 11, 1998, the Exchange filed

Amendment No. 1,2 and on April 16,

1998, the Exchange filed Amendment

No. 2.3 The Commission is publishing

this notice to solicit comments on the

proposed rule change from interested

persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change would

revise the ‘‘List of Exchange Rule

Violations and Fines Applicable Thereto

Pursuant to Rule 476A’’ by adding the

failure to comply with the provisions of

Rules 392,460.30, 80A(b), 79A.15 and

105. The Exchange believes it is

appropriate to make the failure to

comply with the provisions of the

above-named rules subject to the

possible imposition of a fine under Rule

476A procedures.4

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change.

In its filing with the Commission, the

NYSE included statements concerning

the purpose of and basis for the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. The NYSE has

prepared summaries, set forth in

sections A, B, and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

Rule 476A provides that the Exchange

may impose a fine, not to exceed $5,000,

or any member, member organization,

allied member, approved person, or

registered or non-registered employee of

a member or member organization for a

minor violation of certain specified

Exchange rules.

The purpose of the Rule 476A

procedure is to provide for a meaningful

sanction for a rule violation when the

initiation of a disciplinary proceeding

under Rule 476 would be more costly

and time-consuming than would be

warranted given the minor nature of the

violation, or when the violation calls for

a stronger regulatory response than a

cautionary letter would convey. Rule

476A preserves due process rights;

identifies those rule violations which

may be the subject of summary fines;

and includes a schedule of fines.

In SR–NYSE–84–27, which initially

set forth the provisions and procedures

of Rule 476A, the Exchange indicated in

would amend the list of rules from time

to time, as it considered appropriate, in

order to phase-in the implementation of

Rule 476A as experience with it was

gained.

The Exchange is presently seeking

approval to add to the List of Rules

subject to possible imposition of fines

under Rules 476A procedures, failure by

members or member organizations to

comply with the provisions of: (1) Rule

392 and Rule 460.30 which require

notification to the Exchange by member

organizations when they are

participating in or engaging in certain

activities related to an offering of

securities listed on the Exchange; (2)

Rule 80-A(b) which prohibits entry of

stop orders for the remainder of any

trading day on which ‘’sidecar’’

procedures have been invoked; (3) Rule

79A.15 on specialists’ publishing bids

or offers upon receipt of limit orders;

and (4) Rule 105 and its Guidelines with

respect to specialists’ specialty stock

options transactions and the reporting of

such transactions.

The purpose of the proposed change

to Rule 476A is to facilitate the

Exchange’s ability to induce compliance

with all aspects of the above-cited rules.

The Exchange believes failure to comply

with the requirments of these rules

should be addressed with an

appropriate sanction and seeks

Commission approval to add violations

of these requirements to the Rule 476A

List so as to have a board range of

regulatory responses available. The

Exchange believes that this would more

effectively encourage compliance by

enabling a prompt, meaningful and

heightened regulatory response (e.g., the

issuance of a fine rather than a

cautionary letter) to a minor violation of

a rule.

The Exchange wishes to emphasize

the importance it places upon

compliance with the above-named rules

and, in particular, Rule 79A.15, which

it adopted to reflect the provisions and

certain interpretations of SEC Rule

11Ac1–4 under the Act. The Exchange

recognizes that violations of Rule

79A.15 would likely result in violations

of a Commission rule and, therefore,

proposes, when a full disciplinary

action is not warranted, to issue a

summary fine instead of a cautionary

letter as its first regulatory action against

a specialist organization. While the

Exchange, upon investigation, may

determine that a violation of any of

these rules is a minor violation of the

type which is properly addressed by the

procedures adopted under Rule 476A,

in those instances where investigation

reveals a more serious violation of the

above-described rules, the Exchange

will provide an appropriate regulatory

response. This includes the full

disciplinary procedures available under

Rule 476.