[Federal Register Volume 66, Number 125 (Thursday, June 28, 2001)]
[Notices]
[Pages 34501-34503]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-16257]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44459; File No. SR-MSRB-2001-02]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Municipal Securities 
Rulemaking Board Relating to Interpretation of Rule G-37, on Political 
Contributions and Prohibitions on Municipal Securities Business, and 
Rule G-38, on Consultants

June 20, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') and Rule 19b-4 thereunder,\1\ notice is hereby given that on 
June 7, 2001, the Municipal Securities Rulemaking Board (``MSRB'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change (File No. SR-MSRB-2001-02) as described in Items, 
I, II, and III below, which Items have been prepared by the MSRB. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The MSRB has filed with the Commission a proposed rule change 
consisting of a notice of interpretation concerning rules G-37, on 
political contributions and prohibitions on

[[Page 34502]]

municipal securities business, and G-38, on consultants. The text of 
the proposed rule change is set forth below. The new text is italicized 
and underlined.

Question and Answer Notice: Rules G-37 and G-38

Bank Affiliates: Individuals as Municipal Finance Professionals or 
Consultants

    Q: In a Question and Answer Notice relating to rule G-38 dated 
May 20, 1998, the MSRB discussed a scenario in which a bank and its 
employees communicate with an issuer on behalf of an affiliated 
broker, dealer or municipal securities dealer (a ``dealer'') to 
obtain municipal securities business for that dealer in return for 
certain ``credits.'' 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. The MSRB observed that, even if there is no 
immediate transfer of funds or anything of value to an affiliate or 
individual employed by the affiliate, the referral credits would 
still be considered payment for purposes of rule G-38 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. 
The MSRB concluded that if the dealer or any other person 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. 
Does this mean that in all cases where a bank's employee refers 
municipal securities business to an affiliated dealer, such bank 
employee is necessarily a consultant under rule G-38 rather than a 
municipal finance professional of the dealer under rule G-37?
    A: No. The purpose of the Question and Answer Notice was to 
illustrate that the term ``payment'' as used in rule G-38 is not 
limited to cash payments but also includes anything of value, such 
as referral credits, that ultimately results in cash or non-cash 
compensation to the bank employee. The MSRB was not providing 
guidance as to whether such bank employee should be considered a 
consultant rather than a municipal finance professional of the 
dealer. As the MSRB noted in footnote 1 to the Question and Answer 
Notice, municipal finance professionals are excluded from the 
definition of consultant. If a dealer has an arrangement whereby 
referral credits are give to an employee of a bank affiliate in 
exchange for a referral of municipal securities business, the dealer 
should first determine whether the bank employee is a municipal 
finance professional of the dealer. As a threshold question, the 
dealer must determine whether such bank employee is a person 
associated with the dealer within the meaning of the Securities 
Exchange Act of 1934, as amended the ``Exchange Act'').\2\ If the 
bank employee is an associated person of the dealer and has 
solicited municipal securities business on behalf of the dealer, the 
employee would be a municipal finance professional of the dealer 
subject to the provisions of rule G-37, regardless of whether such 
employee has received a referral credit or any other payment.\3\ 
Such employee, as a municipal finance professional of the dealer, is 
excluded from being a consultant of the dealer under rule G-38. If 
the bank employee is not an associated person of the dealer and has 
received such referral credits as a result of a solicitation of 
municipal securities business for the dealer, the employee would be 
a consultant of the dealer subject to the provisions of rule G-38.
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    \2\ Questions regarding the scope of the term ``person 
associated with a broker or dealer'' under Section 3(a)(18) of the 
Exchange Act or ``person associated with a municipal securities 
dealer'' under Section 3(a)(32) of the Exchange Act should be 
addressed to staff of the Securities and Exchange Commission.
    \3\ The definition of municipal finance professional in rule G-
37 is not dependent upon whether the associated person has received 
payment in exchange for the solicitation of municipal securities 
business.
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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 MSRB 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 
texts of these statements may be examined at the places specified in 
Item IV below. The MSRB 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

    (a) Since adoption of rules G-37 and G-38, the MSRB has received 
numerous inquiries concerning the application of these rules. In order 
to assist the municipal securities industry in understanding and 
complying with the provisions of the rules, the MSRB has published a 
series of interpretive notices, which set forth, in question-and-answer 
format, general guidance on rules G-37 and G-38.
    On May 20, 1998, the Commission approved an interpretive notice of 
the MSRB relating to rule G-38.\4\ This question-and-answer notice 
provided guidance regarding the meaning of the term payment under rule 
G-38 in the context of the granting of referral credits to an employee 
of a bank in exchange for the referral of municipal securities business 
to a dealer affiliated with the bank. The MSRB made clear that, even if 
there is not immediate transfer of funds or anything of value to an 
affiliate of a dealer or an individual employed by such affiliate, the 
referral credits would still be considered payment for purposes of rule 
G-38 if the credits eventually result in compensation to the affiliate 
or individual for referring municipal securities business to the 
dealer.
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    \4\ Securities Exchange Act Release No. 40014 (May 20, 1998), 63 
FR 29282 (May 28, 1998).
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    The MSRB recently has learned that some members of the municipal 
securities industry may have misunderstood the guidance provided by 
this prior question-and-answer notice. Some industry participants 
appear to believe that the MSRB has determined that an employee of a 
bank that refers municipal securities business to a dealer affiliated 
with such bank would necessarily be considered a consultant of the 
dealer under rule G-38 rather than a municipal finance professional of 
the dealer under rule G-37. This was not the intent of the prior 
interpretation, which focused solely on whether referral credits could 
be considered payment for purposes of rule G-38. The interpretation did 
not seek to analyze the further factors that must be considered in 
determining whether an individual should be considered a municipal 
finance professional or a consultant. As a result, the MSRB has 
determined that it is necessary to provide clarification of the prior 
question-and-answer notice and to provide further guidance on the 
factors to be considered in determining whether an employee of an 
affiliate of a dealer that makes a referral of municipal securities 
business to the dealer is a consultant under rule G-38 or a municipal 
finance professional under rule G-37.
    (b) The MSRB believes that the proposed rule change is consistent 
with Section 15B(b)(2)(C) of the Act, which requires that the MSRB's 
rules.

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.

The MSRB believes that the proposed rule change is consistent with the 
Act in that it provides guidance to dealers in complying with existing 
MSRB rules.

[[Page 34503]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purposes of the Act since it would apply equally to all dealers.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The MSRB has designated this proposed rule change as constituting a 
stated policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing MSRB rule under section 
19(b)(3)(A)(i) of the Act,\5\ and subparagraph (f) of Rule 19b-4, 
thereunder.\6\ At any time within 60 days of the filing of this 
proposed rule change, the Commission may summarily abrogate this rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \5\ 15 U.S.C. 78s(b)(3)(A)(i).
    \6\ 17 C.F.R. 240.19b-4(f).
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V. 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-
0609. 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 MSRB's principal offices. 
All submissions should refer to File No. SR-MSRB-2001-02 and should be 
submitted by July 19, 2001.

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-16257 Filed 6-27-01; 8:45 am]
BILLING CODE 8010-01-M