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.

Recently, dealers have raised questions regarding how the prohibition on municipal securities business in rule G-37, on political contributions and prohibitions on municipal securities business, applies to certain situations. Rule G-37 prohibits any 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.[1] If a municipal finance professional makes a political contribution to an issuer official for whom he is not entitled to vote, the dealer is prohibited from engaging in municipal securities business with that issuer for two years. The Board has been asked whether the prohibition on municipal securities business extends to certain services provided under contractual agreements with an issuer that pre-date the contribution. The Board is issuing the following interpretation of the prohibition on municipal securities business pursuant to rule G-37.

"New" Municipal Securities Business

 A dealer subject to a prohibition on municipal securities business with an issuer may not enter into any new contractual obligations with that issuer for municipal securities business.[2] The Board adopted rule G-37 in an effort to sever any connection between the making of political contributions and the awarding of municipal securities business. The Board believes that the problems associated with political contributions––including the practice known as "pay-to-play"––undermine investor confidence in the municipal securities market, which confidence is crucial to the long-term health of the market, both in terms of liquidity and capital-raising ability.

Pre-Existing Issue-Specific Contractual Undertakings

The Board believes that it is consistent with the intent of rule G-37 that a dealer subject to a prohibition on municipal securities business with an issuer be allowed to continue to execute certain issue-specific contractual obligations in effect prior to the date of the contribution that caused the prohibition. For example, if a bond purchase agreement was signed prior to the date of the contribution, a dealer may continue to perform its services as an underwriter on the issue. Also, if an issue-specific agreement for financial advisory services was in effect prior to the date of the contribution, the dealer may continue in its role as financial advisor for that issue. In the same manner, a dealer may act as remarketing agent or placement agent for an issue and also may continue to underwrite a commercial paper program as long as the contract to perform these services was in effect prior to the date of the contribution. Subject to the limitations noted below, these activities are not considered new municipal securities business and thus can be performed by dealers under a prohibition on municipal securities business with the issuer.

Dealers also have asked questions regarding certain terms in contracts to provide on-going municipal securities business that allow for additional services or compensation. For example, a dealer may have an agreement to provide remarketing services for a municipal securities issue, the terms of which allow the issuer to change the "mode" of the outstanding bonds from variable to a fixed rate of interest or from Rule 2a-7 eligible to non-Rule 2a-7 eligible. [3] Generally, the per bond fee increases if the dealer sells fixed rate municipal securities or non-money market fund securities. Also, an agreement to underwrite a commercial paper program may include terms for increasing the size of the program. While the per bond fee probably does not increase if more commercial paper is underwritten, the amount of money paid to the dealer does increase. The Board views the provisions in existing contracts that allow for changes in the services provided by the dealer or compensation paid by the issuer as new municipal securities business and, therefore, rule G-37 precludes a dealer subject to a prohibition on municipal securities business from performing such additional functions or receiving additional compensation.

Non-Issue Specific Contractual Undertakings

Dealers also at times enter into long-term contracts with issuers for municipal securities business, e.g., a five-year financial advisory agreement. If a contribution is given after such a non-issue-specific contract is entered into that results in a prohibition on municipal securities business, the Board believes the dealer should not be allowed to continue with the municipal securities business, subject to an orderly transition to another entity to perform such business. This transition should be as short a period of time as possible and is intended to give the issuer the opportunity to receive the benefit of the work already provided by the dealer and to find a replacement to complete the work, as needed.

* * *

The Board recognizes that there is a great variety in the terms of agreements regarding municipal securities business and that the interpretation noted above may not adequately deal with all such agreements. Thus, the Board is seeking comment on how a prohibition on municipal securities business pursuant to rule G-37 affects contracts for municipal securities business entered into with issuers prior to the date of the contribution triggering the prohibition on business. In particular, the Board is seeking comment on other examples whereby a dealer may be contractually obligated to perform certain activities after the date of the triggering contribution. If other examples are provided, the Board would like comments on how these situations should be addressed pursuant to rule G-37.

Based upon the comments received on this notice, the Board may issue additional interpretations or amend the language of rule G-37. 

[1] The only exception to rule G-37’s absolute prohibition on municipal securities business is for certain contributions made to issuer officials by municipal finance professionals. Contributions by such persons to officials of issuers do not invoke application of the prohibition on business if (i) the municipal finance professional is entitled to vote for such official and (ii) contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election.

[2] The term "municipal securities business" is defined in the rule to encompass certain activities of dealers, such as acting as negotiated underwriters (as managing underwriter or as syndicate member), financial advisors, placement agents and negotiated remarketing agents. The rule does not prohibit dealers from engaging in business awarded on a competitive bid basis.

[3] SEC Rule 2a-7 under the Investment Company Act of 1940 defines eligible securities for inclusion in money market funds

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.

MSRB Rule G-14 on Transaction Reporting requires that every dealer obtain an executing broker symbol, if one has not already been assigned, from National Association of Securities Dealers Automated Quotations (NASDAQ).  NASDAQ will assign executing broker symbols to all dealers including bank dealers.  NASDAQ Subscriber Services can be reached at 212-231-5180, option 3.  When calling NASDAQ Subscriber Services for an executing broker symbol, dealers should state that they need the symbol for use in reporting transactions in municipal securities to the MSRB.  If dealers experience difficulties in obtaining executing broker symbols, then they can send an e-mail to subscriber@NASDAQ.com.

NOTE: This notice was revised to reflect updated information.

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.

1. Q: When is the inter-dealer time of trade reporting requirement effective?

A: The amendment to the rule G-14 transaction reporting procedures requiring the submission of time of trade execution for inter-dealer transactions became effective on July 1, 1996.

2. Q: What is the purpose of submitting the time of trade to the Board?

A: The Board's Transaction Reporting Program has two functions - public dissemination of price and volume information about frequently traded securities and the maintenance of a surveillance database to assist regulators in inspection for compliance with, and enforcement of, Board rules and securities laws. The surveillance database includes, among other things, the price and volume of each reported transaction, the trade date, the identification of the security traded, and the parties to the trade. The addition of the time of trade execution will enable the enforcement agencies to construct audit trails of inter-dealer transactions. When customer transactions are added to the system in 1998, these transaction records also will include time of trade. Time of trade will not be made public.

3. Q: How is time of trade reported?

A: Under rule G-14, inter-dealer transaction information is reported to the Municipal Securities Rulemaking Board using the same system used for automated comparison of inter-dealer transactions, operated by National Securities Clearing Corporation. Rule G-14 requires that the transaction information be submitted in the format specified by NSCC, and within such timeframe as required by NSCC to produce a compared trade for the transaction in the initial comparison cycle on the night of trade date. A broker, dealer or municipal securities dealer may employ an agent that is a member of NSCC or a registered clearing agency for the purpose of submitting transaction information. For example, the clearing broker generally reports transactions to the MSRB through NSCC when there is an introducing/clearing broker arrangement.

Under the new amendment to rule G-14, the transaction information submitted in accordance with the rule G-14 procedures must include the time of trade execution. NSCC has provided a space designated for this purpose in the standard format used for submitting trade data into the automated comparison system.

4. Q: Which dealer in an inter-dealer transaction reports the time of trade?

A: Under NSCC's automated comparison procedures, both sides of a transaction generally are required to submit transaction information. Therefore, time of trade will be reported by each side of the transaction in most cases. For "syndicate take-down" transactions, which are reported by only the seller, the time of trade is reported only by the seller.

5. Q: If the time of trade that I submit does not agree with the time of trade that the contra party submits, will this cause the trade not to compare?

A: No. The time of trade is not a match item in the automated comparison system.

6. Q: Why do both sides to the transaction have to submit the time of trade?

A: In some cases, even though both sides of a transaction are supposed to submit transaction information, the Board receives transaction information from only one party to a transaction. This may occur, for example, when a dealer "stamps an advisory" to create a compared trade. It therefore is necessary for each side of a transaction to report the time of trade to ensure that the surveillance data base has at least one report of the time of trade.

7. Q: Does the time of trade reporting requirement apply only to secondary market transactions?

A: No. The time of trade is required for all inter-dealer transactions including those in the primary market.

8. Q: How does a dealer determine the time of trade for transactions?

A: In general, this is the same time as the "time of execution," as currently required for recordkeeping purposes under rule G-8(a)(vi) and (vii).

9. Q: What is the time of trade for syndicate allocations on new issues?

A: First it should be noted that the "initial trade date" for an issue of municipal securities cannot precede the date of award (for competitive issues) or the date that the bond purchase agreement is signed (for negotiated issues). See rule G-34(a)(ii)(C)(2) and MSRB Interpretations of April 30, 1982, MSRB Manual and October 7, 1982, MSRB Manual. Similarly, the time of trade may not precede the time of award (for competitive issues) or the time that the bond purchase agreement is signed (for negotiated issues). In the typical case involving a competitive issue in which allocations are made after the date of award, the time of trade execution is the time that the allocation is made. If allocations have been "preassigned," prior to a competitive award, or prior to the signing of a bond purchase agreement, the time of award or signing of the bond purchase agreement should be entered as the "time of trade."

Board rule G-11, concerning syndicate practices, among other things, requires syndicates to establish priorities for different categories of orders and requires certain disclosures to syndicate members which are intended to assure that allocations are made in accordance with those priorities. In addition, the rule requires that the manager provide certain accounting information to syndicate members. In particular, rule G-11(h)(i) provides that: "Discretionary fees for clearance costs to be imposed by a syndicate manager and management fees shall be disclosed to syndicate members prior to the submission of a bid, in the case of a competitive sale, or prior to the execution of a purchase contract with the issuer, in the case of a negotiated sale.[1] The purpose of this provision is to provide information useful to syndicate members in determining whether to participate in a syndicate account. The rule also requires that the senior syndicate manager, at or before final settlement of a syndicate account, furnish to the syndicate members "an itemized statement setting for the nature and amount of all actual expenses incurred on behalf of the syndicate." One of the purposes of this section is to render managers accountable for their handling of syndicate funds.

The Board has received inquiries regarding the appropriateness of a per-bond fee for the bookrunning expenses or management fees of the senior syndicate manager. Discretionary fees for clearance costs and management fees may be expressed as a per-bond charge. These expenses, however, must be disclosed to members prior to the submission of a bid or prior to the execution of a purchase contract with the issuer; for example, in the Agreement Among Underwriters. The itemized statement setting forth a detailed breakdown of actual expenses incurred on behalf of the syndicate, such as advertising, printing, legal, computer services, etc., must be disclosed to syndicate members at or before final settlement of the syndicate account. With respect to these fees, the Board has previously noted that managers who assess a per-bond charge for designated sales may be acting in violation of rule G-17 if the expenses charged to members bear no relation to or otherwise overstate the actual expenses incurred on behalf of the syndicate. [2] The Board believes a per-bond fee creates the appearance that it is not an actual expense related to and incurred on behalf of the syndicate.

The Board is concerned about the charging of syndicate expenses and compliance with rule G-11. Managers should exercise care in accounting for syndicate funds, and any charge that has not been disclosed to members prior to the submission of a bid or prior to the execution of a purchase contract may be charged to syndicate members only if it is an actual expense incurred on behalf of the syndicate. The Board will continue to monitor syndicate practices and will notify the appropriate enforcement agency of any complaints it receives in this area. Syndicate members are encouraged to notify directly the appropriate enforcement agency of any violations of these provisions.

[1] The rule defines management fees to include, "in addition to amounts categorized as management fees by the syndicate manager, any amount to be realized by a syndicate manager, and not shared with the other members of the syndicate, which is attributable to the difference in price to be paid to an issuer for the purchase of a new issue of municipal securities and the price at which such securities are to be delivered by the syndicate manager to the members of the syndicate."

[2] Syndicate Managers Charging Excessive Fees for Designated Sales (July 29, 1985), [reprinted in MSRB Reports, Vol. 7, No. 2 (March 1987) at 5].

Rule G-15(a) generally requires that confirmations of municipal securities transactions with customers state a dollar price and yield for the transaction. Thus, for transactions executed on a dollar price basis, a yield must be calculated; for transactions executed on a yield basis, a dollar price must be calculated. Rule G-33 provides the standard formulae for making these price/yield calculations.

It has come to the Board’s attention that certain municipal securities have been issued in recent years with features that do not fall within any of the standard formulae and assumptions in rule G-33, nor within the calculation formulae available through the available settings on existing bond calculators. For example, an issue may have first and last coupon periods that are longer than the standard coupon period of six months.

With respect to some municipal securities issues with non-standard features, industry members have agreed to certain conventions regarding price/yield calculations. For example, one of the available bond calculator setting might be used for the issue, even though the calculator setting does not provide a formula specifically designed to account for the non–standard feature. In such cases, anomalies may result in the price/yield calculations. The anomalies may appear when the calculations are compared to those using more sophisticated actuarial techniques or when the calculations are compared to those of other securities that are similar, but that do not have the non–standard feature.

The Board reminds dealers that, under rule G-17, dealers have the obligation to explain all material facts about a transaction to a customer buying or selling a municipal security. Dealers should take particular effort to ensure that customers are aware of any non-standard feature of a security. If price/yield calculations are affected by anomalies due to a non-standard feature, this may also constitute a material fact about the transaction that must be disclosed to the customer.

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.]

Rule G-15(a) requires that, 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 (dealers) shall give or send to the customer "a written confirmation of the transaction" containing specified information. Securities Exchange Act Rule 10b-10 states similar confirmation requirements for customer transactions in securities other than municipal securities. In December 1992, Thomson Financial Services, Inc. (Thomson) asked the Securities and Exchange Commission (Commission) to allow dealers to use Thomson's OASYS Global system for delivering confirmation under Rule 10b-10. In October 1993, the Commission staff provided Thomson with a "no-action" letter stating that, if OASYS Global system participants agree between themselves to use the system's electronic "contract confirmation messages" (CCMs) instead of hard-copy confirmations and if certain other requirements are met[1] the Commission staff would not recommend enforcement action to the Commission if broker-dealers rely on CCMs sent through the OASYS Global system to satisfy the requirements to confirm a transaction under Rule 10b-10.[2]

Thomson has asked the Board for an interpretation of rule G-15(a) that would allow dealers to use the OASYS Global system for municipal securities transactions to the same extent as dealers are allowed to use the system to comply with Rule 10b-10. The Board believes that the speed and efficiencies offered by electronic confirmation delivery are of benefit to the municipal securities industry, especially in light of the move to T+3 settlement. Therefore, the Board has interpreted the requirement in rule G-15(a) to provide customers with a written confirmation to be satisfied by a CCM sent through the OASYS Global system when the following conditions are met: (i) the customer and dealer have both agreed to use the OASYS Global system for purposes of confirmation delivery; (ii) the CCM includes all information required by rule G-15(a); and (iii) all other applicable requirements and conditions concerning the OASYS Global system expressed in the Commission's October 8, 1993 no-action letter concerning Securities Exchange Act Rule 10b-10 continue to be met.[3]

[1] The other requirements contained in the Commission's no-action letter are as follows: (i) that the CCMs can be printed or downloaded by the participants, (ii) that the recipient of a CCM must respond through the system affirming or rejecting the trade, (iii) that the CCMs will not be automatically deleted by the system, and (iv) that the use of the system by the participants ensures that both parties to the transaction have the capacity to receive the CCMs.

[2] The Commission's October 8, 1993 no-action letter is reprinted in MSRB Reports, Vol. 14, No. 3 (June 1994) at 38-39.

[3] The Board understands that Thomson's OASYS Global system is not at this time a registered securities clearing agency and is not linked with other registered securities clearing agencies for purposes of automated confirmation/acknowledgement required under rule G-15(d). Thus, under these circumstances, use of the OASYS Global system will not constitute compliance with rule G-15(d) on automated confirmation/acknowledgement.

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]

New products are constantly being introduced into the municipal securities market. Dealers must ensure that, prior to effecting transactions with customers in municipal securities with new features, they obtain all necessary information regarding these features. The Board will attempt periodically through educational notices to describe new products or features of municipal securities and review the responsibilities of dealers to customers in these transactions. In this notice, the Board will review detachable call features.

Certain recent issues of municipal securities include a new feature called a detachable call right. This feature allows the issuer to sell its right to call the bond. Thus, upon the sale of this call right, the owner of the right has the ability, at certain times, to require the mandatory tender of the underlying municipal bond. The dates of mandatory tender of the underlying bonds generally correlate with the optional call dates. If the holder exercises such rights, the underlying bondholder tenders its bond to the issuer (just as if the issuer had called the bond) and the holder of the call right purchases the bond. In some instances, issuers already have issued municipal call rights and the underlying bonds in such cases are sometimes referred to as being subject to "detached" call rights.

Bonds subject to detachable call rights generally include a provision that permits an investor that owns both the detached call right and the underlying bond to link the two instruments together, subject to certain conditions. Such "linked" municipal securities would not be subject to being called at certain times by holders of call rights or the issuer. They may, however, be subject to other calls, such as sinking fund provisions. If a customer obtains a linked security, thereafter the customer has the option to de-link the security, again subject to certain conditions, into a municipal call right and an underlying bond subject to a right of mandatory tender.

Applicability of Board Rules

Of course, the Board’s rules apply to bonds subject to detachable call features and "linked" securities just as they apply to all other municipal securities. The Board, however, would like to remind dealers of certain Board rules that should be considered in transactions involving these municipal securities.

Rule G-15(a) on Customer Confirmations

Rule G-15(a)(i)(E)[*] requires customer confirmations to set forth "a description of the securities, including… if the securities are… subject to redemption prior to maturity…, an indication to such effect." Additionally, rule G-15(a)(iii)(F)[*] requires a legend to be placed on customer confirmations of transactions in callable securities which notes that "Call features may exist which could affect yield; complete information will be provided upon request."

Confirmations of transactions in bonds subject to detachable call rights, therefore, would have to indicate this information.[1] In addition, the details of the call provisions of such securities would have to be provided to the customer upon the customer’s request.

Confirmation disclosure, however, serves merely to support—not to satisfy—a dealer’s general disclosure obligations. More specifically, the disclosure items required on the confirmation do not encompass "all material facts" that must be disclosed to customers at the time of trade pursuant to rule G-17.

Rule G-17 on Fair Dealing

Rule G-17 of the Board’s rules of fair practice requires municipal securities dealers to deal fairly with all persons and prohibits them from engaging in any deceptive, dishonest, or unfair practice. The Board has interpreted this rule to require that a dealer must disclose, at or before the sale of municipal securities to a customer, all material facts concerning the transaction, including a complete description of the security, and must not omit any material facts which would render other statements misleading. Among other things, a dealer must disclose at the time of trade whether a security may be redeemed prior to maturity in-whole, in-part, or in extraordinary circumstances because this knowledge is essential to a customer’s investment decision.

Clearly, bonds subject to detachable calls must be described as callable at the time of the trade.[2] In addition, if a dealer is asked by a customer at the time of trade for specific information regarding call features, this information must be obtained and relayed promptly.

Although the Board requires dealers to indicate to customers at the time of trade whether municipal securities are callable, the Board has not categorized which, if any, specific call features it considers to be material and therefore also must be disclosed. Instead, the Board believes that it is the responsibility of the dealer to determine whether a particular feature is material.

With regard to detachable calls, dealers must decide whether the ability of a third party to call the bond is a material fact that should be disclosed to investors. Dealers should make this determination in the same way they determine whether other facets of a municipal securities transaction are material—is it a fact that a reasonable investor would want to know when making an investment decision? For example, would a reasonable investor who knows a bond is callable base an investment decision on whether someone other than the issuer can call the bond? Does this new feature affect the pricing of the bond?

*  *  *

The Board is continuing its review of detachable call rights and may take additional related action at a later date. The Board welcomes the views of all persons on the application of Board rules to transactions in securities subject to detachable call rights.

[1] With regard to the confirmation requirement for linked securities, if these securities are subject to other call provisions such as sinking fund calls, the customer confirmation must indicate that these securities are callable.

[2] Similarly, when considering the application of rule G-17 to transactions in "linked" securities, as with other municipal securities, dealers have the obligation to ensure that investors understand the features of the security. In particular, if a linked security to other call provisions, dealers should ensure that retail customers do not mistakenly believe the bond is "non-callable."

[*] [Currently codified at rule G-15(a)(i)(C)(2)(a)]

The Board has become aware that some municipal issuers recently have issued securities that are structured as collateralized mortgage obligations (CMOs). Like the CMOs issued by non-municipal issuers, these securities represent interest in pools of mortgages and are partitioned into several classes (or tranches), which are serialized as to priority for redemption and payment of principal.

Since these "municipal CMOs" are being issued directly by political subdivisions, agencies or instrumentalities of state or local governments, it appears that they may be "municipal securities," as that term is defined under section 3(a)(29) of the Securities Exchange Act of 1934.[1] Although the interest paid on these instruments may be subject to federal taxation, the Board reminds dealers that transactions in municipal securities are subject to Board rules whether those securities are taxable or tax-exempt. Accordingly, dealers executing transactions in municipal CMOs should ensure that they are in compliance with all applicable Board rules. For example, dealers should ensure that all Board requirements regarding professional qualifications and recordkeeping are observed.[2]

Because the interest and principal payment features of municipal CMOs are very different from those of traditional municipal bonds, dealers should take care to ensure that all Board rules designed for the protection of customers are observed. This includes ensuring that: (i) all material facts about each transaction are disclosed to the customer, in compliance with rule G-17; (ii) each transaction recommended to a customer is suitable for the customer, in compliance with rule G-19; and (iii) the price of each customer transaction is fair and reasonable, in compliance with rule G-30. With respect to the material facts that should be disclosed to customers, dealers should ensure that customers are adequately informed of the likelihood of "prepayment" of principal on the securities and the likelihood of the securities being redeemed substantially prior to the stated maturity date. If the amount of principal that will be delivered to the customer differs from the "face" amount to be delivered, the customer also should be informed of this fact, along with the amount of the principal that will be delivered.

The Board also has reviewed the requirements of rule G-15(a)(i)(l)[*] with respect to confirmation disclosure of "yield to maturity" or "yield to call" on customer confirmations in these securities. Because CMOs typically pay principal to holders prior to maturity and because the actual duration of the securities often varies significantly from the stated maturity, the Board has interpreted rule G-15(a) not to require a statement of yield for transactions in municipal CMOs. A dealer that decides to voluntarily include a statement of "yield" on a confirmation for these securities must also disclose on the confirmation the method by which yield was computed. This will help to avoid the possibility of the customer misunderstanding the yield figure if he should use it to compare the merits of alternative investments.

The Board will be monitoring municipal CMOs and will adopt specific rules for the instruments in the future if this appears to be necessary.

[1] Of course, whether any instrument is a municipal security is a matter to be determined by the Securities and Exchange Commission.

[2] In addition, as noted above, the interest paid on these instruments may be subject to federal taxation. If the securities are identified by the issuer or sold by the underwriter as subject to federal taxation, rules G-12(c) and G-15(a) require confirmations to contain a designation to that effect.

[*] [Currently codified at rule G-15(a)(i)(A)(5)]

Board rule G-11, concerning syndicate practices, among other things, requires syndicates to establish priorities for different categories of orders and requires certain disclosures to syndicate members which are intended to assure that allocations are made in accordance with those priorities. Rule G-11(h)(i) requires that a senior syndicate manager, at or before final settlement of a syndicate account, furnish to syndicate members "an itemized statement setting forth the nature and amount of all actual expenses incurred on behalf of the syndicate." One of the purposes of this section is to render managers accountable for their handling of syndicate funds.

Over the years, the Board, pursuant to rule G-11 and rule G-17, on fair dealing, has urged syndicate managers to provide members with a clear and accurate itemized statement of all actual expenses incurred in the underwriting of each issue. In a 1984 notice, the Board stated that expense items must be sufficiently described to make the expenditures readily understandable by syndicate members, and that generalized categories of expenses are not sufficient if they do not portray the specific nature of the expenses. [1] In 1985, the Board issued a notice specifically warning managers to take care in determining actual syndicate expenses, and noting that managers may violate rule G-17 if the expenses charged to syndicate members bear no relation to, or otherwise overstate, the actual expenses incurred. [2] And in 1987, in response to industry complaints concerning the amount of syndicate expenses charged by managers, the Board issued another notice reiterating that Board rules prohibit managers from overstating actual syndicate expenses. [3]

The Board wishes to reiterate its interpretation of rules G-11 and G-17 that syndicate expenses charged to members must be clearly identified and must be the actual expenses incurred on behalf of the syndicate. [4] The Board continues to be concerned over the number of complaints about syndicate managers who may be charging expenses that are overstated or excessive, particularly with respect to clearance fees for designated sales and computer expenses. Board rules specifically prohibit managers from overstating actual syndicate expenses.

The Board urges syndicate members to report possible overstatements of syndicate expenses and other problems in compliance with rule G-11(h)(i). The Board will continue to monitor this situation, and will refer any complaints it receives in this area to the appropriate enforcement agencies. In addition, the NASD has alerted the Board that it will accept telephone complaints or information from syndicate members who do not wish to reveal their identities.

[1] Notice Concerning Disclosure of Syndicate Expenses (January 12, 1984), [reprinted in MSRB Reports, Vol. 4, No. 1 (February 1984) at 9].

[2] Notice Concerning Syndicate Managers Charging Excessive Fees for Designated Sales (July 29, 1985), [reprinted in MSRB Reports, Vol. 5, No. 5 (August 1985) at 17].

[3] Notice Concerning Syndicate Expenses that Appear Excessive (March 3, 1987), [reprinted in MSRB Reports, Vol. 7, No. 2 (March 1987) at 5].

[4] See MSRB Reports, Vol. 5, No. 6 (November 1985)[at 5], and Vol. 5, No. 5 (August 1985)[at 5].

Disclosure of the investment of bond proceeds. This is in response to your letter asking whether rule G-15(a), on customer confirmations, requires disclosure of the investment of bond proceeds.

Rule G-15(a)(i)(E)[*] requires dealers to note on customer confirmations the description of the securities, including, at a minimum

the name of the issuer, interest rate, maturity date and if the securities are limited tax, subject to redemption prior to maturity (callable), or revenue bonds, an indication to such effect, including in the case of revenue bonds the type of revenue, if necessary for a materially complete description of the securities, and in the case of any securities, if necessary for a materially complete description of the securities, the name of any company or other person in addition to the issuer obligated, directly or indirectly, with respect to debt service or, if there is more than one such obligor, the statement "multiple obligors" may be shown.

The Board has not interpreted this provision as requiring disclosure of the investment of bond proceeds.

Of course, rule G-17, on fair dealing, has been interpreted by the Board to require that, in connection with the purchase from or sale of a municipal security to a customer, at or before execution of the transaction, a dealer must disclose all material facts concerning the transaction which could affect the customer's investment decision and must not omit any material facts which would render other statements misleading. Thus, if information on the investment of bond proceeds of a particular issue is a material fact, Board rules require disclosure at the time of trade. MSRB Interpretation of August 16, 1991.

[*][Currently codified at rules G-15(a)(i)(B) and G-15(a)(i)(C)]

Current Refundings. This is in response to your letter of July 10, 1991. You note that, pursuant to recently adopted amendments to rule G-36, underwriters are required to deliver advance refunding documents (i.e., escrow agreements) to the Board. You state that, under Section 149(d)(5) of the Internal Revenue Code of 1986, as amended, an advance refunding issue is one which will be issued more than 90 days before the redemption of the refunded bonds. Escrow deposits customarily are made of U.S. government obligations or other highly-rated securities which are sufficient to pay principal and interest to retire the bonds being refunded over some period of time. You note, however, that for current refundings, there also are short-term escrows established for periods of less than 90 days which involve the investment of bond proceeds in permitted defeasance securities until the first permitted redemption date. You ask whether it is necessary to file Form G-36(ARD) and the related documents when the escrow period is less than 90 days. The Board has reviewed your request and has authorized this response.

Rule G-36 requires underwriters, among other things, to provide advance refunding documents to the Board. The purpose of this requirement is so these documents will be available through the Board's Municipal Securities Information Library^(TM) (MSIL^(TM)) system, to the holders of the refunded issues, as well as dealers and customers effecting transactions in such issue. In general, municipal securities industry participants consider advance refunding issues as those issued more than 90 days before the redemption of the refunded bonds. The current refunding issues you describe would not be considered advance refunding issues. Thus, rule G-36 does not require underwriters to provide the Board with escrow agreements for current refundings.

*In 2009, the MSRB amended and consolidated Rule G-36, on delivery of official statements, advance refunding documents and forms G-36(OS) and G36(ARD) and Rule G-32, on disclosures in connection with new issues into Rule G-32, on disclosures in connection with primary offerings. See Release No. 34-59966 (May 21, 2009), 102 FR 25790 (May 29, 2009). Effective May 10, 2021, this notice expressly shall apply to analogous interpretive issues under Rule G-32, on disclosures in connection with primary offerings.

The Board has become aware of several issues of municipal securities that prepay principal to the bondholders over the life of the issue. These securities are issued with a face value that equals the total principal amount of the securities. However, as the prepayment of principal to bondholders occurs over time, the "unpaid principal" associated with a given quantity of the securities become an increasingly lower percentage of the face amount. The Board believes that there is a possibility of confusion in transactions involving such securities, since most dealers and customers are accustomed to municipal securities in which the face amount always equals the principal amount that will be paid at maturity.

Because of the somewhat unusual nature of the securities, the Board believes that dealers should be alert to their disclosure responsibilities. For customer transactions, rule G-17 requires that the dealer disclose to its customer, at or prior to the time of trade, all material facts with respect to the proposed transaction. Because the prepayment of principal is a material feature of these securities, dealers must ensure that the customer knows that securities prepay principal. The dealer also must inform the customer of the amount of unpaid principal that will be delivered on the transaction.

For inter-dealer transactions, there is no specific requirement for a dealer to disclose all material facts to another dealer at time of trade. A selling dealer is not generally charged with the responsibility to ensure that the purchasing dealer knows all relevant features of the securities being offered for sale. The selling dealer may rely, at least to a reasonable extent, on the fact that the purchasing dealer is also a professional and will satisfy his need for information prior to entering into a contract for the securities. Nevertheless, it is possible that non-disclosure of an unusual feature such as principal prepayment might constitute an unfair practice and thus become a violation of rule G-17 even in an inter-dealer transaction. This would be especially true if the information about the prepayment feature is not accessible to the market and is intentionally withheld by the selling dealer. Whether or not non-disclosure constitutes an unfair practice in a specific case would depend upon the individual facts of the case. However, to avoid trade disputes and settlement delays in inter-dealer transactions, it generally is in dealers’ interest to reach specific agreement on the existence of any prepayment feature and the amount of unpaid principal that will be delivered.

In recent months, several dealers have requested guidance from the Board on the appropriate confirmation treatment of miscellaneous charges added to customer transactions. These inquiries typically relate to small amounts which some dealers add to the combined extended principal and accrued interest of a transaction, prior to arriving at the final monies.[1] In some cases, the charges are levied for specific services provided as part of the transaction (e.g., special delivery arrangements, delivery of physical securities, delivery vs. payment settlement). In other cases, dealers may charge a flat fee characterized simply as a "transaction fee." These miscellaneous fees differ from the commissions charged on agency transactions in that they are flat amounts and are not computed from the par value of the transaction.

Rule G-15(a)(iii)(J)[*] requires each customer confirmation to include, in addition to the specific items noted in G-15(a), "such other information as may be necessary to ensure that the parties agree to the details of the transaction." Accordingly, the nature and amount of miscellaneous charges must be noted on the confirmation.[2]

Questions have arisen whether miscellaneous transaction fees also should be reflected in the yield required to be disclosed on the confirmation under rule G-15(a)(i)(l).[3] The Board does not believe that it is appropriate for these fees to be incorporated in the stated yield. Because such fees are small, they generally will not significantly affect a customer's return on investment. To the extent that the minor miscellaneous fees charged in today's market may be relevant to the customer's investment decision, the Board believes that a clear disclosure of the nature and amount of the fee on the confirmation will provide customers with sufficient information. If the practice of charging that the fees routinely begin to represent significant factors in customers' return on investment, the Board may reconsider this interpretation in favor of placing the charges in the stated yield.

[1] In purchases from customers, such transaction charges may be subtracted from the monies owed the customer.

[2] The Board also has considered questions relating to periodic charges, such as monthly charges for safekeeping. A dealer assessing periodic charges to customer accounts, of course, must reach agreement with the customer on the nature and extent of the charges and the services that will be provided in return. However, since periodic charges do not relate to a specific transaction and may change over time, a dealer's policy on periodic charges is not required on the confirmation as a "detail of the transaction."

[3] [Currently codified at rule G-15(a)(i)(A)(8)] Commissions charged on agency transactions must be included in the yield calculation. See [Rule G-15 Interpretive Letter - Agency transactions: yield disclosures] MSRB interpretation of July 13, 1984, MSRB Manual 3571,33 at 4528. This has led dealers to ask whether miscellaneous transaction charges should be handled in a similar manner. As noted above, the Board does not believe that miscellaneous charges should be handled in the same manner as commissions.

[*] [Currently codified at rule G-15(a)(i)(A)(8)]

Rule G-34 requires underwriters and dealers participating in the placement of a new issue of municipal securities to ensure that an application is made for CUSIP numbers for the new issue.[1] The CUSIP Service Bureau assigns CUSIP numbers to reflect the differences in securities that are relevant to trading and investment decisions.[2] In addition, Board rules G-12 and G-15 require that CUSIP numbers appear on confirmations of transactions and that the securities delivered on those transactions match the CUSIP numbers appearing on the confirmations.[3]

Recently, certain questions have arisen about the proper method for assignment of CUSIP numbers to certain general obligation securities that have been issued in multiple series. In these issues, the issuer uses the proceeds from each series to fund a separate project, but the project itself offers bondholders no additional security for payment beyond that provided by the full faith and credit of the issuer. Securities within multiple series may be identical with respect to dated date, maturity, security and source of payment. However, an individual series may be called, in whole or part, at the option of the issuer, based on the series designation. In addition, the securities are subject to certain mandatory redemption features, which are exercisable by series and which are dependent upon the status of the project funded by the series.

Underwriters have encountered confusion as to whether each series within these issues should be assigned separate CUSIP numbers or whether the CUSIP number assignment for the issues should ignore the series designation. The Board wishes to clarify that, because of the possibility that the securities will be subject to early redemption by series designation, separate CUSIP numbers for each series are required.

The Board previously has indicated that a designation of multiple "purposes" for general obligation debt does not require separate CUSIP numbers for each purpose if the securities otherwise are identical.[4] Accordingly, there are a number of outstanding multi-series general obligation issues which are assigned one CUSIP number for each maturity and which are traded, cleared, and settled without regard to series designation. While the Board does not wish to change this general rule, it believes that separate CUSIP number assignment is required for those multi-series issues which can be called by series. The Board notes that the probability of a partial or "in-whole" redemption of a series has the potential to become a significant factor to investors and that it therefore is necessary to preserve distinctions among the various series when trading, clearing and settling these securities.

The Board has consulted with the CUSIP Service Bureau in this matter and the Service Bureau has agreed to assign separate CUSIP numbers to multi-series general obligation issues which can be called by series. Dealers serving as underwriters for these issues therefore should not request the Service Bureau to ignore the series designation when assigning numbers to these issues.

[1]The rule applies to all issues eligible for CUSIP number assignment. This includes nearly all new issue securities over three months in maturity.

[2] CUSIP numbers are assigned to municipal issues by their issuer title, dated date, interest rate, and maturity date. Municipal securities which are identical as to these four elements are assigned different numbers if there is a further distinction between the securities involving any of the following:

(1) the call features (i.e., whether or not securities are callable, date or terms of call feature, etc.);

(2) any limitation of the pledge on a general obligation bond (e.g., limited tax versus full faith and credit);

(3) any distinction in the secondary security or the source of payment of a revenue bond;

(4) the identity of any entity, besides the issuer, obligated on the debt service of the securities (e.g., two pollution control revenue bonds secured by different corporate obligors); and

(5) any distinction in the secondary security or the source of payment of a general obligation bond.

[3] Certain exceptions to these rules exist for securities which have not been assigned CUSIP numbers and instances in which the CUSIP number on a confirmation and the CUSIP number assigned to securities differ only because of a transposition or transcription error.

[4] See MSRB Reports Vol. 2, No. 1, (January 1982), p. 3. Of course, if specific portions of a general obligation issue are additionally backed by the revenues from various issuer activity or proceeds from various projects (so-called "double-barrelled" issues), separate CUSIP numbers are required to reflect these distinctions.

Confirmation requirements for partially refunded securities. This will respond to your letter of May 16, 1989. The Board reviewed your letter at its August 1989 meeting and authorized this response.

You ask what is the correct method of computing price from yield on certain types of "partially prerefunded" issues having a mandatory sinking fund redemption. The escrow agreement for the issues provides for a stated portion of the issue to be redeemed at a premium price on an optional, "in-whole," call date for the issue. The remainder of the issue is subject to a sinking fund redemption at par.[1] Unlike some issues that are prerefunded by certificate number, the certificates that will be called at a premium price on the optional call date are not identified and published in advance. Instead, they are selected by lottery 30 to 60 days before the redemption date for the premium call. Prior to this time, it is not known which certificates will be called at a premium price on the optional call date. In the particular issues you have described, the operation of the sinking fund redemption will retire the entire issue prior to the stated maturity date for the issue.

As you know, rules G-12(c) and G-15(a) govern inter-dealer and customer confirmations, respectively. Rules G-12(c)(v)(1) and G-15(a)(i)(1)[*] require the dollar price computed from yield and shown on the confirmation to be computed to the lower of call date or maturity. For purposes of computing price to call, only "in-whole" calls, of the type which may be exercised in the event of a refunding, are used.[2] Accordingly, the Board previously has concluded that the sinking fund redemption in the type of issue you have described should be ignored and the dollar price should be calculated to the lowest of the "in-whole" call date for the issue (i.e., the redemption date of the prerefunding) or maturity. In addition, the stated maturity date must be used for the calculation of price to maturity rather than any "effective" maturity which results from the operation of the sinking fund redemption. Identical rules apply when calculating yield from dollar price. Of course, the parties to a transaction may agree to calculate price or yield to a specific date, e.g., a date which takes into account a sinking fund redemption. If this is done, it should be noted on the confirmation.[3]

In our telephone conversations, you also asked what is the appropriate securities description for securities that are advance refunded in this manner. Rules G-12(c)(v)(E) and G-15(a)(i)(E)[†] require that confirmations of securities that are "prerefunded" include a notation of this fact along with the date of "maturity" that has been fixed by the advance refunding and the redemption price. The rules also state that securities that are redeemable prior to maturity must be described as "callable".[4] In addition, rules G-12(c)(vi)(I) and G-15(a)(iii)(J)[‡] state that confirmations must include information not specifically required by the rules if the information is necessary to ensure that the parties agree to the details of the transaction. Since, in this case, only a portion of the issue will be chosen by lot and redeemed at a premium price under the prerefunding, this fact must be noted on the confirmation. As an example, the issue could be described as "partially prerefunded to [redemption date] at [premium price] to be chosen by lot-callable." The notation of this fact must be included within the securities description shown on the front of the confirmation. MSRB Interpretation of August 15, 1989.

[1] In some issues, a sinking fund redemption operates prior to the optional call date, while, in others, the sinking fund redemption does not begin until on or after that date.

[2] See [Rule G-15 Interpretation –] Notice of December 10, 1980, Concerning Pricing to Call, MSRB Manual, paragraph 3571.

[3] These rules on pricing partially prerefunded securities with sinking funds are set forth in [Rule G-15 Interpretive Letter – Disclosure of pricing: calculating the dollar price of partially prerefunded bonds,] MSRB  interpretation of May 15, 1986, MSRB Manual, paragraph 3571.26.

[4] The Board has published an interpretive notice providing specific guidance on the confirmation of advanced refunded securities that are callable pursuant to an optional call. See Application of Rules G-12(c) and G-15(a) on Confirmation Disclosure of Escrowed-to-Maturity Securities [in Rule G-17 Interpretation – Notice of Interpretation on Escrowed-to-Maturity Securities: Rules G-17, G-12 and G-15], MSRB Manual, paragraph 3581.

[*] [Currently codified at rule G-15(a)(i)(A)(5)(c)(i)] 

[†] [Currently codified at rule G-15(a)(i)(C)(3)(a)]

[‡] [Currently codified at rule G-15(a)(i)(A)(8)]