29282 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

9 15 U.S.C. 78f(b)(5).

10 In approving this rule, the Commission notes

that it has also considered the proposed rule’s

impact on efficiency, competition, and capital

formation. 15 U.S.C. 78c(f).

11The CHX presently has the ability to install the

new SuperMAX algorithm.

12See Securities Exchange Act Release No.

37619A (September 6, 1996), 61 FR 48290

(September 12, 1996).

13The proposal to permanently adopt the new

SuperMAX will be considered with the proposal to

approve the adoption of the new Enhanced

SuperMAX.

14 15 U.S.C. 78s(b)(2).

15 17 CFR 200.30–3(1)(12).

1On November 13, 1997, the Board filed the same

proposal as a Q&A under Section 19(b)(3)(A) of the

Act, which rendered the proposal effective upon

receipt of the filing by the Commission. See

Securities Exchange Act Rel. No. 39391 (December

III. 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, N.W.,

Washington D.C. 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 at

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to File No.

SR–CHX–98–09 and should be

submitted by June 18, 1998.

IV. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the publication of

the 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.

V. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission finds that part of the

Exchange’s proposal modifying the

price improvement algorithm amending

SuperMAX is consistent with the

requirements of the Act and the rules

and regulations thereunder applicable to

a national securities exchange.

Specifically, the Commission finds that

the proposed rule change is consistent

with Section 6(b)(5) of the Act,9 which

requires that the rules of an exchange be

designed, among other things, 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 securities, to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest.10 The Commission

believes, in light of the industry’s move

to trading in finer increments last year,

that CHX’s modification to its price

improvement algorithms will provide

investors a meaningful opportunity for

price improvement when securities

trading in 1⁄16ths have a spread of 1⁄8

point or greater. In addition, the

Commission finds that the new

SuperMAX and Enhanced SuperMAX

rules provide greater price improvement

opportunities for investors because the

criteria for when such opportunities are

available has been simplified. The

Commission believes that because the

opportunity for price improvement is

automatic and without any specialist

intervention, SuperMAX 11 and

Enhanced SuperMAX facilitate order

interaction and enhance the execution

of customer orders consistent with

Section 6(b)(5) of the Act. The

Commission notes that while

SuperMAX and Enhanced SuperMAX

are voluntary programs that specialists

choose to participate in for Dual Trading

Systems issues, providing a greater

number of investors an opportunity to

achieve price improvement is

compatible with the view expressed in

the Order Handling release.12

The Commission therefore finds good

cause for granting partial approval to the

proposed rule change (SR–CHX–98–09)

with respect to the adoption of a new

SuperMAX prior to the thirtieth day

after date of publication of notice of

filing thereof in the Federal Register.

The Commission is granting this partial

approval on a temporary basis, until

August 20, 1998.

The Commission is therefore granting

accelerated approval for the new

SuperMAX algorithm on a temporary

basis, until August 20, 1998.13 The

Commission is deferring action on the

new Enhanced SuperMAX to provide

interested parties an opportunity to

comment on the proposal. In addition,

the Commission and the CHX will have

the opportunity to review the

implementation of the new SuperMAX

algorithm.

The changes to the SuperMAX

algorithm will be phased in during the

next month. Until the Enhanced

SuperMAX proposal is adopted, the

existing Enhanced SuperMAX algorithm

will continue to apply. In those

instances where a security is both on the

new SuperMAX algorithm and the old

Enhanced SuperMAX algorithm, the

size of the order will determine which

algorithm is used. The introductory

paragraph of existing Rule 37(e) that

describes the interaction between

SuperMAX and Enhanced SuperMAX

for a security on both systems shall be

deemed to be amended such that if an

order is for between 100 shares and 499

shares, the new SuperMAX algorithm

shall apply, and if the order is for 500

shares or more (up to the 2099 shares or

such greater amount specified by the

specialist and approved by the

Exchange), the old Enhanced

SuperMAX algorithm shall apply.

It is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,14 that the

proposed rule change (SR–CHX–98–09)

be, and hereby is, approved in part and

on a temporary basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14113 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40014; File No. SR–MSRB–

98–1]

Self-Regulatory Organizations;

Municipal Securities Rulemaking

Board; Order Granting Approval of

Proposed Rule Change and Notice of

Filing and Order Granting Accelerated

Approval of Amendment No. 1 Relating

to Interpretation of Rule G–38 on

Consultants Concerning Bank

Affiliates and the Definition of Payment

May 20, 1998.

I. Introduction

On January 12, 1998,1 the Municipal

Securities Rulemaking Board (‘‘Board’’
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices 29283

3, 1997), 62 FR 65114 (December 10, 1997) (SR–

MSRB–97–8). The Commission received four

comment letters on the filing. See infra note 6. To

provide additional time to fully air the concerns

raised by the commenters, the Board agreed to

withdraw this filing and resubmit it, pursuant to

Section 19(b)(2). See letter from Diane G. Klinke,

General Counsel, Municipal Securities Rulemaking

Board, to Katherine A. England, Assistant Director,

Division of Market Regulation, dated January 9,

1998.

2 15 U.S.C. 78s(b)(1).

3 17 CFR 240.19b–4.

4See Securities Exchange Act Rel. No. 39541

(January 12, 1998), 63 FR 3010.

5See letter from Sarah A. Miller, Senior

Government Relations Counsel, Trust and

Securities, American Bankers Association, to

Jonathan G. Katz, Secretary, SEC, dated February

10, 1998 (‘‘ABA Letter No. 2’’); letter from Mae A.

Cavoli, Senior Vice President, Senior Managing

Counsel, KeyCorp Management Company, to

Jonathan G. Katz, Secretary, SEC, dated February

10, 1998 (‘‘KeyCorp Letter’’); letter from William E.

Marquis, Associate Counsel, Mellon Bank

Corporation, to Jonathan G. Katz, Secretary, SEC,

dated February 9, 1998 (‘‘Mellon Bank Letter No.

2’’); letter from Robert J. Nagy, Senior Counsel,

NationsBank, to Jonathan G. Katz, Secretary, SEC,

dated February 10, 1998 (‘‘NationsBank Letter No.

2’’); letter from Victor M. DiBattista, Chief Regional

Counsel, PNC Bank, N.A., dated February 10, 1998

(‘‘PNC Letter No. 2’’).

6These letters were resubmitted; they were

originally submitted to address SR–MSRB–97–8.

Letter from Sarah A. Miller, Senior Government

Relations Counsel, Trust and Securities, American

Bankers Association, to Jonathan G. Katz, Secretary,

SEC, dated December 30, 1997 (‘‘ABA Letter No.

1’’); letter from Michael E. Bleier, General Counsel,

Mellon Bank Corporation, to Jonathan G. Katz,

Secretary, SEC, dated January 12, 1998 (‘‘Mellon

Bank Letter No. 1’’); letter from Robert J. Nagy,

Senior Counsel, NationsBank, to Jonathan G. Katz,

Secretary, SEC, dated December 31, 1997

(‘‘NationsBank Letter No. 1’’); letter from Victor M.

DiBattista, Chief Regional Counsel, PNC Bank, N.A.,

to Jonathan G. Katz, Secretary, SEC, dated January

2, 1998 (‘‘PNC Letter No. 1’’).

This letter, which was also initially submitted to

address SR–MSRB–97–8, was not resubmitted.

Letter from Alan R. Leach, Senior Vice President

and Manager, Dealer Bank Department, Deposit

Guaranty National Bank, to Jonathan G. Katz,

Secretary, SEC, dated January 5, 1998 (‘‘Deposit

Guaranty Letter’’).

7See infra note 13. The Board’s response to the

comment letters also included an amendment to the

interpretation. The amended language clarifies that

the consultant may be either the affiliate itself or

an individual employed by the affiliate.

8To assist brokers, dealers, and municipal

securities dealers in understanding and complying

with its rules, the Board publishes notices of

interpretation, in question-and-answer format,

when warranted. Two sets of Q&A’s have

previously been published providing the Board’s

interpretation of the application of Rule G–38. See

Securities Exchange Act Release No. 36950 (March

11, 1996); 61 FR 10828 (March 15, 1996) and

Securities Exchange Act Release No. 37997 (Nov.

29, 1996); 61 FR 64781 (Dec. 6, 1996).

See also MSRB Reports Vol. 16, No. 2 (June 1996)

at 3–5; and Vol. 17, No. 1 (Jan. 1997) at 15.

9Municipal finance professionals and any person

whose sole basis of compensation is the actual

provision of legal, accounting or engineering

advice, services or assistance are exempted from the

definition of consultant.

10 MSRB Manual, General Rules, Rule G–38(a)(v)

(CCH) ¶ 3686.

11The 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.

12See supra notes 5 and 6.

13See letter from Diane G. Klinke, General

Counsel, MSRB, to Katherine A. England, Esq.,

Assistant Director, Division of Market Regulation,

SEC, dated March 2, 1998 (‘‘MSRB Letter’’ and

‘‘Amendment No. 1’’).

14ABA Letter No. 2, p. 1, Deposit Guaranty Letter,

p. 2, Nationsbank Letter No. 2, p. 2, Mellon Bank

Letter, p. 2, and PNC Letter No. 2, p. 2.

15 Id.

16MSRB Letter, p. 2.

or ‘‘MSRB’’) submitted to 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 to provide an interpretation of

Rule G–38 on consultants relating to

bank affiliates and the definition of

payment. Notice of the proposed rule

change appeared in the Federal Register

on January 20, 1998.4

The Commission received five

comment letters specifically addressing

the proposed rule change.5 The

Commission, however, received ten

comment letters in total which

addressed either the proposed rule

change or the proposed rule change that

was withdrawn.6 All commenters

opposed this interpretation, citing

discriminatory effect against banks and

bank-affiliated municipal securities

dealers and focusing on the MSRB’s

jurisdiction concerning the banking

industry. On March 3, 1998, the Board

submitted Amendment No. 1 to the

proposed rule change.7 This order

approves the proposed rule change.

Also, Amendment No. 1 is approved on

an accelerated basis.

II. Description of the Proposal

Recently, the Board has received

inquiries from market participants

concerning the definition of payment, as

used in Rule G–38, and whether bank

affiliates and their employees may,

under certain circumstances, be deemed

consultants for purposes of the rule.8

Specifically, a bank and its employees

communicate with an issuer on behalf

of an affiliated dealer to obtain

municipal securities business. The

affiliated dealer issues credits to

identify, for internal purposes, the

source of business referrals; however,

these credits do not involve any direct

or indirect cash payments from the

dealer to the bank or its employees. The

issue is whether the credits received by

a bank and its employees from an

affiliated dealer qualify as ‘‘payment’’

under Rule G–38, thus requiring the

dealer to designate the bank or its

employees as consultants and comply

with the requirements of Rule G–38.

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.9

The term payment, as used in Rule G–

38, means any gift, subscription, loan,

advance, or deposit of money or

anything of value.10 Under the Board’s

interpretation of payment in this

proposed rule change, the absence of an

immediate transfer of funds or anything

of value, such as credits, 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 11 eventually gives anything of

value (i.e., 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 and the dealer must

comply with the various requirements

of the rule.

III. Summary of Comments

All of the comment letters addressing

the proposed rule change opposed the

proposed rule change, raising several

issues.12 At the Commission’s request,

the Board submitted a response which

addresses these issues.13

Most commenters contend that the

Board’s interpretation is an

impermissible extension of rule G–38 to

banks’ soft dollar compensation

programs.14 These commenters are

concerned that this interpretation would

infringe upon the most effective method

used by financial institutions to crosssell their various products and services

to a wide range of customers.15

According to the MSRB, this

interpretation merely clarifies what is

already required and is reasonably and

fairly implied by the rule; it does not

reflect a change in MSRB policy.16 The

rule requires disclosure of the

‘‘compensation arrangement’’ of any

consultant used by a dealer to obtain or
29284 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

17MSRB Manual, General Rules, Rule G–38(c)

(CCH) ¶3686.

18MSRB Letter, p. 2.

19 Id.

20ABA Letter pp. 2–3, Deposit Guaranty Letter, p.

2, Nationsbank Letter No. 2, p. 2, Mellon Bank

Letter No. 2, pp. 3–4 and PNC Letter No. 2, p. 1.

21 Id.

22MSRB Letter, p. 2.

23 Id. See also 15 U.S.C. 78c(a)(30) (defining the

term ‘‘municipal securities dealer’’ pursuant to the

Act).

24MSRB Letter, p. 3.

25See, e.g., reports submitted by Sun Trust Bank,

Atlanta (3Q 1997); SunTrust Capital Markets, Inc.

(3Q 1997); and Norwest Investment Services, Inc.

(2Q and 3Q ‘997) and available for public

inspection at the Board’s Public Access Facility in

Alexandria, Virginia and on the Board’s web site at

www,msrb.org.

26ABA Letter No. 2, pp. 3–5, KeyCorp Letter,

Deposit Guaranty Letter, p. 1, NationsBank Letter

No. 2, pp. 1–2, Mellon Bank Letter No. 2, p. 1, and

PNC Letter No. 2, pp. 1–2.

27 Id.

28MSRB Letter, p. 3. See supra note 11 for the

definition of the term ‘‘person.’’

29MSRB Letter, p. 3.

30Rule G–38(a)(v) states that the term ‘‘payment’’

has the same meaning as in Rule G–37(g)(viii).

31See Securities Exchange Act Release No. 36950

(March 11, 1996), 61 FR 10828 (March 15, 1996)

(Q&A No.’s 6 and 7).

32ABA Letter No. 2, pp. 3–4, Deposit Guaranty

Letter, p. 2, Mellon Bank Letter No. 2, p. 2, and PNC

Letter, pp. 1–2.

33 Id.

34 Id.

35See supra note 23.

36See supra note 31.

37MSRB Letter, p. 4.

38 Id.

39 Id.

retain municipal securities business.17

The Board is aware that consultants are

sometimes paid in non-cash

compensation, and thus specifically

chose the term ‘‘compensation

arrangement’’ because it did not want to

limit the disclosure to cash payments.18

Thus, the interpretation is not an

unwarranted extension to soft dollar

compensation arrangements, because

the rule already applied to such

arrangements.19 The Commission agrees

with the MSRB’S explanation that the

dealer’s disclosure requirements are

specifically delineated in the rule, and

that the interpretation is consonant with

these requirements.

The commenters also suggest that the

interpretation is unworkable when

applied to non-traditional compensation

programs, given the subjective nature of

the calculations, and would

significantly discourage traditional

banking referral programs.20 According

to these commenters, most

compensation programs are based on

factors other than the initial credit

allocation. Thus, translating credits

allocated by the affiliated dealer into a

specific dollar amount of the employees’

compensation would be difficult

because the reports are due quarterly;

referral compensation, however, is

usually awarded in the form of a year

end bonus.21 The MSRB notes that Rule

G–38 requires, among other things, that

each broker, dealer, and municipal

securities dealer disclose to the Board

certain information relating to each

consultant used by the dealer during the

reporting period to obtain or retain

municipal securities business.22 This

definition also includes bank dealers.23

Furthermore, the Board notes that based

on a review of reports submitted, several

bank dealers and bank-affiliated dealers

have been disclosing the information

required by Rule G–38.24 These dealers

have listed as consultants their bank

affiliates and bank employees, and have

disclosed the compensation

arrangements for such consultants

(either in dollar or as a formula), as well

as dollar amounts paid to consultants.25

The commenters contend that rule G–

38 should not apply to banks’ referral

programs because the intent of the rule

is to capture traditional cash payments

made by municipal dealers to

independent consultants (i.e.,

professionals in the municipal securities

arena) whose primary activity is to

obtain or retain municipal securities

business for the dealer.26 Moreover,

they contend that, as the employee

receives no ‘‘payment’’ or ‘‘anything of

value’’ from the dealer, but rather from

the financial institution itself, the

employee cannot be deemed a

consultant for purposes of the rule.27

The MSRB states that these assertions

are erroneous. Under Rule G–38, a

consultant is defined as any person used

by the dealer to obtain or retain

municipal securities business through

direct or indirect communication with

an issuer on the dealer’s behalf where

the communication is undertaken by

such person in exchange for, or with the

understanding of receiving, payment

from the dealer or any other person.28

(emphasis added) The Board drafted the

rule language in this manner to ensure

that dealers could not circumvent the

rule’s disclosure requirements by

claiming that another party

compensated a consultant that referred

municipal securities business to the

dealer.29 Furthermore, such

compensation is not limited to cash

payments; the term ‘‘payment’’ is

defined as any gift, subscription, loan,

advance, or deposit of money or

anything of value.30

The Commission agrees with the

MSRB’s assessment. While these

‘‘credits’’ may not be initially

transmitted in monetary form, they are

a factor in the calculations made to

determine eventual monetary

compensation, which is something of

value. Moreover, a previous

interpretation published by the MSRB

directly addresses this issue.31 The

MSRB has addressed Q&A No. 7, but

Q&A No. 6 is also on point. If an

employee of an affiliated company of a

bank introduces one of its customers

(i.e. a municipal issuer) to the bank’s

dealer department for purposes of

engaging in municipal securities

business, and that dealer pays the

affiliated company for this activity, then

that employee is considered a ‘‘finder.’’

Any person used by a dealer as a

‘‘finder’’ for municipal securities

business would be considered a

consultant under Rule G–38.

Several commenters stated that the

MSRB’s proposal unfairly discriminates

against bank-affiliated dealers, because

it does not apply equally to incentive

programs established and operated by

financial service firms not affiliated

with a bank.32 These commenters also

contend that the MSRB’s interpretation

is an impermissible extension of its

authority into an area exclusively

reserved for bank regulators.33

Moreover, because the MSRB lacks

jurisdiction over bank’s compensation

programs, banks would have to consent

to their municipal securities dealer

affiliates filing proprietary information

with the MSRB, an unlikely occurrence,

given the public availability of this

information once submitted.34

In its response, the MSRB notes that

bank dealers, like securities firms, are

subject to federal securities laws.35

Further, all Board rules apply equally to

bank dealers and securities firms. Prior

Rule G–38 interpretations clearly state

that the rule applies to both dealer

affiliates and bank affiliates.36 If a

securities firm has an affiliate that refers

municipal securities business to the

dealer in exchange for ‘‘credits,’’ then

the affiliate would be a consultant and

the dealer must make the required

disclosures under Rule G–38, including

the consultant’s compensation

arrangement, even if the payment would

be made by ‘‘any other person’’ and not

by the dealer.37 The Board disagrees

with the argument that the proposal

unfairly discriminates against bankaffiliated dealers.38 In fact, if bank

dealers were allowed an exemption

from Rule G–38 for referrals by bank

affiliates and their employees, the rule

would unfairly discriminate against

non-bank affiliated dealers.39 The

Commission agrees that the rule and its

disclosure requirements apply equally

to both dealer affiliates and bank
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices 29285

40NationsBank Letter No. 1 and NationsBank

Letter No. 2, p. 2 and its attached modified

interpretation.

41MSRB Letter, p. 4.

42PNC Letter No. 2, p. 3.

43See supra notes 8 and 13.

44MSRB Letter, p. 4 and Amendment No. 1.

45 Id.

46 Id.

47However, several banks are currently

complying with Rule G–38. See supra note 25.

48The Commission has considered the proposed

rule’s impact on efficiency, competition and capital

formation. The proposed rule change will add to the

information available in the municipal securities

market, and thus, competition, in the municipal

securities markets because all municipal securities

dealers will be required to disclose affiliations and

compensation arrangements concerning their

relationships with consultants. Efficiency and

capital formation will be tangentially improved as

enhanced disclosure will likely conserve both

capital and personnel resources. 15 U.S.C. 78c(f).

49Section 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.

50 15 U.S.C. 78s(b)(2).

51 17 CFR 200.30–3(a)(12).

affiliates. As the MSRB explains, this

proposal would also apply if the

circumstance involved a securities firms

and its affiliate. The Commission,

therefore, supports the MSRB’s

assessment, as the interpretation

ensures an evenhanded application of

the rule.

In its letters, NationsBank suggests

that the MSRB modify the proposal to

clarify that a bank and its employees

would only be consultants under

circumstances where the bank receives

credits for the referral of municipal

securities business which are then

allocated to employees based on a

formulaic fashion.40 The MSRB

disagrees with this interpretation and

has, therefore, declined to adopt it.41

Alternatively, PNC Bank suggests that

Rule G–38 be clarified to designate only

the financial institution as the

consultant in the case of soft dollar

compensation programs.42 In response,

the MSRB has amended Rule G–38 43 to

say that the consultant may be either the

affiliate or an individual employee of

the affiliate.44 The dealer must make

this determination and ensure proper

compliance with the rule, including the

contractual arrangements and requisite

disclosures.45 Thus, the Board has

amended the language of the

interpretation to clarify that the

consultant may be either the affiliate

itself or an individual employed by the

affiliate.46

According to the MSRB, Amendment

No. 1 clarifies who is deemed a

consultant and the process of

designation. The Commission agrees

that the onus should be on the dealer to

designate the consultant, whether

affiliate or employee, and to ensure

compliance with the rule. The

Commission notes, however, that as

amended, the dealer may designate

either the bank affiliate or the employee

as the consultant. As noted in their

comments, most banks are reluctant to

disclose what they deem to be

proprietary information to the MSRB,

and hence, the public.47 The

Commission notes that both the

employee and the affiliate benefit from

referrals facilitated by these soft dollar

compensation programs.

IV. Discussion

The Commission believes the

proposed rule change is consistent with

the Act and the rules and regulations

promulgated thereunder.48 Specifically,

the Commission believes that approval

of the proposed rule change is

consistent with Section 15B(b)(2)(C) 49

of the Act. This interpretation clarifies

the rule’s applicability to all brokerdealers engaged in the municipal

securities business. The interpretation is

necessary to ensure that all persons

hired by dealers to solicit municipal

securities business will be covered by

the rule. This interpretation will require

that all consultant activity stemming

from attendant soft dollar compensation

arrangements, whether those of

financial institutions or securities firms,

be disclosed. The clarification of Rule

G–38 regarding referrals by bank

affiliates and their employees will

improve the effectiveness of the rule by

making explicit that it applies to all

consultants and their political

contribution activity.

The Commission finds good cause for

approving proposed Amendment No. 1

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. Amendment

No. 1 clarifies who is deemed a

consultant and the process of

designation. The Commission agrees

that the onus should be on the dealer to

designate the consultant, whether bank

affiliate or employee thereof, and to

ensure compliance with the rule,

including contractual arrangements and

required disclosures. The dealer’s

payment of credits to the consultant

creates a strong incentive for the

consultant to solicit an issuer and refer

their business to the dealer. The dealer,

therefore, should have the responsibility

of documenting its relationship with the

consultant and any compensation

arrangements that result from or

facilitate this relationship. For these

reasons, the Commission finds good

cause for accelerating approval of the

proposed rule change, as amended.

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1, including whether the amendment is

consistent with the Act. Persons making

written submissions should file six

copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

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. Any

submissions should refer to File No.

SR–MSRB–98–1 and should be

submitted by June 18, 1998.

V. 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,50 that the

proposed rule change (SR–MSRB–98–1),

be hereby approved including

Amendment No. 1, on an accelerated

basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.51

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14119 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–M