Employees of a joint-venture broker-dealer, who previously worked for and remain "associated persons" with the two legacy firms that created and control the joint venture, may solicit municipal securities business on behalf of each of their legacy firms without triggering Rule's G-38 prohibition against broker-dealers using independent consultants, the Municipal Securities Rulemaking Board said in recent guidance.
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The board indicated that the guidance stemmed from concerns that while the joint venture broker-dealer is not engaged in muni business, its employees will be "associated persons" with the legacy firms and could trigger either Rule G-38's ban on broker-dealers using independent consultants or G-37's two-year bar on negotiated muni business with certain issuers for both legacy firms.
The interpretative letter did not name the joint-venture or legacy firms that prompted the guidance, but sources said it appears to be the recent joint-venture Morgan Stanley Smith Barney, which was announced in January as Citi, the owner of Smith Barney, sought to raise capital by shedding the brokerage business to Morgan Stanley.
The board said that Rule G-38's ban on consultants applies only to individuals who are not affiliated with a firm.
Rule G-38, which took effect in March 1996, initially only required dealers to enter into written contracts with, and disclose information about, the independent consultants they hired to solicit muni securities business from issuers on their behalf.
But the board overhauled the rule in August 2005 to ban dealers from directly or indirectly paying anyone who is not affiliated with the dealer to retain or maintain muni securities business. It adopted the ban after becoming concerned that there were a growing number of independent consultants who were soliciting business for dealers, and engaging in activities similar to those dealers, but who were not regulated like dealers.
The board also said that G-37's restrictions on political contributions define an individual as a "municipal finance professional," or MFP, only at the firm for which he or she solicits muni business. That interpretation goes beyond language of the rule that defines an MPF as any associated person who solicits municipal securities business "but does not expressly limit MFP status to the dealer on whose behalf the municipal securities business was solicited.
"The MSRB is of the view that implicit in the concept of a solicitor MFP ... is the notion that an associated person who solicits municipal securities business on behalf of a dealer becomes an MFP of such dealer," the MSRB wrote.
Under G-37, dealers cannot engage in negotiated municipal securities business with an issuer for two years if they or their MFPs contribute to issuer officials who can influence the award of muni bond business. MFPs, however, can contribute up to $250 to any issuer official for whom they can vote.
A footnote to the letter seems to acknowledge it stems from the Morgan Stanley Smith Barney joint venture, warning that if the individual's firm name "incorporates significant elements of two affiliated dealers' firm names" the individual needs to take extra precautions to ensure that a direct solicitation on behalf of the directly-benefited dealer does not also serve as an indirect solicitation on behalf of the other dealer." It does not define "extra precautions."
Meanwhile, the board noted in a lengthy final paragraph of its letter that G-38's applies to any direct or indirect solicitations with an issuer for muni business and suggested that there are lots of ways for indirect solicitations to make an employee an MFP for both legacy firms.
"In circumstances similar to those described in this letter, dealers should have in place effective procedures to ensure that the solicitations for municipal securities business are tracked in a way that will properly classify individuals making solicitations as MFPs of the appropriate dealer," the board also said.
