Amendments to Rules G-8, on Books and Records, G-9, on Preservation of Records, and G-27, on Supervision, Filed with the Securities and Exchange Commission
On January 7, 2000 the Municipal Securities Rulemaking Board (the "MSRB" or the "Board") filed with the Securities and Exchange Commission (the "SEC") amendments to rules G-8, on books and records, G-9, on preservation of records, and G-27, on supervision, regarding the supervision, review, and retention of correspondence with the public.1 The effective date of the amendments will be 180 days following publication of the notice announcing Commission approval.
Technology has greatly expanded how communications between brokers, dealers and municipal securities dealers ("dealers") and their customers take place. These new means of communication (e.g., e-mail, Internet) will continue to significantly affect the manner in which dealers and their associated persons conduct their business. While these changes allow timely and efficient communication with customers, prospective customers, and others, the significant changes in communications media and capacity raise questions regarding supervision, review, and retention of correspondence with the public.
On December 31, 1997, the SEC approved proposed rule changes filed by the National Association of Securities Dealers ("NASD")2 and New York Stock Exchange ("NYSE")3 to update rules governing supervision of communication with the public. NASD Notice to Members 98-11 announced approval of the proposed rule change and provided implementation guidance to dealers.
Most of these rules became effective on April 7, 1998.4 In response to public comment and certain SEC concerns, the NASD subsequently proposed further changes to these rules, which were approved by the SEC and became effective on March 15, 1999.5 NASD Notice to Members 99-03 provided guidance on the further changes.6
The Board has determined to adopt substantially similar rule changes. The Board believes that conforming its rule language to the language in the NASD rules will help ensure a coordinated regulatory approach to the supervision of correspondence. The amendments will allow dealers to develop flexible supervisory procedures for the review of correspondence with the public. In addition, in connection with SEC approval of the amendments, the Board will issue a notice to provide guidance to dealers on how to implement the amendments. This guidance has been coordinated with NASD Notice to Members 98-11 and NASD Notice to Members 99-03.
Rule G-27(d)(i), as proposed, provides that procedures for review of correspondence with the public relating to a dealer’s municipal securities activities be designed to provide reasonable supervision for each municipal securities representative, be described in the dealer’s written supervisory procedures, and be evidenced in an appropriate manner.
Proposed rule G-27(d)(ii) requires each dealer to develop written policies and procedures for review of correspondence with the public relating to its municipal securities activities, tailored to its structure and the nature and size of its business and customers. The proposed amendments require that any dealer that does not conduct either an electronic or manual pre-use review will be required to:
- develop appropriate supervisory procedures;
- monitor and test to ensure these policies and procedures are being implemented and complied with;
- provide education and training to all appropriate employees concerning the dealer’s current policies and procedures governing correspondence, and update this training as policies and procedures are changed; and
- maintain records documenting how and when employees are educated and trained.
The proposed amendments state that these procedures must also include the review of incoming, written correspondence directed to municipal securities representatives and related to the dealer’s municipal securities activities to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with the dealer’s procedures.
The retention requirements of the proposed amendments to rule G-27 cross reference proposed changes to rules G-8(a)(xx) and G-9(b)(viii) and (xiv) and state that the names of persons who prepared, reviewed and approved correspondence must be readily ascertainable from the retained records. The records must be made available, upon request, to the appropriate enforcement agency (i.e., NASD or federal bank regulatory agency).
January 7, 2000
TEXT OF PROPOSED AMENDMENTS 7
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)- (xix) No change
(xx) Records Concerning Compliance with Rule G-27. Each broker, dealer and municipal securities dealer shall maintain the records required under G-27(c) and G-27(d).
(b)-(f) No change
Rule G-9: Preservation of Records
(a) No change
(b) Records to be Preserved for Three Years. Every broker, dealer and municipal securities dealer shall preserve the following records for a period of not less than three years:
(i)-(vii) No change
(viii) the following records, to the extent made or received by such broker, dealer or municipal securities dealer in connection with its business as such broker, dealer or municipal securities dealer and not otherwise described in this rule:
(A) -(B) no change;
(C) all written and electroniccommunications received and sent, including inter-office memoranda, relating to the conduct of the activities of such broker, dealer or municipal securities dealer with respect to municipal securities;
(D) – (E) no change.
(ix) – (xiii) no change.
(xiv) the records to be maintained pursuant to rule G-8(a)(xx).
Rule G-27. Supervision
(a)– (b) No change
(c) Written supervisory procedures. Each dealer shall adopt, maintain and enforce 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 as required in section (a) of this rule. Such procedures shall codify the dealer’s supervisory system for ensuring compliance and, at a minimum, shall establish procedures
(i)- (vi) No change
(vii) for the prompt review and written approval by a designated principal of:
(A) the opening of each customer account introduced or carried by the dealer in which transactions in municipal securities may be effected; and
(B) each transaction in municipal securities on a daily basis, including each transaction in municipal securities effected with or for a discretionary account introduced or carried by the dealer [; and
(C) all correspondence pertaining to the solicitation or execution of transactions in municipal securities].
(d) Review of Correspondence
(i) Supervision of Municipal Securities Representatives. Each dealer shall establish procedures for the review by a designated principal of incoming and outgoing written (i.e., non-electronic) and electronic correspondence of its municipal securities representatives with the public relating to the municipal securities activities of such dealer. Such procedures must be in writing and be designed to reasonably supervise each municipal securities representative. Evidence that these supervisory procedures have been implemented and carried out must be maintained and made available, upon request, to a registered securities association or the appropriate regulatory agency as defined in section 3(a)(34) of the Act.
(ii) Review of correspondence. Each dealer shall develop written procedures that are appropriate to its business, size, structure, and customers for the review of incoming and outgoing written (i.e., non-electronic) and electronic correspondence with the public relating to its municipal securities activities. Procedures shall include the review of incoming, written correspondence directed to municipal securities representatives and related to the dealer’s municipal securities activities to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with the dealer’s procedures. Where such procedures for the review of correspondence do not require review of all correspondence prior to use or distribution, they must include provisions for the education and training of associated persons as to the dealer's procedures governing correspondence; documentation of such education and training; and surveillance and follow-up to ensure that such procedures are implemented and adhered to.
(iii) Retention of correspondence. Each dealer shall retain correspondence of municipal securities representatives relating to its municipal securities activities in accordance with rules G-8(a)(xx) and G-9(b)(viii) and (xiv). The names of the persons who prepared outgoing correspondence and who reviewed the correspondence shall be ascertainable from the retained records and the retained records shall be readily available, upon request, to a registered securities association or the appropriate regulatory agency as defined in Section 3(a)(34) of the Act.
[(d)](e) Duty to update and review written procedures. Each dealer shall revise and update its written supervisory procedures as necessary to respond to changes in Board or other applicable rules and as other circumstances require. In addition, each dealer shall review, at least on an annual basis, its supervisory system and written supervisory procedures adopted under sections (c) and (d) of this rule to determine whether they are adequate and up-to-date and shall ensure that the dealer is in compliance with this rule.
ENDNOTES
1. File No. SR-MSRB-00-1. Comments submitted to the SEC should refer to this file number.
2. See Exchange Act Release No. 39510 (December 31, 1997), 63 FR 1131 (January 8, 1998).
3. See Exchange Act Release No. 39511 (December 31, 1997), 63 FR 1135 (January 8, 1998).
4. See Exchange Act Release No. 39866 (April 14, 1998), 63 FR 19778 (April 21, 1998).
5. See Exchange Act Release No. 40372 (August 27, 1998), 63 FR 47059.
6. See Notice to Members 99-03 (January 1999).
7. Underlining indicates new language; brackets denote deletions.
