MSRB PUBLISHES INTERPRETIVE LETTER REGARDING SOLICITATION ACTIVITY ON BEHALF OF AN AFFILIATED COMPANY PURSUANT TO RULES G-37 AND G-38

The Municipal Securities Rulemaking Board has published an interpretive letter pursuant to Rule G-37, on political contributions and prohibitions on municipal securities business, and Rule G-38, on solicitation of municipal securities business, concerning the activities of a broker-dealer on behalf of an affiliated company. The text of the interpretive letter is included below. Questions regarding the interpretive letter may be directed to Leslie Carey, Associate General Counsel, or Ronald W. Smith, Senior Legal Associate. 

July 2, 2009

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TEXT OF INTERPRETIVE LETTER

Rules G-37 and G-38 Interpretive Letter – Solicitation activity on behalf of affiliated company.  This is in response to your April 29, 2009 letter seeking guidance regarding Municipal Securities Rulemaking Board (“MSRB”) Rule G-38, on solicitation of municipal securities business, and MSRB Rule G-37, on political contributions and prohibitions on municipal securities business. Your letter relates to the formation of a joint venture broker-dealer (“JV B-D”) by two existing broker-dealers (the “legacy firms”). You state that JV B-D will not engage in municipal securities business[1] and that the employees of JV B-D will not retain their employment status with the legacy firms, but will be associated persons of both legacy firms.

Specifically, you request guidance on the following two issues: (i) whether the employees of the JV B-D may solicit municipal securities business, under Rule G-38, on behalf of the legacy firms; and (ii) whether an employee who solicits municipal securities business on behalf of one of the legacy firms will be considered a municipal finance professional (“MFP”) [2] solely of the legacy firm on whose behalf the MFP solicits municipal securities business under Rule G-37, rather than of both legacy firms. The Board has reviewed your letter and authorized this response.

JV B-D Employee Solicitation of Municipal Securities Business on Behalf of Legacy Firms: You ask whether employees of JV B-D, who are the prior employees of the legacy firms, may solicit municipal securities business on behalf of such firms under Rule G-38. Rule G-38(a) prohibits a broker, dealer or municipal securities dealer (“dealer”) from providing, directly or indirectly, payment to any person who is not an affiliated person[3] of the dealer for a solicitation of municipal securities business on behalf of such dealer.

You state that JV B-D will be controlled by the legacy firms and, as such, should be viewed as an affiliated company[4] of the legacy firms. Under Rule G-38, if JV B-D is controlled by the legacy firms, JV B-D and its employees should be viewed as affiliates of the legacy firms. Based on the control relationships you describe, Rule G-38 will not be violated if employees of JV B-D are paid by a legacy firm for a solicitation of municipal securities business on behalf of such legacy firms.

JV B-D Employee Status as Municipal Finance Professional for Legacy Firm on Behalf of Which the Employee Has Solicited Municipal Securities Business: You also ask whether an employee of JV B-D who solicits municipal securities business on behalf of one of the legacy firms will be considered an MFP solely of the legacy firm on whose behalf the employee solicits municipal securities business, rather than of both legacy firms. Rule G-37(g)(iv)(B) defines MFP, in relevant part, as any associated person (including, but not limited to, any affiliated person of the dealer, as defined in Rule G-38) who solicits municipal securities business (a “solicitor MFP”). You note that this language 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, as set forth in Rule G-37(g)(iv)(B), is the notion that an associated person who solicits municipal securities business on behalf of a dealer becomes an MFP of such dealer.[5] Although an individual who solicits municipal securities business on behalf of one dealer with which he or she is associated thereby becomes an MFP of such dealer, the solicitation does not by itself result in the individual becoming an MFP of a different dealer with which such individual may be associated but for which he or she has not solicited municipal securities business. Rather, such individual would have to undertake a solicitation or another activity described in Rule G-37(g)(iv) on behalf of the second dealer in order to become an MFP of such second dealer.

The MSRB notes that Rule G-38(b)(i) defines solicitation broadly to mean, any direct or indirect communication with an issuer for the purpose of obtaining or retaining municipal securities business. The MSRB has previously provided guidance regarding the types of communications that are viewed as solicitations of municipal securities business.[6] Depending upon specific facts and circumstances, a direct solicitation of municipal securities business by an individual on behalf of a dealer with which such individual is associated (the “directly-benefited dealer”) might also be considered an indirect solicitation of business on behalf of another dealer with which such individual is associated (the “indirectly-benefited dealer”). In conversations with issuers or other third parties, the individual must clearly indicate for which dealer he or she is soliciting business. For example, an individual who describes to issuer personnel two or more affiliated dealers as leading underwriting firms in that issuer’s state but only explicitly asks such personnel to hire one dealer (i.e., the directly-benefited dealer) would likely be considered to have indirectly solicited business on behalf of the other dealer as well (i.e., the indirectly-benefited dealer). An important factor in determining whether a direct solicitation on behalf of a directly-benefited dealer could also be considered an indirect solicitation on behalf of an indirectly-benefited dealer is whether the individual solely identifies his or her affiliation with the directly-benefited dealer or also identifies an affiliation with the other dealer.[7]  To the extent that multiple dealers are identified directly or indirectly, dealers would need to take extra precautions to ensure that the solicited issuer personnel understand that the solicitation is solely on behalf of the directly-benefited dealer and that the identification of the other firm is limited and does not serve to promote the other firm.[8] 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. MSRB Interpretation of June 23, 2009.

Supervisory procedures relating to indirect contributions: conference accounts and 527 organizations.  This is in response to your request for confirmation that donations to segregated conference accounts of organizations such as the Democratic Governors Association (DGA) and Republican Governors Association (RGA) do not constitute contributions to an official of an issuer within the meaning of Rule G-37(b) without an intent to use the conference accounts as a device for contributing to the election activities of individual governors or other officials of issuers.  You describe both organizations as independent, voluntary political organizations constituted under Section 527 of the Internal Revenue Code to raise money for political activities.  You note that the organizations’ activities have the primary purpose of influencing gubernatorial elections but also seek to conduct policy conferences and workshops to help their members and other interested parties to understand and participate in public policy questions that confront state governments.  You state that all Democratic governors are members of the DGA and all Republican governors are members of the RGA.

You further note that each organization has a wide variety of accounts into which it receives funds from individuals, organizations and other entities, with some accounts used to provide financial support to gubernatorial candidates and other accounts (including conference accounts) used exclusively to fund policy conferences.  You state that the conference accounts are segregated from accounts that provide financial support to gubernatorial candidates and that neither organization permits transfers of funds from their conference accounts to any of their other accounts, including their administrative accounts.  You represent that both organizations follow a standard practice of honoring any request by a donor to place donated funds in a conference account and that they have further committed to provide, upon a donor’s request, written confirmation prior to accepting a donation that the donated funds will be allocated to the conference account.

The MSRB cannot provide confirmation regarding the status under Rule G-37 of payments to any particular organization or account of such organization as such a determination requires an analysis of, among other things, the specific facts and circumstances of each individual payment, the written supervisory procedures of the broker, dealer or municipal securities dealer (“dealer”), and the efforts of the dealer to enforce such procedures.  However, this letter reviews guidance previously provided by the MSRB that may assist you in undertaking such an analysis.

Under Rule G-37, on political contributions and prohibitions on municipal securities business, contributions to officials of an issuer by a dealer, a municipal finance professional (“MFP”) of the dealer, or a political action committee (“PAC”) controlled by the dealer or an MFP can result in the dealer being banned from municipal securities business with such issuer for a period of two years.[1]  Section (d) of Rule G-37 provides, in part, that no dealer or MFP shall, directly or indirectly, through or by any other person or means, do any act which would result in a violation of the ban on municipal securities business.

The MSRB has previously provided guidance regarding the potential for payments made to political parties, PACs or others to constitute indirect contributions to issuer officials for purposes of Rule G-37(d).  In guidance published in 1996, the MSRB stated that a dealer would violate Rule G-37 by doing municipal securities business with an issuer after providing money to any person or entity when the dealer knows that such money will be given to an official of an issuer who could not receive such a contribution directly from the dealer without triggering the rule’s prohibition on municipal securities business. Further, depending on the specific facts and circumstances, a payment to a PAC or political party that is soliciting funds for the purpose of supporting a limited number of issuer officials might result in the same prohibition on municipal securities business as would a contribution made directly to an issuer official.[2]  In such circumstances, dealers should inquire of the PAC or political party how any funds received from the dealer would be used.[3]

In 2005, the MSRB published guidance on dealers’ written supervisory procedures under Rule G-27, on supervision, relating to compliance with Rule G-37(d).  The MSRB noted that each dealer must adopt, maintain and enforce written supervisory procedures reasonably designed to ensure that neither the dealer nor its MFPs are using payments to political parties and non-dealer controlled PACs to contribute indirectly to an official of an issuer.[4]  Please note that the scope of Rule G-37(d) is not limited to the use of political parties and PACs as possible conduits for indirect contributions to issuer officials and, therefore, the need for such supervisory procedures would apply in connection with dealer and MFP payments to other types of political organizations as well, including but not limited to organizations constituted under Section 527 of the Internal Revenue Code.

The 2005 guidance on supervisory procedures included examples of certain provisions that dealers might include in their written supervisory procedures to ensure compliance with Rule G-37(d).  The MSRB stated that such examples are not exclusive and are only suggestions, and that each dealer is required to evaluate its own circumstances and develop written supervisory procedures reasonably designed to ensure that the conduct of the municipal securities activities of the dealer and its associated persons are in compliance with Rule G-37(d).[5]  Thus, a dealer need not include the specific supervisory procedures described in the 2005 guidance in order to meet its obligation under Rule G-27(c) so long as the dealer in fact has, and enforces, other written supervisory procedures reasonably designed to ensure that the conduct of the municipal securities activities of the dealer and its associated persons are in compliance with Rule G-37(d).

The MSRB also has stated that payments to “housekeeping,” “conference” or “overhead” accounts of political parties are not safe harbors under Rule G-37 and that a dealer’s written supervisory procedures designed to ensure compliance with Rule G-37(d) must take into account such payments.  The MSRB noted that “preemptive” instructions accompanying payments to housekeeping accounts of political parties stating that such payments are not to be used for the benefit of one or a limited number of issuer officials are not considered sufficient to meet the dealer’s obligations with regard to ensuring that the payment is not being made to circumvent the requirements of Rule G-37.[6]  Although payments to housekeeping, conference or overhead accounts are not safe harbors and preemptive instructions are not by themselves sufficient to establish compliance with Rule G-37(d), procedures permitting payments to political parties and other political organizations only if made to these types of accounts and/or requiring preemptive instructions regarding the use of such payments may be elements in a supervisory program that, together with other appropriate procedures, could adequately ensure compliance with Rule G-37(d), depending on the specific facts and circumstances. MSRB Interpretation of December 21, 2006.
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[1] MFPs may make certain de minimis contributions to issuer officials without triggering the ban on business.

[2] See Rule G-37 Question and Answer No. III.4 (August 6, 1996), reprinted in MSRB Rule Book.

[3] See Rule G-37 Question and Answer No. III.5 (August 6, 1996), reprinted in MSRB Rule Book.

[4] See Rule G-37 Question and Answer No. III.7 (September 22, 2005) (“Q&A-III.7”), reprinted in MSRB Rule Book.

[5] See Q&A-III.7.

[6] See Rule G-37 Question and Answer No. III.8 (September 22, 2005), reprinted in MSRB Rule Book.

529 college savings plan advertisements.  Thank you for your letter of April 21, 2006 in which you request interpretive guidance on the application of Rule G-21, on advertising, with respect to advertisements of 529 college savings plans.  Rule G-21 was amended in 2005 by adding new section (e) relating to advertisements by brokers, dealers and municipal securities dealers (“dealers”) of interests in 529 college savings plans and other municipal fund securities (collectively referred to as “municipal fund securities”).  These new provisions were modeled after the provisions of Securities Act Rules 482 and 135a relating to mutual fund advertisements, with certain modifications.

The Board expects to undertake a detailed review of issues relating to the implementation of section (e) of its advertising rule in the coming months and your views will be instrumental in that review.  We appreciate your interest in the operation of the rule and the commitment of your organization and your individual members to assure that investors receive appropriate disclosures.  As you are aware, MSRB rules apply solely to dealers, not to issuers or other parties.  The MSRB has previously stated that Rule G-21 does not govern advertisements published by issuers but that an advertisement produced by a dealer as agent for an issuer must comply with Rule G-21.  Similarly, a dealer cannot avoid application of Rule G-21 merely by hiring a third party to produce and publish advertisements on its behalf.[1]  Pending our detailed review of section (e) of Rule G-21, I would like to address certain basic principles under the current rule language and existing interpretive guidance that may prove helpful in the context of some of the issues you raise in your letter.[2]

Section (a) of the rule provides a broad definition of “advertisement.”[3]  Sections (b) through (e) of the rule establish requirements with respect to specific types of advertisements.  Section (b) establishes standards for professional advertisements, which are advertisements concerning the dealer’s facilities, services or skills with respect to municipal securities.  Section (c) establishes general standards for product advertisements, with additional specific standards relating to advertisements for new issue debt securities set forth in Section (d) and specific standards relating to advertisements for municipal fund securities set forth in Section (e).  In addition, all advertisements are subject to the MSRB’s basic fair dealing rule, Rule G-17,[4] and are subject to approval by a principal pursuant to Section (f) of Rule G-21.

Where an advertisement does not identify specific securities, specific issuers of securities or specific features of securities, but merely refers to one or more broad categories of securities with respect to which the dealer provides services, the MSRB would generally view such advertisement as a professional advertisement under Section (b) rather than as a product advertisement.  For example, if an advertisement simply states that the dealer provides investment services with respect to 529 college savings plans – without identifying any specific 529 college savings plan, specific municipal fund securities issued through a 529 college savings plan, or specific features of any such municipal fund securities – the advertisement would be subject to Section (b) of Rule G-21, rather than to Sections (c) and (e).

On the other hand, advertisements that identify specific securities, specific issuers of securities or specific features of securities generally are viewed as product advertisements under Rule G-21 and therefore would be subject to Section (c), as well as Section (d) or (e), if applicable.  However, in some circumstances, an advertisement that identifies an issuer of securities without identifying its securities or specific features of such securities effectively may not constitute an advertisement of such issuer’s securities and therefore would not be treated as a product advertisement under the rule, particularly if the dealer or any of its affiliates is not identified.  For example, if an advertisement identifies the state or other governmental entity that operates a 529 college savings plan without identifying its municipal fund securities, the specific features of such securities or the dealer and its affiliates that may participate in the marketing of its municipal fund securities, the MSRB generally would not view such advertisement as a product advertisement subject to Sections (c) and (e) of Rule G-21.[5] MSRB Interpretation of May 12, 2006.

[1] The MSRB expresses no opinion at this time as to the applicability of MSRB rules to advertisements relating to municipal fund securities produced and published by issuers with funds provided directly or indirectly by a dealer.

[2] Other issues you raise in your letter will be considered during the upcoming review of Rule G-21.

[3] An advertisement is defined as any material (other than listings of offerings) published or designed for use in the public, including electronic, media, or any promotional literature designed for dissemination to the public, including any notice, circular, report, market letter, form letter, telemarketing script or reprint or excerpt of the foregoing. The term does not apply to preliminary official statements or official statements (including program disclosure documents), but does apply to abstracts or summaries of official statements, offering circulars and other such similar documents prepared by dealers.  The MSRB expresses no opinion at this time as to whether the specific communications or promotional materials described in your letter would constitute advertisements under this definition.

[4] Rule G-17 requires each dealer, in the conduct of its municipal securities activities, to deal fairly with all persons and prohibits the dealer from engaging in any deceptive, dishonest or unfair practice.

[5] The advertisement may, in addition to or instead of identifying the state or other governmental entity that operates the 529 college savings plan, include the state’s marketing name for such plan so long as such name does not identify the dealer or any dealer affiliates that may participate in the marketing of its municipal fund securities.  Further, any contact information (such as a telephone number or Internet address) included in the advertisement should be for the state or other governmental entity and must not be for the dealer or its affiliates.

Differential re-offering prices. This is in response to your letter in which you ask us to provide interpretive guidance on MSRB rules G-21, G-30 and G-32 in the context of a proposed new system (the “System”) to be established by your client (the “Company”) for pricing and distribution of primary market municipal securities to retail investors. You provide a description of the System, including a discussion of incremental changes through various versions of the System. We have included below a brief summary of the MSRB’s understanding of certain key features of the System that may be relevant in responding to your questions. This should not be construed as meaning that the MSRB has “approved” the System, or even reviewed the System description which you provided, except for the limited purpose of addressing your specific questions on the three rules noted above. The MSRB expresses no views and has not considered whether the System as you describe it, or whether a broker-dealer using the System, would be in compliance with MSRB rules or other applicable law, rules or regulations, beyond the specific statements set forth herein on these three rules.

As you describe it, the System consists of an internet-based electronic primary market order matching process that will provide (1) electronic notices (“Electronic Notices”) to registered representatives at subscribing broker-dealer firms and (2) an ability to establish a range of acceptable reoffering prices for each order of primary market municipal securities. Registered representatives will provide to the System profiles (“Retail Inquiries”) that describe the features of municipal securities that the registered representative’s customers wish to purchase. The System will then automatically advise the registered representatives of the availability for purchase of a new municipal security issue that matches the Retail Inquiry by sending an Electronic Notice by fax or e-mail. The Company intends to register with the Securities and Exchange Commission as a broker-dealer prior to charging subscription fees for the services provided by the System. We understand that, for purposes of the System, a retail investor is characterized solely by the size of the order, rather than by the identity of an investor as a retail or institutional customer.

Municipal securities available for purchase through the System will be sold using a structure that establishes a range of acceptable retail reoffering prices. For each new issue, the underwriter and the issuer will establish a maximum and minimum yield and a maximum and minimum price to be entered into the System. For all Retail Inquiries that match the basic parameters of the issue (e.g., maturity, rating, state of issuer), the System will send an Electronic Notice to each registered representative that adjusts the price to include the least of the registered representative’s desired mark-up, the maximum mark-up established by the registered representative’s broker-dealer firm, or the maximum issue mark-up established by the underwriter. In the System’s initial stages, a registered representative may place an order for amounts up to $500,000 to purchase the securities upon receiving an Electronic Notice. You note that use of the System will permit sales of municipal securities of the same maturity and order size to different buyers at different prices.

You state that you believe that the business and operating plan for the System will be in compliance with all published MSRB rules and that broker-dealers subscribing to the System will not violate any MSRB rules by virtue of their use of the System. You request clarification regarding the applicability of certain provisions of rules G-21, G-30 and G-32 to broker-dealers using the System. As noted above, the MSRB cannot provide an “approval” of a proposed system or of its use by broker-dealers. We can, however, provide some guidance regarding your specific rule-related interpretive requests. Since the application of rules to particular factual situations is, by its nature, fundamentally dependent upon the specific facts and circumstances, you should be cognizant of the precise nature of our guidance and of the potential for seemingly small factual variances resulting in different conclusions regarding compliance with our rules.

Rule G-30, on Prices and Commissions

You ask us whether we view use of the System by broker-dealers to establish a range of reoffering prices (instead of a single reoffering price) as compliant with the requirement under rule G-30, on prices and commissions, that municipal securities prices be fair and reasonable. We cannot provide you with assurance that under all circumstances prices charged to customers by broker-dealers using the System will comply with rule G-30. However, the following discussion should provide some guidance in assessing whether broker-dealers using the System will be able to comply with rule G-30.

Rule G-30(a) provides that no broker-dealer shall sell municipal securities to a customer in a principal transaction except at a price that is fair and reasonable, taking into consideration all relevant factors.[1] The rule cites, as relevant factors, the best judgment of the broker-dealer as to the fair market value of the securities at the time of the transaction, the expense involved in effecting the transaction, the fact that the broker-dealer is entitled to a profit, and the total dollar amount of the transaction.[2] In addition, the MSRB has identified a number of other factors which might be relevant in determining the fairness and reasonableness of prices in municipal securities transactions. These additional factors include, but are not limited to, the availability of the security in the market, the price or yield of the security, the maturity of the security, and the nature of the professional’s business.[3] The MSRB firmly believes that the resulting yield to the customer is the most important factor in determining the fairness and reasonableness of a price in any given transaction. The MSRB previously has stated that such yield should be comparable to the yield on other securities of comparable quality, maturity, coupon rate, and block size then available in the market.

Although a comparative yield assessment is the most important factor in determining whether a transaction price is fair and reasonable, rule G-30 states that other facts and circumstances of a specific transaction may also enter into the final determination of whether the transaction price is fair and reasonable. Thus, rule G-30 clearly contemplates the possibility that, depending upon the facts and circumstances of two contemporaneous transactions in identical securities, both transactions may be priced in compliance with rule G-30 even though the prices are not identical. It is not possible to state a specific percentage of variance between prices on contemporaneous transactions that would create a presumption of a violation of rule G-30 with respect to the higher priced transaction since a number of different factors may be relevant to the individual transactions.[4] However, the degree to which price variances may occur without raising the presumption of a rule G-30 violation generally would parallel the level of variance in the relevant factors under rule G-30 from transaction to transaction in the same security. For example, a large difference in the par value of two transactions could potentially justify a larger price difference than would a small difference in the par value of the two transactions.

The MSRB has stated that, although rule G-30 does not specifically mention new issue offering prices which may be set by the syndicate or the issuer, compliance with rule G-30 in this context also is determined by whether the price of a municipal security is fair and reasonable, taking into account all relevant factors.[5] As noted above, a comparative yield assessment is the most important factor in determining the fairness and reasonableness of a transaction price. Although it is the ultimate responsibility of the broker-dealer effecting a transaction with a customer to ensure that the price is in compliance with rule G-30, the issuer and underwriter may help broker-dealers using the System to avoid possible violations of rule G-30 by carefully reviewing the ranges of yields and prices entered by the underwriter into the System to ensure that the net yield to customers[6] would be comparable to that of similar securities regardless of where within the established ranges a transaction is executed by a broker-dealer using the System.

Rule G-32, on Disclosures in Connection with New Issues

You provide us with a sample of proposed language to be included in the official statement for new issue municipal securities to be sold using the System. This language indicates the lowest price at which any of the securities in the new issue are offered and also indicates a range of maximum prices at which the securities are offered based on various lot sizes of the securities sold in a particular transaction. The language further states that, subject to the practices of each broker-dealer firm in the selling group, investors may have purchased the securities at prices lower than those shown in the range of maximum prices included in the official statement. Finally, the language provides a specific dollar amount representing the total compensation paid to the underwriter as representative of the selling group. You ask us whether inclusion of such language in the official statement by issuers using the System complies with rule G-32.

Rule G-32(a)(ii) provides that, in connection with new issue municipal securities purchased by the underwriter in a negotiated sale, any broker-dealer selling such securities to a customer must deliver to the customer by no later than settlement information regarding, among other things, the underwriting spread and the initial offering price for each maturity in the issue, including maturities that are not reoffered.[7] The MSRB has stated that the obligation to disclose the underwriting spread requires that the broker-dealer disclose the difference between the initial offering price of the new issue and the amount paid by the underwriter to the issuer, expressed either in dollars or points per bond.[8] The MSRB has prohibited broker-dealers from merely disclosing to customers the offering prices and amount paid to the issuer and describing how the underwriting spread can be calculated from these figures.[9] The MSRB has stated that initial offering prices may be expressed either in terms of dollar price or yield.[10]

The MSRB recognizes that disclosure of initial offering prices and underwriting spread is more complicated in circumstances where securities of the same maturity may be offered at a number of different prices, as compared to the typical situation where each maturity is stated to be offered at a single price. The MSRB believes that, under these circumstances, the initial offering prices and underwriting spread may be expressed as a range of values.

In expressing the initial offering prices as a range of values, broker-dealers must ensure that the prices at which the securities are initially offered to customers will fall within the expressed range. At the same time, the MSRB believes that the disclosure of a range of prices must not be misleading to customers. For example, a range that implies that a market may exist at prices where in fact no transactions are likely to occur could be misleading. In addition, a range that includes prices that are not fair and reasonable for purposes of rule G-30 could mislead customers with regard to what would in fact constitute a fair and reasonable price. These and other practices arising in connection with the disclosure of a range of initial offering prices could constitute violations of rule G-17[11] and would not satisfy the disclosure obligation under rule G-32. Broker-dealers are cautioned, when using a range to disclose initial offering prices, to make such range as narrow as reasonably possible in order to avoid violations of rules G-17 and G-32. For example, if broker-dealers have established discrete price ranges for specific securities within the issue (e.g., separate maturities) or for specific types of transactions (e.g., different lot sizes), they should include such discrete ranges in the disclosure made to customers. The initial offering price range must be expressed either in terms of dollar prices or yields.

In expressing the underwriting spread as a range of values, the range must be no broader than would be obtained by calculating the lowest possible spread based on all of the lowest initial offering price values and the highest possible spread based on all of the highest initial offering price values. This range should be further refined based on specific information available to the broker-dealer (e.g., minimum or maximum spreads agreed to between the issuer and the underwriter, fixed components of the gross spread, known levels of transactions at particular prices, etc.).[12] Broker-dealers may show this spread range either as a range of a total amount or as a listing of the components of the spread range. If components of the spread range are listed, that portion of the range which represents compensation to the underwriter must be clearly identified as such. The spread range must be expressed either in dollars or points per bond.

Rule G-21, on Advertising

You state that you do not believe that Electronic Notices constitute advertisements within the meaning of rule G-21, which sets forth certain requirements with respect to advertisements of municipal securities. An advertisement is defined as any material (other than listings of offerings) published or designed for use in the public, including electronic, media or any promotional literature designed for dissemination to the public, including any notice, circular, report, market letter, form letter, telemarketing script or reprint or excerpt of the foregoing. The rule covers communications that are intended to reach a broad segment of the public rather than individually tailored communications between two specific parties and communications between broker-dealers. Thus, if the use of Electronic Notices is limited in the manner you describe in your letter, it appears that such Electronic Notices would not constitute advertisements within the meaning of rule G-21. However, we express no opinion as to whether Electronic Notices might constitute advertisements if they were to be disseminated to investors.

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I must emphasize once again that the guidance provided in this letter cannot be considered an “approval” of the System. Further, this guidance cannot be considered to provide or imply that broker-dealers using the System will, under all circumstances, be in compliance with the rules discussed herein. Nor can this guidance be considered to provide or imply that the operation of the System or the use of the System by broker-dealers is in compliance with any other rules of the MSRB or the laws, rules or regulations of any other entity. MSRB interpretation of December 11, 2001.

Municipal finance professional: supervisor.  This is in response to your inquiry seeking guidance regarding the possible classification as a municipal finance professional under rule G-37 of a Taxable Department Head at your firm. You stated that the Taxable Department Head is the direct supervisor of a Branch Manager and this Branch Manager manages a sales representative who has solicited municipal securities business from an issuer. You state that it is clear that the Branch Manager and the sales representative are both municipal finance professionals. However, you further state that the Taxable Department Head has delegated all Public Finance/Municipal oversight responsibilities to the Public Finance Department Head for the Taxable Department Head's personnel. You ask whether, under these circumstances, the Taxable Department Head would be considered a municipal finance professional under rule G-37 as a result of his or her supervisory position.

The term "municipal finance professional" is defined in rule G-37(g)(iv). Clauses (C) and (D) of the definition set forth the basis for considering an associated person of a dealer to be a municipal finance professional as a result of his or her supervisory position. Clause (C) includes any associated person who is both (i) either a municipal securities principal or municipal securities sales principal and (ii) a supervisor of any associated person either primarily engaged in municipal securities representative activities or who solicits municipal securities business (referred to herein as a "primary municipal securities supervisor"). Clause (D) includes any associated person who is a supervisor of a primary municipal securities supervisor up through and including (in the case of a non-bank dealer) the Chief Executive Officer or similarly situation official (referred to herein as a "secondary municipal securities supervisor").

Unlike in the case of a primary municipal securities supervisor, a secondary municipal securities supervisor is not required to be a municipal securities principal or municipal securities sales principal. The status of a secondary municipal securities supervisor as a municipal finance professional is not conditioned on the areas in which such supervisor has responsibility over a primary municipal securities supervisor, so long as such secondary municipal securities supervisor retains some degree of supervisory responsibility (whether or not relating to municipal securities activities) over the primary municipal securities supervisor.  MSRB interpretation of November 23, 1999.

Financial advisory relationship: private placements. This is in response to your letter in which you seek clarification on certain matters related to rules G-23, on activities of financial advisors, and G-37, on political contributions and prohibitions on municipal securities business.

You ask when it is "necessary in the process of commencing preliminary work with a potential financial advisory client to enter into a formal written financial advisory contract." Rule G-23(c) states that "[e]ach financial advisory relationship shall be evidenced by a writing entered into prior to, upon or promptly after the inception of the financial advisory relationship (or promptly after the creation or selection of the issuer if the issuer does not exist or has not been determined at the time the relationship commences)." Rule G-23(b) states that "...a financial advisory relationship shall be deemed to exist when a broker, dealer or municipal securities dealer renders or enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such issue or issues, for a fee or other compensation or in expectation of such compensation for the rendering of such services."

You ask whether you are to advise the Board by means of reporting on Form G-37/G-38 or by any other means when you commence work on subsequent financing transactions with an issuer with which your firm has an ongoing financial advisory contract. The Instructions for Completing and Filing Form G-37/G-38 provide a guideline to use in determining when to report financial advisory services on Form G-37/G-38.[1] Pursuant to these Instructions, dealers should indicate financial advisory services when an agreement is reached to provide the services. In addition, the Instructions note that dealers also should indicate financial advisory services during a reporting period when the settlement date for a new issue on which the dealer acted as financial advisor occurred during such period. There are no other requirements for reporting financial advisory services to the Board.

Finally, you ask whether rules G-23 or G-37 contain requirements concerning private placement activities. The term "municipal securities business" is defined in rule G-37 to include "the offer or sale of a primary offering of municipal securities on behalf of any issuer ( e.g. , private placement)..." The Instructions for Completing and Filing Form G-37/G-38 provide that private placements should be indicated at least by the settlement date if within the reporting period.

With respect to rule G-23, section (d) of the rule states that no dealer that has a financial advisory relationship with respect to a new issue of municipal securities shall acquire as principal either alone or as a participant in a syndicate or other similar account formed for the purpose of purchasing, directly or indirectly, from the issuer all or any portion of such issue, or act as agent for the issuer in arranging the placement of such issue, unless various actions are taken.[2] In addition, rule G-23(g) states that each dealer subject to the provisions of sections (d), (e) or (f) of rule G-23 shall maintain a copy of the written disclosures, acknowledgments and consents required by these sections in a separate file and in accordance with the provisions of rule G-9, on preservation of records. Finally, rule G-23(h) states that, if a dealer acquires new issue municipal securities or participates in a syndicate or other account that acquires new issue municipal securities in accordance with section (d) of rule G-23, such dealer shall disclose the existence of the financial advisory relationship in writing to each customer who purchases such securities from such dealer, at or before the completion of the transaction with the customer. MSRB interpretation of October 5, 1999.

[1] I have enclosed a copy of the Instructions for Completing and Filing Form G-37/G-38 as contained in the MSRB Rule Book. The instructions are also contained on the Board's web site (www.msrb.org) under the link for rule G-37.

[2] These actions are: (i) if such issue is to be sold by the issuer on a negotiated basis, (A) the financial advisory relationship with respect to such issue has been terminated in writing and at or after such termination the issuer has expressly consented in writing to such acquisition or participation, as principal or agent, in the purchase of the securities on a negotiated basis; (B) the dealer has expressly disclosed in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing to the dealer receipt of such disclosure; and (C) the dealer has expressly disclosed in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation referred to in section (c) of rule G-23, and the issuer has expressly acknowledged in writing to the dealer receipt of such disclosure; or (ii) if such issue is to be sold by the issuer at competitive bid, the issuer has expressly consented in writing prior to the bid to such acquisition or participation.

MUNICIPAL FUND SECURITIES - REVISED DRAFT RULE CHANGES

The Board is requesting further comments on revised draft rule changes relating to municipal fund securities. Comments are due by November 1, 1999.
 

        On March 17, 1999, the Municipal Securities Rulemaking Board (the "Board") published a notice (the "March Notice") requesting comments on draft rule changes relating to transactions effected by or through brokers, dealers and municipal securities dealers ("dealers") in municipal fund securities (as defined below).⁽¹⁾ The Board received comments from eleven commentators. After reviewing these comments, the Board has determined to republish the draft rule changes, with certain modifications and additions (including a revision to exempt municipal fund securities from underwriting assessments), for further comment from industry participants.

        The Board believes that many of the comments reflect a misunderstanding of the nature of the Board's rulemaking proposals and therefore the Board is taking this opportunity to clarify the scope and intent of these proposals. Specifically, the Board wishes to emphasize that the draft rule changes would not extend the reach of Board rules. Rather, they seek to make Board rules that are already applicable to municipal fund securities more accommodating to the unique features of such securities. Dealers should understand that Board rules apply to their transactions in any security that is a municipal security, regardless of whether the dealer is aware of the security's status. Although the Board does not have authority to direct enforcement of its rules, it is statutorily charged with determining the best means of protecting investors and the public interest in regard to dealer transactions in municipal securities. As such, the Board believes that, under the unique circumstances relating to municipal fund securities, enforcement of its rules with regard to transactions in such securities that occurred prior to the industry having been put on notice of their applicability would serve no substantial investor protection purpose, absent extraordinary circumstances or a showing of investor harm resulting from a material departure from standards of fairness generally applicable under the federal securities laws.
 

SCOPE AND INTENT OF BOARD RULEMAKING WITH RESPECT TO MUNICIPAL FUND SECURITIES

        Dealers that effect transactions in municipal securities are subject to the Board's jurisdiction pursuant to Section 15B of the Securities Exchange Act of 1934 (the "Exchange Act"). In particular, Section 15B(c)(1) prohibits dealers from effecting transactions in, or inducing or attempting to induce the purchase or sale of, a municipal security in contravention of any Board rule. Thus, since enactment of Section 15B and the creation of the Board in the Securities Acts Amendments of 1975 (the "Securities Acts Amendments"), a transaction effected by a dealer in a municipal security must be effected in conformity with Board rules.

        In the March Notice, the Board reviewed two types of state or local governmental programs involving investment interests in which dealers may effect transactions: pooled investment funds under trusts established by state or local governmental entities ("local government pools")⁽²⁾ and higher education savings plan trusts established by states ("higher education trusts").⁽³⁾ These programs had been brought to the Board's attention by staff of the Securities and Exchange Commission (the "SEC"). In response to a Board inquiry as to the SEC's position on whether interests in such programs were municipal securities, SEC staff stated that "at least some interests in local government pools and higher education trusts may be, depending on the facts and circumstances, 'municipal securities' for purposes of the Exchange Act."⁽⁴⁾

        Board rules do not apply to any interest in a local government pool or higher education trust that is not a municipal security. In addition, Board rules apply only to activities of dealers that effect municipal securities transactions. Thus, Board rules do not apply to an issuer of, or a non-dealer entity providing advice to issuers in regard to, municipal securities, including municipal fund securities. However, to the extent that interests in a local government pool or a higher education trust are municipal securities and dealers are effecting transactions in them, Board rules automatically govern such dealer transactions, without the necessity of further Board rulemaking^.(5) On several previous occasions, the Board has alerted the industry to the applicability of Board rules to (and has proposed rule changes to accommodate) transactions in new forms of municipal securities or pre-existing forms of securities that many in the industry had not previously recognized as municipal securities.⁽⁶⁾

        A municipal fund security is defined as a municipal security issued by an issuer that, but for Section 2(b) of the Investment Company Act of 1940 (the "Investment Company Act"),⁽⁷⁾ would constitute an investment company under that Act. Thus, Board rules on municipal fund securities would apply to interests in a state or local governmental trust, such as local government pools and higher education trusts,⁽⁸⁾ only if the following three conditions are met:

1. A dealer is engaging in transactions in such interests;
2. Such interests, in fact, constitute municipal securities; and
3. Such interests are issued by an issuer that, but for the exemption under Section 2(b) of the Investment Company Act, would be considered an investment company within the meaning of that Act.

        The Board understands that municipal fund securities may not have features typically associated with more traditional municipal securities. Instead, their features are similar to those of investment company securities.⁽⁹⁾ In the March Notice, the Board stated that, although its rules generally have been drafted to accommodate the characteristics of debt securities, it believes that most current rules can appropriately be applied to municipal fund securities. Nonetheless, the Board felt that certain rules should be amended to recognize the unique characteristics of municipal fund securities. The draft rule changes did not seek to extend the reach of Board rules, since the rules already apply to municipal fund securities, but sought to tailor certain Board rules to the nature of municipal fund securities.

DISCUSSION OF COMMENTS AND DRAFT RULE CHANGES
 

Authority of Board to Adopt Draft Rule Changes
 

        Comments Received. Some commentators state that the Board has no authority to regulate municipal fund securities, particularly local government pool interests.⁽¹⁰⁾ They state that such interests are not municipal securities under the Exchange Act. They argue that the term "municipal securities" is limited to debt obligations of municipal issuers and that interests in local government pools represent equity interests in trust assets, not debt obligations.⁽¹¹⁾ Another commentator questions whether Congress intended that the Board regulate local government pools when it created the Board.

        Board Response. As previously stated, a security must first be a municipal security in order to be a municipal fund security. The draft rule changes would not, and existing Board rules do not, apply to local government pool or higher education trust interests that are not municipal securities. Thus, the Board does not overstep its authority by regulating dealer transactions in municipal fund securities since, by definition, regulation is limited to interests that are municipal securities.

        A firm wishing to determine if Board rules apply to services it provides to an issuer of local government pool or higher education trust interests may seek advice of counsel as to whether (1) such services constitute broker-dealer activities, or (2) such interests are municipal securities. It may seek comfort on counsel's opinion from SEC staff through the SEC's no-action procedure. If a non-dealer firm's activities do not constitute broker-dealer activities, the firm need not be a registered broker or dealer subject to Board rules, even if the interests are municipal securities.⁽¹²⁾ If the interests are not municipal securities, the dealer need not comply with Board rules; however, the dealer's activities may be subject to Exchange Act provisions and SEC and National Association of Securities Dealers ("NASD") rules, unless the interests otherwise qualify for an exemption (e.g., as exempted securities other than municipal securities) under the Exchange Act.

        Of course, the Board's rulemaking proposal is meaningful only if municipal fund securities, in fact, exist. As noted above, the Board sought comfort from SEC staff that local government pool and higher education trust interests are municipal securities. SEC staff replied that "at least some interests in local government pools and higher education trusts may be, depending on the facts and circumstances, 'municipal securities' for purposes of the Exchange Act."⁽¹³⁾ Although the Board is not empowered to determine whether a security is a municipal security within the meaning of Section 3(a)(29) of the Exchange Act, the Board believes that, based on this SEC response as well as a close review of existing no-action letters and legislative history of the Securities Acts Amendments, the Exchange Act and the Securities Act of 1933 (the "Securities Act"), as discussed below, at least some interests in local government pools and higher education trusts are municipal securities.

        For example, in agreeing not to recommend enforcement action in several no-action letters, SEC staff relied on opinions of counsel that interests in state or local governmental trusts were municipal securities under the Exchange Act.⁽¹⁴⁾ In one instance, SEC staff agreed not to recommend enforcement action if a dealer, in offering and selling interests in a higher education trust, were to comply with Board rules as they have been proposed to be amended in the March Notice, in lieu of complying with such rules as currently in effect.⁽¹⁵⁾ In another no-action letter, SEC staff agreed not to recommend enforcement action if dealers (1) sold interests in a higher education trust through persons qualified to sell investment company products but who did not meet the Board's professional qualification requirements⁽¹⁶⁾ and (2) complied with Rule 15c2-12(b)(5) through a continuing disclosure undertaking from a dealer affiliate, rather than from the issuer. In reaching this position, SEC staff noted that the higher education trust interests were "atypical municipal securities."⁽¹⁷⁾

        In other instances, SEC staff agreed not to recommend enforcement action if state entities and their employees sold higher education trust interests without registering as brokers.⁽¹⁸⁾ The applicants opined in these cases that the interests were municipal securities under the Exchange Act, thereby exempting the issuers from registering as brokers by virtue of the exemption for issuers of municipal securities set forth in Section 3(d).⁽¹⁹⁾ SEC staff also agreed not to recommend enforcement action if interests in a state trust were not registered under the Exchange Act, in reliance on an opinion that the exemption under Section 3(a)(12) of the Exchange Act for exempted securities was available.⁽²⁰⁾

        SEC staff also has taken the position that non-debt securities may be municipal securities under the Exchange Act.⁽²¹⁾ In one case, SEC staff was unable to conclude that receipts/certificates evidencing developers' payments to a city of fees for the issuance of building permits could not be considered municipal securities under the Exchange Act.⁽²²⁾ SEC staff also has advised the Board that warrants sold by a municipal corporation entitling the holders to purchase other municipal securities of that corporation are themselves municipal securities under the Exchange Act.⁽²³⁾ Finally, in those cases in which SEC staff concluded that an "obligation" within the meaning of the Internal Revenue Code would also constitute an "obligation" for purposes of Section 3(a)(29) of the Exchange Act, SEC staff did not conclude that the failure of a security to be an obligation for purposes of the Internal Revenue Code would mean that such security was not a municipal security for purposes of the Exchange Act.⁽²⁴⁾ In these cases, SEC staff was not presented with the issue of whether a non-debt security could be a municipal security. As noted above, on the last two occasions when SEC staff was confronted with this issue, it concluded that a non-debt security may be a municipal security for purposes of the Exchange Act.⁽²⁵⁾

        A review of legislative history also suggests that the commentators' position that the term "municipal securities" in the Exchange Act excludes non-debt securities is not justified. The Senate report on the Securities Acts Amendments notes that the legislation created a definition of municipal securities in new Section 3(a)(29) that, for all relevant purposes, used the same language as in the original version of the definition of exempted securities in Section 3(a)(12) of the Exchange Act.⁽²⁶⁾ It also states that no substantive changes in meaning would be effected by creating Section 3(a)(29).⁽²⁷⁾ Thus, the import of the term "municipal securities" must be viewed through the eyes of the original drafters of the Exchange Act in 1934 rather than the drafters of the Securities Acts Amendments in 1975.

        The purpose of including municipal securities in the definition of exempted securities in the Exchange Act was to provide an exemption from most provisions of that Act. Although commentators suggest that Board regulation of dealer transactions in non-debt securities of municipal issuers is inconsistent with the intent of the drafters of the Securities Acts Amendments, the appropriate inquiry is whether the drafters of the original Exchange Act would have intended that only debt securities of municipal issuers be exempted from most provisions of the Exchange Act. That is, would the drafters of the original Exchange Act have intended that non-debt securities of state or local governmental entities - had such securities existed at the time - be subject to the entire range of regulation of the Exchange Act applicable to other equity securities, including in some instances a requirement for registration of such securities with the SEC? A review of Congressional debates, committee reports and hearing testimony relating to enactment of the Securities Act and the Exchange Act reveals that, in spite of differences in statutory language, both Acts were expected to exempt the same universe of municipal securities.

        For example, the 1933 House report on the Securities Act speaks of exempted state and local government securities almost exclusively in terms of "obligations" and "bonds," not "securities."⁽²⁸⁾ The report explains the exemption set forth in Section 3(a) of the Securities Act as follows:

        Paragraph (2) exempts United States, Territorial and State obligations, or obligations of any political subdivision of these governmental units. The term "political subdivision" carries with it the exemption of such securities as county, town, or municipal obligations, as well as school district, drainage district, and levee district, and other similar bonds. The line drawn by the expression "political subdivision" corresponds generally with the line drawn by the courts as to what obligations of States, their units and instrumentalities created by them, are exempted from Federal taxation. By such delineation, any constitutional difficulties that might arise with reference to the inclusion of State and municipal obligations are avoided.⁽²⁹⁾

        Furthermore, during Congressional debate and hearings held in 1933 on the Securities Act, members of Congress used the terms "securities," "obligations" and "bonds" interchangeably.⁽³⁰⁾ Thus, although the statutory language in the Securities Act uses only the term "securities" and not the term "obligations" when describing municipal securities, there is no suggestion that Congress had anything in mind when enacting the Securities Act other than the tax-exempt bonds and other debt obligations of state and local governments that are customarily associated with municipal securities. Nonetheless, the commentators all have agreed that local government pool and higher education trust interests are exempt from the Securities Act and none has suggested that this exemption is limited to tax-exempt debt obligations.

        The initial Exchange Act draft introduced in Congress the following year exempted federal government securities but not municipal securities. Members of Congress expressed concern regarding the appropriateness of federal regulation of state and local governmental matters,⁽³¹⁾ the burden that Exchange Act provisions would place on state and local issuers⁽³²⁾ and the relative detriment in the market to municipal securities if they were not exempted but federal government securities were exempted.⁽³³⁾ Some discussion focused on whether a distinction should be drawn between defaulted and non-defaulted municipal securities.⁽³⁴⁾ Ultimately, the language that was added to the Exchange Act to exempt municipal securities made no such distinction but instead was drafted in non-exclusive terms that paralleled the language used in the Exchange Act to describe federal government securities. This language also employed the same type of terminology that the drafters of the Securities Act had used in the legislative history to explain the statutory language on municipal securities in that Act.⁽³⁵⁾ Legislative history does not reflect any intent or understanding that the municipal securities contemplated in the Exchange Act were any different than those that were already exempted under the Securities Act.⁽³⁶⁾ It would be inconsistent with legislative intent to limit the exemption under the Exchange Act solely to debt securities of state and local governments without similarly limiting the reach of the exemption provided in the Securities Act.

        Finally, in using the same term - "municipal securities" - that sets out the exemption from most Exchange Act provisions to also delineate the Board's rulemaking authority under Section 15B of the Exchange Act, Congress elected in the Securities Acts Amendments to grant the Board jurisdiction over dealer transactions in the identical universe of securities as were otherwise exempted from the Exchange Act as municipal securities. Thus, even if Congress did not have interests in local government pools or higher education trusts in mind when enacting the Securities Acts Amendments, it did have a specific intent that the Board would have authority over dealer transactions in any security that would constitute an exempted security by virtue of being a municipal security. In creating the Board, the Senate report on the Securities Acts Amendments stated that it would not "be desirable to restrict the Board's authority by a specific enumeration of subject matters. The ingenuity of the financial community and the impossibility of anticipating all future circumstances are obvious reasons for allowing the Board a measure of flexibility in laying down the rules for the municipal securities industry."⁽³⁷⁾ The fact that certain types of instruments (such as non-debt securities of state or local governments) were essentially non-existent at the time of enactment of the Securities Acts Amendments did not, in the minds of the drafters, mean that regulations relating to newly created instruments would not be within the Board's power.⁽³⁸⁾

Appropriateness of Regulating Dealer Transactions in Municipal Fund Securities
 

        Comments Received. Commentators state that, even if the Board has authority to adopt the draft rule changes, the Board should refrain from doing so. They argue that no need has been demonstrated for regulation to protect investors or the public interest in connection with local government pool interests. They state that investors are local governments and not the typical public investor in municipal securities.⁽³⁹⁾ They also argue that offerings of interests in local government pools do not pose risks that are similar to those identified in the legislative history of the Securities Acts Amendments.⁽⁴⁰⁾ One commentator argues that safeguards already exist to provide investor protections comparable to those in the draft rule changes.⁽⁴¹⁾

        Some commentators state that Board rulemaking would adversely impact state and local governments. In particular, they believe that underwriting assessments would be passed on, directly or indirectly, to issuers and issuers would face additional administrative burdens as a result of the application of Board rules. They note that any increased costs to issuers likely would be passed on to investors in the form of lower returns on their investments.

        Commentators also state that interests in local government pools involve transactions between the state or local government-sponsored pools and participating local governmental entities of that same state. One commentator believes that Board rulemaking would be inconsistent with the Tenth Amendment and transactions in local government pool interests do not constitute interstate commerce. Furthermore, noting that the Exchange Act does not require registration of a broker or dealer whose business is exclusively intrastate, this commentator suggests that the Board "follow Congress's restraint in approaching intrastate transactions in securities." Finally, it states that regulation of transactions in these interests would "improperly intrude on state sovereignty" by indirectly regulating states by mandating actions by their agents.

        Board Response. As the Board has previously observed, the current rulemaking proposal would not subject dealer transactions in municipal fund securities to Board rules but instead would make certain Board rules, to which such transactions are already subject, better accommodate the nature of these securities. Making Board rules fit the characteristics of municipal fund securities is an appropriate Board undertaking. Also, Board rules do not govern the actions of issuers; instead, they impose standards on dealers effecting transactions in the securities of such issuers. In establishing the Board, Congress determined that dealer regulation was the appropriate manner of providing investor protection in the municipal securities market while maintaining the existing exemption for issuers.⁽⁴²⁾

        The definition of customer under rule D-9 includes issuers, except in connection with sales of an issuer's new issue municipal securities, and therefore Board rules contemplate that governmental entities acting as investors are entitled to the protections afforded by such rules to all customers.⁽⁴³⁾ The Board understands that local government pools exist in nearly every state and that, in many states, more than one pool may be available to a local government.⁽⁴⁴⁾ One market observer states that these pools "can differ in their level of risk taking, internal oversight, shareholder services, and external reporting."⁽⁴⁵⁾ Although a number of pools have been rated, the vast majority remain unrated. Most local government pools appear to be designed to maintain, as nearly as possible, a constant net asset value (similar to regulated money market mutual funds), but some operate as variable net asset value pools that do not seek to maintain a constant share value. Furthermore, a number of local government pools have experienced financial difficulties.⁽⁴⁶⁾ These factors suggest that investor protection issues may be raised in connection with the sale by dealers of interests in local government pools.⁽⁴⁷⁾ The Board believes that investor protection issues also may arise with respect to sales by dealers of interests in higher education trusts.⁽⁴⁸⁾ For example, the Board believes that dealers have suitability obligations if they recommend a transaction in a local government pool or higher education trust interest to a local government or an individual, respectively, if such interest constitutes a municipal security.⁽⁴⁹⁾

        Commentators describe local government pools as being operated "consistent with" the federal securities laws applicable to investment companies and managed and administered in a manner "similar" to money market mutual funds, "where practicable." These comments imply that many programs in fact deviate to some degree from their voluntary compliance with existing federal regulations that would be applicable to these programs if they were not operated by state or local governmental entities. However, the Board notes that its proposed rulemaking would not impose requirements on issuers and in fact has been drafted with the understanding that dealers may be effecting transactions in securities that are similar, but not identical, to investment company securities. In that respect, the Board believes that its proposed rulemaking is more suitable for dealers effecting transactions in municipal fund securities than existing SEC and NASD rules applicable to dealer transactions in investment company securities since some such rules impose obligations on dealers based on the assumption that issuers, as registered investment companies, must comply with federal investment company laws and regulations. Thus, a dealer might have difficulty in complying with the letter of existing regulations relating to securities of registered investment companies where the issuer of a local government pool or higher education trust interest has chosen not to voluntarily comply with the provisions that would be obligatory if it were a registered investment company. As is the case with all existing Board rules, the current rulemaking proposal recognizes that issuers, as largely unregulated entities, may act in widely divergent manners. Thus, obligations placed on dealers should be sufficiently flexible to permit dealers to act in a lawful manner in view of this wide divergence of circumstances while maintaining an adequate level of customer protection.

        The Board believes that state regulation, federal rules applicable to investment advisors and Governmental Accounting Standards Board statements, although providing important protections in the areas governed by such rules and standards, do not serve as a substitute for regulation tailored specifically toward dealer activities in municipal fund securities. Furthermore, the Board believes that voluntary adherence to the substance of existing rules applicable to investment company securities and/or other equity securities provides inadequate protection to investors since dealers are free to deviate from these rules in any manner and at any time they choose without any apparent legal consequence. The existence of these collateral safeguards do not justify the Board refraining from making its rules more rational with respect to such securities.

        Finally, with regard to the argument that interests in local government pools are strictly intrastate in nature and therefore are not the appropriate subject of federal regulation, Board rules currently do not apply to any entity that, by virtue of the fact that its business is exclusively intrastate, is not registered as a broker or dealer under Section 15 of the Exchange Act. Beyond this, the federal securities laws provide that, once an entity engages in some interstate activities that require it to register under the Exchange Act, the broker-dealer rules applicable to such entity apply to both its interstate and intrastate transactions. We believe that Congress has made clear its policy determination that intrastate transactions of registered broker-dealers should be subject to broker-dealer regulation.⁽⁵⁰⁾
 

Applicability of Existing Board Rules to Transactions in Municipal Fund Securities Effected Prior to Effectiveness of Draft Rule Changes

        Comments Received. Two commentators argue that, to the extent that the Board may have authority to regulate dealer transactions in these interests, existing Board rules relating to municipal securities do not currently apply to transactions in local government pool interests. They state that existing Board rules were never intended to apply to securities other than debt obligations, as evidenced by the Board's statement in the March Notice that its rules "generally have been drafted to accommodate the characteristics of debt obligations and not investment interests such as municipal fund securities." As a result, they believe that any interpretation by the Board to the effect that existing rules apply to municipal fund securities can only be effected through the rulemaking process.

        Board Response. As stated above, the Board believes that Section 15B(c)(1) of the Exchange Act automatically subjects any dealer transactions in municipal fund securities to Board rules. This is true regardless of whether dealers effecting such transactions are aware that municipal fund securities are, in fact, municipal securities. It is incumbent upon dealers to be aware of the nature of the securities in which they undertake transactions and it is not a defense against the applicability of Board rules that the dealer did not know that the securities were municipal securities. Thus, the Board's statement that any interest in a local government pool or a higher education trust that is a municipal security currently is subject to Board rules was a statement of fact rather than an interpretation.⁽⁵¹⁾

        The Board recognizes, however, that, prior to publication of the March Notice, it may not have been readily apparent to the vast majority of dealers, as well as to most regulatory agencies, that interests that constitute municipal fund securities were municipal securities. Although the Board does not have authority to direct enforcement of its rules, it is statutorily charged with determining the best means of protecting investors and the public interest in regard to dealer transactions in municipal securities. As such, the Board believes that, under the unique circumstances relating to municipal fund securities, enforcement of its rules with regard to transactions in such securities that occurred prior to the industry having been put on notice of their applicability would serve no substantial investor protection purpose, absent extraordinary circumstances or a showing of investor harm resulting from a material departure from standards of fairness generally applicable under the federal securities laws.
 

Structure of Draft Rule Changes

        Comments Received. Some commentators express concern that the Board's rulemaking proposal contemplates amendments to existing rules rather than creation of a separate body of regulations. One commentator states that the "attempt to fit a totally new product or way of doing business into existing regulation that was created to address fundamentally different products and a different market structure is fraught with danger." Commentators also state that transactions in municipal fund securities should be regulated in a manner as similar as possible to the existing regulatory scheme for investment company securities.

        Board Response. The Board reviewed its existing rules and compared them, where relevant, to rules that govern dealer transactions in securities of registered investment companies. In many respects, Board rules are functionally identical to such existing rules. In other cases, existing SEC or NASD rules provide a more appropriate method of regulating municipal fund securities and the Board sought to modify its rules in a manner that was consistent with such other rules. In yet other cases, the regulation of the structure and marketing of securities of registered investment companies has been effected by regulations applicable to issuers, an approach which the Board cannot, and does not seek to, duplicate. Finally, certain NASD and SEC rule provisions arise out of specific Congressional authorization in the Investment Company Act applicable to securities of registered investment companies but not applicable to unregistered municipal fund securities.

        Under the circumstances, the Board believes that its approach is appropriate. The Board sought industry comment on the draft rule changes and, in those circumstances where commentators noted specific shortcomings, the Board considered the merits of the comments and made revisions where appropriate. The Board was disappointed that several commentators chose to comment almost exclusively on jurisdictional issues and hopes that they will now address the details of, and any concerns raised by, the revised draft rule changes.

Specific Rule Provisions
 

        Rule A-13, on Underwriting Assessments. In the March Notice, the Board states that sales of municipal fund securities are made in a primary offering subject to the underwriting assessment in rule A-13.⁽⁵²⁾ The draft amendment to rule A-13 would have provided for the imposition of an underwriting assessment with respect to such sales of municipal fund securities.

        Most commentators express concern regarding the assessment of underwriting fees on sales of municipal fund securities. Some suggest that such sales should be exempted from the underwriting assessment. They state that the fee structure for dealers involved in the distribution of municipal fund securities is more like an administrative fee than an underwriting discount or commission since these dealers do not undertake underwriting risks. As a result, they state that fees generally are fixed and are low relative to traditional underwriting fees. Because of these small margins, a number of commentators state that underwriting assessments would be passed on to issuers and therefore would represent a financial burden on the issuers' programs.⁽⁵³⁾

        Some commentators state that, given the volume of investments and redemptions in many municipal fund securities programs,⁽⁵⁴⁾ the level of fees generated by the Board from underwriting assessments would be disproportionate to the resulting regulatory costs. One commentator states that, if assessments are imposed, they should be at a significantly lower level than the assessments charged in connection with more traditional municipal securities offerings.⁽⁵⁵⁾

        Based on the comments, the Board has revised the draft amendment to rule A-13 to exempt sales of municipal fund securities from the underwriting assessment. The continuous nature of offerings in municipal fund securities, the programmatic nature of most customer investments and the heightened potential that underwriting assessments could create significant financial burdens on issuers to their customers' detriment justify caution in imposing the underwriting assessment. The Board also wishes to make clear that it does not intend to seek payment of any previously accrued underwriting assessments that may technically be due and owing on prior sales of municipal fund securities.

        Draft Rule D-12, on Definition of "Municipal Fund Security". Draft rule D-12 defines municipal fund security as a municipal security that would be an investment company security under the Investment Company Act but for the fact that the issuer is a state or local governmental entity or instrumentality. For a security to constitute a municipal fund security, the security must first constitute a municipal security. The draft amendments would not apply to any local government pool or higher education trust interest that is not a municipal security. The Board has not revised the draft definition.⁽⁵⁶⁾

        Rule G-3, on Professional Qualifications. The draft amendment to rule G-3 would permit an associated person qualified as an investment company limited representative to effect transactions in municipal fund securities (but no other municipal securities).⁽⁵⁷⁾ A dealer must have municipal securities principals as required under rule G-3(b), even if the dealer's only municipal securities transactions are sales of municipal fund securities. The Board has not revised this draft amendment.⁽⁵⁸⁾

        Rule G-8, on Recordkeeping. The draft amendment to rule G-8 would recognize that municipal fund securities do not have par values, dollar prices, yields and accrued interest and that some investment company limited representatives would be permitted to effect transactions in municipal fund securities. The Board did not receive comments on its draft amendment to rule G-8. However, in conjunction with revisions to the draft amendment to rule G-15 described below, the Board is proposing an additional revision to rule G-8 to require that dealers retain copies of all periodic statements delivered to customers in lieu of individual confirmations.

        Rule G-14, on Transaction Reporting. The draft rule change would make a technical modification in rule G-14(b)(i) to make clear that certain types of municipal securities transactions may be excluded from transaction reporting as provided in the Rule G-14 Transaction Reporting Procedures. In the Procedures, the language change would expressly exempt any transaction in municipal fund securities from the customer transaction reporting system.⁽⁵⁹⁾ The Board did not receive comments on, and has not revised, these draft amendments.

        Rule G-15, on Customer Confirmations. The draft amendment to rule G-15 would effect changes relating to the concepts of par value, yield, dollar price, maturity date and interest, none of which would appropriately apply to a municipal fund security. Thus, on a confirmation of a municipal fund securities transaction, a dealer would use the purchase or sale price of the securities (as appropriate) rather than par value and would omit yield, dollar price, accrued interest, extended principal, maturity date and interest rate. Dealers selling municipal fund securities would be required to include the denomination or purchase price of each share or unit as well as the number of shares or units to be delivered. Confirmations of municipal fund securities transactions would require a disclosure to the effect that a deferred commission or other charge may be imposed upon redemption, if applicable.⁽⁶⁰⁾ The amendment also would make clear that dealers must confirm redemptions of municipal fund securities. Finally, the amendment would permit dealers to use quarterly statements, rather than transaction-by-transaction confirmations, if customers are purchasing such securities in an agreed amount on a periodic basis, in a manner similar to the periodic reporting provision under Exchange Act Rule 10b-10.

The Board received a number of technical comments on various provisions in rule G-15:⁽⁶¹⁾

        Periodic Statements - Rule G-15(a)(vi)(G) and (a)(viii) - Some commentators state that the draft amendments would require individual confirmations for each transaction in local government pool interests and suggest that dealers be permitted to use monthly statements.⁽⁶²⁾ Another commentator states that transactions in higher education trust interests that are not effected pursuant to a periodic plan should nonetheless qualify for periodic statements in lieu of individual transaction confirmations.⁽⁶³⁾

        The Board has decided to revise the draft amendment to rule G-15 to provide that information regarding transactions in municipal fund securities effected in connection with a program that does not provide for periodic purchases or redemptions of municipal fund securities may be disclosed to customers on a monthly statement in lieu of transaction confirmations.⁽⁶⁴⁾ With respect to natural persons who participate in a non-periodic program, this monthly reporting would require the written consent of such individual or of the issuer. If the issuer directs that monthly statements be used in lieu of transaction confirmations, the revised draft amendment to rule G-15(a)(viii) would permit dealers effecting transactions in such municipal fund securities to use monthly statements without obtaining the consent of any customers. In addition, the draft amendment has been revised to eliminate the requirement that customers participating in a group plan consent to the use of periodic statements in lieu of transaction confirmations.⁽⁶⁵⁾

        Rule G-15(a)(i)(A)(7) - In order to avoid the potential for ambiguity, this subparagraph has been revised to eliminate reference to denomination and to refer solely to the share purchase price.⁽⁶⁶⁾

        Rule G-15(a)(i)(C) and (a)(i)(B)(1) - A commentator notes that the Board did not provide guidance regarding the securities descriptive information required to be included under paragraph (a)(i)(C) and states that such paragraph should not be applicable to municipal fund securities. In the alternative, it suggests that confirmations should not be required to state that municipal fund securities are unrated.⁽⁶⁷⁾ The Board has revised the draft amendment to (i) provide that a confirmation of a municipal fund security transaction need not show the information required under paragraph (a)(i)(C) other than whether the security is puttable and (ii) include a requirement in subparagraph (a)(i)(B)(1) that the confirmation include the name used by the issuer to identify the security and, to the extent necessary to differentiate the security from other municipal fund securities of the issuer, any separate program series, portfolio or fund designation. A statement to the effect that the security is unrated would not be required.

        Rule G-21, on Advertising. The Board did not propose amending rule G-21 in the March Notice. One commentator states that this rule should be revised to eliminate references to price and yield for purposes of municipal fund securities. Section (d)(i) provides that an advertisement for new issue municipal securities may show the initial reoffering price or yield, even if they have changed, so long as the date of sale is shown. In addition, it provides that if the price or yield shown in the advertisement is other than the initial price or yield, the price or yield shown must have been accurate at the time the advertisement was submitted for publication. The Board believes that these provisions do not unnecessarily restrict the manner in which municipal fund securities may be advertised nor do they mandate that an advertisement for a municipal fund security specify a price or yield.⁽⁶⁸⁾ Therefore, no change has been proposed to rule G-21.

        Rule G-26, on Customer Account Transfers. The draft amendment to rule G-26 amends the definition of "nontransferable asset" to reflect the fact that the issuer of municipal fund securities may limit which dealers may carry accounts for customers in such securities. The Board did not receive comments on, and has not revised, this draft amendment.

        Rule G-32, on New Issue Disclosures. No amendments to rule G-32 were proposed in the March Notice. However, the Board stated that municipal fund securities sold in a primary offering would constitute new issue municipal securities for purposes of rule G-32 so long as the securities are in the underwriting period. Since the Board understands that issuers of municipal fund securities are continuously issuing and delivering the securities as customers make purchases, the Board believes that municipal fund securities would remain in their underwriting period so long as such issuance and delivery continues.⁽⁶⁹⁾ Thus, a dealer effecting a transaction in a municipal fund security would be required to deliver to the customer the official statement, if one exists, by settlement of the transaction. However, in the case of a customer purchasing such securities who is a repeat purchaser, no new delivery of the official statement would be required so long as the customer has previously received it in connection with a prior purchase and the official statement has not been changed from the one previously delivered to that customer.⁽⁷⁰⁾

        One commentator expresses concern regarding the timing requirement of rule G-32 in the limited circumstances where a revision has just been made to the official statement and a customer that participates in a periodic plan makes an automatic purchase of additional shares of municipal fund securities. In spite of the best efforts of the dealer and the issuer, it may be impossible for the revised official statement to be delivered to the customer by settlement. The commentator suggests that, under these circumstances, the timing requirement under rule G-32 should be based on the sending rather than the delivery of the official statement.

        The Board is proposing a draft amendment to rule G-32 that would permit a dealer to sell, pursuant to a periodic plan, a municipal fund security to a customer who has previously received the official statement so long as it sends to the customer a copy of any new, supplemented, amended or stickered official statement promptly upon receipt from the issuer. The draft amendment also would except municipal fund securities for which periodic statements in lieu of transaction confirmations are provided from the requirement that information on the underwriting arrangements (which information would be limited to the fees paid to the dealer by the issuer) be provided to customers by settlement so long as such information is disclosed at least annually and information on any fee changes paid by the issuer to the dealer be sent to customers simultaneously with or prior to the sending of the next periodic statement.

        Rule G-33, on Calculations. The Board did not propose amending rule G-33 in the March Notice. One commentator states that this rule should be revised to eliminate references to par value, yield dollar price, maturity date and interest for purposes of municipal fund securities. By its terms, rule G-33 applies only to municipal securities that bear interest or are sold at a discount. Since municipal fund securities do not bear interest and are not sold at a discount, rule G-33 would by its nature not apply. Therefore, no change has been made to rule G-33.

        Rule G-34, on CUSIP Numbers and Depository Eligibility. The draft amendments would exempt municipal fund securities from the requirements of rule G-34 since no secondary market is expected to develop.⁽⁷¹⁾ The Board did not receive comments on, and has not revised, this draft amendment.

        Rule G-36, on Delivery of Official Statements and Form G-36(OS) to the Board. The Board did not propose amending rule G-36 in the March Notice but did state that, consistent with SEC staff's view regarding the sale in primary offerings of municipal fund securities, dealers acting as underwriters in primary offerings of municipal fund securities would be subject to the requirements of rule G-36. Thus, unless such primary offering falls within one of the stated exemptions in Rule 15c2-12, the Board expects that the dealer would receive a final official statement from the issuer or its agent under its contractual agreement entered into pursuant to Rule 15c2-12(b)(3). Such official statement should be received from the issuer in sufficient time for the dealer to send the official statement, together with Form G-36(OS), to the Board within one business day of receipt but no later than 10 business days after any final agreement to purchase, offer, or sell the municipal fund securities.⁽⁷²⁾ Since municipal fund securities remain in their underwriting period so long as they continue to be sold and delivered, the dealer would remain obligated under rule G-36(d) to send to the Board, within one business day of receipt, any amendments made to the official statement during such extended underwriting period.⁽⁷³⁾ No change has been made to rule G-36.

        Rule G-37, on Political Contributions and Prohibitions on Municipal Securities Business, and Rule G-38, on Consultants. The Board did not propose amending rules G-37 and G-38 in the March Notice but did reminded dealers that the definition of municipal securities business under such rules includes the purchase of a primary offering from the issuer on other than a competitive bid basis or the offer or sale of a primary offering on behalf of any issuer. Thus, a dealer's transactions in municipal fund securities may impact upon such dealer's obligations under rules G-37 and G-38. No changes have been made to rules G-37 and G-38.

* * * * *

Comments from all interested parties are welcome. Comments should be submitted no later than November 1, 1999, and may be directed to Ernesto A. Lanza, Associate General Counsel. Written comments will be available for public inspection.

August 27, 1999

TEXT OF DRAFT AMENDMENTS⁽⁷⁴⁾

Rule A-13. Underwriting and Transaction Assessments for Brokers, Dealers and Municipal Securities Dealers

(a) Underwriting Assessments - Scope. Each broker, dealer and municipal securities dealer shall pay to the Board an underwriting fee as set forth in section (b) for all municipal securities purchased from an issuer by or through such broker, dealer or municipal securities dealer, whether acting as principal or agent, as part of a primary offering, provided that section (b) of this rule shall not apply to a primary offering of securities if all such securities in the primary offering:

        (i)-(ii) No change.

        (iii) at the option of the holder thereof, may be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent; or

        (iv) have authorized denominations of $100,000 or more and are sold to no more than thirty-five persons each of whom the broker, dealer or municipal securities dealer reasonably believes: (A) has the knowledge and experience necessary to evaluate the merits and risks of the investment; and (B) is not purchasing for more than one account, with a view toward distributing the securities; or

        (v) constitute municipal fund securities.

If a syndicate or similar account has been formed for the purchase of the securities, the underwriting fee shall be paid by the managing underwriter on behalf of each participant in the syndicate or similar account.

(b)-(f) No change.
 

Rule D-12. "Municipal Fund Security"

The term "municipal fund security" shall mean a municipal security issued by an issuer that, but for the application of Section 2(b) of the Investment Company Act of 1940, would constitute an investment company within the meaning of Section 3 of the Investment Company Act of 1940.

Rule G-3. Classification of Principals and Representatives; Numerical Requirements; Testing; Continuing Education Requirements

No broker, dealer or municipal securities dealer or person who is a municipal securities representative, municipal securities principal, municipal securities sales principal or financial and operations principal (as hereafter defined) shall be qualified for purposes of rule G-2 unless such broker, dealer or municipal securities dealer or person meets the requirements of this rule.

(a) Municipal Securities Representative.

        (i) No change.

        (ii) Qualification Requirements.

        (A)-(B) No change.

        (C) The requirements of subparagraph (a)(ii)(A) of this rule shall not apply to any person who is duly qualified as a limited representative - investment company and variable contracts products by reason of having taken and passed the Limited Representative - Investment Company and Variable Contracts Products Examination, but only if such person's activities with respect to municipal securities described in paragraph (a)(i) of this rule are limited solely to municipal fund securities.

        (D) Any person who ceases to be associated with a broker, dealer or municipal securities dealer (whether as a municipal securities representative or otherwise) for two or more years at any time after having qualified as a municipal securities representative in accordance with subparagraphs (a)(ii)(A), (B) or (C) or (B) shall again meet the requirements of subparagraphs (a)(ii)(A), (B) or (C) or (B) prior to being qualified as a municipal securities representative.

        (iii) Apprenticeship.

        (A) Any person who first becomes associated with a broker, dealer or municipal securities dealer in a representative capacity (whether as a municipal securities representative, or general securities representative or limited representative - investment company and variable contracts products) without having previously qualified as a municipal securities representative, or general securities representative or limited representative - investment company and variable contracts products shall be permitted to function in a representative capacity without qualifying pursuant to subparagraphs (a)(ii)(A), (B) or (C) or (B) for a period of at least 90 days following the date such person becomes associated with a broker, dealer or municipal securities dealer, provided, however, that such person shall not transact business with any member of the public with respect to, or be compensated for transactions in, municipal securities during such 90 day period, regardless of such person's having qualified in accordance with the examination requirements of this rule. A person subject to the requirements of this paragraph (a)(iii) shall in no event continue to perform any of the functions of a municipal securities representative after 180 days following the commencement of such person's association with such broker, dealer or municipal securities dealer, unless such person qualifies as a municipal securities representative pursuant to subparagraphs (a)(ii)(A), (B) or (C) or (B).

        (B) Prior experience, of at least 90 days, as a general securities representative, limited representative - investment company and variable contracts products mutual fund salesperson or limited representative - government securities representative, will meet the requirements of this paragraph (a)(iii).

(b)-(h) No change.
 

Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

        (i) Records of Original Entry. "Blotters" or other records of original entry containing an itemized daily record of all purchases and sales of municipal securities, all receipts and deliveries of municipal securities (including certificate numbers and, if the securities are in registered form, an indication to such effect), all receipts and disbursement of cash with respect to transactions in municipal securities, all other debits and credits pertaining to transactions in municipal securities, and in the case of brokers, dealers and municipal securities dealers other than bank dealers, all other cash receipts and disbursements if not contained in the records required by any other provision of this rule. The records of original entry shall show the name or other designation of the account for which each such transaction was effected (whether effected for the account of such broker, dealer or municipal securities dealer, the account of a customer, or otherwise), the description of the securities, the aggregate par value of the securities, the dollar price or yield and aggregate purchase or sale price of the securities, accrued interest, the trade date, and the name or other designation of the person from whom purchased or received or to whom sold or delivered. With respect to accrued interest and information relating to "when issued" transactions which may not be available at the time a transaction is effected, entries setting forth such information shall be made promptly as such information becomes available. Dollar price, yield and accrued interest relating to any transaction shall be required to be shown only to the extent required to be included in the confirmation delivered by the broker, dealer or municipal securities dealer in connection with such transaction under rule G-12 or rule G-15.

        (ii)-(viii) No change.

        (ix) Copies of Confirmations, Periodic Statements and Certain Other Notices to Customers. A copy of all confirmations of purchase or sale of municipal securities, of all periodic written statements disclosing purchases, sales or redemptions of municipal fund securities pursuant to rule G-15(a)(viii) and, in the case of a broker, dealer or municipal securities dealer other than a bank dealer, of all other notices sent to customers concerning debits and credits to customer accounts or, in the case of a bank dealer, notices of debits and credits for municipal securities, cash and other items with respect to transactions in municipal securities.

        (x) No change.

        (xi) Customer Account Information. A record for each customer, other than an institutional account, setting forth the following information to the extent applicable to such customer:

        (A)-(G) No change.

        (H) signature of municipal securities representative, and general securities representative or limited representative - investment company and variable contracts products introducing the account and signature of a municipal securities principal, municipal securities sales principal or general securities principal indicating acceptance of the account;

        (I)-(K) No change.

For purposes of this subparagraph, the terms "general securities representative," and "general securities principal" and "limited representative - investment company and variable contracts products" shall mean such persons as so defined by the rules of a national securities exchange or registered securities association. For purposes of this subparagraph, the term "institutional account" shall mean the account of (i) a bank, savings and loan association, insurance company, or registered investment company; (ii) an investment adviser registered either with the Commission under Section 203 of the Investment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (iii) any other entity (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million. Anything in this subparagraph to the contrary notwithstanding, every broker, dealer and municipal securities dealer shall maintain a record of the information required by items (A), (C), (F), (H), (I) and (K) of this subparagraph with respect to each customer which is an institutional account.

        (xii)-(xix) No change.

(b)-(f) No change.

(g) Price substituted for par value of municipal fund securities. For purposes of this rule, each reference to the term "par value," when applied to a municipal fund security, shall be substituted with (i) in the case of a purchase of a municipal fund security by a customer, the purchase price paid by the customer, exclusive of any commission, and (ii) in the case of a sale or tender for redemption of a municipal fund security by a customer, the sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.
 

Rule G-14. Reports of Sales or Purchases

(a) No change.

(b) Transactions Reporting Requirements.

        (i) Each broker, dealer or municipal securities dealer shall report to the Board or its designee information about its transactions in municipal securities to the extent required by, and using the formats and within the timeframes specified in, Rule G-14 Transaction Reporting Procedures. Transaction information collected by the Board under this rule will be used to make public reports of market activity and prices and to assess transaction fees. The transaction information will be made available by the Board to the Commission, securities associations registered under Section 15A of the Act and other appropriate regulatory agencies defined in Section 3(a)(34)(A) of the Act to assist in the inspection for compliance with and the enforcement of Board rules.

        (ii)-(iii) No change.
 

Rule G-14 Transaction Reporting Procedures

(a) No change.

(b) Customer Transactions.

        (i)-(ii) No change.

        (iii) The following transactions shall not be required to be reported under this section (b):

        (A) A a transaction in a municipal security that is ineligible for assignment of a CUSIP number by the Board or its designee; and shall not be required to be reported under this section (b).

        (B) a transaction in a municipal fund security.

        (iv) No change.

Rule G-15. Confirmation, Clearance and Settlement of Transactions with Customers

(a) Customer Confirmations

        (i) At or before the completion of a transaction in municipal securities with or for the account of a customer, each broker, dealer or municipal securities dealer shall give or send to the customer a written confirmation that complies with the requirements of this paragraph (i):

        (A) Transaction information. The confirmation shall include information regarding the terms of the transaction as set forth in this subparagraph (A):

        (1)-(2) No change.

        (3) Par value. The par value of the securities shall be shown, with special requirements for the following securities:

        (a) No change.

        (b) Municipal fund securities. For municipal fund securities, in place of par value, the confirmation shall show (i) in the case of a purchase of a municipal fund security by a customer, the total purchase price paid by the customer, exclusive of any commission, and (ii) in the case of a sale or tender for redemption of a municipal fund security by a customer, the total sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.

        (4) No change.

        (5) Yield and dollar price. Yields and dollar prices shall be computed and shown in the following manner, subject to the exceptions stated in subparagraph (A)(5)(d) of this paragraph:

        (a)-(c) No change.

        (d) Notwithstanding the requirements noted in subparagraphs (A)(5)(a) through (c) of this paragraph, above:

        (i)-(v) No change.

        (vi) Municipal fund securities. For municipal fund securities, neither yield nor dollar price shall be shown.

        (6) Final Monies. The following information relating to the calculation and display of final monies shall be shown:

        (a) No change.

        (b) amount of accrued interest, with special requirements for the following securities:

        (i)-(ii) No change.

        (iii) Municipal fund securities. For municipal fund securities, no figure for accrued interest shall be shown;

        (c) if the securities pay interest on a current basis but are traded without interest, a notation of "flat;"

        (d) extended principal amount, with special requirements for the following securities:

        (i) No change.

        (ii) Municipal fund securities. For municipal fund securities, no extended principal amount shall be shown;

        (e)-(h) No change.

        (7) Delivery of securities. The following information regarding the delivery of securities shall be shown:

        (a) Securities other than bonds or municipal fund securities. For securities other than bonds or municipal fund securities, denominations to be delivered;

        (b) No change.

        (c) Municipal fund securities. For municipal fund securities, the purchase price, exclusive of commission, of each share or unit and the number of shares or units to be delivered;

        (d) Delivery instructions. Instructions, if available, regarding receipt or delivery of securities, and form of payment, if other than as usual and customary between the parties.

        (8) No change.

        (B) Securities identification information. The confirmation shall include a securities identification which includes, at a minimum:

        (1) the name of the issuer, with special requirements for the following securities:

        (a) For stripped coupon securities, the trade name and series designation assigned to the stripped coupon municipal security by the broker, dealer or municipal securities dealer sponsoring the program must be shown;

        (b) Municipal fund securities. For municipal fund securities, the name used by the issuer to identify such securities and, to the extent necessary to differentiate the securities from other municipal fund securities of the issuer, any separate program series, portfolio or fund designation for such securities must be shown;

        (2) No change.

        (3) maturity date, if any, with special requirements for the following securities:

        (a) No change.

        (b) Municipal fund securities. For municipal fund securities, no maturity date shall be shown;

        (4) interest rate, if any, with special requirements for the following securities:

        (a)-(e) No change.

        (f) Municipal fund securities. For municipal fund securities, no interest rate shall be shown;

        (C) Securities descriptive information. The confirmation shall include descriptive information about the securities which includes, at a minimum:

        (1)-(4) No change.

        (5) Municipal fund securities. For municipal fund securities, the information described in clauses (1) through (4) of this subparagraph (C) is not required to be shown; provided, however, that if the municipal fund securities are puttable or otherwise redeemable by the customer, the confirmation shall include a designation to that effect.

        (D) Disclosure statements:

        (1)-(2) No change.

        (3) The confirmation for securities for which a deferred commission or other charge is imposed upon redemption or as a condition for payment of principal or interest thereon shall include a statement that the customer may be required to make a payment of such deferred commission or other charge upon redemption of such securities or as a condition for payment of principal or interest thereon, as appropriate, and that information concerning such deferred commission or other charge will be furnished upon written request.

        (ii)-(iii) No change.

        (iv) Confirmation to customers who tender put option bonds or municipal fund securities. A broker, dealer, or municipal securities dealer that has an interest in put option bonds (including acting as remarketing agent) and accepts for tender put option bonds from a customer, or that has an interest in municipal fund securities (including acting as agent for the issuer thereof) and accepts for redemption municipal fund securities tendered by a customer, is engaging in a transaction in such municipal securities and shall send a confirmation under paragraph (i) of this section.

        (v) No change.

        (vi) Definitions. For purposes of this rule, the following terms shall have the following meanings:

        (A)-(F) No change.

        (G) The term "periodic municipal fund security plan" shall mean any written authorization or arrangement for a broker, dealer or municipal securities dealer, acting as agent, to purchase, sell or redeem for a customer or group of customers one or more specific municipal fund securities, in specific amounts (calculated in security units or dollars), at specific time intervals and setting forth the commissions or charges to be paid by the customer in connection therewith (or the manner of calculating them).

        (H) The term "non-periodic municipal fund security program" shall mean any written authorization or arrangement for a broker, dealer or municipal securities dealer, acting as agent, to purchase, sell or redeem for a customer or group of customers one or more specific municipal fund securities, setting forth the commissions or charges to be paid by the customer in connection therewith (or the manner of calculating them) and either (1) providing for the purchase, sale or redemption of such municipal fund securities at the direction of the customer or customers or (2) providing for the purchase, sale or redemption of such municipal fund securities at the direction of the customer or customers as well as authorizing the purchase, sale or redemption of such municipal fund securities in specific amounts (calculated in security units or dollars) at specific time intervals.

        (vii) Price substituted for par value of municipal fund securities. For purposes of this rule, each reference to the term "par value," when applied to a municipal fund security, shall be substituted with (i) in the case of a purchase of a municipal fund security by a customer, the purchase price paid by the customer, exclusive of any commission, and (ii) in the case of a sale or tender for redemption of a municipal fund security by a customer, the sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.

        (viii) Alternative periodic reporting for certain transactions in municipal fund securities. Notwithstanding any other provision of this section (a), a broker, dealer or municipal securities dealer may effect transactions in municipal fund securities with customers without giving or sending to such customer the written confirmation required by paragraph (i) of this section (a) at or before completion of each such transaction if:

        (A) such transactions are effected pursuant to a periodic municipal fund security plan or a non-periodic municipal fund security program; and

        (B) such broker, dealer or municipal securities dealer gives or sends to such customer within five business days after the end of each quarterly period, in the case of a customer participating in a periodic municipal fund security plan, or each monthly period, in the case of a customer participating in a non-periodic municipal fund security program, a written statement disclosing, for each purchase, sale or redemption effected for or with, and each payment of investment earnings credited to or reinvested for, the account of such customer during the reporting period, the information required to be disclosed to customers pursuant to subparagraphs (A) through (D) of paragraph (i) of this section (a), with the information regarding each transaction clearly segregated; provided that it is permissible for the name and address of the broker, dealer or municipal securities dealer and the customer to appear once at the beginning of the document; and

        (C) in the case of a periodic municipal fund security plan that consists of an arrangement involving a group of two or more customers and contemplating periodic purchases of municipal fund securities by each customer through a person designated by the group, such broker, dealer or municipal securities dealer:

        (1) gives or sends to the designated person, at or before the completion of the transaction for the purchase of such municipal fund securities, a written notification of the receipt of the total amount paid by the group;

        (2) sends to anyone in the group who was a customer in the prior quarter and on whose behalf payment has not been received in the current quarter a quarterly written statement reflecting that a payment was not received on such customer's behalf; and

        (3) advises each customer in the group if a payment is not received from the designated person on behalf of the group within 10 days of a date certain specified in the arrangement for delivery of that payment by the designated person and either (a) thereafter sends to each customer the written confirmation described in paragraph (i) of this section (a) for the next three succeeding payments, or (b) includes in the quarterly statement referred to in subparagraph (B) of this paragraph (viii) each date certain specified in the arrangement for delivery of a payment by the designated person and each date on which a payment received from the designated person is applied to the purchase of municipal fund securities;

        (D) such customer is provided with prior notification in writing disclosing the intention to send the written information referred to in subparagraph (B) of this paragraph (viii) on a periodic basis in lieu of an immediate confirmation for each transaction; and

        (E) such customer has consented in writing to receipt of the written information referred to in subparagraph (B) of this paragraph (viii) on a periodic basis in lieu of an immediate confirmation for each transaction; provided, however, that such customer consent shall not be required if (1) the customer participates in a periodic municipal fund security plan described in subparagraph (C) of this paragraph (viii), (2) the customer is not a natural person and participates in a non-periodic municipal fund security program or (3) the customer is a natural person that participates in a non-periodic municipal fund security program and the issuer has consented in writing to the use by the broker, dealer or municipal securities dealer of the periodic written information referred to in subparagraph (B) of this paragraph (viii) in lieu of an immediate confirmation for each transaction with each customer participating in the non-periodic municipal fund security program.

(b)-(e) No change.
 

Rule G-26. Customer Account Transfers

(a) Definitions. For purposes of this rule, the following terms have the following meanings:

        (i)-(ii) No change.

        (iii) The term "nontransferable asset" means an asset that is incapable of being transferred from the carrying party to the receiving party because (A) it is an issue in default for which the carrying party does not possess the proper denominations to effect delivery and no transfer agent is available to re-register the securities, or (B) it is a municipal fund security which the issuer requires to be held in an account carried by one or more specified brokers, dealers or municipal securities dealers that does not include the receiving party.

(b) No change.

(c) Transfer Instructions.

        (i) No change.

        (ii) If an account includes any nontransferable assets, the carrying party must request, in writing and prior to or at the time of validation of the transfer instruction, further instructions from the customer with respect to the disposition of such assets. Such request shall provide the customer with the following alternative methods of disposition of nontransferable assets, if applicable:

        (A) No change.

        (B) retention by the carrying party for the customer's benefit; or

        (C) in the case of a nontransferable asset described in section (a)(iii)(B), transfer to another broker, dealer or municipal securities dealer, if any, which the issuer has specified as being permitted to carry such asset.

(d)-(i) No change.
 

Rule G-32. Disclosures in Connection with New Issues

(a) Customer Disclosure Requirements. No broker, dealer or municipal securities dealer shall sell, whether as principal or agent, any new issue municipal securities to a customer unless such broker, dealer or municipal securities dealer delivers to the customer no later than the settlement of the transaction:

        (i) a copy of the official statement in final form prepared by or on behalf of the issuer or, if an official statement in final form is not being prepared by or on behalf of the issuer, a written notice to that effect together with a copy of an official statement in preliminary form, if any; provided, however, that:

        (A) if a customer who participates in a periodic municipal fund security plan has previously received a copy of the official statement in final form in connection with the purchase of municipal fund securities under such plan, a broker, dealer or municipal securities dealer may sell additional shares or units of the municipal fund securities under such plan to the customer if such broker, dealer or municipal securities dealer sends to the customer a copy of any new, supplemented, amended or "stickered" official statement in final form, by first class mail or other equally prompt means, promptly upon receipt thereof; or

        (B) if an official statement in final form is being prepared for new issue municipal securities issued in a primary offering that qualifies for the exemption set forth in paragraph (iii) of section (d)(1) of Securities Exchange Act Rule 15c2-12, a broker, dealer or municipal securities dealer may sell such new issue municipal securities to a customer if such broker, dealer or municipal securities dealer:

        (A)-(B) Renumbered as (1)-(2).

        (ii) in connection with a negotiated sale of new issue municipal securities, the following information concerning the underwriting arrangements:

        (A) the underwriting spread, if any;

        (B) the amount of any fee received by the broker, dealer or municipal securities dealer as agent for the issuer in the distribution of the securities; provided, however, that if a broker, dealer or municipal securities dealer selling municipal fund securities provides periodic statements to the customer pursuant to rule G-15(a)(viii) in lieu of individual transaction confirmations, this paragraph (ii)(B) shall be deemed to be satisfied if the broker, dealer or municipal securities dealer provides this information to the customer at least annually and provides information regarding any change in such fee on or prior to the sending of the next succeeding periodic statement to the customer; and

        (C) except with respect to an issue of municipal fund securities, the initial offering price for each maturity in the issue that is offered or to be offered in whole or in part by the underwriters, including maturities that are not reoffered.

(b) Inter-Dealer Disclosure Requirements. Every broker, dealer or municipal securities dealer shall send, upon request, the documents and information referred to in this section (a) to any broker, dealer or municipal securities dealer to which it sells new issue municipal securities no later than the business day following the request or, if an official statement in final form is being prepared but has not been received from the issuer or its agent, no later than the business day following such receipt. Such items shall be sent by first call mail or other equally prompt means, unless the purchasing broker, dealer or municipal securities dealer arranges some other method of delivery and pays or agrees to pay for such delivery.

(b)-(c) Relettered as (c)-(d).
 

Rule G-34. CUSIP Numbers and New Issue Requirements

(a)-(b) No change.

(c) CUSIP Number Eligibility Exemptions. The provisions of this rule shall not apply to an issue of municipal securities (or for the purpose of section (b) any part of an outstanding maturity of an issue) which (i) does not meet the eligibility criteria for CUSIP number assignment or (ii) consists entirely of municipal fund securities.

ENDNOTES

1. See "Municipal Fund Securities," MSRB Reports, Vol. 19, No. 2 (April 1999) at 9.

2. The Board understands that local government pools are established by state or local governmental entities as trusts that serve as vehicles for the pooled investment of public moneys of participating governmental entities. Participants purchase interests in the trust and trust assets are invested in a manner consistent with the trust's stated investment objectives. Investors generally do not have a right to control investment of trust assets. See generally National Association of State Treasurers ("NAST"), Special Report: Local Government Investment Pools (July 1995) (the "NAST Report"); Standard & Poor's Fund Services, Local Government Investment Pools (May 1999) (the "S&P Report").

3. The Board understands that higher education trusts generally are established by states under section 529(b) of the Internal Revenue Code as "qualified state tuition programs" through which individuals make investments for the purpose of accumulating savings for qualifying higher education costs of beneficiaries. Individuals purchase interests in the trust and trust assets are invested in a manner consistent with the trust's stated investment objectives. Investors do not have a right to control investment of trust assets. See generally College Savings Plans Network, Special Report on State and College Savings Plans (1998) (the "CSPN Report").

4. Letter dated February 26, 1999 from Catherine McGuire, Chief Counsel, Division of Market Regulation, SEC, to Diane G. Klinke, General Counsel of the Board, in response to letter dated June 2, 1998 from Diane G. Klinke to Catherine McGuire, published as Municipal Securities Rulemaking Board, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 032299033 (Feb. 26, 1999) (the "SEC Letter").

5. Dealers also should consider the applicability of Exchange Act Rule 15c2-12. SEC staff has stated:

[W]e note that Rule 15c2-12(f)(7) under the Exchange Act defines a "primary offering" as including an offering of municipal securities directly or indirectly by or on behalf of an issuer of such securities. Based upon an analysis of programs that have been brought to our attention, it appears that interests in local government pools or higher education trusts generally are offered only by direct purchase from the issuer. Accordingly, we would view those interests as having been sold in a "primary offering" as that term is defined in Rule 15c2-12. If a dealer is acting as an "underwriter" (as defined in Rule 15c2-12(f)(8)) in connection with that primary offering, the dealer may be subject to the requirements of Rule 15c2-12.

SEC Letter, supra note 4. Questions on Rule 15c2-12 should be directed to SEC staff.

6. See "Transactions in Municipal Collateralized Mortgage Obligations: Rule G-15," MSRB Reports, Vol. 12, No. 1 (April 1992) at 21; "Stripped Coupon Municipal Securities," MSRB Reports, Vol. 9, No. 1 (March 1989) at 3; "Taxable Securities," MSRB Reports, Vol. 6, No. 5 (Oct. 1986) at 5; "Tender Option Programs: SEC Response to Board Letter," MSRB Reports, Vol. 5, No. 2 (Feb. 1985) at 3; "Tax-Exempt Notes: Notice Concerning Application of Board Rules to Such Notes and of Filing of Rule Change," MSRB Reports, Vol. 2, No. 7 (Oct./Nov. 1982) at 17; "Application of Board's Rules to Municipal Commercial Paper," MSRB Reports, Vol. 2, No. 1 (Jan. 1982) at 9 (the "CP Notice"); "Application of Board's Rules to Participation Interests in Municipal Tax-Exempt Financing Arrangements," MSRB Reports, Vol. 2, No. 1 (Jan. 1982) at 13; "Notice Concerning Application of Board's Rules to MAC Warrants," [1977-1987 Transfer Binder] MSRB Manual (CCH) � 10,171 (Jan. 22, 1981) (the "Warrant Notice").

7. Section 2(b) provides that the Investment Company Act shall not apply to a state, or any political subdivision of a state, or any agency, authority, or instrumentality thereof.

8. As noted in the March Notice, the definition of municipal fund security is not limited to local government pool or higher education trust interests that are municipal securities but also would apply to any municipal security of an issuer that, but for the identity of the issuer as a state or local governmental entity, would constitute an investment company under the Investment Company Act.

9. Municipal fund securities generally provide investment return and are valued based on the investment performance of an underlying pool of assets having an aggregate value that may increase or decrease from day to day, rather than providing interest payments at a stated rate or discount, as is the case for more traditional municipal securities. In addition, unlike traditional municipal securities, these interests do not have stated par values or maturity dates and cannot be priced based on yield or dollar price. See generally NAST Report, supra note 2; S&P Report, supra note 2; CSPN Report, supra note 3.

10. A commentator states that, although the Board has no authority to regulate either local government pool or higher education trust interests, it believes that interested parties would not resist "appropriate regulation" of higher education trust interests. It states that regulation of transactions in such interests is "arguably both more important and less controversial" than regulation of local government pool interests, noting that higher education trust interests "clearly affect public investors and the public interest."

11. Commentators observe that municipal securities are defined in Section 3(a)(29) of the Exchange Act as "securities which are direct obligations of, or obligations guaranteed as to principal or interest by, a State or any political subdivision thereof," in contrast to the language used in Section 3(a)(2) of the Securities Act of 1933 regarding any "security issued or guaranteed ... by any State of the United States, or by any political subdivision of a State or Territory." They quote a Senate report statement on the Securities Acts Amendments that "'municipal securities' refers to debt obligations of state and local government issuers." Senate Comm. on Banking, Housing and Urban Affairs, Securities Acts Amendments of 1975, S.Rep. No. 75, 94th Cong., 1st Sess. 38 (1975) (the "1975 Senate Report"); but cf. Securities Acts Amendments of 1975, H.R. Conf. Rep. No. 229, 94th Cong., 1st Sess. 101 (1975) (the "1975 Conference Report") (amendments "provide a comprehensive pattern for the registration and regulation of securities firms and banks which underwrite and trade securities issued by States and municipalities") (emphasis added). They note references in SEC no-action letters to obligations under the Internal Revenue Code to support their position that municipal securities are limited to debt obligations. See Itel Corp., SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 100581018 (Oct. 1, 1981) (the "Itel Letter"); Bedford-Watt Enterprises, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 062678019 (June 9, 1978) (the "Bedford-Watt Letter"). In addition, an SEC no-action letter is cited to suggest that an equity security may not be a municipal security. See City Employees' Retirement System of the City of Los Angeles, SEC No-Action Letter, [1977-1978 Dec.] Fed. Sec. L. Rep. (CCH) � 81,194 (May 12, 1977) (the "CERS Letter").

12. Thus, non-dealer firms may act as investment advisers to local government pool or higher education trust programs and not become subject to Board rules.

13. SEC Letter, supra note 4.

14. See, e.g., Maine College Savings Program Fund, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 080999001 (Aug. 2, 1999) (the "Maine Letter");Teachers Personal Investors Services, Inc., SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 092898006 (Sept. 10, 1998) (the "TPIS Letter"); New Hampshire Higher Education Savings Plan Trust, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 070698010 (June 30, 1998) (the "New Hampshire Letter"); Public Employees Retirement Board of the State of Oregon, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 041398009 (March 3, 1998) (the "Oregon Letter"); North Carolina State Education Assistance Authority, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 032497016 (March 24, 1997) (the "North Carolina Letter"); Missouri Family Trust Fund, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 101392001 (Sept. 22, 1992) (the "Missouri Letter").

15. Maine Letter, supra note 14. SEC staff's position was conditioned on the dealer complying with all existing Board rules, other than those proposed to be amended in the March Notice, and complying with all Board rules upon completion of the current Board rulemaking process. Counsel had opined that the interests were direct obligations of an instrumentality of a state and therefore were municipal securities within the meaning of Section 3(a)(29) of the Exchange Act. See id. and accompanying letter of inquiry.

16. TPIS Letter, supra note 14. SEC staff stated that this no-action position expires six months after rule G-3 is amended to establish qualification requirements for persons selling such interests.

17. Id. Counsel had opined that the interests were direct obligations of an instrumentality of a state and, therefore, were municipal securities under the Exchange Act. See id. and accompanying letter of inquiry. See also New York State College Choice Tuition Savings Trust, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 091498008 (Sept. 10, 1998) and accompanying letter of inquiry.

18. See, e.g., Maine Letter, supra note 14; New Hampshire Letter, supra note 14; North Carolina Letter, supra note 14.

19. See Maine Letter, supra note 14, and accompanying letter of inquiry; New Hampshire Letter, supra note 14, and accompanying letter of inquiry; North Carolina Letter, supra note 14, and accompanying letter of inquiry. See also Missouri Letter, supra note 14, and accompanying letter of inquiry.

20. See Oregon Letter, supra note 14. Counsel opined that the interests would be exempt from the registration requirements of the Exchange Act as securities issued by a state instrumentality. See id. and accompanying letter of inquiry. See also Pennsylvania Local Government Investment Trust, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 022283009 (Feb. 21, 1983) (the "Pennsylvania Letter") and accompanying letter of inquiry, in which counsel opined that interests in a local government pool were municipal securities under the Exchange Act that qualified for the exemption from the registration requirements of Section 12(g) of the Exchange Act. SEC staff did not expressly rely on this opinion in arriving at its no-action position.

21. See, e.g., City of El Paso de Robles, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 111285020 (June 18, 1985) (the "El Paso de Robles Letter"); MAC Warrant Notice, supra note 6. The SEC's position with respect to these two types of non-debt securities stands in contrast to SEC staff's earlier position regarding call options in the CERS Letter, supra note 11.

22. See El Paso de Robles Letter, supra note 21.

23. MAC Warrant Notice, supra note 6. The MAC Warrant Notice was cited with approval by SEC staff in a letter to the Office of the Comptroller of the Currency. See letter dated August 12, 1981 (note 7) from Thomas G. Lovett, Attorney, SEC, to Owen Carney, Director, Investment Securities Division, Office of the Comptroller of the Currency (the "CP Letter"), reprinted in CP Notice, supra note 6, at 11.

24. See Itel Letter, supra note 11 (term "obligation" in Exchange Act definition of municipal security "would generally include" obligations under the Internal Revenue Code); Bedford-Watt Letter, supra note 11 (Internal Revenue Code "provides a useful analogy"). In the Bedford-Watt Letter, SEC staff recognized that "obligation" under Section 3(a)(29) of the Exchange Act could include non-financial obligations to take actions needed for payment of the security. See also Pennsylvania Letter and accompanying letter of inquiry, supra note 20. In arriving at its opinion that the local government pool interests described in the Pennsylvania Letter were municipal securities, counsel suggested, in reference to the definition of municipal securities in the Exchange Act, "that the word 'obligations' need not be read as 'debt' in this context. The Trust is under obligation to redeem all Shares of Beneficial Interest presented for redemption." In addition, the Chairman of the College Savings Plans Network noted in Congressional testimony that "state-sponsored college tuition programs are secured by the moral or political obligation of the states." Marshall Bennett, Testimony Before the House Committee on Ways and Means, Hearing on Reducing the Tax Burden: II. Providing Tax Relief to Strengthen the Family and Sustain a Strong Economy, 106th Cong., 1st Sess. (June 23, 1999), available at <http://www.house.gov/ways_means/fullcomm/106cong/6-23-99/6-23benn.htm> (visited Aug. 26, 1999) (emphasis added).

25. See El Paso de Robles Letter, supra note 21; MAC Warrant Notice, supra note 6.

26. See 1975 Senate Report, supra note 11, at 90, 92.

27. Id. at 92.

28. See, e.g., House Comm. on Interstate and Foreign Commerce, Federal Supervision of Traffic in Investment Securities in Interstate Commerce, H.R.Rep. No. 85, 73d Cong., 1st Sess. 6, 14 (1933) (the "1933 House Report").

29. Id. at 14. This view was confirmed the following year during House committee hearings on the Exchange Act by the Commissioner of the Federal Trade Commission, which was charged with enforcing the Securities Act. See Stock Exchange Regulation: Hearing on H.R. 7852 and H.R. 8720 Before the House Comm. on Interstate and Foreign Commerce, 73d Cong., 2d Sess. 899 (1934) (the "1934 House Hearings") (statement of James M. Landis, Commissioner, Federal Trade Commission). Commissioner Landis stated:

We had that same problem up in the Securities Act, where the exemption that is given to what might be called municipal bonds, and bonds of States and their instrumentalities, and is drawn according to a line that parallels the line that is drawn which makes tax-exempt municipal bonds, State instrumentalities, and so on. In other words, every instrumentality of a State which, like a municipality, or a political subdivision of a State, was exempted from taxation, would be exempted from registration upon an issue of securities. That is the line drawn in the Securities Act. If exempt from taxation they are also exempted from the necessity of registration under that act.

30. See, e.g., Securities Act: Hearings on S. 875 Before the Senate Comm. on Banking and Currency on S. 875, 73d Cong., 1st. Sess. 65 (1933) (the "1933 Senate Hearings") (statement of Sen. Reynolds); id. at 228, 232 (statement of Sen. Kean); id. at 232 (statement of Sen. Costigan); id. at 303 (statement of Sen. Norbeck); 77 Cong. Rec. 2925 (1933) (statement of Rep. Studley).

31. See 1934 House Hearings, supra note 29, at 822 (statement of Rep. Pettingill); id. at 898-9 (statements of James M. Landis, Commissioner, Federal Trade Commission; Rep. Pettingill). This concern also served as a primary basis for the exemption of municipal securities under the Securities Act. See 1933 House Report, supra note 28, at 14, and text accompanying note 29 above.

32. See 1934 House Hearings, supra note 29, at 721, 911-3 (statement of Rep. Holmes); Stock Exchange Practices: Hearings on S. Res. 84 and S. Res. 56 and S. Res. 97 Before the Senate Comm. on Banking and Currency, 73d Cong., 1st Sess. 7441-52 (1934) (the "1934 Senate Hearings") (statements of Archibald B. Roosevelt, Roosevelt & Weifold, Inc.; George B. Gibbons, George B. Gibbons & Co.; Sen. Gore; Sen. Goldsborough).

33. See 1934 House Hearings, supra note 29, at 720 (statement of Rep. Holmes).

34. See 1934 Senate Hearings, supra note 32, at 7413 (statements of H.H. Cotton, Investment Bank of Los Angeles; Ferdinand Pecora, Counsel to the Committee; Sen. Fletcher); id. at 7477 (statements of Tom K. Smith, Assistant to the Secretary of the Treasury; Sen. Adams; Sen. Walcott); 1934 House Hearings, supra note 29, at 7201(statements of Tom K. Smith, Assistant to the Secretary of the Treasury; Rep. Holmes); id. at 819-23 (statements of George B. Gibbons, George B. Gibbons & Co.; Rep. Merritt; Rep. Rayburn; Rep. Pettengill).

35. See note 29 above and accompanying text.

36. The phrase "security issued or guaranteed by" used in Section 3(a)(2) of the Securities Act introduces bank securities (including bank equity securities) as well as government and municipal securities. In contrast, the phrase "securities which are direct obligations of or obligations guaranteed as to principal or interest by" used in Section 3(a)(12) of the Exchange Act introduced only municipal and government securities. Thus, even though the drafters of both the Securities Act and the Exchange Act thought of municipal and government securities solely as debt securities, the term "obligation" (to the extent such term is limited to debt securities) could only be used in the Exchange Act.

37. 1975 Senate Report, supra note 11, at 47. See also CP Letter (note 7), supra note 23.

38. In testimony at a 1975 Senate committee hearing on the Securities Acts Amendments, a representative of the Municipal Finance Officers Association stated that the municipal securities market "is completely a debt market." Securities Acts Amendments of 1975: Hearings on S. 249 Before the Senate Comm. on Banking, Housing and Urban Affairs, 94th Cong., 1st Sess. 479 (1975) (statement of Michael S. Zarin, Member, Comm. on Governmental Debt Administration, Municipal Finance Officers Association). Having been so informed, the Senate's description in the 1975 Senate Report, supra note 11, at 38, of municipal securities as "debt obligations of state and local government issuers," as noted by some commentators on the March Notice, in fact merely reflected an understanding of the nature of the municipal securities market at such time, not an understanding that the Exchange Act definition of municipal securities was to be limited only to the debt segment of a broader municipal market that might also include equity securities.

39. As noted above, one commentator concedes that interests in higher education trusts "clearly affect public investors and the public interest."

40. Commentators list Congressional concern about unconscionable markups, churning of accounts, misrepresentations, disregard of suitability standards, high-pressure sales techniques, fraudulent trading practices resulting in substantial losses to public investors, and threats to the integrity of the local government capital-raising system. They argue that there is no opportunity for unconscionable markups and little incentive for churning of accounts or use of high-pressure sales techniques for these interests because they are purchased and redeemed at the current net asset value and purchasers do not pay commissions. Commentators also argue that suitability concerns are not raised since local government pools are operated like money market funds and invest solely in the types of investments that their participants are permitted by state law to purchase.

41. One commentator states that protections exist under the Investment Advisers Act of 1940, state regulations, voluntary adherence to the Investment Company Act and related federal regulations applicable to investment company securities, and Governmental Accounting Standards Board Statement No. 31 relating to accounting and financial reporting for certain investments and for external investment pools.

42. See 1975 Conference Report, supra note 11, at 101.

43. As originally proposed, rule D-9 would have excluded from the definition of customer "the issuer of securities which are the subject of the transaction in question." See "Notice of Filing of Fair Practice Rules," [1977-1987 Transfer Binder] MSRB Manual (CCH) � 10,030 (Sept. 20, 1977). In amending the original proposed rule language to limit this exclusion solely to "the issuer in connection with the sale of a new issue of its securities," the Board stated that it believed "that the protections afforded customers by its rules should be extended to issuers when they act in secondary market transactions." See "Notice of Filing of Amendments to Fair Practice Rules," [1977-1987 Transfer Binder] MSRB Manual (CCH) � 10,058 (Feb. 28, 1978). Given that the Board has always felt that issuers should be considered customers even in secondary market transactions involving their own securities, issuers certainly should be considered customers in transactions involving securities of other issuers. Furthermore, in Congressional testimony on the bankruptcy filing of Orange County, California and its local government pool, SEC Chairman Arthur Levitt discussed customer protection rules of self-regulatory organizations as they may apply to state or local governmental entities acting as customers. See Derivative Financial Instruments Relating to Banks and Financial Institutions: Hearings Before the Senate Comm. on Banking, Housing and Urban Affairs, 104th Cong., 1st Sess. (1995) ("SEC Testimony").

44. S&P Report, supra note 2, at 3, 6-11. The Board takes no position as to which of these local government pools may issue interests that would constitute municipal fund securities.

45. Id. at 3.

46. One commentator identifies several state-run and county-run pools (including the Orange County, California pool) as having had recent financial difficulties. See also NAST Report, supra note 2, at 2, 5, 38; S&P Report, supra note 2, at 5.

47. NAST has stated that it:

recognizes that potential pool participants have numerous alternative investment vehicles from which to choose. The goal of the … [NAST Guidelines for Local Government Investment Pools] is to insure that local government investment officials, when choosing among their available investment options, are fully aware of significant investment and administrative policies, practices and restrictions of the pool and are thereby able to make informed investment decisions on behalf of the local governments. … NAST further recommends that the broker/dealer community govern itself to follow the same standards of conduct NAST has recommended for treasurers.

NAST Report, supra note 2, at 8. As the self-regulatory organization established by Congress to adopt rules for dealer transactions in municipal securities, the Board has created a body of rules which, together with these proposed rule changes, constitute the self-governance and standards of conduct which NAST has recommended be established.

48. The Board understands that investment strategies, pay-out restrictions, and fees and redemption charges or penalties of the existing higher education trusts vary. At least some higher education trusts permit sales of interests to persons living in other states and permit redemption proceeds to be used to pay higher education expenses in any state. In other cases, redemption proceeds may be limited for use within a specific state. See generally CSPN Report, supra note 3. Thus, a single customer may have a choice of investments in various higher education trusts having widely differing investment strategies and terms. The Board takes no position as to which of these higher education trusts may issue interests that would constitute municipal fund securities.

49. See NAST Report, supra note 2, at 8 ("The investment alternatives offered by brokers/dealers to public finance officials should be suitable for the public entity's objectives."). The fact that a local government pool's assets are invested in investments that are legally available as direct investments by local governments does not resolve suitability issues. See note 39 above. As with transactions in any other municipal security, rule G-19 would require a dealer recommending a transaction in a municipal fund security to have reasonable grounds for believing that the recommendation is suitable, based upon information available from the issuer or otherwise and the facts disclosed by or otherwise known about the customer. These suitability requirements do not differ in substance from those of the NASD, to which dealers effecting transactions in such interests might otherwise be subject if these interests are not municipal securities. See also SEC Testimony, supra note 43.

50. See, e.g., Sections 15(b)(3) and 15B(a)(3) of the Exchange Act.

51. Actual interpretations relating to how certain rules would be applied to transactions in municipal fund securities would be filed with the SEC to the extent required under Section 19(b) of the Exchange Act and Exchange Act Rule 19b-4.

52. This view regarding sales of municipal fund securities as part of a primary offering is based on SEC staff's statement in the SEC Letter, supra note 4, that it would view such securities as having been sold in a primary offering for purposes of Rule 15c2-12.

53. Two commentators suggest that the Board exempt municipal fund securities from the prohibition in rule A-13(e) from passing through underwriting assessments to issuers.

54. Commentators note that many local government pools have annual share turn-over rates of 3 to 4 times their assets, due to the fact that many participants are investing short-term funds that move in and out of the pools frequently during the course of the year. Another commentator believes that this multiplier may reach as high as 10 times assets. One commentator estimates that total issuances of interests in local government pools may be on the same order of magnitude as issuances of traditional municipal securities.

55. In the alternative, some commentators suggest that underwriting assessments should be based on net issuances of municipal fund securities, taking into account all securities retired. Another commentator suggests a flat annual or monthly fee set at a modest level.

56. Two commentators suggest that local government pool interests be excluded from this definition. The Board declines to do so for the reasons noted above.

57. Thus, an associated person who sells both municipal fund securities and other types of municipal securities would be required to qualify as a municipal securities representative or general securities representative.

58. One commentator suggests exempting dealers in local government pool interests from the requirement of having municipal securities principals, provided that they meet the requirements regarding principals established by the NASD. The Board believes that dealers effecting transactions in municipal fund securities must have a municipal securities principal who is required to be familiar with Board rules.

59. Several factors influenced the Board's determination to exempt such securities from rule G-14, as set forth in the March Notice. If the Board receives information in the future that practices have developed in the municipal fund security market that merit reporting of transaction information, it will consider whether to revisit the exemption from rule G-14.

60. Disclosure of deferred commissions or other charges would cover, for example, any deferred sales load or, in the case of interests in certain higher education trusts, any penalty imposed on a redemption that is not for a qualifying higher education expense.

61. In addition to the comments described below, one commentator suggests that the draft amendment relating to disclosure of deferred commissions or redemption charges be clarified to indicate that information may be disclosed in a program description document together with the confirmation or periodic statement. The Board believes that this provision does not require revision since it already permits disclosure of such information in a document separate from the confirmation or periodic statement, although the confirmation or periodic statement must disclose that such deferred commission or charge may exist and that information will be furnished upon written request.

62. They note that individual confirmations for the frequent purchases and redemptions of local government pool interests would impose high administrative and cost burdens.

63. It states that this would be "analogous to and consistent with" the provisions of Rule 10b-10 permitting periodic statements in lieu of confirmations for non-periodic transactions in tax-qualified individual retirement and individual pension plans.

64. In addition, the Board has made a minor language change to paragraph (a)(vi)(G) to make clearer that quarterly statements in lieu of individual confirmations also would be available for arrangements involving a group of two or more customers.

65. A commentator states that requiring customer consent to receive quarterly statements would impose administrative burdens on dealers that are not justified by any investor protection interest. It notes practical difficulties with sending confirmations to some members of a group plan and quarterly statements to others, stating that if the dealer fails to receive consent from any customer, it might be forced to send individual confirmations to all customers. The commentator states that, in adopting the investment company plan exception to the confirmation requirements in Rule 10b-10, the SEC recognized that securities sold through such plans do not require the same level of reporting as other securities transactions since their regularized nature raised fewer concerns about whether a particular transaction was executed consistent with the expectations of the customer.

66. A commentator states that municipal fund securities will not be issued in certificated form and therefore the delivery provisions under subparagraph (a)(i)(A)(7) would not be relevant. Subparagraph (a)(i)(A)(7) would require that the confirmation for a municipal fund security transaction indicate the purchase price (exclusive of commission) of each share or unit and the number of shares or units to be delivered, regardless of whether a physical or book-entry delivery of the securities will occur.

67. The commentator states that such securities are ineligible for ratings and such notation might be misleading. However, the Board notes that a relatively small number of local government pools have in fact been rated. See NAST Report, supra note 2, at 36. See generally S&P Report, supra note 2.

68. The Board understands that, in the context of local government pools, the term "yield" may be used to refer to historical returns that may be used as a basis for comparing investment performance. See NAST Report, supra note 2, at 8. References in rule G-21 to yield, consistent with its use in other Board rules, refer to a future rate of return on securities and do not refer to historical yields. The Board notes that any use of historical yields would be subject to section (c) of rule G-21, which provides that no dealer shall publish or cause to be published any advertisement concerning municipal securities which such dealer knows or has reason to know is materially false or misleading. Thus, a dealer advertisement of municipal fund securities that refers to yield typically would require a description of the nature and significance of the yield shown in the advertisement in order to assure that such advertisement is not false or misleading.

69. Rule G-32 defines underwriting period for securities purchased by a dealer (not in a syndicate) as the period commencing with the first submission to the dealer of an order for the purchase of the securities or the purchase of the securities from the issuer, whichever first occurs, and ending at such time as the following two conditions both are met: (1) the issuer delivers the securities to the dealer, and (2) the dealer no longer retains an unsold balance of the securities purchased from the issuer or 21 calendar days elapse after the date of the first submission of an order for the securities, whichever first occurs. However, since the issuer continuously delivers municipal fund securities, the first condition for the termination of the underwriting period remains unmet.

70. In addition, in the case of a repeat purchaser of municipal fund securities for which no official statement in final form is being prepared, no new delivery of the written notice to that effect or of any official statement in preliminary form would be required so long as the customer has previously received it in connection with a prior purchase. However, if an official statement in final form is subsequently prepared, the customer's next purchase would trigger the delivery requirement with respect to such official statement.

71. Dealers may still elect to acquire CUSIP numbers for municipal fund securities and to make such securities depository eligible, subject to meeting all of the eligibility requirements of the CUSIP Service Bureau and of any securities depository, respectively.

72. If the primary offering is exempt from Rule 15c2-12 (other than as a result of being a limited offering as described in section (d)(1)(i) of the Rule) and an official statement has been prepared by the issuer, then the dealer would be expected to send the official statement, together with Form G-36(OS), to the Board under rule G-36(c)(i).

73. Rule G-36(d) provides that a dealer that has previously sent an official statement to the Board also is required to send to the Board any amendments made by the issuer during the underwriting period. In view of the extended underwriting period for municipal fund securities and the possibility that the issuer may change the dealer that participates in the sale of the securities during the life of the program, the Board would interpret this provision of the rule to obligate any dealer that is at the time of an amendment then serving as underwriter for the municipal fund securities to send the amendment to the Board, regardless of whether that dealer or another dealer sent the original official statement to the Board.

74. Underlining indicates additions to existing Board rules; strikethrough indicates deletions from existing Board rules.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Solicitation of contributions.  This is in response to your letter in which you summarize your understanding of our telephone conversation relating to section (c) of rule G-37, on political contributions and prohibitions on municipal securities business. As I noted during our conversation, the Board’s rules, including rule G-37, apply solely to brokers, dealers and municipal securities dealers (“dealers”). The Board’s rulemaking authority, granted under Section 15B of the Securities Exchange Act of 1934, does not extend to issuers of municipal securities. Thus, rule G-37 does not impose any obligations upon issuers or officials of issuers. Although the Board appreciates your interest in not placing dealers and their associated persons in a position to violate their obligations under the rule, it is ultimately the responsibility of such dealers and associated persons, in consultation with appropriate compliance personnel, to ensure compliance with Board rules.

As you know, rule G-37(c) provides that no dealer or municipal finance professional shall solicit any person or political action committee to make any contribution, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business. The Board has previously stated that this provision would:

prohibit a dealer and any municipal finance professional from soliciting . . . any other person or entity, to make contributions to an official of an issuer with which the dealer engages or is seeking to engage in municipal securities business or to coordinate (i.e., bundle) contributions. . .[*] [M]unicipal finance professionals may volunteer their personal services in other ways to political campaigns.[1]

You had sought guidance regarding what activities would be covered by this provision of the rule. As you noted in your letter, I had indicated that the term “solicit” is not explicitly defined for purposes of section (c) of the rule. I had stated that whether a particular activity can be characterized as a solicitation of a contribution for purposes of section (c) is dependent upon the facts and circumstances surrounding such activity. I had noted, however, that the rule does not prohibit or restrict municipal finance professionals from engaging in personal volunteer work, unless such work constituted solicitation or bundling of contributions for an official of an issuer with which the municipal finance professional’s dealer is engaging or seeking to engage in municipal securities business[2] Municipal finance professionals are therefore free to, among other things, solicit votes or other assistance for such an issuer official so long as the solicitation does not constitute a solicitation or coordination of contributions for the official. [3]

Whether a municipal finance professional is permitted by section (c) of the rule to indicate to third parties that someone is a “great candidate” or to provide a list of third parties for the candidate to call would be dependent upon all the facts and circumstances surrounding such action. The facts and circumstances that may be relevant for this purpose may include, among any number of other factors, whether the municipal finance professional has made an explicit or implicit reference to campaign contributions in his or her conversations with third parties whom the candidate may contact and whether the candidate contacts such third parties seeking campaign contributions. However, the totality of the facts and circumstances surrounding any particular activity must be considered in determining whether such activity may constitute a solicitation of contributions for purposes of section (c) of the rule. Therefore, the Board cannot prescribe an exhaustive list of precautions that would assure that no violation of this section would occur as a result of such activity.  MSRB interpretation of May 21, 1999.
__________

[1] MSRB Reports, Vol. 14, No. 3 (June 1994) at 5. See Securities Exchange Act Release No. 33868 (April 7, 1994), 59 FR 17621 (April 13, 1994). See also Questions and Answers Concerning Political Contributions and Prohibitions on Municipal Securities Business: Rule G-37, May 24, 1994, reprinted in MSRB Rule Book; MSRB Interpretation of November 7, 1994, reprinted in MSRB Rule Book; MSRB Interpretation of May 31, 1995, reprinted in MSRB Rule Book. Furthermore, the Board stated in its filing of the rule with the Securities and Exchange Commission that the rule’s “anti-solicitation and anti-bundling proscriptions are intended to prohibit covered parties from: (i) soliciting others, including spouses and family members, to make contributions to issuer officials; and (ii) coordinating, or soliciting others to coordinate, contributions to issuer officials in order to influence the awarding of municipal securities business.” SEC File No. SR-MSRB-94-2.

[2] See Question and Answer No. 24, May 24, 1994, reprinted in MSRB Rule Book; Question and Answer No. 3, August 18, 1994, reprinted in MSRB Rule Book. In addition, if the municipal finance professional used dealer resources or incurred expenses that could be considered contributions in the course of undertaking such volunteer work, the ban on municipal securities business under section (b) of the rule could be triggered.

[3] In upholding the constitutionality of rule G-37, the United States Court of Appeals for the District of Columbia Circuit observed that “municipal finance professionals are not in any way restricted from engaging in the vast majority of political activities, including making direct expenditures for the expression of their views, giving speeches, soliciting votes, writing books, or appearing at fundraising events.” Blount v. SEC, 61 F.3d 938, 948 (D.C. Cir. 1995), cert. denied, 116 S. Ct. 1351 (1996). However, the Board has stated that hosting or paying to attend a fundraising event may constitute a contribution subject to section (b) of the rule. See Questions and Answers Nos. 24 and 29, May 24, 1994, reprinted in MSRB Rule Book.

[*][sentence deleted to reflect current rule provisions.]

Amendment Filed to Proposed Rule Change on Rule G-15(d)(ii) on Automated Confirmation/Acknowledgement

On April 16, 1999, the Board filed with the Securities and Exchange Commission ("Commission") an amendment to its proposed rule change on Board rule G-15(d)(ii) on automated confirmation/acknowledgment of customer transactions.¹ The proposed rule change was initially filed with the Commission on April 1, 1998.² If approved by the Commission, it would allow dealers to comply with rule G-15 (d)(ii) by using the services of "qualified vendors" for confirmation/acknowledgment of Delivery Versus Payment/Receipt Versus Payment (DVP/RVP) customer transactions. Currently, without the proposed rule change, only clearing agencies that are registered with the Commission may be used to obtain the required confirmation/acknowledgment.

The amendment is comprised of two minor changes to the language of the proposed rule change. These modifications were requested by the Commission to make the Board’s proposed rule change more consistent with similar proposed rule changes on the same subject that have been filed with the Commission by other Self-Regulatory Organizations. One change concerns proposed subparagraph G-15(d)(ii)(B)(2)(C), which requires that, in order to maintain status as a qualified vendor, the vendor must file certain Auditor’s Reports annually with the Commission staff. The original requirement states that to remain qualified the vendor must obtain a statement from the Commission staff that the Commission staff does not object to the Auditor’s Report. The amendment states that the Auditor’s Report must be one "which is not deemed unacceptable" by the Commission staff.

The second language change relates to subparagraph G-15(d)(ii)(B)(2)(B), which contains the requirement that a Qualified Vendor certify that its confirmation/acknowledgement system meets certain qualifications. The amendment clarifies that this certification is to be made to the customers of the Qualified Vendor and removes the previous requirement that the certification be done annually.

April 20, 1999

Text of Proposed Rule Change (as amended)³

G-15. Confirmation, Clearance and Settlement of Transactions with Customers

(a) - (c) No change

(d) Delivery/Receipt vs. Payment Transactions.

        (i) No change.

        (ii) Requirement for Confirmation/Acknowledgment.

(A) Use of Registered Clearing Agency or Qualified Vendor. Except as provided in this paragraph (ii) of rule G-15(d), no broker, dealer or municipal securities dealer shall effect a customer transaction for settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP) basis unless the facilities of a Cclearing Aagency registered with the Securities and Exchange Commission (registered clearing agency) or Qualified Vendor are used for automated confirmation and acknowledgment of the transaction. Each broker, dealer and municipal securities dealer executing a customer transaction on a DVP/RVP basis shall: (A) ensure that the customer has the capability, either directly or through its clearing agent, to acknowledge transactions in an automated confirmation/acknowledgment system operated by a registered Cclearing Aagency or Qualified Vendor; (B) submit or cause to be submitted to a registered Cclearing Aagency or Qualified Vendor all information and instructions required by the registered Cclearing Aagency or Qualified Vendor for the production of a confirmation that can be acknowledged by the customer or the customer’s clearing agent; and (C) submit such transaction information to the automated confirmation/acknowledgment system on the date of execution of such transaction; provided that a transaction that is not eligible for automated confirmation and acknowledgment through the facilities of a registered Cclearing Aagency shall not be subject to this paragraph (ii).

(B) Definitions for Rule G-15(d)(ii).

(C) Disqualification of Vendor. A broker, dealer or municipal securities dealer using a Qualified Vendor that ceases to be qualified under the definition in rule G-15(d)(ii)(B)(2) shall not be deemed in violation of this rule G-15(d)(ii) if it ceases using such vendor promptly upon receiving notice that the vendor is no longer qualified.

(iii) No change

ENDNOTES

1. File No. SR-MSRB-98-6, Amendment No. 1.

2. See Securities Exchange Act No. 39833 (April 6, 1998).

3. Underlining indicates additions; strikethrough denotes deletions.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Execution of infrequent unsolicited orders. This is in response to your letter in which you state that your firm is a discount broker that executes orders on an unsolicited basis and that occasionally a customer will approach your firm to sell a municipal security they own or to purchase a specific issue.  You ask that the Board give consideration to allowing a firm like yours to act as a broker/dealer for customers on an unsolicited basis without being required to have an associated person qualified as a municipal securities principal.

Rule G-2, on standards of professional qualification, states that no dealer shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any municipal security unless such dealer and every natural person associated with such dealer is qualified in accordance with the rules of the Board.  Rule G-3, on professional qualifications, states that a dealer that conducts a general securities business shall have at least one associated person qualified as a municipal securities principal to supervise the dealer’s municipal securities activities.

The Board’s rules do not provide an exemption from the numerical requirements for municipal securities principals based on the type of transactions in municipal securities in which a dealer engages.  There also is no exemption from the Board’s rules based on a de minimus number of transactions in municipal securities.  MSRB interpretation of October 2, 1998.

Disclosure obligations. This is in response to your letters dated March 18, 1998 and March 31, 1998 in which you present an example where a dealer advertises a specific municipal security which it knows, or has reason to know, is subject to a material adverse circumstance such as a technical default. You ask whether a dealer is obligated to include disclosure information indicating that a bond is subject to additional risk in order to avoid publishing a false or misleading advertisement as prohibited by rule G-21(c).  The Board reviewed your letters and has authorized this response. 

Section (c) of rule G-21 provides, among other things, that no dealer shall publish any advertisement[1] concerning municipal securities which such dealer knows or has reason to know is materially false or misleading. The Board has previously interpreted the rule as not requiring that any specific statements or information be included in an advertisement but that any statement or information that is included must not be materially false or misleading.  Thus, if a dealer makes a statement in an advertisement that explicitly or implicitly refers to the soundness or safety of an investment in the municipal securities described in the advertisement, such dealer must include any information necessary to ensure that the advertisement is not materially false or misleading with respect to the soundness or safety of such investment. The rule establishes a general ethical standard that provides the enforcement agencies with the flexibility that is needed to evaluate advertisements in light of what information is printed and how the information physically is presented.  Thus, the enforcement agencies should continue to evaluate advertisements on a case-by-case basis to make a determination whether any such advertisements, in fact, are misleading. 

You also ask whether the relative specificity of any such disclosure obligation that may exist depends on the level of detail provided about the municipal security. As stated above, rule G-21 does not require that any specific statements or information be included in an advertisement but that any statement or information that is included must not be materially false or misleading. Thus, the nature and extent of any disclosures or other explanatory statements that must be included in an advertisement is dependent upon the substance and form of the information presented in the advertisement.

The Board wishes to emphasize that the enforcement agencies should remain cognizant of certain other rules of the Board that may be relevant in evaluating whether a dealer's advertisement and such dealer's interactions with customers or potential customers that arise as a result of such advertisement are in conformity with Board rules. Thus, depending upon the facts and circumstances, an advertisement for a particular municipal security that on its face conforms with the requirements of rule G-21 may nonetheless be violative of rule G-17, the Board's fair dealing rule,[2] if, for example, the advertisement is designed as a “bait-and-switch” mechanism that attracts potential customers interested in an advertised security that the dealer is not in a legitimate position to sell (because of its unavailability, unsuitability or otherwise) for the primary purpose of creating a captive audience for the offering of other securities. In addition, a dealer that in fact sells the municipal securities that are described in its advertisement must fulfill its obligations  under rule G-19, on suitability, and rule G-30, on pricing. MSRB interpretation of May 21, 1998.

[1] “Advertisement” is defined in rule G-21 as any material (other than listings of offerings) published or designed for use in the public, including electronic, media, or any promotional literature designed for dissemination to the public, including any notice, circular, report, market letter, form letter, telemarketing script or reprint or excerpt of the foregoing. The term does not apply to preliminary official statements or official statements, but does apply to abstracts or summaries of official statements, offering circulars and other such similar documents prepared by dealers. 

[2] Rule G-17 requires each dealer, in the conduct of its municipal securities business, to deal fairly with all persons and prohibits the dealer from engaging in any deceptive, dishonest or unfair practice.

Multiple underwriters.  This is in response to your letter in which you ask us whether a dealer that serves in the capacity as settlement agent for an issuer, as described in your letter, is obligated to file Form G-36(OS) in connection with a primary offering of municipal securities sold and delivered in the manner described in your letter.

           Board rule G-36 obligates an underwriter in any primary offering of municipal securities that is subject to Rule 15c2-12 promulgated by the Securities and Exchange Commission to send to the Board, within one business day after receipt of the final official statement from the issuer, but no later than 10 business days after any final agreement to purchase, offer or sell the municipal securities, two copies of the final official statement and two copies of completed Form G-36 (OS).[1] In the event a syndicate or similar account has been formed for the underwriting of a primary offering, the managing underwriter is obligated to undertake, on behalf of the syndicate or account, the duty of sending the official statement and Form G-36(OS) to the Board.[2]

The obligation to comply with the requirements of rule G-36 and the related recordkeeping requirements of rule G-8(a)(xv) attaches to all underwriters in a primary offering that is subject to rule G-36. The only circumstance in which these rules permit an underwriter to depend upon another party to fulfill such obligation is when another underwriter has taken on the duties of a managing underwriter for a syndicate or similar account formed for the particular underwriting, in which case the rules place responsibility for compliance on such managing underwriter. Thus, in any primary offering in which more than one dealer is serving as underwriter (within the meaning of federal securities laws) for the same municipal securities without having formed an underwriting syndicate or similar account, each such underwriter (regardless of its stated capacity as settlement agent or otherwise) is individually obligated to comply with the requirements of rule G-36 and the related recordkeeping requirements of rule G-8(a)(xv).  MSRB interpretation of January 30, 1998.

__________

 ENDNOTES

[1]           Rule G-36 also obligates an underwriter in any primary offering of municipal securities that is not subject to SEC Rule 15c2-12 (other than a limited placement within the meaning of SEC Rule 15c2-12(d)(1)(i)) for which the issuer has prepared an official statement in final form to send to the Board, within one business day after delivery of the securities by the issuer to the underwriters, two copies of the official statement in final form and two copies of completed Form G-36(OS).

[2]           The managing underwriter is also required to undertake all recordkeeping duties imposed under rule G-8(a)(xv) in connection with rule G-36.

Purchase of new issue from issuer. This is in response to your letter in which you ask whether Board rule G-17, on fair dealing, or any other rule, regulation or federal law, requires an underwriter to purchase a bond issue from a municipal securities issuer at a “fair price.”

Rule G-17 states that, in the conduct of its municipal securities business, each broker, dealer and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice. Thus, the rule requires dealers to deal fairly with issuers in connection with the underwriting of their municipal securities.  Whether or not an underwriter has dealt fairly with an issuer is dependent upon the facts and circumstances of an underwriting and cannot be addressed simply by virtue of the price of the issue. For example, in a competitive underwriting where an issuer reserves the right to reject all bids, a dealer submits a bid at a net interest cost it believes will enable it to successfully market the issue to investors. One could not view a dealer as having violated rule G-17 just because it did not submit a bid that the issuer considers fair. On the other hand, when a dealer is negotiating the underwriting of municipal securities, a dealer has an obligation to negotiate in good faith with the issuer. If the dealer represents to the issuer that it is providing the best market price available on this issue, and this is not the case, the dealer may violate rule G-17. Also, if the dealer knows the issuer is unsophisticated or otherwise depending on the dealer as its sole source of market information, the dealer’s duty under rule G-17 is to ensure that the issuer is treated fairly, specifically in light of the relationship of reliance that exists between the issuer and the underwriter. MSRB interpretation of December 1, 1997.

MSRB TRANSACTION REPORTING PROGRAM

QUESTIONS AND ANSWERS

October 1997

Most of these questions and answers were included in an MSRB mailing sent to each broker, dealer and municipal securities dealer on March 31, 1997. Questions numbered 60 and higher have been added since that mailing.

These questions and answers touch upon the following topics:

GENERAL QUESTIONS

CUSTOMER TRANSACTION REPORTING

• Preparing for Customer Transaction Reporting
• Completing the Customer Transaction Reporting Form
• Price and Yield
• Settlement Date
• Agency and Principal Transactions
• Control Numbers
• Records Amending and Cancelling Trades
• Submission of Files
• File Forwarding by NSCC
• Transaction Reporting to MSRB Using MSRB's Dial-Up Facility
• Testing Customer Transaction Reporting with the MSRB
• Record and File Format Questions
• Other Questions

 

INTER-DEALER TRANSACTION REPORTING

• Accrued Interest
• Executing Broker Symbol
• Time of Trade
• Problems in Inter-Dealer Transaction Reporting

 

QUESTIONS ADDED AFTER MARCH 1997

• Yield
• Commission
• File Format

 

GENERAL QUESTIONS

1. Q: What is the purpose of the requirement in MSRB rule G-14 to report each municipal securities transaction to the MSRB?

A: One purpose of the requirement is to make transaction information (e.g., prices and volumes) available to market participants. This is generally known as the "transparency" function of the MSRB Transaction Reporting Program. It is being accomplished at this time through a daily report that shows information such as the high, low and average prices of municipal securities that were traded four or more times on the previous day. A second, equally important, function of the program is market surveillance. Each transaction reported is entered into a database that essentially is an audit trail of transactions. This database is available only to the SEC, the NASD and other regulators charged with surveillance of the market. Transparency and surveillance functions have long been in existence in other major U.S. securities markets. The MSRB is responsible to bring these functions to full implementation in the municipal securities market.

2. Q: Have the requirements of G-14 been approved by the Securities and Exchange Commission?

A: Yes. The Commission approved the transaction reporting requirements described here on November 29, 1996 (Securities and Exchange Act Release No. 37998; see also MSRB Reports, Vol. 17, No. 1 [January 1997] at 3-8).

3. Q: When does compliance with these functions have to take place?

A: Inter-dealer transaction reporting began on January 23, 1995, with an amendment to rule G-14. (See MSRB Reports, Vol. 14, No. 5 [December 1994] at 3-6.) Each dealer should now be well aware of the specific requirements of reporting inter-dealer transactions. A number of notices have appeared in MSRB Reports indicating areas where attention is specifically needed to improve reporting. (See, e.g., MSRB Reports, Vol. 16, No. 2 [June 1996] at 9-12.) Customer transaction reporting begins with mandatory testing in July 1997 and full program operations are planned for early 1998.

4. Q: How does a dealer report municipal securities transactions to the MSRB?

A: The answer to the question differs depending upon whether the transaction is with another dealer ("inter-dealer transaction") or with an entity that is not a dealer ("customer transaction"). Inter-dealer transactions are reported by submitting the required transaction information, in proper form, to the automated comparison system for municipal securities. Dealers achieve both the automated comparison function and the transaction reporting function by submitting a single file to the comparison system. For customer transactions, dealers must produce a computer-readable file specifically for the MSRB and transmit that file to the MSRB each night.

CUSTOMER TRANSACTION REPORTING

Preparing for Customer Transaction Reporting

5. Q: What should dealers be doing now to prepare for customer transaction reporting?

A: After becoming familiar with the G-14 requirements, dealers should either be making changes to their computer systems necessary to produce and transmit customer transaction files, or making arrangements with clearing brokers or service bureaus who will do this on their behalf. Although the mandatory testing period does not begin until summer 1997, preparations should be made now.

6. Q: Is there anything else that a dealer can do now to prepare?

A: Each dealer should complete and return a Customer Transaction Reporting Form.

Completing the Customer Transaction Reporting Form

7. Q: In completing the information form for customer transaction reporting, whom should I identify as the "primary contact with the MSRB for purposes of customer transaction reporting"? Should I name our Municipal Securities Department Director or our Compliance Officer?

A: The primary contact should be the individual who will be ultimately responsible for ensuring that MSRB mailings and other communications (e.g., phone calls) on this subject will reach the appropriate persons in the firm. The primary contact will be the MSRB's initial contact regarding tests of customer transaction reporting.

8. Q: Who should be identified as the "point-of-contact regarding technical matters"?

A: The MSRB will contact this person on computer-related matters such as the firm's telecommunications and methods for transmitting files, how many characters each field should have in the record of a trade, what headers must be included in the files, etc.

9. Q: How do the above topics differ from the person designated for questions about the "correctness of trade details"?

A: A question about trade details might arise, for example, if MSRB calculates a yield that differs substantially from the dealer-reported yield for the same trade. MSRB staff may ask the dealer what it used to derive yield from dollar price to account for the difference. In general, the contact for "correctness of trade details" will be the person called if the question is about the substantive information being provided about a transaction.

10. Q: In response to the question on page one of the form, my firm does not effect municipal securities transactions, does not intend to do so and does not intend to submit transactions to the MSRB for other dealers. I will check the appropriate box and return the form. What should I do if my firm's plans later change?

A: Since all transactions in municipal securities will have to be reported to the MSRB, if a firm decides to begin effecting transactions or to submit transaction data, it should immediately contact the MSRB to obtain and complete this form.

11. Q: What is the "dial-up transmission facility" referred to in the form?

A: Most dealers will send customer trade data to the MSRB through National Securities Clearing Corporation (NSCC), but some low-volume transmissions may be done by dialing the MSRB's computer directly using a personal computer and telephone modem. By checking the appropriate box on the form, you may request more information about the dial-up facility from the MSRB. In response, the MSRB will mail information before testing begins that describes how the dial-up facility can be installed and used to report customer trades. (More detailed questions and answers about the dial-up facility are found below.)

12. Q: Where can I find a description of the data elements that must be included in transaction records?

A: The MSRB document entitled "File and Record Specifications for Reporting Customer Transactions" defines the data elements and provides format specifications for transaction records and files.

Price and Yield

13. Q: Both price and yield are required to be included for transactions on which the settlement date is known. Why is that?

A: One of the most difficult problems in collecting and disseminating accurate information on municipal securities transactions is that there are approximately 1.3 million different municipal securities. Typographical errors in trade input, for example, are always possible, and since there is generally not a stream of transaction data coming in on a specific issue, it is difficult for the system collecting the information to mechanically check reported information to ensure that it is not a likely input error. This is particularly important when it is recognized that the price information collected will be disseminated and reviewed by market participants on the next day and may be used as part of trading or investment decisions. Requiring both yield and price, along with the CUSIP number of the issue being reported, will allow the MSRB to mechanically perform mathematical checks that will help to ensure that the information being reported makes sense, given the coupon, maturity date and call features of the security. Other means of checking data accuracy also will be employed. For example, the CUSIP check digit is required to guard against typographical errors in the entry of CUSIP numbers. (More questions and answers about error correction are found below.)

14. Q: What if a yield cannot not be computed for a transaction done on a dollar price basis, for example, because the trade is in a variable rate security or in a defaulted security?

A: The trade may be submitted using a dollar price only in these cases. Note, however, that if the security is not known to the MSRB system as one which is a variable rate instrument or in default, the MSRB may contact you to ensure that its information about the security is correct and so that subsequent transaction input in the security will not be questioned in the future.

See also questions 60 and 61.

Settlement Date

15. Q: What if settlement for a transaction is not known because the transaction is in a new issue and settlement date has not been set?

A: The transaction should be reported with a yield or a dollar price and without a settlement date.

16. Q: If the settlement date for the transaction is determined after a submission is made without a settlement date, should the dealer report revised trade information to the MSRB?

A: No. If the only change in the transaction information is the settlement date on a new issue, the dealer should not send an amended transaction report. Once the settlement date for the new issue becomes known to the MSRB, that settlement date will be included in the transaction data automatically.

Agency and Principal Transactions

17. Q: When reporting dollar prices on agency transactions, should the effect of commissions be included in the dollar price submitted?

A: No. There is a separate field for submitting the commission amount on agency transactions. The MSRB will include the effect of the commission in the dollar price when aggregating principal and agency transactions and reporting price information on the daily report. There should be no "commissions" on principal transactions so that the dollar price given on principal transactions should be the net transaction dollar price to the customer.

18. Q: How should commissions be reported?

A: Commission is reported in dollars per $100 par value.

See also questions 62 and 63.

Control Numbers

19. Q: The file format requires each transaction submitted by a dealer to have a unique "control number" (unique for the dealer) that is no longer than 20 characters and that may be composed of alpha and/or numeric characters. Why is this necessary?

A: The control number given by the dealer is the mechanism by which the dealer identifies a specific transaction to the Transaction Reporting System. The dealer chooses its own numbering system; however, the control number for a transaction must be unique for the dealer within a three-year period. For example, if a dealer submits two different transactions with the same control number, the system may reject the second transaction. Use of the control number is critical so that the dealer may correct information submitted in error to the system. The MSRB also will use the dealer's control number to report back information to the dealer about the transaction.

Records Amending and Cancelling Trades

20. Q: Under what circumstances would a dealer need to correct information about a transaction submitted to the system?

A: An example might be a dealer who has made an input error resulting in the wrong price or yield being submitted for a transaction. Note that it is important for these errors to be corrected as soon as possible so that the audit trail and surveillance database is correct. Note also that it is important for errors like these to be minimized since the prices reported on trade date will be used for the daily reports appearing on the next business day.

21. Q: What will the MSRB do if it discovers a probable input error that has resulted in submitted transaction information?

A: As part of the daily process of collecting transaction information from dealers, the MSRB will send to each dealer that submitted transaction information a receipt with messages identifying errors in transactions that failed to meet acceptance testing, together with a copy of all such input records.

22 Q: What should happen next?

A: If the dealer finds that the record should be amended -- for example, because of a typographical error in the price -- he or she will submit an "Amend" record as soon as possible (i.e., a record with "A" as the "Cancel/Amend Code"). The "Amend" record must include the same dealer control number as the first report of the trade and must include all of the correct information about the trade. If the dealer finds that the questioned record was correct -- as might happen if the dealer knows features about the bond that affect the price/yield calculation and that are not in the MSRB's database -- a "Verify" record should be submitted, including the original dealer control number, to indicate that it is correct.

23. Q: What happens if I try to amend a transaction with a control number that I have not previously reported?

A: If a transaction is submitted with a "Cancel/Amend Code" of "A" and there is not an existing transaction in the database with that control number, the transaction information will be rejected -- that is, returned to the dealer for correction.

24. Q: Can I amend any information about a trade that I have previously reported?

A: No. The following fields cannot be amended: dealer identity, CUSIP number, and transaction control number. If you report a trade with an error in one of these fields, you should cancel the transaction report, as described below, and then report the trade using a new control number.

25. Q: Under what circumstances would a transaction be "cancelled" in the system and how is that done?

A: There may be limited numbers of instances in which customer transactions are reported, but the transactions later must be cancelled with customers due to circumstances beyond the dealer's control (for example, a new issue is cancelled). In this case, the dealer must submit a record with the control number of the transaction and with the "Cancel/Amend Code" set to "C" for "Cancel." Doing so will allow MSRB to indicate the transaction as cancelled in the surveillance database so that the database is accurate.

26. Q: For how long after initial submission is it possible for dealers to amend or cancel transactions that have been entered into the system?

A: This can be done for a period of three months after initial submission. However, for new issues for which there is no settlement date, it will be possible to submit cancellations until three months after the settlement date of the issue. Note that, while some numbers of cancellations and corrections are inevitable, it is important for dealers to minimize the need for these types of corrections by making sure that procedures are in place for reporting necessary information correctly in the initial submission.

Submission of Files

27. Q: When must a transaction be reported to the MSRB?

A: A transaction record, in the correct format, must reach the MSRB by midnight on trade date.

28. Q: How are these transaction records sent to the MSRB?

A: The records are put into a file with appropriate header information. The resulting file is sent to the MSRB.

29. Q: My firm is a clearing broker and will be submitting a file each day on behalf of many of our correspondents. Is there any special way in which the records in the file should be organized?

A: No. As long as the header information is correct and the information in each record is correct, the records within the file can be in any order. The header identifies the party submitting the file; the records may pertain to any number of executing dealers.

File Forwarding by NSCC

30. Q: My organization processes thousands of customer transactions in municipal transactions each day. How can such a large file be sent to the MSRB?

A: National Securities Clearing Corporation is providing its participants the ability to send the MSRB customer transaction file to NSCC along with other types of files that are sent to NSCC each day. NSCC will forward the MSRB customer transaction file to the MSRB.

31. Q: My firm uses another broker-dealer for clearing and processing municipal securities transactions. The clearing broker submits my inter-dealer transactions to NSCC on my behalf. Can the clearing broker submit my customer transaction reports to NSCC for forwarding on to the MSRB on my behalf?

A: Yes. The clearing broker can submit transaction reports for dealers for which it clears transactions. Note that the dealer effecting transactions is responsible for the clearing broker's performance in this regard. You should talk with your clearing broker now to ensure that it will provide this service.

32. Q: My firm uses a service bureau to submit inter-dealer transaction information to NSCC. Can the service bureau also submit customer transaction files to NSCC for forwarding to the MSRB?

A: Yes. As in the previous answer, the dealer effecting transactions is responsible to report the transactions correctly.

33. Q: Are there any special requirements for formatting the file to NSCC and getting the file to NSCC?

A: Yes. You should review NSCC's April 2, 1997 Important Notice on the interface requirements for customer transaction reporting (Notice No. A-4571 and P&S 4155). Similarly, if a clearing broker or service bureau will be sending your MSRB customer transaction files to NSCC for forwarding to the MSRB, they should ensure that the files can be sent in the correct format.

34. Q: Will customer transaction records submitted to NSCC for forwarding to the MSRB be included in the automated comparison system?

A: No. The MSRB customer transaction file sent to NSCC for forwarding to the MSRB is a totally separate file than the inter-dealer transactions and other files sent to NSCC for clearance and settlement purposes. NSCC will not process data in the MSRB customer transaction files, but will only forward the files to the MSRB. The use of NSCC for this purpose will allow dealers and service bureaus to use existing telecommunication channels set up between dealers and NSCC and between NSCC and the MSRB. Thus, it should provide efficiencies, especially for dealers that have many customer transactions each day. (An additional question on this subject is given below, under "Other Questions.")

Transaction Reporting to MSRB Using MSRB's Dial-Up Facility

35. Q: My firm submits its inter-dealer transactions to NSCC through a dial-up terminal or personal computer. Can I use this method of file transfer to transmit customer transaction files to NSCC for forwarding to the MSRB?

A: No; as noted in NSCC's Important Notice, all dial-up connections will be directly to the MSRB.

36. Q: How will this be done?

A: MSRB will offer a facility whereby dealers may send relatively small files directly to the MSRB by using a personal computer and a standard telephone modem, such as those made by Hayes, U.S. Robotics and others. The MSRB will provide telecommunications software by summer 1997 to dealers who ask for this service. Please note that this software will run only on computers using the Windows 95 or Windows NT operating systems. Also note that dealers using this method of transmitting files directly to the MSRB will still need a means to generate files from their own records that meet MSRB file and record format requirements.

Testing Customer Transaction Reporting with the MSRB

37. Q: What is the purpose of the mandatory testing?

A: The purpose of testing is to ensure each dealer that its own system can produce files containing the required information in the proper format, that it is able to correct erroneous input, and so forth. Testing is mandatory so that all dealers will be ready before the reporting requirement becomes effective in January 1998.

38. Q: What is the date for dealers to test their customer transaction reporting capabilities with the MSRB?

A: Mandatory testing will begin in July 1997. The MSRB plans to schedule the first tests with the dealers that have the greatest volume of customer trades and with service bureaus, followed by the lower-volume dealers. The MSRB will publicize the testing schedule before testing begins.

39. Q: What will happen during the test?

A: First, the MSRB will contact the designated primary contact person listed on your organization's MSRB Transaction Reporting form. Information will be obtained on how the organization will be submitting data, a fax number for the dealer to receive receipt/error logs from the MSRB, and technical details. Dates will be chosen to run your test. The contact person will arrange to send test files to the MSRB, using either NSCC or the MSRB dial-up facility, to establish that the telecommunications link is working, and that the trade records meet the format specifications.

40. Q: How long will the test last?

A: Each test cycle should take approximately five days. However, it may take more than one test cycle for a dealer to validate its methodology for creating files in the proper formats and for handling trade data corrections.

41. Q: Will there be special formats and test procedures for submission through NSCC?

A: Yes. As part of testing the communications, dealers and service bureaus will go through NSCC's usual procedures for setting up transmission of a new data stream or "SysID" - verifying that the file header meets Datatrak specifications, etc. Details are provided in the NSCC Important Notice previously mentioned (Notice No. A-4571 and P&S 4155).

Record and File Format Questions

42. Q: What is the format for the computer-readable file that must be sent to the MSRB each day to comply with the customer transaction reporting requirement?

A: For files sent directly to the MSRB via the MSRB dial-up facility, the physical formats for transaction records, and for the file header record that must precede them, are specified in the MSRB document entitled "File and Record Specifications for Reporting Customer Transactions." Files sent to NSCC will need to be in the format specified by NSCC. See NSCC's April 1997 Important Notice.

See also questions 64 through 66.

Other Questions

43. Q: Is the customer's identity included anywhere in the information reported?

A: No. The customer's identity is never submitted in reports of customer transactions. Each record must correctly indicate whether the transaction was a sale to a customer or a purchase from a customer, whether it is a principal or agency transaction, and certain other information.

44. Q: Are institutional and retail customer transactions reported in the same way?

A: Yes.

45. Q: How should the "Buy/Sell" code be reported?

A: If the dealer has sold securities to the customer, report this as "S" (sell). If the dealer has purchased securities from the customer, report this as "B" (buy).

46. Q: May I include my inter-dealer trades in the customer trade file I send to the MSRB?

A: No. All files submitted as part of a dealer's customer transaction file must report only customer transactions -- no inter-dealer transactions may be included.

INTER-DEALER TRANSACTION REPORTING

47. Q: How are inter-dealer transactions reported to the MSRB?

A: By submitting the transactions on trade date, to the automated comparison system, in the format and manner required by that system to obtain a comparison on the night of trade date. NSCC provides this information to the MSRB to accomplish transaction reporting for those trades. (Please note that these requirements are currently in effect under MSRB rule G-14.)

48. Q: What items are required by rule G-14, in addition to the items necessary to obtain an automated comparison of an inter-dealer trade on the night of trade date?

A: Specific items that are mandatory, in addition, to the information required for automated comparison, are: (i) accrued interest, on any transaction in which the settlement date is known; (ii) executing broker identity; and (iii) time of trade.

Accrued Interest

49. Q: Why does the MSRB need accrued interest in inter-dealer transaction reports?

A: For most transactions reported through the automated comparison system, dealers report a final money figure in lieu of a dollar price or yield. The MSRB derives a dollar price for these transactions by subtracting the reported accrued interest and dividing the result by the par amount traded. Therefore, if accrued interest is not reported correctly, the resulting dollar price may not be accurate.

Executing Broker Symbol

50. Q: Why does the MSRB need an "executing broker symbol"?

A: This symbol is used for the audit trail function. It identifies the dealer that actually effected the transactions (in contrast to the dealer that submitted the trade to NSCC or who cleared the trade). It is particularly important for dealer identification when one dealer clears for several other dealers. The dealer that actually effected the transaction should be the one identified with this symbol.

51. Q: What symbol should be used for executing broker identity?

A: The four-character symbol of the firm or bank assigned by the NASD, for example, ABCD.

52. Q: Is it permissible for my firm to use our NSCC clearing number (e.g., 1234) instead of this symbol? In our case, this would serve the same purpose since we only clear for ourselves.

A: No. The four-character alphabetic symbol is required, as it is the standard identifier used in the surveillance database. Note that, when the customer reporting phase of the Program becomes operational, this NASD-assigned symbol will be the primary identifier.

53. Q: My organization does not have one of these symbols. Should we just use the symbol of the dealer that we clear through?

A: No, if your organization is a broker, dealer or municipal securities dealer and it is effecting trades in municipal securities (with other dealers or with customers), it must use its own symbol.

54. Q: How does a dealer obtain an NASD-assigned symbol if it does not already have one?

A: Call NASD Subscriber Services at (800) 777-5606 and explain that you need a symbol for reporting municipal securities transactions.

55. Q: Will the NASD assign a symbol, even though my organization is a dealer bank?

A: Yes.

Time of Trade

56. Q: Why does the MSRB need the time of trade?

A: This information is also needed for audit trail purposes. It is not currently used in the transparency component of the program.

57. Q: How is time of trade submitted for inter-dealer transactions?

A: It is submitted in military format (e.g., 1400 for 2:00 p.m.) and in terms of Eastern time.

Problems in Inter-Dealer Transaction Reporting

58. Q: What kind of problems has the MSRB seen in the inter-dealer transaction information submitted under rule G-14?

A: For the daily report generated by the Program, only compared transactions can be used for generating price and volume information. It accordingly is very important for dealers to ensure that their procedures for reporting inter-dealer transactions are designed to submit correct information reliably to the automated comparison system. A significant number of the following types of transaction in the automated comparison system indicates that a dealer is having problems that require a review of its procedures and corrective action: (i) stamped advisories; (ii) "as of" submissions; (iii) "demand-as-of" submissions coming in against the dealer; (iv) compared transactions that are deleted using either the "one-sided delete" function or using the "withhold" function.

59. Q: My firm clears through a clearing broker. When my firm does trades with another firm that also uses that same clearing broker, must that transaction be reported to the MSRB by submitting the trade to the automated comparison system?

A: Yes. Note that the submission to the automated comparison system is also required in this instance by rule G-12(f) on automated comparison.

QUESTIONS ADDED AFTER MARCH 1997

Yield

60. Q: Should I report to the MSRB the transactions's yield to maturity or another yield -- yield to first call, yield to par call, etc.? My system calculates several yields for use in customer confirmations.

A: Report the yield as required by MSRB rule G-15(a) for customer confirmations. Rule G-15(a) in most cases requires the yield to be computed to the lower of call or nominal maturity date. Exception: If the transaction was effected at par, the yield (coupon rate) should be reported on the customer trade record, even though rule G-15(a) allows the yield to be omitted from the confirmation in such a case.

If reporting the yield is not possible because the transaction was done on a dollar price basis and no settlement date has been set for a "when-issued" security, leave the yield blank or enter zero.

61. Q: How should I report negative yield?

A: Enter a negative number in the "yield" field. The minus sign may precede or follow the number, as long as it is inside the defined field area.

Commission

62. Q: Should the effect of the commission be reported in the yield?

A: Yes. You should report as yield the same "net" yield that is reported on customer confirmations. Therefore, the reported yield should include the effect of any commission (see MSRB rule G-15(a)).

63. Q: Should miscellaneous fees such as transaction fees be included in the commission field or elsewhere? If the sales representative receives a portion of the firm's profit, should that portion be reported?

A: No. Neither miscellaneous fees nor sales representatives' portions should be reported.

File format

64. Q: Can I include binary data in the customer transaction file, along with ASCII data?

A: No. Binary data should not be included, even in the unused portions of the record. Including binary data will likely cause errors such as skipped records when MSRB processes the file. 
 

Q: The MSRB file header record requires a "version number." What should be put here?

A: This field identifies the version of the MSRB format specification that applies to the file. Initially, use '0010' here.

65. Q: The header record requires a "record count" field. What should be put here?

A: Put here the count of the number of transactions being reported in this file. Do not count the header record(s). Depending on the format used, the record count is the same as the number of physical transaction records or one-half the number of physical transaction records.

66. Q: If the header record of a transaction file contains errors, how will MSRB inform the submitter of this fact?

A: If the header of a file forwarded by NSCC does not identify a submitter and site known to the MSRB, then MSRB staff will ask NSCC to follow up. (MSRB will not accept any direct submissions by dial-up from unknown parties.) Otherwise, MSRB will send a receipt/error message file or fax to the submitter. The header errors will be identified in the file in the first two records following the receipt record, using the same format as for transaction detail errors.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

From The Chairman ,

In prior years, the Chairperson of the MSRB has written her or his letter to the industry in time for the January issue of MSRB Reports. This year, I waited until after the Board completed its review of the municipal industry's underwriting process so that I could share with you some observations on how and why we reached our conclusions and on rulemaking in general. The Board finished its review at its May meeting; the Board's proposals for rule changes in the municipal securities underwriting process are in this issue of MSRB Reports awaiting your comments.

The overall approach of these proposals is additional disclosure. I expect that various members of our industry may differ on the specifics of the rule proposals, but one thing stands out to me as crystal-clear: all of us underwriters, issuers, counsel, and financial advisors have a responsibility to see that the underwriting of a new issue is efficient and above reproach. Cities, towns, counties, and states, large and small, must raise money to build roads, schools and other public facilities necessary for our daily life. The cost of those improvements will only be at its lowest when we provide investors with a marketplace where they get fair treatment and assurance that all relevant aspects of the transactions are known to the parties involved.

To put these proposals into context, it is important that you understand how the process of rulemaking works in a self-regulating industry like ours. Of the fifteen Board members, five come from dealer firms and five are dealer bank representatives. Of its five public members, the Board currently has two issuers, two investors and one bond lawyer. The Board has large and small firm representatives and members from geographically diverse parts of the United States. Since all of the Board members are involved in the municipal market every working day, they see or hear of situations or activities that may be of concern.

When concerns of the industry are identified, the Board and the staff review current practices. The Board prioritizes the concerns for further discussion and study; it then instructs the staff to prepare options memorandum. The Board and staff have thorough discussions of the options. The Board may take several meetings to reach a consensus. The process is slow and deliberative because, while the Board is committed absolutely to protecting the integrity and fairness of the marketplace, it recognizes that non-essential regulation is burdensome and inefficient.

Once the Board approves proposed rule changes, they are released for your comment. Please take your opportunity to comment on the proposed rule changes seriously; the Board reviews every comment letter and will modify its proposals where better suggestions are made. After the comment period and review, the proposals are filed with the Securities and Exchange Commission (SEC). The SEC puts the proposed rule out for a second comment period. After the SEC reviews these comments, generally the rule is approved. At this point the rule has the force and effect of federal law.

Self-regulation has been the municipal industry's responsibility and privilege since 1975. As long as we act responsibly to protect the integrity of our marketplace and investors, I believe we will continue to enjoy that privilege. Our industry owes each Board member a debt of gratitude for their willingness to spend the time to become knowledgeable about the issues facing our industry and for their insights and thoughtful discussions throughout the process of creating the proposals. Now it is your turn to spend the time and effort to study the proposals for their effect on our marketplace. The Board will read and consider each of your comments.

The municipal securities industry and the MSRB have demonstrated a willingness to deal with tough issues. We have effectively dealt, I believe, with the influence of political contributions. We can take pride in the fact that we are the only industry in this country to have done so. With your help, the Board will continue to address vigorously any concern in this marketplace, a marketplace essential for the growth and development of this nation. Thank you for doing your part.

Roger G. Hayes Chairman, 1996-1997

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use. 

Financial advisor to conduit borrower.  This is in response to your letter concerning rule G-37, on political contributions and prohibitions on municipal securities business. You state that your firm served as financial advisor to the underlying borrower, not the governmental issuer, for a certain issue of municipal securities. You ask whether you are required to report this financial advisory activity on Form G-37/G-38.

Rule G-37(g)(vii) defines the term "municipal securities business" to include "the provision of financial advisory or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities in which the dealer was chosen to provide such services on other than a competitive bid basis." If the financial advisory services your firm provided were to the underlying borrower and not "to or on behalf of an issuer,"[1] then your firm was not engaging in "municipal securities business" and these financial advisory services are not required to be reported on Form G-37/G-38.  MSRB interpretation of January 23, 1997.
__________

[1] Rule G-37(g)(ii) defines "issuer" as the governmental issuer specified in section 3(a)(29) of the Securities Exchange Act.

Fairness opinions. This is in response to your letter concerning the retention of your firm by issuers to render a fairness opinion on the pricing associated with certain negotiated issues of general obligation municipal securities issued by [state deleted] governmental units. You ask whether the rendering of these fairness opinions on the pricing of municipal securities issues is a financial advisory activity which must be disclosed on Form G-37/G-38 as municipal securities business.

Rule G-23, on activities of financial advisors, states in paragraph (b) that a financial advisory relationship shall be deemed to exist when

a broker, dealer, or municipal securities dealer renders or enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such issue or issues, for a fee or other compensation or in expectation of such compensation for the rendering of such services. [Emphasis added]

Thus, the activity your firm performs on behalf of issuers of municipal securities pursuant to an agreement (i.e. , rendering advice with respect to the terms of a new issue) establishes that a financial advisory relationship exists between your firm and these issuers.

Rule G-37, on political contributions and prohibitions on municipal securities business, requires dealers to report municipal securities business to the Board on Form G-37/G-38. The definition of "municipal securities business" contained in rule G-37(g)(viii) includes

the provision of financial advisory or consultant services to or on behalf of an issuer with respect to a primary offering of municipal securities in which the dealer was chosen to provide such services on other than a competitive bid basis.

Pursuant to the information contained in your letter, your firm should submit a Form G-37/G-38 during each quarter in which the firm reaches an agreement to provide the financial advisory services you described. If your firm has an on-going financial advisory arrangement with an issuer, your firm would need to list each new issue in which your firm acted as financial advisor during the quarter in which the new issue settled. I have enclosed for your information a copy of the Rule G-37 and Rule G-38 Handbook which includes instructions for completing and filing Form G-37/G-38. MSRB interpretation of January 10, 1997.

Review and approval of customer accounts.  This is in response to your letter dated July 24, 1996, requesting an interpretation of rule G-27(c)(iii) on written supervisory procedures.

Rule G-27(c)(iii) requires that each municipal securities dealer adopt, maintain and enforce written supervisory procedures ensuring the "regular and frequent" review and approval by a designated principal of customer accounts introduced or carried by the dealer in which transactions in municipal securities are effected. The rule further states that such review shall be designed to ensure that such transactions are in accordance with all applicable rules and to detect and prevent irregularities and abuses.

Because circumstances vary from dealer to dealer, the Board has not specified a time period to define "regular and frequent" for purposes of rule G-27(c)(iii).  As you can see, however, the purpose of this provision is to detect and prevent irregularities and abuses that may occur in customer accounts. The Board expects dealers to establish procedures that effectively obtain this objective and that are capable of compliance. While the Board has never specifically addressed "risk-focussed" methods for determining periodic account review, the Board has stated that, in determining when an account must be reviewed, a dealer might look to the volume and frequency of trading and the nature of the securities traded. The Board noted that account review guidelines based on these factors would be appropriate if they are articulated clearly in a dealer's written supervisory procedures.[1] MSRB interpretation of August 7, 1996.

[1] Supervision Requirements, MSRB Reports, Vol. 10, No. 2 (May 1990) at 6.

Campaign for federal office. This is in response to your letter dated May 5, 1995, concerning the application of the Board's rule G-37 to a campaign for President of the United States. You ask specifically about the application of rule G-37 to contributions to Governor [name deleted] presidential campaign. The Board reviewed your letter at its May 18-19, 1995 meeting and has authorized this response.

As you know, rule G-37, among other things, prohibits any broker, dealer or municipal securities dealer (dealer) from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the dealer; (ii) any municipal finance professional associated with such dealer; or (iii) any political action committee controlled by the dealer or any municipal finance professional. The only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals. Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. Rule G-37(g)(i) defines the term "contribution" as any "gift, subscription, loan, advance, or deposit of money or anything of value made: (A) for the purpose of influencing any election for federal, state or local office..."

The Board previously has clarified that rule G-37 does not encompass all contributions to candidates for federal office. Rather, for federal office, the rule encompasses only those contributions to a current issuer official who is seeking election to federal office.[1]

You ask whether the Governor of [a state] is an "official of an issuer" for purposes of rule G-37. Rule G-37(g)(vi) defines the term "official of an issuer" as "any person (including any election committee for such person) who was, at the time of the contribution, an incumbent, candidate or successful candidate: (A) for elective office of the issuer which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by the issuer; or (B) for any elective office of a state or of any political subdivision, which office has authority to appoint any official(s) of an issuer..." as defined above. The Board has not provided any exemptions from, or exception to, the definition "official of an issuer" as set forth in rule G-37.

The Board does not make determinations concerning whether a particular individual meets the definition of "official of an issuer." The Board believes that because such determinations may involve particular issues of fact, such decisions must generally be the dealer's responsibility. The Board has, however, provided guidance in this area by recommending that dealers review the scope of authority conferred upon the particular office (and not the individual) to determine whether the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a dealer for municipal securities business.[2] For example, a state may have certain issuing authorities whose boards of directors are appointed by the governor. In such circumstances, the Board previously has stated that it intended to include the governor as an official of the issuer.a [3]

You ask whether rule G-37 applies to candidates for President of the United States. As noted above, the term "contribution" as defined in rule G-37(g)(i) includes payments "for the purpose of influencing any election for federal, state or local office." [Emphasis added]. Thus, rule G-37 is applicable to contributions given to officials of issuers who seek election to federal office, such as the House of Representatives, the Senate or the Presidency.

You ask whether rule G-37 unfairly impinges upon Governor [name deleted] equal protection and freedom of speech and association rights in the context of the Presidential election since he is, at this time, the only candidate with respect to whom those covered by the rule face "disqualification" from municipal securities business for making contributions. You also state that rule G-37 violates the First Amendment rights of association or speech by limiting the ability of municipal finance professionals to contribute to Governor [name deleted] presidential campaign. In its order approving rule G-37, the Securities and Exchange Commission stated that:

any resulting hardship to candidates for federal office who are currently local officials is not a reason for eliminating these requirements. The MSRB cannot overlook potential conflicts of interest solely because there are candidates for the same federal office who do not face the same conflicts. In any event, the resulting burden to current local officials does not appear to be significant.[4]

The Board believes that rule G-37 is not the product of governmental action and is not subject to Constitutional review. However, as you may be aware, these issues currently are pending before the D.C. Court of Appeals.

You ask whether the creation of the District of Columbia Financial Responsibility and Management Assistance Authority means that the President of the United States is an "official of an issuer" and that all candidates for President now fall under rule G-37. Rule G-37(g)(vi) defines "official of an issuer" as "any person ... who was, at the time of the contribution, an incumbent, candidate or successful candidate: (A) for elective office of the issuer which office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for municipal securities business by the issuer; or (B) for any elective office of a state or political subdivision, which office has authority to appoint any official(s) of an issuer." [Emphasis added]. The President does not hold an elective office of an "issuer" of municipal securities. In addition, the President is not, and would not become, an issuer official by virtue of his authority to appoint members to the D.C. Financial Responsibility and Management Assistance Authority because the Presidency is not an elective office of a state or political subdivision.

You ask a number of questions concerning what activities are permissible by those individuals covered by the rule. You ask whether the $250 de minimis contribution exception in rule G-37 applies to Presidential candidates. As noted previously, the only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals. Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. The Board previously has stated that, if an issuer official is involved in a primary election prior to the general election, the municipal finance professional who is entitled to vote for such official may contribute up to $250 for the primary election and $250 for the general election to each such official.[5]

[Two paragraphs deleted.][6]

You ask whether an individual covered by rule G-37 may raise money from others on behalf of Governor [name deleted]. Rule G-37(c) provides that no dealer or any municipal finance professional shall solicit any person or political action committee to make any contribution, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business. A violation of rule G-37(c) does not trigger a two-year ban on engaging in municipal securities business with an issuer; however, if the appropriate enforcement agency finds that a violation of rule G-37(c) has occurred, the enforcement agency will determine the appropriate sanction.[7] You ask whether the de minimis exception applies to solicited and bundled contributions of $250 and less. Solicitations of contributions are prohibited by the rule (for those covered); therefore, there is no de minimis exception.

You ask whether a covered individual may hold a party in his home for a Presidential candidate if contributions are raised at the party. The Board has stated that rule G-37 is not intended to restrict municipal finance professionals from engaging in personal volunteer work.[8] Personal expenses incurred by the municipal finance professional in the conduct of such volunteer work, which expenses are purely incidental to such work and unreimbursed by the dealer (e.g., cab fares and personal meals), would not constitute a contribution. However, the expenses incurred for hosting a party to solicit contributions would be viewed as a contribution.[9] The Board also has stated that if a dealer's or a municipal finance professional's name appears on fundraising literature for an issuer official for which the dealer is engaging or seeking to engage in municipal securities business then there is a presumption that such activity is a solicitation by the dealer or municipal finance professional in violation of section (c) of the rule.[10] 

Finally, you ask whether spouses and eligible children of covered personnel may contribute to a Presidential candidate. The Board has stated that contributions to issuer officials by municipal finance professionals' spouses and household members are not covered by rule G-37 unless these contributions are directed by the municipal finance professional, which is prohibited by section (d) of the rule.[11] MSRB interpretation of May 31, 1995.
__________

[1] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 14.

[2] Id.

[3] See MSRB Reports, Vol. 14, No. 4 (August 1994) at 24.

[4] See Securities Exchange Act Release No. 33868 (April 7, 1994) at 41-42; 59 FR 17621.

[5] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 13.

[6] An interpretation on determining whether a municipal finance professional is "entitled to vote" for an issuer official was withdrawn by the Board in January 1996. The Board has issued a revised interpretation of "entitled to vote" which states that a municipal finance professional is "entitled to vote" for an issuer official if the municipal finance professional's principal residence is in the locality in which the issuer official seeks election. In such instances, a municipal finance professional is able to make a de minimis contribution without resulting in a ban on municipal securities business. For example, if an issuer official is a governor running for re-election, anyone residing in that state may make a de minimis contribution to the official without causing a ban on municipal securities business with that issuer. In the example of an issuer official running for President, anyone in the country can contribute the de minimis amount to the official's Presidential campaign. The Securities and Exchange Commission approved this revision on February 16, 1996. See MSRB Reports, Vol. 16. No. 1 (January 1996) at 31-34.

[7] The enforcement agencies are: for securities firms, the National Association of Securities Dealers; and for bank dealers, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or the Office of the Comptroller of the Currency.

[8] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 15.

[9] Id.

[10] See MSRB Reports, Vol. 14, No. 5 (December 1994) at 17.

[11] See MSRB Reports, Vol. 14, No. 3 (June 1994) at 15.

Solicitation of contributions. This is in response to your letter dated September 29, 1994 regarding rule G-37, on political contributions and prohibitions on municipal securities business. You review a situation regarding a municipal finance professional's participation in a fundraising event for a certain state official. You seek guidance on two matters. First, you inquire whether the activities of the municipal finance professional in connection with this fundraiser constitute a violation of the solicitation prohibition in rule G-37(c). Second, you inquire that, if a violation of rule G-37(c) occurred, would such violation subject your firm to a two-year ban on municipal securities business with the state. The Board has reviewed your letter and authorized this response.

Rule G-37(b) prohibits dealers from engaging in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by: (i) the dealer; (ii) any municipal finance professional associated with such dealer; or (iii) any political action committee controlled by the dealer or municipal finance professional.[1] Rule G-37(c) provides that no dealer or any municipal finance professional shall solicit any person or political action committee to make any contribution, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business.

With regard to your first inquiry, the Board is not the appropriate authority to determine whether in this instance the municipal finance professional's activities amounted to a solicitation of contributions in violation of rule G-37(c). While the Board has authority to adopt rules concerning transactions in municipal securities effected by brokers, dealers and municipal securities dealers, it has no enforcement authority over dealers; that authority is vested with the National Association of Securities Dealers, Inc. (NASD) for securities firms. Whether a particular activity should be characterized as a solicitation of a contribution and a violation of the rule is fact specific, and further inquiry and investigation may be appropriate prior to a determination of violation. The Board believes that it is more appropriate for the NASD to make such inquiries and determinations. Your letter has been forwarded to the NASD for its review.

The Board believes, however, that if a dealer's or a municipal finance professional's name appears on fundraising literature for an issuer official for which the dealer is engaging or seeking to engage in municipal securities business, there is a presumption that such activity is a solicitation by the named party.

With regard to your second inquiry, a violation of rule G-37(c) does not trigger a two-year ban on engaging in municipal securities business with an issuer. If the NASD finds a violation of rule G-37(c) has occurred, the NASD will determine the appropriate sanction.

Finally, rule G-27, on supervision, requires each dealer to adopt, maintain and enforce written supervisory procedures reasonably designed to ensure compliance with Board rules, including rule G-37. In view of the significant penalties associated with rule G-37, including a two-year ban on municipal securities business with an issuer in certain cases, effective compliance procedures are essential. We recognize that some dealers may focus their compliance procedures on the areas in the rule concerning certain political contributions. Rule G-37 has other important provisions, however, such as the prohibition against certain solicitations and the recordkeeping and reporting requirements. Given the situation presented in your letter, your firm may wish to review its procedures to determine whether they are sufficient to ensure compliance with all provisions of rule G-37. MSRB Interpretation of November 7, 1994.

__________

[1]  The prohibition does not apply if the only contributions to officials of issuers are made by municipal finance professionals entitled to vote for such officials, and provided, such contributions, in total, are not in excess of $250 by each such municipal finance professional to each official of such issuer, per election.

Advertisements on behalf of issuer.  You ask whether a certain advertisement is subject to approval by a principal pursuant to rule G-21, on advertising. You state that an issuer asked the bank to act as its agent in producing the advertisement.  Rule G-21 defines an advertisement as any material (other than listings of offerings) published or designed for use in the public media, or any promotional literature designed for dissemination to the public, including any notice, circular, report, market letter, form letter or reprint or excerpt of the foregoing. The term does not apply to preliminary official statements or official statements, but does apply to abstracts or summaries of official statements, offering circulars and other such similar documents prepared by dealers. Each advertisement subject to the requirements of rule G-21 must be approved in writing by a municipal securities principal or general securities principal prior to first use. The fact that a bank dealer is acting as an agent of an issuer in the production of an advertisement meeting the definition contained in rule G-21 does not relieve a bank from complying with the requirements of the rule.  MSRB interpretation of June 20, 1994.

Review and approval of transactions.  This is in response to your letter in which you ask several questions concerning Board rules.

[One paragraph deleted.]^[*]

With respect to your second question, someone qualified as both a municipal securities representative and as a municipal securities principal may review and approve his or her own transactions effected in the capacity as a representative.

With respect to your final question, rule G-27(c)(vii)(B), on supervision, requires the prompt review and written approval by a designated principal of each transaction in municipal securities on a daily basis.  MSRB interpretation of June 20, 1994.

^[*] [The deleted paragraph concerned an unrelated question regarding a different Board rule and appears elsewhere in the MSRB Rule Book.]

Municipal securities principal: MSRB registered dealer. This is in response to your March 21, 1994 letter to [name deleted] of the National Association of Securities Dealers, a copy of which you sent to my attention. The issue in question is whether [name deleted] (the “Dealer”) is required at this time to have someone qualified as a municipal securities principal.

You note in your letter that the activities that the Dealer will be engaging in currently do not involve municipal securities, therefore, you concluded that the Dealer is not subject to the Board’s requirement that the dealer have at least one municipal securities principal.

Board rules apply only to brokers, dealers and municipal securities dealers who have registered as such with the Securities and Exchange Commission (“SEC”) and who engage in municipal securities activities. A dealer “registers” with the Board, pursuant to rule A-12, on the Board’s initial fee, by submitting a letter with certain information and paying the … initial fee along with the … annual fee pursuant to rule A-14, on the Board’s annual fee. Rule A-12 requires that the information and fee be submitted to the Board prior to the dealer engaging in municipal securities activities. Once a dealer is “registered” with the Board all Board rules are applicable to that dealer including the requirement in rule G-3, on professional qualifications, that every dealer shall have at least one municipal securities principal.[1]

Regardless of whether the Dealer is currently engaging in municipal securities activities, the dealer has “registered” with the Board and is subject to the Board’s requirement that the dealer have a municipal securities principal.[2]  If the Dealer determines that it does not wish to remain “registered” with the Board upon its conclusion that it is not engaging in municipal securities activities, rule A-15(a), on notification to Board of termination, requires that the Dealer submit a letter to the Board with a statement of its termination. In the future, should the dealer remain a registered broker or dealer with the SEC and make a determination that it will be engaging in municipal securities activities, the dealer will have to “register” with the Board pursuant to the requirements of rules A-12 and A-14 prior to engaging in municipal securities activities and, of course, meet the Board’s numerical requirements concerning municipal securities principals. MSRB interpretation of March 30, 1994.

[1]  Rule G-3(b)(iii) requires that a dealer have two municipal securities principals if the dealer performs only municipal securities activities and it employs eleven or more persons associated with it in whatever capacity on a full-time or full-time equivalent basis who are engaged in the performance of its municipal securities activities.

[2]   I have enclosed a copy of the December 14, 1993 letter you submitted to the Board pursuant to rule A-12.

Disclosures in connection with new issues. This is in response to your November 30, 1993 letter requesting interpretive guidance regarding Board rule G-32(a)(ii)(C). That provision requires dealers in connection with a negotiated sale of new issue municipal securities to disclose "the initial offering price for each maturity in the issue that is offered or to be offered in whole or in part by the underwriters." You inquired as to whether the term "initial offering price" as used in this provision could be stated in terms of yield. The Board has reviewed your request and authorized this response.

Rule G-32 requires dealers selling new issue municipal securities to provide certain written information to customers. In connection with new negotiated issues, paragraph (a)(ii) of the rule requires that this written information include the underwriting spread, the amount of any fee received by a dealer as agent for the issuer in the distribution of the securities for each maturity in the issue that is offered or to be offered in whole or in part by the underwriters, and the initial offering price of each maturity.[1]