The SEC formally issued its order approving the Municipal Securities Rulemaking Board's new rule on consultants yesterday, saying the rule is needed to prevent firms from circumventing the board's rules on political contributions and gifts and gratuities that are aimed at curbing pay-to- play practices in the municipal market.
The MSRB's Rule G-38, which was actually approved by the Securities and Exchange Commission on Wednesday but will not take effect until March 18, will require municipal securities firms to disclose more information about the consultants they hire to obtain or retain municipal bond business.
The rule is the latest in a series of actions taken by the SEC and MSRB to combat abuses associated with the awarding of municipal bond business.
The SEC said the rule, which is virtually unchanged from the version the MSRB filed with the commission last September, is intended in part to prevent municipal firms and professionals from circumventing both MSRB rules G-37 and G-20.
Rule G-37, which took effect in April 1994, generally bars municipal securities firms and their employees who contribute to issuer clients from engaging in negotiated business with those clients for two years afterward. Firms are barred from doing indirectly what they cannot do directly under the rule, such as having consultants make contributions to issuer-clients on their behalf.
At the same time, the MSRB's Rule G-20 prohibits dealers from directly or indirectly giving anything of value in excess of $100 to issuer officials and others.
"While both rules prohibit municipal securities firms from doing directly what they are precluded from doing directly, indirect activities often are difficult to prove," the SEC said.
Rule G-38 "is intended to provide additional information to issuers and to the public to assist in determining the extent to which payments to consultants influence the issuer's selection process in connection with municipal securities business, as well as the extent to which such payments increase the cost of bringing municipal securities issues to market," the SEC said in its order approving the rule.
Rule G-38 narrowly defines consultants to exclude lawyers, accountants or others who provide traditional services in connection with bond financings.
The MSRB had proposed an earlier version of the rule last year that contained a broad definition of consultants that would have covered virtually anyone providing assistance to a dealer in pursuit of bond business. But the Public Securities Association and individual firms complained such a rule would have had a chilling effect on the market.
In its order approving the rule, the SEC said the rule will not apply to lawyers retained to provide legal analyses for transactions contemplated by firms or to review local regulations. The rule also will not apply to accountants retained to do tax analyses or scrutinize financial reports, or to engineers hired to perform technical reviews or feasibility studies, the commission said.
"Any attorney, accountant, engineer, or other professional used by the municipal securities firm as a 'finder' for municipal securities business would, however, be considered a consultant under the ... rule," the SEC said.
The rule will also apply to third parties who initiate contact with prospective underwriters to offer their services in obtaining or retaining bond business through direct or indirect communications with issuer officials, the commission said.
"The rule does not distinguish between instances in which the municipal securities firm initiates contact and instances in which the third party initiates a contact," the SEC said.
In a footnote to the order, the SEC noted the MSRB plans to study whether issuer-designated underwriters' counsel and other professionals should be covered as consultants by the rule and said it "encourages" the MSRB "to consider further initiatives in this area to promote the awarding of municipal securities business based on merit."
The rule requires firms to enter into written contracts with consultants that include their names, companies, roles, and compensation arrangements. Firms must disclose consulting arrangements to issuers when contemplating engaging in transactions with them. They must file quarterly consolidated G-37 and G-38 forms with the MSRB.
In its order, the SEC described a series of recent enforcement actions it has taken in cases involving pay-to-play situations or conflicts of interest and said these "do not represent isolated instances of wrongdoing" in the market.
