The MSRB published a notice regarding Interpretation on the Application of Rules G-32 and G-36 to New Issue Offerings Through Auction Procedures.

Traditionally, brokers, dealers and municipal securities dealers (“dealers”) have underwritten new issue municipal securities through syndicates in which one dealer serves as the managing underwriter. In some cases, a single dealer may serve as the sole underwriter for a new issue. Typically, these underwritings are effected on an “all-or-none” basis, meaning that the underwriters bid on the entire new issue. In addition, new issues are occasionally sold to two or more underwriters that have not formed a syndicate but instead each underwriter has purchased a separate portion of the new issue (in effect, each underwriter serving as the sole underwriter for its respective portion of the new issue).

In the primary market in recent years, some issuers have issued their new offerings through an electronic “auction” process that permits the taking of bids from both dealers and investors directly. In some cases, these bids may be taken on other than an all-or-none basis, with bidders making separate bids on each maturity of a new issue. The issuer may engage a dealer as an auction agent to conduct the auction process on its behalf. In addition, to effectuate the transfer of the securities from the issuer to the winning bidders and for certain other purposes connected with the auction process, the issuer may engage a dealer to serve in the role of settlement agent or in some other intermediary role.

Although the Municipal Securities Rulemaking Board (the “MSRB”) has not examined all forms that these auction agent, settlement agent or other intermediary roles (collectively referred to as “dealer-intermediaries”) may take, it believes that in most cases such dealer-intermediary is effecting a transaction between the issuer and each of the winning bidders. The MSRB also believes that in many cases such dealer-intermediary may be acting as an underwriter, as such term is defined in Rule 15c2-12(f)(8) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).[1] A dealer-intermediary that is effecting transactions in connection with such an auction process has certain obligations under rule G-32. If it is also an underwriter with respect to an offering, it has certain additional obligations under rules G-32 and G-36.

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

Rule G-32(a) generally requires that any dealer (i.e., not just the underwriter) selling municipal securities to a customer during the issue’s underwriting period must deliver the official statement in final form, if any, to the customer by settlement of the transaction. Any dealer selling a new issue municipal security to another dealer is obligated under rule G-32(b) to send such official statement to the purchasing dealer within one business day of request. In addition, under rule G-32(c), the managing or sole underwriter for new issue municipal securities is obligated to send to any dealer purchasing such securities (regardless of whether the securities were purchased from such managing or sole underwriter or from another dealer), within one business day of request, one official statement plus one additional copy per $100,000 par value of the new issue municipal securities sold by such dealer to customers. Where multiple underwriters underwrite a new issue without forming an underwriting syndicate, each underwriter is considered a sole underwriter for purposes of rule G-32 and therefore each must undertake the official statement delivery obligation described in the preceding sentence.

If a dealer-intermediary is involved in an auction or similar process of primary offering of municipal securities in which all or a portion of the securities are sold directly to investors that have placed winning bids with the issuer, the dealer-intermediary is obligated under rule G-32(a) to deliver an official statement to such investors by settlement of their purchases. If all or a portion of the securities are sold to other dealers that have placed winning bids with the issuer, the dealer-intermediary is obligated under rule G-32(b) to send an official statement to such purchasing dealers within one business day of a request. Further, to the extent that the dealer-intermediary is an underwriter, such dealer-intermediary typically would have the obligations of a sole underwriter under rule G-32(c) to distribute the official statement to any other dealer that subsequently purchases the securities during the underwriting period and requests a copy. Any dealer that has placed a winning bid in a new issue auction would have the same distribution responsibility under rule G-32(c), to the extent that it is acting as an underwriter.

The MSRB views rule G-32 as permitting one or more dealer-intermediaries involved in an auction process to enter into an agreement with one or more other dealers that have purchased securities through a winning bid in which the parties agree that one such dealer (i.e., a dealer-intermediary or one of the winning bidders) will serve in the role of managing underwriter for purposes of rule G-32. In such a case, such single dealer (rather than all dealers individually) would have the responsibility for distribution of official statements to the marketplace typically undertaken by a managing or sole underwriter under rule G-32(c).[2] Such an agreement may be entered into by less than all dealers that have purchased securities through the auction process. All dealers that agree to delegate this duty to a single dealer may rely on such delegation to the same extent as if they had in fact formed an underwriting syndicate.

Application of Rule G-36, on Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to the MSRB

Rule G-36 requires that the managing or sole underwriter for most primary offerings send the official statement and Form G-36(OS) to the MSRB within certain time frames set forth in the rule. In addition, if the new issue is an advance refunding and an advance refunding document has been prepared, the advance refunding document and Form G-36(ARD) also must be sent to the MSRB by the managing or sole underwriter. Where multiple underwriters underwrite an offering without forming an underwriting syndicate, the MSRB has stated that each underwriter would have the role of sole underwriter for purposes of rule G-36 and therefore each would have a separate obligation to send official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to the MSRB.[3]

To the extent that the dealer-intermediary in an auction or similar process of primary offering of municipal securities is an underwriter for purposes of the Exchange Act, such dealer-intermediary would have obligations under rule G-36. If all or a portion of the securities are sold directly to investors that have placed winning bids with the issuer, the dealer-intermediary would be obligated to send the official statement and Form G-36(OS) (as well as any applicable advance refunding document and Form G-36(ARD)) to the MSRB with respect to the issue or portion thereof purchased by investors. If all or a portion of the securities are sold to other dealers that have placed winning bids with the issuer, the dealer-intermediary and each of the purchasing dealers (to the extent that they are underwriters for purposes of the Exchange Act) also typically would be separately obligated to send such documents to the MSRB with respect to the issue or portion thereof purchased by dealers.

To avoid duplicative filings under rule G-36, the MSRB believes that one or more dealer-intermediaries involved in an auction process may enter into an agreement with one or more other dealers that have purchased securities through a winning bid in which the parties agree that one such dealer (i.e., a dealer-intermediary or one of the winning bidders) will serve in the role of managing underwriter for purposes of rule G-36. In such a case, such single dealer (rather than all dealers individually) would have the responsibility for sending the official statement, advance refunding document and Forms G-36(OS) and G-36(ARD) to the MSRB.[4] Such an agreement may be entered into by less than all dealers that have purchased securities. All dealers that agree to delegate this duty to a single dealer may rely on such delegation to the same extent as if they had in fact formed an underwriting syndicate.

March 26, 2001

[1] Questions regarding whether an entity acting in an intermediary role is effecting a transaction or whether a dealer acting in such an intermediary role for a particular primary offering of municipal securities would constitute an underwriter should be addressed to staff of the Securities and Exchange Commission.

[2] Each dealer that is party to this agreement would be required to inform any dealer seeking copies of the official statement from such dealer under rule G-32(c) of the identity of the dealer that has by agreement undertaken this obligation or, in the alternative, may fulfill the request for official statements. In either case, the dealer would be required to act promptly so as either to permit the dealer undertaking the distribution obligation to fulfill its duty in a timely manner or to provide the official statement itself in the time required by the rule. Such agreement would not affect the obligation of a dealer that sells new issue securities to another dealer to provide a copy of the official statement to such dealer upon request as required under rule G-32(b), nor would it affect the obligation to deliver official statements to customers as required under rule G-32(a).

The Municipal Securities Rulemaking Board (the “MSRB”) has received requests for interpretive guidance regarding the maintenance in electronic form of records under rule G-8, on books and records, and rule G-9, on preservation of records. As the MSRB has previously noted, rules G-8 and G-9 provide significant flexibility to brokers, dealers and municipal securities dealers (“dealers”) concerning the manner in which their records are to be maintained, recognizing that various recordkeeping systems could provide a complete and accurate record of a dealer’s municipal securities activities.[1]  Part of the reason for providing this flexibility was that a variety of enforcement agencies, including the Securities and Exchange Commission, NASD Regulation, Inc. and the banking regulatory agencies, all may inspect dealer records.

Rule G-8(b) does not specify that a dealer is required to maintain its books and records in a specific manner so long as the information required to be shown by the rule is clearly and accurately reflected and provides an adequate basis for the audit of such information. Further, rule G-9(e) allows records to be retained electronically provided that the dealer has adequate facilities for ready retrieval and inspection of any such record and for production of easily readable facsimile copies.

[1] See Rule G-8 Interpretation – Interpretive Notice on Recordkeeping, July 29, 1977, reprinted in MSRB Rule Book (January 1, 2001) at 42.

The Securities and Exchange Commission has approved the National Securities Clearing Corporation's ("NSCC") proposed rule change (SR-NSCC-00-13) regarding the submission of trade data for comparison of fixed income inter-dealer transactions.[1]  NSCC proposes to offer its members the ability to submit their fixed income transaction information "locked-in" through Qualified Special Representatives ("QSR") for trades executed via an Alternative Trading System ("ATS").  Locked-in QSR trade data submission currently is only available for transactions in equity securities.  The Municipal Securities Rulemaking Board ("MSRB") is publishing this notice to clarify the requirements of MSRB rules G-12(f) and G-14 as they pertain to the submission of locked-in transactions.   

To accomplish a locked-in QSR submission, NSCC members on each side of a trade must have executed, or clear for a firm that executed, their trade through an ATS and previously authorized a specific NSCC-authorized QSR to submit locked-in trades to NSCC on their behalf.  The locked-in transaction records are not compared in the traditional manner through the two-sided NSCC comparison process.  Instead, the QSR itself takes responsibility to ensure that the trade data is correct and the parties have agreed to the trade according to the stated terms.  Once NSCC receives a locked-in trade, it treats it as compared so that the transaction can proceed to netting or other automated settlement procedures. 

MSRB rule G-12(f) on inter-dealer comparison and rule G-14 on Transaction Reporting Procedures each refer to the NSCC comparison process for inter-dealer transactions in municipal securities.  These rules require dealers to submit their inter-dealer trade data to NSCC for purposes of comparison and for forwarding to the MSRB for trade-reporting purposes.  Questions may arise as to whether the submission of trade data already locked-in by a QSR complies with these rules.  

NSCC's proposal requires that a QSR must obtain authorization to submit locked-in transactions both from NSCC as well as from the NSCC members who wish to use the QSR for locked-in trade submission.  Given this fact, and the fact that both rules G-12(f) and G-14 specifically contemplate the use of intermediaries in submitting data to NSCC and to the MSRB, locked-in trades submitted under NSCC's program will comply both with rule G-12(f) and rule G-14.

The Municipal Securities Rulemaking Board (the “Board”) has learned that sales of certain interests in trust funds held by state or local governmental entities may be effected by or through brokers, dealers or municipal securities dealers (“dealers”). In particular, the Board has reviewed two types of state or local gov-ernmental programs in which dealers may effect transactions in such interests: pooled investment funds under trusts established by state or local governmental entities (“local government pools”) [1] and higher education savings plan trusts established by states (“higher education trusts”).[2] In response to a request of the Board, staff of the Division of Market Regulation of the Securities and Exchange Commission (the “SEC”) has stated that “at least some interests in local government pools and higher education trusts may be, depending on the facts and circumstances, ‘municipal securities’ for purposes of the [Securities] Exchange Act [of 1934].” [3] Any such interests that may, in fact, constitute municipal securities are referred to herein as “municipal fund securities.” To the extent that dealers effect transactions in municipal fund securi-ties, such transactions are subject to the jurisdiction of the Board pursuant to Section 15B of the Securities Exchange Act of 1934 (the “Exchange Act”).

With respect to the applicability to municipal fund securities of Exchange Act Rule 15c2-12, relating to municipal securities disclosure, staff of the SEC’s Division of Market Regulation has stated:

[W]e note that Rule 15c2-12(f)(7) under the Exchange Act defines a “primary  offering” as including an offering of municipal securities directly or indirectly by or on behalf of an issuer of such securities. Based upon an analysis of programs that have been brought to our attention, it appears that interests in local government pools or higher education trusts generally are offered only by direct purchase from the issuer. Accordingly, we would view those interests as having been sold in a “primary offering” as that term is defined in Rule 15c2-12. If a dealer is acting as an “underwriter” (as defined in Rule 15c2-12(f)(8)) in connection with that primary offering, the dealer may be subject to the requirements of Rule 15c2-12. [4]

Rule 15c2-12(f)(8) defines an underwriter as “any person who has purchased from an issuer of municipal securities with a view to, or offers or sells for an issuer of municipal securities in connection with, the offering of any municipal security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking.” [5]

Consistent with SEC staff’s view regarding the sale in primary offerings of municipal fund securities, dealers acting as underwriters in primary offerings of municipal fund securities generally would be subject to the requirements of rule G-36, on delivery of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to Board or its designee. Thus, unless such primary offering falls within one of the stated exemptions in Rule 15c2-12, the Board expects that the dealer would receive a final official statement from the issuer or its agent under its contractual agreement entered into pursuant to Rule 15c2-12(b)(3). [6] Such final official statement should be received from the issuer in sufficient time for the dealer to send it, together with Form G-36(OS), to the Board within one business day of receipt but no later than 10 business days after any final agreement to purchase, offer, or sell the municipal fund securities, as required under rule G-36(b)(i). [7]  “Final official statement,” as used in rule G-36(b)(i), has the same meaning as in Rule 15c2-12(f)(3), which states, in relevant part:

The term final official statement means a document or set of documents prepared by an issuer of municipal securities or its representatives that is complete as of the date delivered to the Participating Underwriter(s) and that sets forth information concerning the terms of the proposed issue of securi- ties; information, including financial information or operating data, concerning such issuers of municipal securities and those other entities, enterprises, funds, accounts, and other persons material to an evaluation of the Offering; and a description of the undertakings to be provided pursuant to paragraph (b)(5)(i), paragraph (d)(2)(ii), and paragraph (d)(2)(iii) of this section, if applicable, and of any instances in the previous five years in which each person specified pursuant to paragraph (b)(5)(ii) of this section failed to comply, in all material respects, with any previous undertakings in a written contract or agreement specified in paragraph (b)(5)(i) of this section. [8]

The Board understands that issuers of municipal fund securities typically issue and deliver the securities continuously as customers make purchases, rather than issuing and delivering a single issue on a specified date. As used in Board rules, the term “underwriting period” with respect to an offering involving a single dealer (i.e., not involving an underwriting syndicate) is defined as the period (A) commencing with the first submission to the dealer of an order for the purchase of the securities or the purchase of the securities from the issuer, whichever first occurs, and (B) ending at such time as the following two conditions both are met: (1) the issuer delivers the securities to the dealer, and (2) the dealer no longer retains an unsold balance of the securities purchased from the issuer or 21 calendar days elapse after the date of the first submission of an order for the securities, whichever first occurs. [9] Since an offering consisting of securities issued and de-livered on a continuous basis would not, by its very nature, ever meet the first condition for the termination of the underwriting period, such offering would continuously remain in its underwriting period. [10] Further, since rule G-36(d) requires a dealer that has previously provided an official statement to the Board to send any amendments to the official statement made by the issuer during the underwriting period, such dealer would remain obligated to send to the Board any amendments made to the official statement during such continuous underwriting period. However, in view of the increased possibility that an issuer may change the dealer that participates in the sale of its securities during such a continuous underwriting period, the Board has determined that rule G-36(d) would require that the dealer that is at the time of an amendment then serving as underwriter for securities that are still in the underwriting period send the amendment to the Board, regardless of whether that dealer or another dealer sent the original official statement to the Board.

In addition, municipal fund securities sold in a primary offering would constitute new issue municipal securities for purposes of rule G-32, on disclosures in connection with new issues, so long as the securities remain in their underwriting period. Rule G-32 generally requires that a dealer selling a new issue municipal security to a customer must deliver the official statement in final form to the customer by settlement of such transaction. Thus, a dealer effecting transactions in municipal fund securities that are sold during a continuous underwriting period would be required to deliver to the customer the official statement by settlement of each such transaction. However, in the case of a customer purchasing such securities who is a repeat purchaser, no new delivery of the official statement would be required so long as the customer has previously received it in connection with a prior purchase and the official statement has not been changed from the one previously delivered to that customer. [11]

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

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

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

[4] SEC Letter.

[5] The definition of underwriter excludes any person whose interest is limited to a commission, concession, or allowance from an underwriter or dealer not in excess of the usual and customary distributors’ or sellers’ commission, concession, or allowance.

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

[8] Dealers seeking guidance as to whether a particular document or set of documents constitutes a final official statement for purposes of rule G-36(b)(i) should consult with SEC staff to determine whether such document or set of documents constitutes a final official statement for purposes of Rule 15c2-12.

[9] See rule G-32(c)(ii)(B). If approved by the SEC, the proposed rule change will redesignate this section as rule G-32(d)(ii)(B).

[10] Similarly, an offering involving an underwriting syndicate and consisting of securities issued and delivered on a continuous basis also would remain in its underwriting period under the definition thereof set forth in rule G-11(a)(ix).

[11] This is equally true for other forms of municipal securities for which a customer has already received an official statement in connection with an earlier purchase and who proceeds to make a second purchase of the same securities during the underwriting period. Furthermore, in the case of a repeat purchaser of municipal securities for which no official statement in final form is being prepared, no new delivery of the written notice to that effect or of any official statement in preliminary form would be required so long as the customer has previously received it in connection with a prior purchase. However, if an official statement in final form is subsequently prepared, the customer’s next purchase would trigger the delivery requirement with respect to such official statement. Also, if an official statement which has previously been delivered is subsequently amended during the underwriting period, the customer’s next purchase would trigger the delivery requirement with respect to such amendment.

On March 16, 2000, the Securities and Exchange Commission approved amendments to rules G-8, on books and records, G-9, on preservation of records, and G-27, on supervision.[1] The amendments will become effective on September 19, 2000. The amendments will allow brokers, dealers and municipal securities dealers ("dealers") to develop flexible supervisory procedures for the review of correspondence with the public. This notice is being issued to provide guidance to dealers on how to implement these rules.

Background

Technology has greatly expanded how communications between 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.

In May 1996, the SEC issued an Interpretive Release on the use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisors for Delivery of Information.[2] That release expressed the views of the SEC with respect to the delivery of information through electronic media in satisfaction of requirements in the federal securities laws, but did not address the applicability of any self-regulatory organization ("SRO") rules. In its release the SEC did, however, strongly encourage the SROs to work with broker/dealer firms to adapt SRO supervisory review requirements governing communications with customers to accommodate the use of electronic communications.[3]

On December 31, 1997, the SEC approved proposed rule changes filed by the National Association of Securities Dealers ("NASD")[4] and the New York Stock Exchange ("NYSE")[5] to update rules governing supervision of communication with the public. NASD Notice to Members 98-11 announced approval of the proposed rule change, provided guidance to firms on how to implement these rules and stated that the amendments to NASD Rules 3010 and 3110 would be effective on February 15, 1998. Over the next year, further amendments were made to NASD Rules 3010 and 3110. NASD Regulation received final SEC approval of amendments to Rule 3010 on November 30, 1998.[6] The rule amendments were effective on March 15, 1999.[7]

As amended, NASD Rule 3010(d)(1) provides that procedures for review of correspondence with the public relating to a member's investment banking or securities business be designed to provide reasonable supervision for each registered representative, be described in an organization's written supervisory procedures, and be evidenced in an appropriate manner. NASD Rule 3010(d)(2) requires each member to develop written policies and procedures for review of correspondence with the public relating to its investment banking or securities business tailored to its structure and the nature and size of its business and customers. These procedures must also include the review of incoming, written correspondence directed to registered representatives and related to the member's investment banking or securities business to properly identify and handle customer complaints and to ensure that customer funds and securities are handled in accordance with firm procedures.

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.

Amended Rules

Rule G-27(d)(i), as revised, 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.

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 rule requires 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 rule change states 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.

It is the understanding and view of the Board that dealers possess the legal capacity to insist that mail addressed to their offices be deemed to be related to their businesses, even if marked to the attention of a particular associated person, if they advise associated persons that personal correspondence should not be received at their firms. Dealers, other than non-NASD member bank dealers, are reminded that SEC Rule 17a-4(b)(4) requires that "originals of all communications received . . . by such member, broker or dealer, relating to its business as such . . ." must be preserved for not less than three years.

The retention requirements of the amendments to rule G-27 cross reference 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).

Guidelines For Supervision And Review

In adopting review procedures pursuant to rule G-27(d)(i), dealers must:

• specify, in writing, the dealer's policies and procedures for reviewing different types of correspondence;

• identify how supervisory reviews will be conducted and documented;

• identify what types of correspondence will be pre- or post-reviewed;

• identify the organizational position(s) responsible for conducting review of the different types of correspondence;

• specify the minimum frequency of the reviews for each type of correspondence;

• monitor the implementation of and compliance with the dealer's procedures for reviewing public correspondence; and

• periodically re-evaluate the effectiveness of the dealer's procedures for reviewing public correspondence and consider any necessary revisions.

In conducting reviews, dealers may use reasonable sampling techniques. As an example of appropriate evidence of review, e-mail related to the dealer's municipal securities activities may be reviewed electronically and the evidence of review may be recorded electronically.

In developing supervisory procedures for the review of correspondence with the public pursuant to rule G-27(d)(ii), each dealer must consider its structure, the nature and size of its business, other pertinent characteristics, and the appropriateness of implementing uniform firm-wide procedures or tailored procedures (i.e., by specific function, office/location, individual, or group of persons).

In adopting review procedures pursuant to rule G-27(d)(ii), dealers must, at a minimum:

• specify procedures for reviewing municipal securities representatives' recommendations to customers;

• require supervisory review of some of each municipal securities representative's public correspondence, including recommendations to customers;

• consider the complaint and overall disciplinary history, if any, of municipal securities representatives and other employees (with particular emphasis on complaints regarding written or oral communications with clients); and

• consider the nature and extent of training provided municipal securities representatives and other employees, as well as their experience in using communications media (although a dealer's procedures may not eliminate or provide for minimal supervisory reviews based on an employee's training or level of experience in using communications media).

Although dealers may consider the number, size, and location of offices, as well as the volume of correspondence overall or in specific areas of the organization, dealers must nonetheless develop appropriate supervisory policies and procedures in light of their duty to supervise their associated persons. The factors listed above are not exclusive and dealers must consider all appropriate factors when developing their supervisory procedures and implementing their supervisory reviews.

Supervisory policy and procedures must also:

• provide that all customer complaints, whether received via e-mail or in written form from the customer, are kept and maintained;

• describe any dealer standards for the content of different types of correspondence; and

• prohibit municipal securities representatives' and other employees' use of electronic correspondence to the public unless such communications are subject to supervisory and review procedures developed by the dealer. For example, the Board would expect dealers to prohibit correspondence with customers from employees' home computers or through third party systems unless the dealer is capable of monitoring such communications.

The method used for conducting reviews of incoming, written correspondence to identify customer complaints and funds may vary depending on the dealer's office structure. Where the office structure permits review of all correspondence, dealers should designate a municipal securities representative or other appropriate person to open and review correspondence prior to use or distribution to identify customer complaints and funds. The designated person must not be supervised or under the control of the municipal securities representative whose correspondence is opened and reviewed. Unregistered persons who have received sufficient training to enable them to identify complaints and funds would be permitted to review correspondence.

Where the office structure does not permit the review of correspondence prior to use or distribution, appropriate procedures that could be adopted include the following:

• forwarding opened incoming written correspondence related to the dealer's municipal securities activities to a designated office, or supervising branch office, for review on a weekly basis;

• maintenance of a separate log for all checks received and securities products sold, which is forwarded to the supervising branch office on a weekly basis;

• communication to clients that they can contact the dealer directly for any matter, including the filing of a complaint, and providing them with an address and telephone number of a central office of the dealer for this purpose; and

• branch examination verification that the procedures are being followed.

Regardless of the method used for initial review of incoming, written correspondence, as with other types of correspondence, rule G-27 would still require review by a designated principal of some of each municipal securities representative's correspondence with the public relating to the dealer's municipal securities activities. Given the complexity and cost of establishing appropriate systems for effectively reviewing electronic communications, some members may determine to conduct a pre-use or distribution review of all incoming and outgoing correspondence (written or electronic).

Dealers must continually assess the effectiveness of these supervisory systems. Education and training must be timely (prior to or concurrent with implementation of the policies and procedures) and must include all appropriate employees. Dealers may incorporate the required education and training on correspondence into their Continuing Education Firm Element Training Program (see rule G-3(h) on continuing education requirements). The requirement for training regarding correspondence may also apply to employees who are not included under the Continuing Education requirements.

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

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

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

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

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

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

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

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

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

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

MUNICIPAL FUND SECURITIES - REVISED DRAFT RULE CHANGES

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

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

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

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

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

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

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

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

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

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

DISCUSSION OF COMMENTS AND DRAFT RULE CHANGES
 

Authority of Board to Adopt Draft Rule Changes
 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Appropriateness of Regulating Dealer Transactions in Municipal Fund Securities
 

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

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

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

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

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

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

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

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

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

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

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

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

Structure of Draft Rule Changes

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

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

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

Specific Rule Provisions
 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * * * *

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

August 27, 1999

TEXT OF DRAFT AMENDMENTS⁽⁷⁴⁾

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

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

        (i)-(ii) No change.

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

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

        (v) constitute municipal fund securities.

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

(b)-(f) No change.
 

Rule D-12. "Municipal Fund Security"

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

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

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

(a) Municipal Securities Representative.

        (i) No change.

        (ii) Qualification Requirements.

        (A)-(B) No change.

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

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

        (iii) Apprenticeship.

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

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

(b)-(h) No change.
 

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

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

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

        (ii)-(viii) No change.

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

        (x) No change.

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

        (A)-(G) No change.

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

        (I)-(K) No change.

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

        (xii)-(xix) No change.

(b)-(f) No change.

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

Rule G-14. Reports of Sales or Purchases

(a) No change.

(b) Transactions Reporting Requirements.

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

        (ii)-(iii) No change.
 

Rule G-14 Transaction Reporting Procedures

(a) No change.

(b) Customer Transactions.

        (i)-(ii) No change.

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

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

        (B) a transaction in a municipal fund security.

        (iv) No change.

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

(a) Customer Confirmations

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

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

        (1)-(2) No change.

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

        (a) No change.

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

        (4) No change.

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

        (a)-(c) No change.

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

        (i)-(v) No change.

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

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

        (a) No change.

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

        (i)-(ii) No change.

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

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

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

        (i) No change.

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

        (e)-(h) No change.

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

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

        (b) No change.

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

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

        (8) No change.

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

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

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

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

        (2) No change.

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

        (a) No change.

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

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

        (a)-(e) No change.

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

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

        (1)-(4) No change.

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

        (D) Disclosure statements:

        (1)-(2) No change.

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

        (ii)-(iii) No change.

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

        (v) No change.

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

        (A)-(F) No change.

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

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

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

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

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

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

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

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

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

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

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

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

(b)-(e) No change.
 

Rule G-26. Customer Account Transfers

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

        (i)-(ii) No change.

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

(b) No change.

(c) Transfer Instructions.

        (i) No change.

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

        (A) No change.

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

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

(d)-(i) No change.
 

Rule G-32. Disclosures in Connection with New Issues

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

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

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

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

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

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

        (A) the underwriting spread, if any;

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

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

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

(b)-(c) Relettered as (c)-(d).
 

Rule G-34. CUSIP Numbers and New Issue Requirements

(a)-(b) No change.

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

ENDNOTES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

13. SEC Letter, supra note 4.

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

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

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

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

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

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

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

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

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

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

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

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

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

27. Id. at 92.

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

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

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

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

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

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

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

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

35. See note 29 above and accompanying text.

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

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

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

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

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

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

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

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

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

45. Id. at 3.

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

47. NAST has stated that it:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

April 20, 1999

Text of Proposed Rule Change (as amended)³

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

(a) - (c) No change

(d) Delivery/Receipt vs. Payment Transactions.

        (i) No change.

        (ii) Requirement for Confirmation/Acknowledgment.

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

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

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

(iii) No change

ENDNOTES

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

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

3. Underlining indicates additions; strikethrough denotes deletions.

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

In response to numerous calls on this subject, the Board wishes to reiterate its position on the application of rule G-37, on political contributions and prohibitions on municipal securities business, to Presidential campaigns of issuer officials. The Board directs persons interested in contributing to an issuer official's Presidential campaign to the MSRB Interpretation of May 31, 1995 (the “1995 Interpretive Letter”).[1]

Rule G-37, among other things, prohibits a 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 an issuer made by the dealer; any municipal finance professional associated with the dealer; or any political action committee controlled by the dealer or any municipal finance professional. In the 1995 Interpretive Letter, the Board noted that rule G-37 is applicable to contributions given to officials of issuers who seek election to federal office, such as the Presidency. The Board also explained that the only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals.[2] 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. In the example of an issuer official running for President, any municipal finance professional in the country can contribute the de minimis amount to the official's Presidential campaign without causing a ban on municipal securities business with that issuer.

The Board previously has stated that, if an issuer official is involved in a primary election prior to the general election, a 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.[3] In the context of a Presidential campaign, the Board notes that the $250 de minimis amount applies to the entire primary process, up through and including the national party convention. While rule G-37 allows a municipal finance professional to then contribute another $250 to the party candidate's general election campaign fund, the Board understands that a Presidential candidate who has accepted public funding for the general election is prohibited under federal law from accepting any contributions to further his or her general election campaign.

Finally, the Board also notes that rule G-37(c) provides that no dealer or municipal finance professional shall solicit any person or political action committee to make any contributions, 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.

[1] The 1995 Interpretive Letter is reprinted in MSRB Rule Book (January 1, 1999) at 201-203. It also is available from the MSRB Rules/Interpretive Letters section of the Board's Web site at www.msrb.org.

[2] The term “municipal finance professional” is a defined term in rule G-37(g)(iv). The Board wishes to remind dealers that the term is broader than persons directly involved in municipal securities activities and may include certain supervisors, including in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer, and in the case of a bank dealer, the officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities. It also may include members of the dealer's executive or management committee or similarly situated officials. See Question and Answer number 2 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports , Vol. 14, No. 3 (June 1994) at 13; Question and Answer number 3 dated September 9, 1997, reprinted in MSRB Rule Book (January 1, 1999) at 199. The Questions and Answers also are available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.

[3] See Question and Answer number 10 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports , Vol. 14, No. 3 (June 1994) at 13. The Question and Answer also is available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.

On May 9, 1996, the Securities and Exchange Commission (the “SEC”) issued an interpretative release expressing its views on the use of electronic media for delivery of information by, among others, brokers and dealers.[1] The SEC stated that brokers, dealers and others may satisfy their delivery obligations under federal securities laws by using electronic media as an alternative to paper-based media within the framework established in the SEC’s October 1995 interpretive release on the use of electronic media for delivery purposes.[2] The SEC also indicated that an electronic communication from a customer to a broker or dealer generally would satisfy the requirements for written consent or acknowledgment under the federal securities laws.

The Municipal Securities Rulemaking Board (the “Board”) is publishing this notice to address the use by brokers, dealers and municipal securities dealers (“dealers”) of electronic media to deliver and receive information under Board rules.[3] The Board will permit dealers to transmit documents electronically that they are required or permitted to furnish to customers under Board rules provided that they adhere to the standards set forth in the SEC Releases and summarized below.[4] Dealers also may receive consents and acknowledgments from customers electronically in satisfaction of required written consents and acknowledgments. Furthermore, the Board believes that the standards applied by the SEC to communications with customers should also apply to communications among dealers and between dealers and issuers. However, although it is the Board’s goal ultimately to permit dealers to make required submissions of materials to the Board electronically if possible, this notice does not affect existing requirements for the submission of materials to the Board, its designees and certain other entities to which information is required to be delivered under Board rules.[5]

Dealers are urged to review the SEC Releases in their entirety to ensure that they comply with all aspects of the SEC’s electronic delivery requirements. Although the examples provided in the SEC Releases are based on SEC rules, the examples nonetheless provide important guidance as to the intended application of the standards set out by the SEC with respect to electronic communications.

Electronic Communications from Dealers to Customers

General. According to the standards established by the SEC, dealers may use electronic media to satisfy their delivery obligations to customers under Board rules, provided that the electronic communication satisfies the following principles:[6]

1. Notice – The electronic communication should provide timely and adequate notice to customers that the information is available electronically.[7] Since certain forms of electronic delivery may not always provide a likelihood of notice that recipients have received information that they may wish to review, dealers should consider supplementing such forms of electronic communication with a separate communication, providing notice similar to that provided by delivery in paper through the postal mail, that information has been sent electronically that the recipients may wish to review.[8]

2. Access – Customers who are provided information through electronic delivery should have access to that information comparable to the access that would be provided if the information were delivered in paper form.[9] The use of a particular electronic medium should not be so burdensome that intended recipients cannot effectively access the information provided.[10] A recipient should have the opportunity to retain the information through the selected medium (e.g., by downloading or printing the information) or have ongoing access equivalent to personal retention.[11] Also, as a matter of policy, the SEC believes that a person who has a right to receive a document under the federal securities laws and chooses to receive it electronically should be provided with a paper version of the document upon specific request or if consent to receive documents electronically is revoked.[12]

3. Evidence to Show Delivery – Dealers must have reason to believe that electronically delivered information will result in the satisfaction of the delivery requirements under the federal securities laws. Dealers should consider the need to establish procedures to ensure that applicable delivery obligations are met, including recordkeeping procedures to evidence such satisfaction.[13] Such procedures should also be designed to ensure the integrity and security of information being delivered so as to ensure that it is the information that was intended to be delivered.[14] Dealers may be able to evidence satisfaction of delivery obligations, for example, by:

(1) obtaining the intended recipient’s informed consent [15] to delivery through a specified electronic medium and ensuring that the recipient has appropriate notice and access;

(2) obtaining evidence that the intended recipient actually received the information, such as by an electronic mail return-receipt [16] or by confirmation that the information was accessed, downloaded, or printed; or

(3) disseminating information through certain facsimile methods (e.g., faxing information to a customer who has requested the information and has provided the telephone number for the fax machine).

Personal Financial Information. The SEC has noted, and the Board agrees, that special precautions are appropriate when dealers are delivering information to customers that is specific to that particular customer’s personal financial information, including but not limited to information contained on confirmations and account statements.[17] In transmitting such personal financial information, dealers should consider the following factors:

1. Confidentiality and Security – Dealers sending personal financial information through electronic means or in paper form should take reasonable precautions to ensure the integrity, confidentiality, and security of that information. Dealers transmitting personal financial information electronically must tailor those precautions to the medium used in order to ensure that the information is reasonably secure from tampering or alteration.

2. Consent – Unless a dealer is responding to a request for information that is made through electronic media or the person making the request specifies delivery through a particular electronic medium, the dealer should obtain the intended recipient’s informed consent prior to delivering personal financial information electronically. The customer’s consent may be made either by a manual signature or by electronic means.

Electronic Communications from Customers to Dealers

Consistent with the position taken by the SEC, dealers may rely on consents and acknowledgments received from customers by electronic means for purposes of Board rules. In relying on such communications from customers, dealers must be cognizant of their responsibilities to prevent, and the potential liability associated with, unauthorized transactions. In this regard, the SEC states, and the Board agrees, that dealers should have reasonable assurance that the communication from a customer is authentic.

Electronic Transmission of Non-Required Communications

The 1996 SEC Release states that the above standards are intended to permit dealers to comply with their delivery obligations under federal securities laws when using electronic media. While compliance with the guidelines is not mandatory for the electronic delivery of non-required information that, in some cases, is being provided voluntarily to customers, the Board believes adherence to the guidelines should be considered, especially with respect to delivery of personal financial information.

Electronic Communications Among Dealers and Between Dealers and Issuers

The Board believes that the standards applied by the SEC to communications with customers should also apply to mandated communications among dealers and between dealers and issuers. Thus, a dealer that undertakes communications required under Board rules with other dealers and with issuers in a manner that conforms with the principles stated above relating to customer communications will have met its obligations with respect to such communications. In addition, a dealer may rely on consents and acknowledgments received from other dealers or issuers by electronic means for purposes of Board rules, provided that the dealer should have reasonable assurance that the communication from such other party is authentic. However, any Board rule that explicitly requires that a dealer enter into a written agreement with another party will continue to require that such agreement be in written form.[18] Financial information, as well as other privileged or confidential information, relating to another dealer or an issuer (or relating to another person or entity contained in a transmission between a dealer and another dealer or an issuer) should be transmitted using precautions similar to those used by a dealer in transmitting personal financial information to a customer.

Rules to Which this Notice Applies

Set forth below is a list of current Board rules to which dealers may apply the guidance provided in this notice. The Board believes that the list sets forth all of the rules that require or permit communications among dealers and between dealers and customers and issuers.[19] The summaries provided of the delivery obligations under the listed rules is intended for ease of reference only and are not intended to be complete statements of all the requirements under such rules.

• Rule G-8, on books and records to be made by dealers, prohibits dealers from obtaining or submitting for payment a check, draft or other form of negotiable paper drawn on a customer’s checking, savings, share or similar account without the customer’s express written authorization.

• Rule G-10, on delivery of investor brochure, requires dealers to deliver a copy of the investor brochure to a customer upon receipt of a complaint by the customer.

• Rule G-11, on sales of new issue municipal securities during the underwriting period, requires certain communications between senior syndicate managers and other members of the syndicate.[20]

• Rule G-12, on uniform practice, provides for confirmation of inter-dealer transactions and certain other inter-dealer communications.[21]

• Rule G-15, on confirmation, clearance and settlement of transactions with customers, provides for confirmation of transactions with customers and the provision of additional information to customers upon request.[22]

• Rule G-19, on suitability of recommendations and transactions and discretionary accounts, requires that dealers obtain certain information from their customers in connection with transactions and recommendations and also receive customer authorizations with respect to discretionary account transactions.

• Rule G-22, on control relationships, requires certain disclosures from a dealer effecting a transaction for a customer in municipal securities with respect to which such dealer has a control relationship and customer authorization of such transaction with respect to discretionary accounts.

• Rule G-23, on activities of financial advisors, requires that, under certain circumstances, dealers acting as financial advisors to issuers provide various disclosures to issuers and customers and receive certain consents and acknowledgments from issuers.[23]

• Rule G-24, on use of ownership information obtained in fiduciary or agency capacity, requires a dealer seeking to use for its own purposes information obtained while acting in a fiduciary or agency capacity for an issuer or other dealer to receive consents to the use of such information.

• Rule G-25, on improper use of assets, provides that put options and repurchase agreements will not be deemed to be guaranties against loss if their terms are provided in writing to customers with or on the transaction confirmation.

• Rule G-26, on customer account transfers, provides for written notice from customers requesting account transfers between dealers and the use of Form G-26 to effect such transfer.[24]

• Rule G-28, on transactions with employees and partners of other municipal securities professionals, requires that a dealer opening an account for a customer who is an employee or partner of another dealer must provide notice and copies of confirmations to such other dealer and permits such other dealers to provide instructions for handling of transactions with such customer.

• Rule G-29, on availability of Board rules, provides that dealers must make available to customers for examination promptly upon request a copy of the Board’s rules required to be kept in their offices.[25]

• Rule G-32, on disclosures in connection with new issues, requires dealers selling new issue municipal securities to customers to deliver official statements[26] and certain other information by settlement and requires selling dealers, managing underwriters and certain dealers acting as financial advisors to deliver such materials to dealers purchasing new issue municipal securities, upon request.[27]

• Rule G-34, on CUSIP numbers and new issue requirements, requires underwriters to communicate information regarding CUSIP numbers and initial trade date to syndicate and selling group members.[28]

• Rule G-38, on consultants, requires dealers to provide certain information to issuers regarding consulting arrangements.[29]

• Rule G-39, on telemarketing, prohibits certain telemarketing calls without the prior consent of the person being called.[30]

ENDNOTES

[1] See Securities Act Release No. 7288, Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15, 1996) (the “1996 SEC Release”).

[2] See Securities Act Release No. 7233, Exchange Act Release No. 36345 (October 6, 1995), 60 FR 53458 (October 13, 1995) (the “1995 SEC Release” and, together with the 1996 SEC Release, the “SEC Releases”).

[3] This notice has been filed with the SEC as File No. SR-MSRB-98-12.

[4] The Board also reminds dealers that the SEC indicated in the 1996 SEC Release that dealers may fulfill their obligation to deliver to customers, upon request, preliminary official statements and final official statements in connection with primary offerings of municipal securities subject to SEC Rule 15c2-12 by electronic means, subject to the guidelines set forth in the 1996 SEC Release. See 1996 SEC Release at note 47.

[5] For example, this notice does not apply to any requirements that dealers supply the Board with written information pursuant to Board rules A-12, A-14, A-15, G-36, G-37 and G-38. The Board has begun the planning process for electronic submission of information required under rule A-15 and of Form G-37/G-38 under rules G-37 and G-38. At such time as electronic submission becomes available, the Board will publish notice thereof and of the procedures to be used for such submission. Although submission of Forms G-36(OS) and G-36(ARD) under rule G-36 could also be made electronically by means similar to those which the Board may develop for Form G-37/G-38, such electronic submission is complicated by the requirement that Forms G-36(OS) and G-36(ARD) be accompanied by an official statement or advance refunding document, as appropriate. Given the current debate and lack of consensus among the various sectors of the municipal securities industry regarding electronic formatting of disclosure materials, and since the Board does not have the authority to dictate the format of issuer documents, the Board believes that any further action regarding electronic submissions under rule G-36 should await resolution of these issues. Finally, the Board does not at this time anticipate permitting electronic submission of information required under rules A-12 and A-14 since such information must be accompanied by payment of certain required fees.

Electronic submission of information under rule G-14 will continue to be governed by rule G-14 and associated Transaction Reporting Procedures. In addition, this notice does not alter the current submission standards applicable to the Board’s Continuing Disclosure Information (CDI) System of the Municipal Securities Information Library[®] (MSIL[®]) system. The Municipal Securities Information Library and MSIL are registered trademarks of the Board.

Furthermore, submission of information to the Board’s designees or certain other designated entities under Board rules must continue to be done in accordance with the procedures established by such designees or other entities. Board rules in which such requirements currently appear include rules G-7 (with respect to information required to be filed with the appropriate enforcement agencies), G-12 and G-15 (with respect to information to be submitted to registered clearing agencies and registered securities depositories), G-26 (with respect to customer account transfer instructions (other than Form G-26) required by registered clearing agencies), G-34 (with respect to information to be submitted to the Board’s designee for assignment of CUSIP numbers and to registered securities depositories) and G-37 (with respect to application to the appropriate enforcement agencies for exemptions from the ban on municipal securities business).

[6] Dealers that structure their deliveries in accordance with the principles set forth in this notice can be assured, except where otherwise noted, that they have satisfied their delivery obligations under Board rules. However, as the SEC stated in the 1995 SEC Release, the three enumerated principles are not the only factors relevant to determining whether the legal requirements pertaining to delivery of documents have been satisfied. Consistent with the SEC’s view, the Board believes that, if a dealer develops a method of electronic delivery that differs from the principles discussed herein, but provides assurance comparable to paper delivery that the required information will be delivered, that method may satisfy delivery obligations. See 1995 SEC Release, text following note 22. For example, a dealer can satisfy its obligation to send a confirmation to a customer under rule G-15 by electronic means in a manner that meets the principles set forth in this notice. In addition, dealers may continue to deliver confirmations electronically through the OASYS Global system established by Thomson Financial Services, Inc. on the conditions described in the Board’s Notice Concerning Use of the OASYS Global Trade Confirmation System to Satisfy Rule G-15(a), dated June 6, 1994, without specifically complying with the principles described in this notice. See MSRB Reports, Vol. 14, No. 3 (June 1994) at 37. See also 1996 SEC Release, note 38, and 1995 SEC Release, note 12. Also, rule G-29 provides that dealers must make available to customers for examination promptly upon request a copy of the Board’s rules required to be kept in their offices. Dealers may continue to comply with such requirement by giving customers access to the rules either in printed form or by viewing the rules on screen from the Board’s Internet web site (www.msrb.org) or from software products produced by other companies. See Interpretive Notice on Availability of Board Rules, dated May 20, 1998, in MSRB Reports, Vol. 18, No. 2 (August 1998) at 37.

[7] See 1996 SEC Release, text at note 20.

[8] See 1996 SEC Release, text at note 21, and 1995 SEC Release, text at note 23. The SEC notes, for example, that if information is provided by physically delivering material (such as a diskette or CD-ROM) or by electronic mail, such communication itself generally should be sufficient notice. However, if information is made available electronically through a passive delivery system, such as an Internet web site, separate notice would be necessary to satisfy the delivery requirements unless the dealer can otherwise evidence that delivery to the customer has been satisfied. 1996 SEC Release, note 21.

[9] The SEC states that, regardless of whether information is delivered in paper form or by electronic means, it should convey all material and required information. For example, if a paper document is required to present information in a certain order, then the information delivered electronically should be in substantially the same order. 1996 SEC Release, text at note 14.

[10] The SEC notes, for example, that if a customer must proceed through a confusing series of ever-changing menus to access a required document so that it is not reasonable to expect that access would generally occur, this procedure would likely be viewed as unduly burdensome. In that case, the SEC would deem delivery not to have occurred unless delivery otherwise could be shown. 1995 SEC Release, note 24.

[11] See 1996 SEC Release, note 22 and accompanying text, and 1995 SEC Release, notes 25-26 and accompanying text.

[12] See 1996 SEC Release, note 17 and accompanying text, and 1995 SEC Release, note 27 and accompanying text.

[13] See 1996 SEC Release, text following note 22, and 1995 SEC Release, note 22 and text at note 28. The Board is of the view that dealers that choose to deliver information to customers electronically should consider establishing systems and procedures for providing paper copies or using alternate electronic means in a timely manner should the primary electronic media fail for any reason.

[14] See 1996 SEC Release, text at note 25, and 1995 SEC Release, note 22. Dealers also should consider the need for systems and procedures to deter or detect misconduct by firm personnel in connection with the delivery of information, whether by electronic or paper means. 1996 SEC Release, text at note 16.

[15] In order for a consent to be an informed consent, the SEC has stated that the consent should specify the electronic medium or source through which the information will be delivered and the period during which the consent will be effective, describe the information that will be delivered using such means, and disclose the potential for the customer to incur costs in accessing the information. See 1996 SEC Release, note 23, and 1995 SEC Release, note 29.

[16] To the extent that material is distributed as an attachment to an electronic mail transmission, dealers must have a reasonable basis for believing that the attachment will in fact be transmitted along with the electronic mail transmission and that the attachment will be received by the recipient in an accessible format.

[17] In addition, the Board believes that other information that is privileged or confidential, regardless of whether such information is financial in nature, should be accorded the same precautions as is personal financial information.

[18] For example, the written agreements required under rules G-20(c), G-23(c) and G-38(b) must continue to be entered into in paper form.

[19] Unless otherwise provided in connection with the adoption by the Board of any new rules or amendments to existing rules that require or permit communications among dealers and between dealers and customers, issuers and others, the guidance provided in this notice would also apply to any such communications.

[20] Rule G-11 also requires that syndicate members furnish certain information to others, upon request. The Board believes that, solely for purposes of this requirement under rule G-11, such information may be provided to others by electronic means so long as the standards established in this notice with respect to electronic deliveries to customers are met.

[21] See, however, note 5 above with respect to information to be submitted to registered clearing agencies and registered securities depositories.

[22] See, however, note 5 above with respect to information to be submitted to registered clearing agencies and registered securities depositories. See also note 6 above regarding alternate electronic means previously reviewed by the Board.

[23] See, however, note 18 above and accompanying text regarding the written agreement to be entered into between a dealer acting as financial advisor and the issuer.

[24] See, however, note 5 above with respect to use of customer account transfer instructions (other than Form G-26).

[25] See note 6 above regarding alternate electronic means previously reviewed by the Board.

[26] The Board believes that dealers must be particularly cautious in delivering official statements by electronic means since they may present special challenges in ensuring that they are received by customers and other dealers without material omissions or distortions in formatting (for example, tables in which data is more than negligibly misaligned) that may cause such materials not to meet the standard for electronically transmitted information comparable to information delivered in paper form. See note 9 above and accompanying text.

[27] The Board believes that, to the extent that rule G-32(b)(i) [currently codified at rule G-32(c)(i)] obligates a managing or sole underwriter to provide, upon request, multiple copies of the official statement to a dealer with respect to new issue municipal securities sold by such dealer to customers, such obligation must continue to be met with paper copies of the official statement unless the purchasing dealer has consented to electronic delivery of the official statement in lieu of delivery of multiple paper copies. Compare 1995 SEC Release, example 11.

[28] See, however, note 5 above with respect to information to be submitted to the Board’s designee with respect to CUSIP number assignment and to registered securities depositories.

[29] See, however, note 18 above and accompanying text regarding the written agreement to be entered into between a dealer and its consultant and note 5 above with respect to submission of Form G-37/G-38 to the Board.

[30] Although the person receiving such telemarketing call may in many cases not be a customer, the Board believes that, solely for purposes of this provision of rule G-39, such consent may be accepted by the dealer by electronic means so long as the standards established in this notice with respect to electronic communications from customers to dealers are met.

Interpretation on the Application of Rules G-32 and G-36 to New Issue Offerings Through Auction Procedures

March 26, 2001

In July 1998, the Securities and Exchange Commission (“SEC”) approved two sets of amendments to rule G-32, on disclosures in connection with new issues. The first set of amendments permits brokers, dealers and municipal securities dealers (“dealers”) that sell new issue variable rate demand obligations qualifying for the exemption provided under subparagraph (d)(1)(iii) of Securities Exchange Act Rule 15c2-12 to deliver the preliminary official statement, rather than the final official statement, to customers by settlement.[1] The second set of amendments strengthens the rule’s existing requirements regarding dissemination of official statements to dealers purchasing new issue municipal securities and incorporates a longstanding Board interpretation regarding disclosure to customers of initial offering prices in negotiated underwritings.[2] In view of these recent amendments and the continuing concerns of the Board and the enforcement agencies that some dealers may have inadequate procedures in place to ensure compliance with rule G-32,[3] the Board is publishing this notice to review the requirements of the rule and to emphasize the importance of full and timely compliance.

Purpose and Structure of Rule G-32

Rule G-32 is designed to ensure that a customer who purchases new issue municipal securities is provided with all available information relevant to his or her investment decision by settlement of the transaction. The rule obligates all dealers selling new issue municipal securities to provide to their customers purchasing the securities certain disclosure materials by settlement. To effectuate this primary obligation, the rule further obligates all dealers that sell new issue municipal securities to other dealers, as well as the managing or sole underwriter for such securities, to provide to such purchasing dealers these disclosure materials so as to permit the purchasing dealers to comply with their primary delivery obligations to their own customers. Finally, the rule provides that a dealer that prepares an official statement in final form on behalf of an issuer while serving in the capacity of financial advisor to such issuer must make the official statement available to the underwriters promptly after the issuer approves its distribution. Compliance with each prong of the rule is crucial to ensure that the primary purpose of the rule is fulfilled.

New Issue Municipal Securities and the Underwriting Period

Rule G-32 applies to the sale of all new issue municipal securities. These are defined in section (c)(i)[*] as any municipal securities (other than commercial paper[4]) that are sold by any dealer during the issue’s underwriting period. Once the underwriting period has ended for an issue of municipal securities, the requirements of rule G-32 no longer apply to transactions in such municipal securities.

The underwriting period for an issue of municipal securities begins with the first submission to the underwriters of an order from a potential customer to purchase the securities or the purchase by the underwriters of the securities from the issuer (i.e., the execution of the purchase contract in a negotiated sale or the award of the securities in a competitive sale), whichever occurs first. The underwriting period ends upon delivery by the issuer of the securities to the underwriters (i.e., the bond closing) if the underwriters no longer retain an unsold balance at such time. If, however, the issue is not sold out by the bond closing, the underwriting period continues until the underwriters no longer retain an unsold balance; provided that, in the case of an issue underwritten by a sole underwriter, if the bond closing has occurred and the underwriter retains an unsold balance 21 calendar days after the first submission of an order, the underwriting period nonetheless ends after such 21st day.[5]

delivery obligationS to customers

A dealer selling new issue municipal securities to a customer is required to deliver (not merely send) certain information to such customer prior to settlement of the transaction. The Board has previously noted that the required information will be presumed to have been delivered to the customer if it was sent at least three business days prior to settlement.[6]

Official Statements. With only two exceptions, a dealer violates section (a) of rule G-32 if it sells, either as principal or agent, a new issue municipal security to a customer but fails to deliver an official statement in final form[7] to such customer by no later than settlement of that transaction. Dealers should note that this obligation differs from the obligation imposed by SEC Rule 15c2-12(b)(4) in that rule G-32 mandates that any dealer selling new issue municipal securities (not just participating underwriters of the offering) must deliver (not just send) the official statement to the customer by settlement, regardless of whether the customer has requested a copy of the official statement.[8]

The first exception under rule G-32 arises where the issuer is not preparing an official statement in final form. In that case, the dealer must deliver to the customer by no later than settlement a written notice that an official statement in final form is not being prepared, together with a copy of a preliminary official statement, if one has been prepared.[9] This exception is not available in cases where the official statement in final form is in the process of being prepared but is not yet available at the time that a dealer wishes to settle a transaction with a customer. Thus, in such a case, a dealer would violate rule G-32(a) by settling a customer transaction without delivery of the official statement in final form, even if a preliminary official statement is delivered by settlement and the official statement in final form is delivered to the customer as soon as it becomes available.

The second exception applies solely to municipal securities issued a primary offering that qualifies for the exemption set forth in SEC Rule 15c2-12(d)(1)(iii) (Exempt VRDOs),[10] but only if an official statement in final form is being prepared.[11] This exception permits a dealer to deliver a preliminary official statement to a customer by settlement in substitution for the official statement in final form so long as (1) the dealer provides written notice to the customer by settlement that the official statement in final form will be sent within one business day following its receipt by the dealer and (2) the dealer sends the official statement in final form to the customer within one business day of its receipt.[12] The Board believes, however, that if the official statement in final form is available in sufficient time to permit delivery to the customer by settlement, it would be in the dealer’s best interest to make such delivery by settlement, as it would be required to do for any other new issue municipal securities. This would permit the dealer to satisfy its delivery obligation with a single delivery of the official statement in final form, rather than two separate deliveries of the preliminary and final official statements, thereby reducing the dealer’s compliance burden.[13]

Additional Disclosures for Negotiated Underwritings . Where the underwriters have purchased an issue of municipal securities from the issuer in a negotiated sale, any dealer (not just syndicate or selling group members) selling such securities to a customer during the underwriting period is required to deliver to such customer prior to settlement, in addition to the official statement, information concerning (A) the underwriting spread;[14] (B) the amount of any fee received by such dealer as agent for the issuer in the distribution of the securities, if applicable;[15] and (C) the initial offering price for each maturity in the issue, including the initial offering price of maturities that are not reoffered.[16] The obligation to make these further disclosures may be satisfied by inclusion by the issuer of such information in the official statement in final form and the delivery of such official statement to the customer by settlement. However, should the issuer elect not to include any such information in the official statement or if an official statement that includes this information is not delivered to the customer by settlement, a dealer selling such securities during the underwriting period must nevertheless provide such information in writing to the customer by settlement (for example, in a confirmation or other writing delivered to the customer by settlement). For example, if a dealer delivers a preliminary official statement to a customer at settlement for a new issue Exempt VRDO and any of the required disclosure information is left blank or is noted as preliminary and subject to change (with the expectation of the information being completed or finalized in the official statement in final form to be delivered after settlement), then disclosure of such information would be required in a separate writing delivered at or prior to settlement.

DELIVERY OBLIGATIONS TO PURCHASING DEALERS

Dealers selling new issue municipal securities to other dealers, and dealers serving as managing or sole underwriters for such new issues, are also required to deliver the official statement and the additional disclosures for negotiated underwritings, if applicable, to dealers purchasing such securities during the underwriting period.

Obligations of Selling Dealers. If a dealer sells a new issue municipal security to another dealer, the selling dealer is obligated under rule G-32(a)[†] to send to the purchasing dealer, upon request, (i) the official statement in final form (or if no official statement in final form is being prepared, a written notice to that effect, together with a copy of a preliminary official statement, if one has been prepared) and (ii) if the underwriters originally purchased the securities from the issuer in a negotiated sale, the additional disclosures described above required in connection with a negotiated underwriting. The official statement and the additional disclosures related to negotiated underwritings, if applicable, must be sent by the selling dealer to the purchasing dealer within one business day of the purchasing dealer’s request, provided that, if the official statement in final form is being prepared but has not yet been received from the issuer or its agent, then the official statement in final form and the additional disclosures must be sent no later than the business day following such receipt.[17] These items must be sent by first class mail or other equally prompt means, unless the purchasing dealer arranges some other method of delivery and pays or agrees to pay for such alternate delivery method. This obligation applies with respect to all requests to a selling dealer made by a dealer purchasing new issue municipal securities from such selling dealer during the underwriting period, even where the selling dealer did not participate as a syndicate or selling group member for the underwriting of the new issue municipal securities.

Obligations of Managing and Sole Underwriters . If an official statement in final form is prepared in connection with an issue of municipal securities, the dealer serving as managing underwriter or sole underwriter for such issue is obligated under rule G-32(b)(i)[‡] to send to any dealer purchasing such securities during the underwriting period, upon request, (i) one copy of the official statement in final form plus one additional copy per $100,000 par value purchased by such purchasing dealer for resale to customers and (ii) if the underwriters originally purchased the securities from the issuer in a negotiated sale, the required additional disclosures. Managing and sole underwriters also are required to provide purchasing dealers, upon request, with instructions on how to order copies of the official statement in final form from the printer. The official statement and the additional disclosures related to negotiated underwritings, if applicable, must be sent by the managing or sole underwriter to the purchasing dealer within one business day of the purchasing dealer’s request, provided that, if the official statement in final form is being prepared but has not yet been received from the issuer or its agent,[18] then the official statement in final form and the additional disclosures must be sent no later than the business day following such receipt. These items must be sent by first class mail or other equally prompt means, unless the purchasing dealer arranges some other method of delivery and pays or agrees to pay for such alternate delivery method. This obligation applies with respect to all requests to the managing or sole underwriter made by purchasing dealers during the underwriting period, even where the managing or sole underwriter did not sell the new issue municipal securities to the purchasing dealer.

Obligations of Dealers Acting as Financial Advisors . Rule G-32(b)(ii)[#] provides that, if a dealer that acts as financial advisor to an issuer prepares an official statement in final form on behalf of such issuer, such dealer must make that official statement available to the managing or sole underwriter promptly after the issuer approves distribution of the official statement in final form. This provision is designed to ensure that, once the official statement is completed and approved by the issuer for distribution, dealers acting as financial advisors will be obligated to commence the dissemination process promptly.[19]

Implications for Inter-Dealer Dissemination . The provisions of rule G-32 relating to dissemination among dealers of official statements and the additional disclosures related to negotiated underwritings is designed to ensure that a dealer selling a new issue municipal security to a customer has a reliable and timely source for obtaining such items for delivery to the customer by settlement. In the case of a syndicate member that purchases a new issue municipal security in an underwriting, the rule, in conjunction with The Bond Market Association’s Standard Agreement Among Underwriters, will effectively obligate the managing underwriter to send the official statement in final form (in the required quantity) and the additional disclosures to the syndicate member within one business day of its receipt from the issuer.[20] If for any reason such syndicate member needs to obtain a copy of the official statement more rapidly than by means of first class mail, it may arrange with the managing underwriter for delivery of the official statement by an alternate means so long as the requesting syndicate member covers the cost of such delivery.

For a non-syndicate member that purchases a new issue municipal security from the syndicate or from any other dealer, both the dealer that sold the security to the non-syndicate member and the managing or sole underwriter is obligated, if requested by such non-syndicate member, to send the official statement in final form and the additional disclosures within one business day of such request. If for any reason such non-syndicate member needs to obtain a copy of the official statement more rapidly than by means of first class mail, it may arrange with the dealer that is fulfilling the request for delivery of the official statement by an alternate means so long as the requesting non-syndicate member covers the cost of such delivery. Dealers purchasing new issue municipal securities from another dealer are advised that the obligation of the selling dealer or of the managing or sole underwriter to send an official statement to such purchasing dealer only takes effect upon the request of the purchasing dealer. Therefore, unless the purchasing dealer already has a copy of the official statement or has an alternate source for receiving it and the additional disclosures, such dealer will need to take the affirmative step of requesting such items from the selling dealer or the managing or sole underwriter.

A dealer that sells a new issue municipal security to a customer is not relieved of its obligation to deliver by settlement the official statement in final form and the additional disclosures related to negotiated underwriters because either the dealer from which it acquired the security or the managing or sole underwriter for the issue fails to fulfill its obligation to send these items to such dealer upon request. Such dealer may need to obtain the official statement in final form from other available sources. Such other sources of official statements include, but are not limited to, the nationally recognized municipal securities information repositories, other information vendors, or the Board’s Municipal Securities Information Library® (MSIL®) system.[21] Similarly, a managing or sole underwriter or a dealer selling a new issue municipal security cannot fulfill its obligation to send the official statement in final form and the additional disclosures to a purchasing dealer upon request by referring such dealer to such other sources of official statements.

RECORDKEEPING

Rule G-8(a)(xiii) requires that each dealer make and keep a record of all deliveries of official statements and of the additional disclosures related to negotiated underwritings made to purchasers of new issue municipal securities.[22] Although the rule does not obligate a dealer to maintain such records in any given manner, such records must provide an adequate basis for the audit of such information. To this end, NASD Regulation, Inc. has noted:

Some firms establish a file containing a copy of the customer’s new issue municipal purchase confirmation and/or a mailing label to demonstrate compliance with Rule G-8. However, NASD Regulation does not view this approach as adequately demonstrating compliance with MSRB Rule G-8. Instead, an adequate record of the delivery of new issue municipal securities disclosure information should, at a minimum, contain the following:

• customer name;

• security description;

• settlement date(s);

• type of disclosure sent (preliminary or final Official Statement);

• date the required disclosure was sent;

• and name of person(s) sending the disclosures.

At times, a firm assigns the new issue municipal securities disclosure function to a third party vendor. As a result, the member [dealer] does not maintain “a record of delivery” of the new issue disclosure. Nevertheless, from a regulatory perspective, the firm remains fully responsible for disclosure. When firms have assigned the new issue disclosure function to a third party, NASD Regulation expects that the compliance review process will include, at a minimum, periodic test to assure that the new issue disclosures are being made at or before settlement.[23]

Dealers should consult with the applicable enforcement agency regarding the adequacy of their recordkeeping under rule G-8(a)(xiii).

[1] See MSRB Reports, Vol. 18, No. 2 (Aug. 1998) at 15-17.

[2] See MSRB Reports, Vol. 18, No. 2 (Aug. 1998) at 19-21.

[3 ] See MSRB Reports, Vol. 17, No. 2 (June 1997) at 23-24; see also NASD Regulation, Inc., “Municipal Securities Update – Disclosure to Purchasers of New Issue Securities,” Regulatory & Compliance Alert, Vol. 12, No. 3 (Sept. 1998) at 19-20.

[4] The exception for commercial paper applies solely to true commercial paper issues (i.e., not to variable rate demand obligations with a nominal long maturity and having a so-called “commercial paper” mode).

[5] See rules G-32(c)(ii) [currently codified at rule G-32(d)(ii)] and G-11(a)(ix).

[6] See MSRB Reports, Vol. 7, No. 2 (March 1987) at 12.

[7] Rule G-32 defines official statement as a document prepared by the issuer or its representatives setting forth, among other matters, information concerning the issuer and the proposed issue of securities. This definition is, of necessity, broader than the definition set forth in SEC Rule 15c2-12(f)(3) for the term “final official statement” since rule G-32 applies to all issues of municipal securities (other than commercial paper issues), not just those issues subject to SEC Rule 15c2-12. However, the Board believes that, in the case of new issue municipal securities subject to SEC Rule 15c2-12, the official statement in final form for purposes of rule G-32 would be the same as the final official statement for purposes of SEC Rule 15c2-12.

[8 ] SEC Rule 15c2-12(b)(4) provides that an underwriter participating in an offering subject to the Rule must send a copy of the final official statement to a potential customer within one business day of a request until the earlier of (i) 90 days from the end of the underwriting period or (ii) the time when the official statement is available from a nationally recognized municipal securities information repository, but in no case less than 25 days following the end of the underwriting period.

[9] Since SEC Rule 15c2-12(3) provides that an underwriter participating in an offering subject to the Rule must contract with the issuer to receive final official statements, the Board expects that a final official statement will be prepared for all such offerings and therefore delivery of preliminary official statements for such issues would never satisfy the delivery obligation under rule G-32(a).

[10] A primary offering qualifies for this exemption if the municipal securities are in authorized denominations of $100,000 or more and, at the option of the holder thereof, may be tendered to the issuer or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption or purchase by the issuer or its designated agent.

[11] If an official statement in final form is not being prepared, then the first exception described above would apply.

[12] See MSRB Reports, Vol. 18, No. 2 (Aug. 1998) at 15-17. If no preliminary official statement is prepared for such issue, then the dealer must still provide written notice by settlement that an official statement in final form will be sent within one business day of receipt.

[13] In addition, ensuring that the official statement in final form, rather than merely the preliminary official statement, is in the possession of the customer by settlement may help to avoid potential liabilities that could result if there are any material differences between the preliminary official statement and the official statement in final form. The fact that rule G-32 permits a dealer to deliver the preliminary official statement, rather than the official statement in final form, to a customer by settlement in this specific situation does not in any way limit or reduce the dealer’s disclosure obligations under the federal securities laws, including in particular the dealer’s obligation under rule G-17 to disclose, at or before execution of a transaction, all material facts concerning the transaction which could affect the customer’s investment decision and not omit any material facts which would render other statements misleading.

[14] This provision obligates a dealer to disclose the gross spread (i.e., the difference between the initial offering price and the amount paid to the issuer), expressed either in dollars or points per bond. The underwriting spread may be shown either as a total amount or as a listing of the components of the gross spread. If components of the gross spread are listed, that portion of the proceeds which represents compensation to the underwriters must be clearly identified as such. For example, the Board believes that use of the terms “underwriters’ discount” or “net to underwriters” would be acceptable but that the term “bond discount” is confusing and, therefore, inappropriate. See MSRB Reports, Vol. 7, No. 2 (March 1987) at 13.

[15] If no fee is received by the dealer for acting as an agent for the issuer in the distribution of the securities, the dealer need not affirmatively state that no such fee was received but may instead omit any statement regarding such fee.

[16] The initial offering price may be expressed either in terms of dollar price or yield.

[17] Thus, if a purchasing dealer requests a copy of the official statement in final form from a selling dealer before the issuer has delivered the official statement to the underwriters, then the obligation of the selling dealer to send the official statement is deferred until the business day after the underwriters receive the official statement from the issuer.

[18] The Board is of the view that an underwriter that prepares an official statement on behalf of an issuer would be deemed to have received the official statement from the issuer immediately upon such issuer approving the distribution of the completed official statement in final form (i.e., when the issuer releases the completed official statement for distribution).

[19] The Board urges issuers that utilize the services of non-dealer financial advisors to hold such financial advisors to the same standards for prompt delivery of official statements to the underwriters.

[20] The Bond Market Association’s Standard Agreement Among Underwriters provides that syndicate members must place orders for the official statement by the business day following the date of execution of the purchase contract and states that any syndicate member that fails to place such an order will be assumed to have requested the quantity required under rule G-32(b)(i) [currently codified at rule G-32(c)(i)]. See The Bond Market Association, Agreement Among Underwriters – Instructions, Terms and Acceptance (Oct. 1, 1997) at ¶ 3. Thus, except in the rare instances where an official statement in final form is completed and available for distribution on the date of sale, syndicate members will have made or have been deemed to have made their requests for official statements by the time the managing underwriter receives the official statement from the issuer, thereby obligating the managing underwriter to send the official statement to syndicate members within one business day of receipt.

[21] Municipal Securities Information Library and MSIL are registered trademarks of the Board.

[22] Rule G-9(b)(x) provides that these records must be preserved for a period of not less than 3 years.

[23] NASD Regulation, Inc., “Municipal Securities Update – Disclosure to Purchasers of New Issue Securities,” Regulatory & Compliance Alert, Vol. 12, No. 3 (Sept. 1998) at 19-20. The views of the bank regulatory agencies regarding adequacy of any particular recordkeeping practice for the purpose of demonstrating compliance with rule G-8 may differ.

[*]  [Currently codified at rule G-32(d)(i).]

[†]  [Currently codified at rule G-32(b).]

[‡] [Currently codified at rule G-32(c)(i).]

[#]  [Currently codified at rule G-32(c)(ii).]

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

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

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

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

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

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

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

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

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

Rule G-29, on availability of Board rules, requires dealers to keep a copy of all rules of the Board as from time to time in effect and to make such rules available for examination by customers promptly upon request. The Board's rules must be kept in each office in which any activities of a municipal securities representative are conducted (e.g., underwriting, trading or sales of municipal securities).

Dealers can meet the requirements of Rule G-29 by a number of different means, including by having Internet access in their offices to the Board's rules at its website (www.msrb.org). Dealers can also use printed versions of the rules or software products produced by other companies that contain the Board's rules. Regardless of the method used to ensure that a copy of the rules is available at each office, customers must be given access to such copies, whether in printed form or by viewing on screen.

In connection with Rule G-29, the Board reminds dealers that Rule G-27, on supervision, requires each dealer to supervise the conduct of its municipal securities business and the municipal securities activities of its associated persons to ensure compliance with Board rules. Dealers should review their supervisory procedures to ensure that they have procedures in place for making the Board's rules available and accessible to customers upon request in each office that engages in municipal securities activities. In addition, the supervisory procedures should address how the dealer will provide its offices with the most current version of the rules once they are in effect so that its securities professionals are alerted to new developments. A dealer may establish a procedure to obtain information about current rule amendments from notices posted on the Board's website.

NOTE: This notice was revised to reflect the discontinuation, effective January 1, 2014, of the MSRB's printed version of the MSRB Rule Book.

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

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

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

__________

 ENDNOTES

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

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

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

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

MSRB TRANSACTION REPORTING PROGRAM

QUESTIONS AND ANSWERS

October 1997

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

These questions and answers touch upon the following topics:

GENERAL QUESTIONS

CUSTOMER TRANSACTION REPORTING

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

 

INTER-DEALER TRANSACTION REPORTING

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

 

QUESTIONS ADDED AFTER MARCH 1997

• Yield
• Commission
• File Format

 

GENERAL QUESTIONS

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

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

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

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

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

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

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

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

CUSTOMER TRANSACTION REPORTING

Preparing for Customer Transaction Reporting

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

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

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

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

Completing the Customer Transaction Reporting Form

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

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

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

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

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

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

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

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

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

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

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

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

Price and Yield

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

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

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

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

See also questions 60 and 61.

Settlement Date

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

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

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

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

Agency and Principal Transactions

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

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

18. Q: How should commissions be reported?

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

See also questions 62 and 63.

Control Numbers

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

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

Records Amending and Cancelling Trades

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

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

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

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

22 Q: What should happen next?

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

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

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

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

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

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

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

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

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

Submission of Files

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

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

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

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

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

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

File Forwarding by NSCC

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

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

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

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

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

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

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

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

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

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

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

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

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

36. Q: How will this be done?

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

Testing Customer Transaction Reporting with the MSRB

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

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

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

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

39. Q: What will happen during the test?

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

40. Q: How long will the test last?

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

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

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

Record and File Format Questions

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

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

See also questions 64 through 66.

Other Questions

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

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

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

A: Yes.

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

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

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

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

INTER-DEALER TRANSACTION REPORTING

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

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

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

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

Accrued Interest

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

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

Executing Broker Symbol

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

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

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

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

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

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

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

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

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

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

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

A: Yes.

Time of Trade

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

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

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

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

Problems in Inter-Dealer Transaction Reporting

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

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

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

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

QUESTIONS ADDED AFTER MARCH 1997

Yield

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

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

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

61. Q: How should I report negative yield?

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

Commission

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

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

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

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

File format

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

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

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

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

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

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

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

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

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

From The Chairman ,

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

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

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

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

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

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

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

Roger G. Hayes Chairman, 1996-1997

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

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.