MSRB Explains Disclosure Form As New Rule G-38 Goes Into Effect

The Municipal Securities Rulemaking Board’s new Rule G-38, which bars dealers from using any outside consultants to retain or obtain municipal securities underwriting business on their behalf, went into effect yesterday as the MRSB issued instructions to the industry on how to file a new quarterly disclosure form required by the rule.

The rule was approved by the SEC Aug. 17 with a delayed effective date of Aug. 29.

“The ban on paid outside consultants … marks a major step in assuring the public that the highest level of professionalism will continue to prevail in the municipal securities market,” said Francis J. Ingrassia, the board’s chairman and a managing director of Goldman, Sachs & Co. “By limiting the solicitation of bond business to employees and other dealer-controlled personnel, the MSRB is raising the bar for the dealer community and assuring the same high standards of professionalism and supervision will apply to all aspects of the underwriting process.”

“Dealers will no longer be permitted to seek underwriting assignments through contacts with public officials by unregulated and unsupervised third-party intermediaries,” said Christopher Taylor, the board’s executive director. “Dealers will need to take full responsibility for these solicitations. The MSRB’s reforms will help to provide further assurances that the awarding of underwriting business is based on merit rather than the political, financial, or other influences that hired consultants may bring to bear on our public officials.”Until now, dealers had been permitted to use independent consultants, but were required to make quarterly disclosures about them. The information included the role of the consultant, the geographic area in which he or she worked, the contractual arrangement and amounts paid during the quarter, as well as the transactions the consultant helped obtain, and any political contributions the consultant made.

But the MSRB decided to change the rule after becoming concerned that an increasing number of municipal securities dealers were hiring and paying independent consultants who were not subject to any of the same regulatory requirements as the dealers.

While the board’s Rule G-37 effectively bars municipal securities dealers and their muni finance professionals from making significant political contributions to issuer officials who can influence the award of bond business, that rule does not apply to independent consultants, many of whom were making an increasing amount of political contributions to issuer officials, according to MSRB records.

The board issued a second notice yesterday reminding dealers that they must use the new Form G-38t to report all information under the new Rule G-38. The MSRB had been allowing dealers to disclose information under G-37 and G-38 on the same quarterly form. But now the board has split up the forms.

Under the new Rule G-38’s transitional provisions, dealers can continue to pay independent consultants for work they have done, but only if they disclose information on the new Form G-38t, including the business for which they expect to pay the consultant as well as the intended amount of the payment.

Dealers must use the MSRB’s new G-37 and G-37x to report information under Rule G-38, the board said.

A detailed description of the provisions of the board’s new Rule G-38 is available on the MSRB’s Web site at www.msrb.org/msrb1/whatsnew/2005-44.asp. The site also includes instructions for using the new forms.