Callable securities: "catastrophe" calls. This will acknowledge receipt of your letter dated October 20, 1977 which has been referred to me for reply. In your letter you request an interpretation of the provisions in rules G-12 and G-15 requiring that the dollar price for transactions in callable securities effected on a yield basis be priced to the lower of price to call or price to maturity. (See rules G-12(c)(v)(I) and G-15(a)(viii))[*].

At its meeting held October 25-26, 1977, the Board confirmed that the requirements in rules G-12 and G-15 relating to pricing to call do not include "catastrophe" calls, that is, calls which occur as a result of events specified in the bond indenture which are beyond the control of the issuer. MSRB interpretation of November 7, 1977.

 

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

The Municipal Securities Rulemaking Board (the "Board") has received a number of inquiries concerning Board rules G-8 and G-9. These rules require municipal securities brokers and municipal securities dealers to make and keep current certain specified records concerning their municipal securities business and to preserve such records for specified periods of time. This interpretive notice addresses several of the more frequent inquiries received by the Board regarding these rules.

General Purposes of Recordkeeping Rules

The Board’s recordkeeping rules are designed to require organizations engaged in the municipal securities business to maintain appropriate records concerning their activities in such business. In writing the rules, the Board adopted the approach of specifying in some detail the information to be reflected in the various records. The Board believed that this approach would provide helpful guidance to municipal securities professionals as well as the regulatory agencies charged with the responsibility of examining the records of such firms. At the same time, the Board attempted to provide a degree of flexibility to firms 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 firm’s municipal securities activities. The interpretations set forth in this notice are intended to be consistent with the foregoing purposes.

This notice is not intended to address all of the questions which have arisen, or may arise; the Board will continue its policy of responding to written requests for individual interpretations and may issue further interpretive notices on recordkeeping should additional questions of general interest arise.

The following topics are covered in this interpretive notice:General Purposes of Recordkeeping Rules

Election to Follow Board or Commission Recordkeeping Rules

Maintenance of Records on a Trade Date or Settlement Date Basis

Current Posting of Records

Unit System Method of Recordkeeping

Rule G-8(a)(ii)—Account Records

Rule G-8(a)(iii)—Securities Records

Rules G-8(a)(vi) and (vii)—Records for Agency and Principal Transactions

Rule G-8(a)(xi)—Customer Account Information

Rule G-8(c)—Non-Clearing Municipal Securities Brokers and Municipal Securities Dealers

Rule G-9(b)(viii)(C)—Preservation of Written Communications

Election to Follow Board or Commission Recordkeeping Rules

Rules G-8(f) and G-9(g) provide that municipal securities brokers and municipal securities dealers other than bank dealers, who are in compliance with the recordkeeping rules of the Securities and Exchange Commission (the "Commission"), will be deemed to be in compliance with Board rules G-8 and G-9, provided that the following additional records, not specified in the Commission’s rules, are maintained by such firms: records of uncompleted transactions involving customers (subparagraph (a)(iv)(D)); records relating to syndicate transactions (paragraph (a)(viii)); new account information (paragraph (a)(xi)); and information concerning customer complaints (paragraph (a)(xii)). Conversely, Commission rules 17a-3 and 17a-4 provide that securities firms engaged in the municipal securities business will satisfy all regulatory requirements concerning recordkeeping with respect to their municipal securities business if they are in compliance with the Board’s rules.

Securities firms must determine to comply with either the Board or Commission rules, but are not required to file with either the Board or the commission a formal written notice of election. Satisfactory compliance with either set of rules will be subject to determination in the course of periodic compliance examinations conducted by the regulatory organizations charged with enforcement of Board and Commission rules.

Maintenance of Records on a Trade Date or Settlement Date Basis

Under rule G-8, records concerning purchases and sales of municipal securities may be maintained on either a trade date or settlement date basis, provided that all records relating to purchases and sales are maintained on a consistent basis. For example, if a municipal securities broker or municipal securities dealer maintains its records of original entry concerning purchases and sales (rule G-8(a)(i)) on a settlement date basis, the municipal securities broker or municipal securities dealer must also maintain its account records (rule G-8(a)(ii)) and securities records (rule G-8(a)(iii)) on the same basis.

The above records may not be maintained on a clearance date basis, that is, the date the securities are actually delivered or received. Records maintained on a clearance date basis would not accurately reflect obligations of a municipal securities broker or municipal securities dealer to deliver or accept delivery of securities. Of course, the date of clearance should be noted in the records of original entry, account records and securities records, regardless of whether these records are kept on a trade date or settlement date basis.

Current Posting of Records

Rule G-8 provides that every municipal securities broker or municipal securities dealer must make and keep current the records specified in the rule. The Board has received inquiries as to the time within which records must be posted to satisfy the currency requirement.

Blotters or other records of original entry showing purchases and sales of municipal securities should be prepared no later than the end of the business day following the trade date. Transactions involving the purchase and sale of securities should be posted to the account records no later than settlement date and to the securities records no later than the end of the business day following the settlement date. Records relating to securities movements and cash receipts and disbursements should reflect such events on the date they occur and should be posted to the appropriate records no later than the end of the following business day.

Commission rule 17a-11 requires municipal securities dealers, other than bank dealers, to give immediate notice to the Commission and their designated examining authorities of any failure to make and keep current the required records, and to take corrective action within forty-eight hours after the transmittal of such notice.

Unit System Method of Recordkeeping

Under rule G-8, records may be maintained in a variety of ways, including a unit system of recordkeeping. In such a system, records are kept in the form of a group of documents or related groups of documents. For example, customer account records may consist of copies of confirmations and other related source documents, if necessary, arranged by customer.

A unit system of recordkeeping is an acceptable system for purposes of rule G-8 if the information required to be shown is clearly and accurately reflected and there is an adequate basis for audit. This would require in most instances that each record in a unit system be arranged in appropriate sequence, whether chronological or numerical, and fully integrated into the overall recordkeeping system for purposes of posting to general ledger accounts.

Rules G-8(a)(ii)—Account Records

Rule G-8(a)(ii) requires every municipal securities broker and municipal securities dealer to maintain account records for each customer account and the account of the municipal securities broker and municipal securities dealer, showing all purchases and sales, all receipts and deliveries of securities, all receipts and disbursements of cash, and all other debits and credits to such account.

The account records may be kept in several different formats. Ledger entries organized separately for each customer and for the municipal securities broker or municipal securities dealer, showing the requisite information, would clearly satisfy the requirements of rule G-8(a)(ii).

The requirements of rule G-8(a)(ii) can also be satisfied by a unit system of recordkeeping. See discussion above. Under such a system, a municipal securities professional might maintain files, organized by customer, containing copies of confirmations and other pertinent documents, if necessary, which reflect all the information required by rule G-8(a)(ii).

The question has also been raised whether the account records requirement of rule G-8(a)(ii) can be satisfied by an electronic data processing system which can produce account records by tracing through separate transactions. The Board is of the view that such a system is acceptable if the account records should be obtainable without delay, although the records need not be maintained by customer prior to being produced. The account records so produced must also reflect clearly and accurately all the required information, provide an adequate basis for audit and be fully integrated into the overall recordkeeping system. Under rule G-27, on supervision, a municipal securities principal is required to supervise the activities of municipal securities representatives with respect to customer accounts and other matters. In this connection, it may be appropriate to obtain printouts of customer accounts on a periodic basis.

The Board believes that it is important to maintain account records in the fashion described above in view of several of the Board’s fair practice rules, such as the rules on suitability and churning. Account records will be important both as a tool for management to detect violations of these rules and for enforcement of these rules by the regulatory agencies conducting compliance examinations or responding to complaints.

The requirement to maintain account records does not apply to a firm which effects transactions exclusively with other municipal securities professionals and has no customers, as defined in paragraph (e) of rule G-8.

Rule G-8(a)(iii)—Securities Records

Rule G-8(a)(iii) requires that records be kept showing separately for each municipal security all long and short positions carried by a municipal securities broker or municipal securities dealer for its account or for the account of a customer, the location of all such securities long and the offsetting position to all such securities short, and the name or other designation of the account in which each position is carried.

The securities records should reflect not only purchases and sales, but also any movement of securities, such as whether securities have been sent out for validation or transfer. If there is no activity with respect to a particular security, it is not necessary to make daily entries for the security in the securities records. The last entry will be deemed to be carried forward until there is further activity involving the security.

Rule G-8(a)(iii) requires that the securities records show all long security count differences and short count differences classified by the date of physical count and verification on which they were discovered. The Board currently has no rule requiring municipal securities professionals to make periodic securities counts. However, if such counts are made, all count differences must be noted as provided in this section. Commission rule 17a-13 requires municipal securities dealers, other than bank dealers and certain securities firms exempted from the rule, to examine and count securities at least once in each quarter.

The requirement to maintain securities records under rule G-8 does not apply to a firm which effects municipal securities transactions exclusively with other municipal securities professionals and has no customers, as defined in paragraph (e) of rule G-8, provided the firm does not carry positions for its own account and records or fails to deliver, fails to receive and bank loans are reflected in other records of the firm.

Rules G-8(a)(vi) and (vii)—Records for Agency and Principal Transactions

Rules G-8(a)(vi) and (vii) require municipal securities brokers and municipal securities dealers to make and keep records for each agency order and each transaction effected by the municipal securities broker or municipal securities dealer as principal. The records may be in the form of trading tickets or similar documents. In each case, the records must contain certain specified information, including "to the extent feasible, the time of execution."

The phrase "to the extent feasible" is intended to require municipal securities professionals to note the time of execution for each agency and principal transaction except in extraordinary circumstances when it is impossible to determine the exact time of execution. In such cases, the municipal securities professional should note the approximate time of execution and indicate that it is an approximation.

Rule G-8(a)(xi)—Customer Account Information

Rule G-8(a)(xi) requires a municipal securities broker or municipal securities dealer to obtain certain information for each customer. Several distinct questions have been raised with respect to this provision.

The requirement to obtain the requisite information may be satisfied in a number of ways. Some municipal securities brokers and municipal securities dealers have prepared questionnaires which they have had their customers complete and return. Others have instructed their salesmen to obtain the information from customers over the telephone at the time orders are placed. It is not necessary to obtain a written statement from a customer to be in compliance with the provision.

Except for the tax identification or social security number of a customer, the customer account information required by this provision must be obtained prior to the settlement of a transaction. The Board believes that such a requirement is reasonable since the information is basic and important.

The requirement in subparagraph (C) of rule G-8(a)(xi) to obtain the tax identification or social security number of a customer tracks the requirement in section 103.35, Part 103 of Title 31 of the Code of Federal Regulations, which was adopted by the Treasury Department and became effective in June 1972. Under this section, every broker, dealer and bank must obtain the tax identification or social security number of customers. If a broker, dealer or bank is unable to secure such information after reasonable effort, it must maintain a record identifying all such accounts. The Board interprets subparagraph (C) of rule G-8(a)(xi) in a similar fashion to require municipal securities professionals to make a reasonable effort to obtain a customer’s tax identification or social security number and, if they are unable to do so, to keep a record of that fact.

Several inquiries have focused on the scope of subparagraph (G) of rule G-8(a)(xi) which requires that a record be made and kept of the name and address of the beneficial owner or owners of such account if other than the customer and transactions are to be confirmed to such owner or owners.

This provision applies to the situation in which securities are confirmed to an account which has not directly placed the order for the securities. This frequently occurs in connection with investment advisory accounts, where the investment advisor places an order for a client and directs the executing firm to confirm the transaction directly to the investment advisor’s client.

Under rule G-8, the only information which must be obtained in such circumstances for the account to which the transaction is confirmed is the name and address of the account, information which would have to be obtained in any event in order to transmit the confirmation. Since the investment advisor itself is the customer, the other items of customer account information set forth in rule G-8(a)(xi) need not be obtained for the investment advisor’s client. The customer account information applicable to institutional accounts, however, must be obtained with respect to the investment advisor. Also, the account records required by rule G-8(a)(ii) would not be required to be maintained for the investment advisor’s client, although such records would have to be maintained with respect to the account of the investment advisor.

A municipal securities professional is not required to ascertain the name and address of the beneficial owner or owners of an account if such information is not voluntarily furnished. Subparagraph G-8(a)(xi)(G) applies only when an order is entered on behalf of another person and the transaction is to be confirmed directly to the other person.

A recent court decision, Rolf v. Blyth Eastman Dillon & Co. Inc., et al. issued on January 17, 1977, in the United States District Court, Southern District of New York, may have important implications with respect to the obligations generally of securities professionals to beneficial owners of accounts, especially to clients of investment advisors. We commend your attention to this decision, which has been appealed.

Rule G-8(c)—Non-Clearing Municipal Securities Brokers and Municipal Securities Dealers

Rule G-8(c) provides that a non-clearing municipal securities broker or municipal securities dealer is not required to make and keep the books and records prescribed by rule G-8 if they are made and kept by a clearing broker, dealer, bank or clearing agency. Accordingly, to the extent that records required by rule G-8 are maintained for a municipal securities broker or municipal securities dealer by a clearing agent, the municipal securities broker or municipal securities dealer does not have to maintain such records. A non-clearing municipal securities broker or municipal securities dealer is still responsible for the accurate maintenance and preservation of the records if they are maintained by a clearing agent other than a clearing broker or dealer, and should assure itself that the records are being maintained by the clearing agent in accordance with applicable recordkeeping requirements of the Board.

In the case of a bank dealer, clearing arrangements must be approved by the appropriate regulatory agency for the bank dealer. The bank regulatory agencies are each considering the adoption of procedures to approve clearing arrangements. It is contemplated that these procedures will require the inclusion of certain provisions in clearing agreements, such as an undertaking by the clearing agent to maintain the bank dealer’s records in compliance with rules G-8 and G-9, and will specify the mechanics for having such arrangements considered and approved. The bank regulatory agencies indicate that they will advise bank dealers subject to their respective jurisdictions on this matter in the near future.

In the case of a securities firm, Commission approval is required for all clearing arrangements with entities other than a broker, dealer or bank. The Commission has recently proposed an amendment to its rule 17a-4 which would eliminate the need to obtain Commission approval of clearing arrangements with such other entities, provided that certain specified conditions are met. If the proposed rule is adopted, the Board would make a corresponding change in rule G-8.

If an agent clears transactions, but transmits copies of all records to the municipal securities broker or municipal securities dealer, and these records are preserved by the municipal securities broker or municipal securities dealer in accordance with rule G-9, the clearing arrangement is not subject to the rule G-8(c).

Rule G-9(b)(viii)(C)—Preservation of Written Communications

Subparagraph (C) of rule G-9(b)(viii) requires municipal securities brokers and municipal securities dealers to preserve for three years all written communications received or sent, including inter-office memoranda, relating to the conduct of the activities of such municipal securities broker or municipal securities dealer with respect to municipal securities.

The communications required to be preserved by this provision relate to the conduct of a firm’s activities with respect to municipal securities. Accordingly, such documents as internal memoranda regarding offerings or bids, letters to or from customers and other municipal securities professionals regarding municipal securities, and research reports must be preserved. Documents pertaining purely to administrative matters, such as vacation policy and the like, would not have to be preserved for purposes of the rule.

Quotation of municipal securities. This will acknowledge receipt of your letter dated February 9, 1977 concerning the Board’s proposed rule G-13 on quotations relating to municipal securities. In your letter you raise certain questions concerning the intent and application of paragraph (b)(ii) of proposed rule G-13, which prohibits a municipal securities professional from distributing or publishing a municipal securities quotation, or causing such a quotation to be distributed or published, unless the quotation is based upon the professional’s best judgment as to the fair market value of the security.

While the provision in question would undoubtedly apply to situations involving outright fraud, the Board believes the rule to have appropriate application in other circumstances as well.  Thus, the Board has attempted in paragraph (b)(ii) to proscribe conduct which, in the Board’s opinion, constitutes bad business practice but may not, depending on the circumstances, constitute fraud. The Board firmly believes that as a matter of just and equitable principles of trade in the municipal securities industry and with a view to promoting free and open markets in municipal securities, certain practices should not be condoned, even though they do not necessarily rise to the level of fraud or cannot be proven to constitute fraud.

Some examples of how paragraph (b)(ii) would operate may be useful.  First, assume that a dealer submits a bid for bonds, knowing that they have been called by the issuer.  The bonds are not general market bonds and the fact that they have been called is not widely known. While called bonds ordinarily trade at a premium, the dealer’s bid is based on the value of the bonds as though they had not been called and is accepted by the dealer on the other side of the trade who is unaware of the called status of the bonds.  In these circumstances, the bid clearly would not have been based upon the best judgment of the dealer making it as to the fair market value of the bonds. While one might argue that the dealer accepting the bid should have known of the called status of the bonds, the dealer making the bid acted unethically and in a manner not conducive to free and open markets in municipal securities. In the Board’s view, the actions of the dealer making the bid should not be condoned, although a charge of fraud might be difficult to sustain in dealings between professionals and might be inappropriate. The improper nature of the dealer’s conduct would be exacerbated, of course, if the person on the other side of the transaction is a non-professional.  However, difficulties in proof that the conduct of the dealer was fraudulent suggest that the best judgment rule would provide an appropriate alternative basis for enforcement action.

Another situation that would be covered by the best judgment rule is one in which a dealer submits a bid for bonds based on valuations obtained from independent sources, which in turn are based on mistaken assumptions concerning the nature of the securities in question.  The circumstances indicate that the dealer submitting the bid knows that the securities have a substantially greater market value than the price bid, but the fact that independent valuations were obtained, albeit based on mistaken facts, clouds the dealer’s culpability.

A third situation to which the best judgment rule would apply is one in which a dealer makes a bid for or offer of a security without any knowledge as to the value of the security or the value of comparable securities. While the Board does not intend that the best judgment of a dealer as to the fair market value of a security be second-guessed for purposes of the proposed rule, the Board does intend that the dealer be required to act responsibly and to exercise some judgment in submitting a quotation.  In other words, a quotation which has been “pulled out of the air” is not based on the best judgment of the dealer and, in the interests of promoting free and open markets in municipal securities, should not be encouraged.

Given the manner in which the Board intends the “best judgment” rule to operate, the Board concluded that it would not have an anti-competitive impact on the municipal markets. The proposed rule is not intended to prohibit legitimate price discounts or mark-ups, as the case may be, based upon a dealer’s anticipation of the direction of the movement of the markets and other factors. The Board does not intend to interfere with legitimate pricing mechanisms and recognizes that there may be a variety of quotations with respect to a given security, each of which would comply with the terms of the proposed rule.

While it is not possible to anticipate all of the specific fact situations that might run afoul of the “best judgment” rule, I would like to make some general observations concerning the operation of the proposed rule. As you know, one of Congress’ principal purposes in calling for the establishment of the Board was to promote the development of a body of rules for the municipal securities industry that would furnish quidelines for good business conduct. The Senate Committee on Banking, Housing and Urban Affairs observed in its Report on the Securities Acts Amendments of 1975 that prior to the legislation, the conduct of municipal market professionals could be controlled only after the fact through enforcement by the Commission of the fraud prohibitions of the federal securities laws.  The Senate Committee expressed hope that a self-regulatory body like the Board would develop prophylactic rules for the industry which would deter unethical and fraudulent practices in the first instance. See Senate Report 94-75, 94th Cong., 1st Sess., 42-43. MSRB interpretation of February 24, 1977.

On December 23, 1976, the Municipal Securities Rulemaking Board (the "Board") issued an interpretive notice addressing certain questions received by the Board with respect to its professional qualifications rules (rules G-2 through G-7). Since that time, the Board has received additional questions concerning rule G-3 which are discussed in this interpretive notice.

1. Requirements for Financial and Operations Principals.

Under the rule G-3(b)(ii)[*], every municipal securities broker and municipal securities dealer other than a bank dealer is required to have at least one qualified financial and operations principal. As defined in the rule, this person is responsible for the overall supervision and preparation of financial reports to the Securities and Exchange Commission and self-regulatory organizations and for the processing, clearance, safekeeping and recordkeeping activities of the firm. If more than one person shares these overall supervisory responsibilities, each such person must be qualified as a financial and operations principal.

The question has been asked whether a financial and operations principal whose duties relate solely to financial and operational matters and not, for example, to underwriting, trading, or sales functions must qualify also as a municipal securities principal by passing the Board's municipal securities principal examination when it is prescribed. The Board does not intend to impose such a requirement on persons whose functions are limited to those set forth in the definition of a financial and operations principal.

The question has also been asked whether a person performing only the functions of a financial and operations principal on and after December 1, 1975 would be "grandfathered" as a municipal securities principal for purposes of taking the Board's municipal securities principal examination when prescribed if such person begins supervising underwriting, trading or sales functions. Activities relating to financial and operational matters are substantially different from those relating to underwriting, trading and sales or other categories of activities supervised by municipal securities principals. The Board does not intend, therefore, that financial and operations principals be "grandfathered" for purposes of the Board's examination requirements for municipal securities principals, or that a financial and operations principal would be qualified to engage in such other supervisory activities solely by reason of having met the Board's requirements for financial and operations principals.

The Board has also been asked whether senior officers or general partners of a firm, who may bear ultimate legal responsibility for the financial and operational activities of the firm, must be qualified as financial and operations principals under the Board's rules. Although the answer depends on the particular factual situation, officers or partners not directly involved in the financial and operations affairs of a firm generally would not be required to qualify as financial and operations principals.

2. Activities Requiring Qualification as a Municipal Securities Principal.

The question has been asked whether supervisory personnel in the processing and clearance areas must qualify as the municipal securities principals under rule G-3. In a securities firm, the financial and operations principal ordinarily would be the only person supervising operations-related activities who will be required to pass an examination. With respect to bank dealer supervisory personnel, to whom the financial and operations principal classification does not apply, qualification in a principal capacity in the operations area will not be required unless the person in question exercises policy-making authority. Thus, an individual may supervise a bank dealer's processing activities without qualifying as a municipal securities principal, regardless of the number of persons supervised by such individual, if policy-making functions and discretionary authority are delegated to a higher level.

Somewhat different considerations apply in determining which persons are required to be qualified as municipal securities principals in connection with underwriting, trading, sales or other activities referred to in the Board's rules as municipal securities principal activities. In these areas, the qualification requirements apply to persons having supervisory responsibility with respect to the day-to-day conduct of the activities in question, even though such persons may not have a policy-making role. The Board's conclusions in this regard are based on the fact that in these other areas the supervisory person is responsible for the activities of personnel who communicate directly with issuers, traders, and investors.

3. Activities Requiring Qualification as a Municipal Securities Representative.

In certain cases, communications from customers may be received at a time when a duly qualified municipal securities representative or municipal securities principal is unavailable. Similarly, there may be situations in which it becomes important to advise a customer promptly of transactions effected and orders confirmed, even though the individual responsible for the account may not be able to communicate with the customer at that time.

In many cases under the rules of other self-regulatory organizations, communications of this nature, which in essence reflect a mechanical function, may be received and made by properly supervised competent individuals whose clerical and ministerial functions would not otherwise subject them to qualification requirements. The Board believes the principle underlying this practice and the application of other self-regulatory organizations' qualification rules is sound.

Accordingly, the Board interprets rule G-3 to permit the recording and transmission in customary channels of orders, the reading of approved quotations, and the giving of reports of transactions by non-qualified clerical personnel when the duly qualified municipal securities representative or municipal securities principal who normally handles the account or customer is unavailable. The foregoing interpretation is applicable only to clerical personnel who are: (a) deemed capable and competent by a municipal securities principal or general securities principal to engage in such activities; (b) specifically authorized in writing to perform such functions on an occasional basis as necessary or directed to perform such functions in specific instances, in either case by a duly qualified municipal securities principal or general securities principal; (c) familiar with the normal type and size of transaction effected with or for the customer or the account; and (d) closely supervised by duly qualified municipal personnel.

All orders for municipal securities received by clerical personnel under the foregoing interpretation must be reviewed and approved by duly qualified municipal personnel familiar with the customer or account prior to being accepted or effected by the municipal securities broker or municipal securities dealer. Solicitation of orders by clerical personnel is not permitted. Confirmations of transactions may be given and quotations read by clerical personnel only when approved by duly qualified municipal personnel. Individuals subject to the 90-day apprenticeship requirements of rule G-3(i)[†] are not clerical personnel and are not authorized or permitted to engage in such activities with members of the public.

Also, the question has been raised whether a bank's branch office personnel, who are not otherwise required to be qualified under rule G-3, will be required to take and pass the qualification examination for municipal securities representatives in order to respond to a depositor's inquiry concerning possible investments in municipal securities. Insofar as the branch office personnel merely refer the depositor to qualified bank dealer personnel for discussion concerning the merits of an investment in municipal securities and execution of the depositor's order, the branch office personnel would not be required to be qualified under the Board's professional qualifications requirements. However, if branch office personnel seek to advise the depositor concerning the merits of a possible investment, or otherwise perform more than a purely ministerial function, qualification under the Board's rules would be required.

 

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[*] [ Currently codified at rule G-3(d)(iii)]

[†] [ Currently codified at rule G-3(a)(iii)]

Previously registered entitites. Thank you for your letter [name and date deleted] which has been referred to me for response. The letter relates to the Municipal Securities Rulemaking Board's rule A-12, which imposes an initial fee of $100 on municipal securities brokers and municipal securities dealers.

We note that the terms "municipal securities broker" and "municipal securities dealer" are not restricted under the Securities Acts Amendments of 1975 (the "1975 Amendments") to securities firms and banks effecting transactions exclusively in municipal securities. Many municipal securities brokers and municipal securities dealers (other than bank dealers) were registered with the Securities and Exchange Commission (the "Commission") as brokers or dealers prior to the 1975 Amendments. Municipal securities brokers and municipal securities dealers already registered with the Commission were not required to re-register with respect to their municipal securities activities, but nevertheless are subject to payment of the Board's initial fee. In addition, many municipal securities brokers and municipal securities dealers have been and are members of the national securities exchanges and the National Association of Securities Dealers, Inc.

We are unable to conclude from the information set forth in your letter that the initial fee imposed by the Board's rule A-12 is inapplicable to your firm. MSRB interpretation of June 16, 1976.

The Municipal Securities Rulemaking Board (the “Board”) has received several requests for interpretation of rule A-13, which requires each municipal securities broker and municipal securities dealer to pay the Board a fee [on] … the face amount of municipal securities purchased from an issuer as part of a new issue. These requests concern the applicability of the fee to securities which have a stated maturity of [nine months or less], but are part of a new issue having a final stated maturity of [more than nine months]. Rule A-13 is intended to impose the … underwriting assessment on the face amount of all securities purchased from an issuer that are part of a new issue of municipal securities if any part of the issue has a final stated maturity of [nine months or less]… from the date of the securities. Thus, calculation of the fee should be based upon all municipal securities which are part of such new issue, including securities having a stated maturity of [nine months or less]. The assessment is not intended to apply, however, to short-term issues having a final maturity of [nine months or less].
NOTE: Revised to reflect subsequent amendments.

Separately identifiable department or division of a bank. This will acknowledge receipt of your letter of November 12, 1975, in which you request, on behalf of the Dealer Bank Association, an interpretative opinion with respect to the rule of the Municipal Securities Rulemaking Board (the "Board") defining the term "separately identifiable department or division of a bank," as used in section 3(a)(30) of the Securities Exchange Act of 1934, as amended (the "Act"). Such rule was originally numbered rule 4 of the Board and became effective on October 15, 1975. The rule is presently numbered rule G-1 of the Board.

In your letter you pose a series of questions concerning rule G-1, as follows: 

1. A bank has an operations department that performs processing and clearance activities, and maintains records, with respect to the bank's underwriting, trading and sales of municipal securities, as well as with respect to certain other bank activities. Can this bank have a "separately identifiable department or division" as defined in rule G-1?
2. In a bank with numerous branches, an employee or officer in a branch will on occasion accept or solicit an order from a customer for municipal securities. Does this preclude a finding that the bank has a "separately identifiable department or division"?
3. Mr. X is a senior vice president of a bank. He is not a director. Mr. X's only relationship to the bank's municipal securities dealer activities is that he is a member of a management committee within the bank that determines the amount of the bank's funds that will be made available for the bank's municipal securities dealer activities, as well as for other bank activities. The bank has a separately identifiable department or division that otherwise meets the requirements of rule G-1. Is Mr. X a person who must be designated by the board of directors of the bank under rule G-1(a)(1)?
4. A bank has a corporate trust department that, among other things, serves as paying agent for certain municipal securities and performs clearing functions in municipal securities, in addition to the processing and clearance activities performed in connection with the bank's underwriting, trading and sales of municipal securities. Are the persons in the bank's corporate trust department who engage solely in activities that do not relate to the underwriting, trading and sales of municipal securities by the bank performing municipal securities dealer activities?

With respect to question (1) above, paragraph (d) of rule G-1 contemplates that the municipal securities dealer activities of a bank, as such activities are defined in paragraph (b) of the rule, may be conducted in more than one organizational or operational unit of the bank, for example, underwriting, trading and sales activities in the bond department, and processing and clearance activities in the operations department of the bank. Under the rule, all such units can be aggregated to constitute a separately identifiable department or division within the meaning of section 3(a)(30) of the Act, provided that each such unit is identifiable and under the direct supervision of an officer 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. The officer so designated need not be the same for all such units. For example, the senior officer of the bank's bond department may be designated as responsible for the municipal securities dealer activities conducted by that department, while the senior officer of the bank's operations department may be designated as responsible for the municipal securities dealer activities conducted by that department. In addition, the records of each such unit relating to municipal securities dealer activities must be separately maintained or separately extractable so as to permit independent examination of such records and enforcement of applicable provisions of the Act, the rules and regulations of the Commission thereunder and the rules of the Board. Finally, each such unit comprising the separately identifiable department or division may be engaged in activities other than those relating to municipal securities dealer activities. For example, the bond department may also engage in activities relating to United States government obligations, while the operations department may perform processing and clearance functions for departments of the bank other than the bond department.

With respect to question (2) above, paragraph (d) of rule G-1 also contemplates that the municipal securities dealer activities of a bank may be conducted at more than one geographic location. However, in order for such a bank to have a separately identifiable department or division, the branch employees who accept or solicit orders for municipal securities must, with respect to acceptance or solicitation of such orders, be affiliated with one of the identifiable units of the bank comprising such department or division and must, with respect to acceptance or solicitation of such orders, be responsible to an officer 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. Further, the bank's records relating to the transactions effected by such branch employees must meet the criteria of paragraph (a) of rule G-1 with respect to separate maintenance and accessibility.

With respect to question (3) above, paragraph (c) of rule G-1 recognizes that senior officers of a bank may make determinations affecting bank policy as a whole which have an indirect effect on the municipal securities dealer activities of the bank. For example, determinations with respect to the deployment of the bank's funds may affect the size of the bank's inventory of municipal securities or volume of underwriting. Ordinarily such determinations would not directly relate to the day-to-day conduct of the bank's municipal securities dealer activities and senior officers making such determinations need not be designated by the board of directors of the bank as responsible for the conduct of such activities. However, if the determinations of senior officers have a direct and immediate impact on the day-to-day conduct of the bank's municipal securities dealer activities, whether by reason of the scope of such determinations, the frequency with which such determinations are made, or by reason of other factors, such officers may be considered to be directly engaged in the conduct of the bank's municipal securities dealer activities and required to be designated by the board of directors of the bank as responsible for the day-to-day conduct of such activities.

With respect to question (4) above, the regulatory focus of section 15B(b)(2)(H) of the Act is on the dealer activities of a bank. Accordingly, subparagraph (b)(2) of rule G-1 was intended to relate to such dealer activities, and not to describe other activities of the bank which might involve municipal securities. Employees of a bank's corporate trust department who perform clearance and other functions with respect to municipal securities, but which do not relate to the underwriting, trading and sales activities of the bank, do not perform municipal securities dealer activities within the meaning of rule G-1.

This opinion is rendered on behalf of the Board, pursuant to authority delegated by the Board. Copies of this opinion are being sent to the Securities and Exchange Commission, the bank regulatory agencies and the National Association of Securities Dealers, Inc. MSRB interpretation of November 17, 1975.

%@ Language=VBScript %> % 'option explicit dim title dim MenuSection dim NumCols title = "Municipal Securities Rulemaking Board" NumCols = "3" MenuSection = "WhatsNew" %> % 'Begin Editable %>

Archive 2009

MSRB Notice 2009-64 (December 21, 2009)
Amendment Filed to Pending Proposal on Underwriter Submission of Information About Continuing Disclosure Undertakings to EMMA

MSRB Notice 2009-63 (December 21, 2009)
Amendment Filed to Pending Proposal on Additional Voluntary Submissions by Issuers and Obligated Persons to EMMA

MSRB Notice 2009-62 (December 4, 2009)
Amendments Filed to Rule G-37 Regarding Contributions to Bond Ballot Campaigns

MSRB Notice 2009-61 (December 1, 2009)
Reminder of December 1, 2009 Effective Date of Amendments to Rule A-13 on Underwriting Assessments

MSRB Notice 2009-60 (November 24, 2009)
MSRB Primary Market and Continuing Disclosure Submission Services - Reminder of Upcoming Word-Searchable Document Requirement and Update on Other Submission-Related Matters

MSRB Notice 2009-59 (November 18, 2009)
Rule Amendments and Interpretive Notice Filed Regarding Priority of Orders in Primary Offerings

MSRB Notice 2009-58 (November 5, 2009)
Proposed Rule A-16 on Examination Fees

MSRB Notice 2009-57 (October 21, 2009)
Upcoming Changes to the Real-Time Transaction Reporting System

MSRB Notice 2009-56 (September 30, 2009)
Amendments to Rule A-13 on Underwriting Assessments

MSRB Notice 2009-55 (September 30, 2009)
Amendments Approved to Rules G-11 and G-12 Regarding Settlement Dates and Payments of Designations

MSRB Notice 2009-54 (September 29, 2009)
Reminder Notice on Fair Practice Duties to Issuers of Municipal Securities

MSRB Notice 2009-53 (September 22, 2009)
MSRB and SIFMA to Co-Host Regulatory and Compliance Seminars in New York and Chicago

MSRB Notice 2009-52 (September 22, 2009)
MSRB Hosts Webinar Series on Market Information Programs

MSRB Notice 2009-51 (September 16, 2009)
Request for Comment: Disclosure of Bank and Bank Holding Company Political Action Committee Contributions

Comments received are available for this notice.

MSRB Notice 2009-50 (September 15, 2009)
Use of Electronic Confirmations Produced By a Clearing Agency or Qualified Vendor to Satisfy the Requirements of Rule G-15(a)

MSRB Notice 2009-49 (August 25, 2009)
Build America Bonds: Reminder of Customer Confirmation Yield Disclosure Requirement

MSRB Notice 2009-48 (August 13, 2009)
Amendment to Rule A-14, on Annual Fee

MSRB Notice 2009-47 (August 11, 2009)
Request for Comment Regarding Priority of Orders in Primary Offerings

Comments received are available for this notice.

MSRB Notice 2009-46 (August 6, 2009)
Amendments to Rules G-11 and G-12 Filed with SEC

MSRB Notice 2009-45 (July 29, 2009)
Amendments Filed to Administrative Rules: Rules A-3, A-4, A-5 and A-6

MSRB Notice 2009-44 (July 15, 2009)
Proposals Filed to Provide for Additional Primary Market and Continuing Disclosure Information to Be Made Available Through EMMA

MSRB Notice 2009-43 (July 14, 2009)
Request for Comment on Additional Increases in Transparency of Municipal ARS and VRDO

Comments received are available for this notice.

MSRB Notice 2009-42 (July 14, 2009)
MSRB Issues Interpretive Guidance on Disclosure and Other Sales Practice Obligations to Individual and Other Retail Investors in Municipal Securities

MSRB Notice 2009-41 (July 10, 2009)
Applicability of MSRB Rules to California Registered Warrants

MSRB Notice 2009-40 (July 2, 2009)
Interpretive Letter Regarding Solicitation Activity on Behalf of an Affiliated Company Pursuant to Rules G-37 and G-38

MSRB Notice 2009-39 (July 1, 2009)
MSRB Launches the Continuing Disclosure Service of EMMA

MSRB Notice 2009-38 (June 30, 2009)
MSRB, FINRA Issue Joint Investor Education Notice

MSRB Notice 2009-37 (June 29, 2009)
Preparations by Issuers and Others for the July 1, 2009 Launch of the Continuing Disclosure Service of EMMA

MSRB Notice 2009-36 (June 25, 2009)
EMMA Dataport Submission System Outage on Friday, June 26, 2009 at 3:00 PM

MSRB Notice 2009-35 (June 22, 2009)
Comments Requested: Draft Amendments to Rule G-37 Regarding Bond Ballot Campaign Committee Contributions

Comments received are available for this notice.

MSRB Notice 2009-34 (June 18, 2009)
MSRB Announces Webinars for Issuers on Continuing Disclosure Registration

MSRB Notice 2009-33 ( June 11, 2009)
Final Specifications for the EMMA Continuing Disclosure Subscription Service

MSRB Notice 2009-32 (June 11, 2009)
Final Specifications for the EMMA Continuing Disclosure Automated Submission Interface

MSRB Notice 2009-31 (June 10, 2009)
MSRB to Accept Voluntary Continuing Disclosures to EMMA

MSRB Notice 2009-30 (June 9, 2009)
Build America Bonds: Application of Rule G-37 to Solicitations of Issuers

MSRB Notice 2009-29 (June 4, 2009)
Webinars About the Business-to-Business Submission and Subscription Process for the Primary Market Disclosure Service of EMMA

MSRB Notice 2009-28 (June 1, 2009)
MSRB Establishes Electronic Official Statement Dissemination Standard under Rule G-32 and Launches Permanent Primary Market Disclosure Service of EMMA

MSRB Notice 2009-27 (June 1, 2009)
MSRB Launches Continuing Disclosure Pilot of EMMA

MSRB Notice 2009-26 (May 29, 2009)
MSRB Files to Terminate its CDINet System Effective July 1, 2009

MSRB Notice 2009-25 (May 28, 2009)
Webinars About the Submission Process for Advance Refunding Documents and 529 College Savings Plan Documents to EMMA

MSRB Notice 2009-24 (May 27, 2009)
MSRB Discontinues e-OS System

MSRB Notice 2009-23 (May 22, 2009)
MSRB to Launch Continuing Disclosure Pilot Service on EMMA

MSRB Notice 2009-22 (May 22, 2009)
SEC Approves Primary Market Disclosure Service on EMMA for Electronic Dissemination of Official Statements

MSRB Notice 2009-21 (May 13, 2009)
Webinars About the Submission Process for the Primary Market Disclosure Service of EMMA

MSRB Notice 2009-20 (May 12, 2009)
Request for Comment Regarding Settlement of Syndicate Accounts and Secondary Market Trading Accounts

Comments received are available for this notice.

MSRB Notice 2009-19 (May 6, 2009)
Webinars About the Submission Process for the Continuing Disclosure Service of EMMA

MSRB Notice 2009-18 (May 6, 2009)
MSRB Updates Timing on Launch of New Services on EMMA

MSRB Notice 2009-17 (May 5, 2009)
Upcoming Enhancements to the SHORT System and Data Elements Clarification

MSRB Notice 2009-16 (April 28, 2009)
Notice of Filing of Amendment to Rule G-8, on Books and Records, Relating to ARS and VRDO

MSRB Notice 2009-15 (April 24, 2009)
MSRB Provides Guidance on Build America Bonds and Other Tax Credit Bonds

MSRB Notice 2009-14 (April 22, 2009)
MSRB Files EMMA Continuing Disclosure Subscription Service and Publishes Preliminary Specifications for Subscription and Document Submission Feeds

MSRB Notice 2009-13 (April 20, 2009)
MSRB and RBDA to Hold Municipal Securities Seminar on May 13, 2009

MSRB Notice 2009-12 (April 14, 2009)
MSRB Files to Allow Voluntary Continuing Disclosures on EMMA

MSRB Notice 2009-11 (March 27, 2009)
Reminder of April 1, 2009 Effective Date of MSRB Short System for Variable Rate Demand Obligations

MSRB Notice 2009-10 (March 25, 2009)
MSRB Files to Establish Pilot for EMMA’s Continuing Disclosure Service

MSRB Notice 2009-09 (March 24, 2009)
Final Specifications for the MSRB’s Electronic Municipal Market Access System (“EMMA”) Primary Market Subscription Service

MSRB Notice 2009-08 (March 24, 2009)
Final Specifications for the MSRB’s Electronic Municipal Market Access System (“EMMA”) Primary Market Automated Submission Interface

MSRB Notice 2009-07 (March 23, 2009)
MSRB Files for EMMA Primary Market Disclosure Service

MSRB Notice 2009-06 ( February 25, 2009)
MSRB Gateway Rollout and Training

MSRB Notice 2009-05 (January 28, 2009)
Reminder of January 30, 2009 Effective Date of MSRB SHORT System and New Location of SHORT System Web Service

MSRB Notice 2009-04 (January 9, 2009)
SEC Approves Proposal to Increase Transparency of Auction Rate Securities and Variable Rate Demand Obligations

MSRB Notice 2009-03 (January 7, 2009)
Recommendations Requested for Board Nominations

MSRB Notice 2009-02 (January 5, 2009)
MSRB Announces Availability of SHORT System Web User Interface

MSRB Notice 2009-01 (January 2, 2009)
MSRB Amends Proposal to Increase Transparency of Variable Rate Demand Obligations

 

% 'End Editable %>

Amendment Approved Concerning Disclosure of Designation Information to Syndicate Members: Rule G-11(g)(iii)

On April 28, 1999, the Securities and Exchange Commission approved an amendment to rule G-11, on sales of new issue municipal securities during the underwriting period.¹ The amendment makes clear that all information about designations paid to syndicate and non-syndicate members is to be provided to each syndicate member and that the designation information must be expressed in total dollar amounts. The amendment became effective upon approval.

More information about the amendment can be found in the notice entitled "Amendment Filed to Rule G-11(g)(iii) Concerning the Disclosure of Designation Information to Syndicate Members."

April 30, 1999

 

TEXT OF AMENDMENT²

Rule G-11. Sales of New Issue Municipal Securities During the Underwriting Period

(a) – (f) No change.

(g) Designations and Allocations of Securities. The senior syndicate manager shall:

(i)–(ii) No change.
(iii) disclose, in writing, to the each members of the syndicate , in writing, all available information on designations paid to syndicate and non-syndicate members expressed in total dollar amounts designation information to members within 10 business days following the date of sale and all information about designations paid to syndicate and non-syndicate members expressed in total dollar amounts with the sending of the designation checks pursuant to rule G-12(k); and
(iv) No change.

(h) No change.

---

ENDNOTES

1. Sec. Exch. Act Rel. No. 41338 (April 28, 1999).

2. Underlining indicates new language; strikethrough denotes deletions.

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

Amendment to Rule G-36(c)(i) Filed with the Securities and Exchange Commission

The Municipal Securities Rulemaking Board has filed with the Securities and Exchange Commission an amendment to rule G-36(c)(i) relating to official statements prepared in connection with most primary offerings exempt from Exchange Act Rule 15c2-12.

        On December 9, 1999, the Municipal Securities Rulemaking Board (the "MSRB" or the "Board") filed with the Securities and Exchange Commission (the "SEC") an amendment to 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.¹ The amendment modifies the existing time frame for brokers, dealers or municipal securities dealers ("dealers") acting as underwriters of primary offerings subject to rule G-36(c)(i) (i.e., offerings exempt from Exchange Act Rule 15c2-12) to send official statements to the MSRB.² The amendment provides that an underwriter in a primary offering subject to rule G-36(c)(i) for which an official statement in final form is prepared by the issuer must send two copies of the official statement in final form, together with two copies of Form G-36(OS), to the MSRB by the later of (i) one business day after the bond closing or (ii) one business day after receipt of the official statement from the issuer.

        Rule G-36 was adopted by the MSRB for the purpose of creating a repository for official statements that would function much like a public library that stores, indexes and provides copies of official statements.³ This library, known as the Municipal Securities Information Library^� (or MSIL^�) system,⁴ is intended to serve as a central source for information regarding municipal securities trading in the primary and secondary markets. As originally adopted by the MSRB and approved by the SEC, rule G-36 applied to all primary offerings of municipal securities regardless of principal amount, other than primary offerings that qualified for exemption under section (d)(1) of Securities Exchange Act Rule 15c2-12.⁵ The MSRB subsequently amended rule G-36 to subject to its requirements certain categories of primary offerings that are exempt under Rule 15c2-12(d)(1), thereby further extending the reach of rule G-36 beyond the scope of Rule 15c2-12.⁶ The MSRB felt that, by expanding the scope of the rule to include such offerings, a more complete collection of disclosure documents would result and the overall integrity, efficiency and liquidity of the municipal securities market would be increased.

        For any primary offering subject to rule G-36(c)(i), the underwriter currently is required to send two copies of the official statement in final form, if one is prepared, together with two copies of Form G-36(OS), to the MSRB by the business day after the issuer delivers the municipal securities to the underwriter (the "bond closing"). The MSRB reviewed certain information included by underwriters on Forms G-36(OS) submitted to the MSIL^� system in 1998, including approximately 2,000 such forms submitted in connection with primary offerings subject to rule G-36(c)(i).⁷ For these offerings, the MSRB found that 96% of the official statements in final form were reported to have been delivered by issuers to underwriters within one business day after closing. The 4% of official statement deliveries by issuers to underwriters that were reported as being made more than one business day after closing and therefore too late to permit underwriters to comply with rule G-36(c)(i) constituted more than half (approximately 54%) of all underwriter failures to meet the time frame of that section.⁸

        The MSRB believes that there is significant room for improvement with respect to underwriter compliance with rule G-36(c)(i) in those situations in which the official statement is received in sufficient time to send to the MSRB on a timely basis. Underwriters experiencing problems in this area should review their internal procedures for ensuring that official statements delivered by issuers are handled in a manner that permits the accurate completion of Form G-36(OS) and the prompt sending of such form and the official statement to the MSRB.

        However, the MSRB is concerned that more than half of the instances in which underwriters have not met the time frame of rule G-36(c)(i) resulted from official statements that were reported to have been delivered by issuers more than one business day after closing. Of course, the MSRB has no authority to require that an issuer prepare an official statement or that any official statement that is prepared be delivered to underwriters within a specified time frame. In addition, the SEC excepted those primary offerings that are subject to rule G-36(c)(i) from Rule 15c2-12 and therefore no regulatory framework exists to compel, directly or indirectly, the preparation and delivery of an official statement in such offerings.

        The MSRB notes that in approximately 36% of the offerings subject to rule G-36(c)(i), the number of business days between the sale date and the business day following closing is less than ten. As a result, for these offerings, the requirement in rule G-36(c)(i) that the underwriter send the official statement to the MSRB within one business day after the bond closing provides the underwriter with less time to comply with its official statement submission requirement than the 10 business day outside time frame of rule G-36(b)(i), were such time frame applicable to these offerings.⁹ At the same time, however, issuers in these offerings generally have not contracted with underwriters to deliver official statements within seven business days of the sale date, as provided in section (b)(3) of Rule 15c2-12, since such offerings are exempt from that Rule. Thus, in more than one-third of all offerings subject to rule G-36(c)(i), underwriters are required to act more quickly than they would under rule G-36(b)(i) even though there is no concomitant obligation on the part of issuers to deliver an official statement within any particular time frame.

        As a result, the MSRB published the MSRB Notice seeking comment on, among other things, a draft amendment to rule G-36(c)(i) which the MSRB believed would address this situation. After reviewing the comments received on the MSRB Notice, the MSRB determined to adopt the draft amendment, with a minor clarifying change.¹⁰ As amended, the rule would provide that an underwriter in a primary offering subject to rule G-36(c)(i) for which an official statement in final form is prepared by the issuer must send two copies of the official statement in final form, together with two copies of Form G-36(OS), to the MSRB by the later of (i) one business day after the bond closing or (ii) one business day after receipt of the official statement from the issuer.¹¹ The amendment is intended solely to provide relief to underwriters that face violation of rule G-36(c)(i) as a result of circumstances beyond their control and is not intended to imply that underwriters and other dealers may ignore their continuing obligation to deliver official statements for new issue municipal securities to customers by settlement, as required under rule G-32.

        The MSRB received two comment letters in response to the MSRB Notice, only one of which addressed the draft amendment. TBMA states that it "strongly supports" the draft amendment.¹² TBMA further states that the change in the timing requirement "means that underwriters and issuers could schedule closings on the basis of the needs of the transaction, rather than for the purpose of allowing a sufficient number of days to increase the odds that the official statement will be ready in time for the closing."

        The MSRB strongly believes that this second statement of TBMA demonstrates a misunderstanding of the nature of the proposed amendment, the purpose of official statements in the municipal securities market and the other obligations of dealers with respect to delivery of official statements. In the MSRB Notice, the MSRB observed that, for new issue municipal securities, dealers typically seek, and customers generally expect, to settle their trades on the same day as the closing of the underwriting. As a result, underwriters need to receive the official statement from the issuer in sufficient time to ensure that the official statement can be delivered to customers by settlement of their transactions, as required under rule G-32. If an issuer is preparing an official statement in final form but does not deliver it to the underwriter by the bond closing, dealers would continue to be prohibited from settling their transactions with customers until they have delivered the official statement to the customers, with certain very limited exceptions.¹³ Thus, other than offerings falling within the narrow exceptions provided under rule G-32, the only offerings in which "the needs of the transaction" would not include delivery of the official statement by closing would be those in which underwriters expect to hold the securities in inventory until the official statement is in fact delivered and therefore made available for redelivery to customers.

        The completion and delivery of an official statement by the closing of the underwriting is not a technical requirement imposed by the MSRB. If an official statement serves no purpose in an offering that is exempt from Rule 15c2-12, then the issuer need not prepare one. Unless an issuer is preparing an official statement for reasons entirely unrelated to the offering that it describes, it is difficult to understand how completion of an official statement after the underwriters and initial customers have received delivery of their securities can be rationalized.¹⁴ Although it is possible that the submission requirement under current rule G-36(c)(i) may in some cases influence an issuer to give completion of the official statement in final form a higher priority, it is also possible that in some cases this requirement serves as a disincentive for the actual preparation of the official statement in final form since an underwriter currently can avoid a rule G-36(c)(i) violation by prevailing upon the issuer not to prepare an official statement in final form at all (e.g., an underwriter that has purchased an issue based on a preliminary official statement could advise an issuer that it need not finalize the official statement). Changing the time frame of the rule G-36(c)(i) submission requirement would eliminate this disincentive while providing relief for underwriters that may face a potential rule violation for reasons beyond their control. The official statement delivery requirement under rule G-32 would continue to provide a powerful incentive to underwriters to urge issuers to complete the official statement in final form in sufficient time to permit the underwriters and the other dealers to which they sell such new issue municipal securities to deliver the official statement to customers by settlement.

        Although TBMA supports the draft amendment to rule G-36(c)(i), it suggests that the MSRB further amend rule G-36(c)(i) to extend the one-business day time frame to two-business days. TBMA argues that "it is often logistically difficult to meet the one-day requirement" and that the MSIL^� system serves "archival rather than real-time disclosure purposes."¹⁵ In adopting rule G-36 and creating the MSIL^� system, the MSRB undertook to make available to the industry a comprehensive repository of official statements for use in both the primary and secondary markets. In addition to serving the vital archival purpose of ensuring that information regarding municipal securities is available throughout the life of the securities, the MSIL^� system serves an important function in the primary market as an alternate source (through its subscribers) of official statements for dealers seeking to fulfill their rule G-32 customer delivery obligation. Delaying the submission of official statements to the MSRB could impair the MSIL^� system’s usefulness in the primary market.¹⁶ Without a more substantial showing of hardship to the dealer community, the MSRB believes that extension of the time frame for underwriters to turn the official statement around to the MSRB is not justified at this time. The ability to meet this requirement is entirely within the control of dealers, and they should review their procedures to ensure that this task is assigned to the appropriate personnel having a clear understanding of the procedural and substantive requirements of rule G-36. To the extent that dealers experience difficulty in coordinating the actions of various personnel involved in the handling of official statements, they should consider whether they have instituted procedures that adequately provide for compliance with the rule.

December 9, 1999

 

* * * * * * * * * *

 

 

TEXT OF AMENDMENT¹⁷

Rule G-36. Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee

(a)-(b) No change.

(c) Delivery Requirements for Issues not Subject to Securities Exchange Act Rule 15c2-12.

        (i) Subject to paragraph (iii) below, each broker, dealer, or municipal securities dealer that acts as an underwriter in a primary offering of municipal securities not subject to Securities Exchange Act rule 15c2-12 for which an official statement in final form is prepared by or on behalf of the issuer shall send to the Board or its designee, by certified or registered mail, or some other equally prompt means that provides a record of sending, within by the later of one business day of after delivery of the securities by the issuer to the broker, dealer, or municipal securities dealer or one business day after receipt of the official statement in final form from the issuer or its designated agent, the following documents and written information: two copies of the official statement in final form, if prepared by or on behalf of the issuer; and, if an official statement in final form is prepared, two copies of completed Form G-36(OS) prescribed by the Board, including the CUSIP number or numbers for the issue.

        (ii) No change.

(d)-(f) No change.

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ENDNOTES

1. File No. SR-MSRB-99-11. Comments submitted to the SEC should refer to this file number.

2. Those primary offerings that are subject to rule G-36(c)(i) consist of offerings of municipal securities for which an official statement in final form has been prepared by or on behalf of the issuer and having (i) an aggregate principal amount of less than $1,000,000 ("Small Issue Securities"); (ii) authorized denominations of $100,000 or more if the securities have a maturity of nine months or less ("Short-Term Securities"); and (iii) authorized denominations of $100,000 or more if, at the option of the holder, the securities may be tendered to the issuer or its 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 agent ("Puttable Securities").

3. See Securities Exchange Act Rel. No. 28081 (June 1, 1990), 55 FR 23333 (June 7, 1990); "Delivery of Official Statements to the Board: Rules G-36 and G-8," MSRB Reports, Vol. 9, No. 3 (Nov. 1989) at 3.

4. Municipal Securities Information Library and MSIL are registered trademarks of the MSRB.

5. In primary offerings subject to Rule 15c2-12, the underwriter is required under section (b)(3) of the Rule to contract with the issuer to receive the final official statement within seven business days after any final agreement to purchase, offer or sell the municipal securities (the "sale date") and in sufficient time to accompany any confirmation that requests payment from any customer. Rule 15c2-12 does not apply to Small Issue Securities. In addition, section (d)(1) of the Rule exempts primary offerings of municipal securities if the securities are (i) in authorized denominations of $100,000 or more and are sold to no more than 35 persons with knowledge and experience in financial and business matters, capable of evaluating the merits and risks of the investment and not purchasing for more than one account or with a view to distribution ("Limited Offering Securities"); (ii) Short-Term Securities; or (iii) Puttable Securities. Thus, as originally adopted, rule G-36 applied to all primary offerings subject to Rule 15c2-12 as well as to Small Issue Securities for which an official statement in final form was prepared, but did not apply to Limited Offering Securities, Short-Term Securities and Puttable Securities.

6. See Securities Exchange Act Rel. No. 32086 (March 31, 1993), 58 FR 18290 (April 8, 1993); "Delivery of Official Statements to the Board: Rule G-36," MSRB Reports, Vol. 12, No. 3 (Sept. 1992) at 11. Thus, only primary offerings exempt from Rule 15c2-12 for which no official statement in final form is prepared and Limited Offering Securities remain exempt from rule G-36.

7. The MSRB reviewed all Forms G-36(OS) for primary offerings having sale dates in 1998 received in acceptable form by the MSIL^� system on or prior to December 31, 1998. Excluded from this review were any Forms G-36(OS) that omitted the sale date, date of receipt by the underwriter of the official statement from the issuer or date that the underwriter sent the official statement to the MSIL� system. Information provided by underwriters on Form G-36(OS) is not independently verified by the MSRB but is provided to the appropriate enforcement agency on a regular basis. Underwriters are required to certify that all information contained in each Form G-36(OS) submitted to the MSIL^� system is true and correct. Inaccuracies in the information reported by underwriters on Form G-36(OS) could subject such underwriter to appropriate enforcement action. The results of the MSRB’s review could be affected by any such inaccuracies. The full results of this review, including results relating to other provisions of rule G-36 and to the provisions of rule G-32 and Rule 15c2-12, were published in "Official Statement Deliveries Under Rules G-32 and G-36 and Exchange Act Rule 15c2-12," MSRB Reports, Vol. 19, No. 3 (Sept. 1999) at 29 (the "MSRB Notice").

8. The remaining failures consisted of situations where the issuer was reported to have delivered the official statement to the underwriter in sufficient time for the underwriter to comply with rule G-36(c)(i) but the underwriter delayed sending the official statement to the MSRB until later than the business day after the bond closing.

9. Section (b)(i) of rule G-36 requires the underwriter of a primary offering subject to Rule 15c2-12 to send two copies of the final official statement, together with two copies of Form G-36(OS), to the MSRB within one business day after receipt of the final official statement from the issuer but no later than 10 business days after the sale date.

10. The change in language makes clearer the fact that section (c)(i) will continue to apply to a primary offering only if an official statement in final form is prepared.

11. In contrast, rule G-36(c)(i) currently requires that the underwriter send the official statement to the MSRB by the business day after the bond closing, regardless of whether the underwriter has in fact received the official statement by such day.

12. The comment letter from The Bond Market Association ("TBMA") addressed the draft amendment as well as certain other issues relating to MSRB rules G-36 and G-32 and Exchange Act Rule 15c2-12. The comment letter from Charles Schwab & Co. Inc. ("Schwab") addressed certain issues relating to rule G-32. The MSRB is considering the comments received on these other matters but has not determined to take any rulemaking action with respect to rule G-32 or any provisions of rule G-36 other than section (c)(i) thereof at this time.

13. Commercial paper is wholly exempt from the rule G-32 customer delivery requirement and preliminary official statements may be delivered by settlement (with official statements in final form sent when they become available) for Puttable Securities.

14. Of course, the MSRB believes that there is significant value to the secondary market in having official statements available throughout the life of the issue. Nonetheless, the MSRB sees no way of justifying the existence of an official statement based on the needs of the secondary market while ignoring the needs of the primary market.

15. TBMA states "that it is difficult to ensure the desirable level of coordination between the underwriter personnel who are best-positioned to authenticate the official statement as the final official statement and the personnel who are responsible for filings with the Board."

16. Schwab notes that it has "found that if the dealers [from which it purchases new issue municipal securities] do not have copies of the final official statement, such copies are also generally unavailable from the managing underwriter, financial printer, Bloomberg or another Nationally Recognized Municipal Securities Information Repository." Delays in receiving official statements by the MSIL� system would further reduce their availability from these other sources.

17. Underlining indicates additions; strikethrough indicates deletions.

 

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

Notice Regarding the Application of Rule G-37 to Presidential Campaigns of Issuer Officials

        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.

March 23, 1999

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ENDNOTES

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.

 

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

Amendments Approved Requiring Dealers to Obtain from Their Consultants Information on Political Contributions and Payments to Political Parties and for Dealers to Report Such Information to the Board: Rules G-38, G-37 and G-8

        On December 7, 1999, the Securities and Exchange Commission approved amendments to rules G-38, on consultants, G-37, on political contributions and prohibitions on municipal securities business, and G-8, on books and records, as well as revisions to the attachment page to Form G-37/G-38.¹ The amendments require dealers to obtain from their consultants information on the consultants’ political contributions and payments to state and local political parties and to report such information to the Board on Form G-37/G-38. The amendments will become effective on April 1, 2000.

SUMMARY OF AMENDMENTS

        The amendments require a dealer to receive and report certain contribution and payment information from the consultant;² any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the dealer; and any political action committee ("PAC") controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer.³ A dealer is required to obtain information from its consultants about the contributions made to issuer officials only if the consultant has had direct or indirect communication with such issuer to obtain municipal securities business on behalf of the dealer.⁴ The political party payments required to be reported are limited to those made to political parties of states and political subdivisions that operate within the geographic area of the issuer with whom the consultant communicates on behalf of the dealer (e.g., city, county and state parties). The date that establishes the obligation for the collection of contribution information is the date of the consultant’s communication with the issuer to obtain municipal securities business on behalf of the dealer.

Consultant Agreement

        A dealer is required to include within its Consultant Agreement⁵ a statement that the consultant agrees to provide the dealer each calendar quarter with a listing of reportable political contributions to official(s) of an issuer and reportable payments to political parties of states and political subdivisions during such quarter, or a report that no reportable political contributions or reportable political party payments were made, as appropriate.⁶

"Look-Back" and "Look-Forward" Provisions

        With respect to the collection of contribution and payment information, the amendments contain a six-month "look-back" provision as well as a six-month "look-forward" provision from the date of communication with an issuer. Thus, a consultant must disclose to the dealer the contributions and payments made by the consultant during the six months prior to the date of the consultant's communication with the issuer.⁷ So too, if the consultant's communication with an issuer continues, any reportable contributions and payments are required to be disclosed. Once communication ceases, the consultant still must disclose contribution and payment information for six months.⁸ The Board believes these provisions are important in providing information for a minimum period of one year about any consultant contributions to officials of an issuer with whom the consultant communicated on behalf of a dealer to obtain municipal securities business. This should help to identify any situations in which contributions could have influenced the awarding of municipal securities business.

        A dealer’s requirement to collect contribution and payment information from its consultants ends when a Consultant Agreement has been terminated.⁹ Of course, dealers should not attempt to avoid the requirements of rule G-38 by terminating a consultant relationship after directing or soliciting the consultant to make a political contribution to an issuer official after such termination. Rule G-37(d) prohibits a dealer from doing any act indirectly which would result in a violation of rule G-37 if done directly by the dealer. Thus, a dealer may violate rule G-37 by engaging in municipal securities business with an issuer after directing or soliciting any person to make a contribution to an official of such issuer.

Disclosure on Form G-37/G-38

        The amendments require that the information obtained by dealers concerning their consultants' contributions and payments be submitted by dealers to the Board on Form G-37/G-38.¹⁰ The disclosures required by the amendments are reflected in the changes to Form G-37/G-38. The amendments require dealers to disclose on the attachment sheet for each consultant used by the dealer the contributions and payments covered by the rule or that the consultant reported that no such contributions or payments were made for such quarter. Furthermore, a dealer must disclose if a consultant has failed to provide it with a report concerning its contributions and payments. When completing a form, a dealer must disclose, in addition to the other required information, the calendar quarter and year of any reportable political contributions and reportable political party payments that were made prior to the calendar quarter of the form being completed (e.g., contributions and payments made in a prior quarter that are reportable as a result of the six-month look-back). "Look-back" contributions should be disclosed on the Form G-37/G-38 for the quarter in which the consultant has communicated with an issuer to obtain municipal securities business on behalf of a dealer.

        As noted above, the amendments will become effective on April 1, 2000. On the reports for the second quarter of 2000 (required to be sent to the Board by July 31, 2000) dealers will be required to disclose their consultants’ reportable political contributions and reportable political party payments for the second quarter of 2000 and include, pursuant to the six-month look-back, reportable political contributions and reportable political party payments since October 1, 1999. Once a contribution or payment has been disclosed on a report, a dealer should not continue to disclose that particular contribution or payment on subsequent reports.

The attachment page to Form G-37/G-38 also has been revised to require dealers to separately identify all of the municipal securities business obtained or retained by the consultant for the dealer.

"Reasonable Efforts" Provision

        The amendments contain a "reasonable efforts" provision that allows dealers to rely in good faith on information received from their consultants regarding contributions. This provision provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. To avail itself of the reasonable efforts, a dealer must:

        (1) state in the Consultant Agreement that Board rules require disclosure of consultant contributions;

        (2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information;

        (3) include language in the Consultant Agreement to the effect that: (a) the Consultant Agreement will be terminated if, for any calendar quarter, the consultant fails to provide the dealer with information about its reportable contributions or payments, or a report noting that the consultant made no reportable contributions or payments, and such failure continues up to the date to be determined by the dealer but no later than the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the dealer must send its Form G-37/G-38 to the Board, and (b) the dealer may not make any further payments to the consultant, including payments owed for services performed prior to the date of termination, as of the date of such termination; and

        (4) enforce the Consultant Agreement provisions described above in a full and timely manner and indicate the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

        The failure by a dealer to include the termination and non-payment provisions in a Consultant Agreement or to enforce any such provisions that may be contained in the Consultant Agreement, would not, in and of itself, constitute a violation of rule G-38 but would instead preclude the dealer from invoking the reasonable efforts provision as a defense against a possible violation for failing to disclose consultant contribution information, which the consultant may have withheld from the dealer.

Recordkeeping

        The amendments to rule G-8 require a dealer to maintain: (1) records of each reportable political contribution; (2) records of each reportable political party payment; (3) records indicating, if applicable, that a consultant made no reportable political contributions or no reportable political party payments; and (4) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.

Technical amendments

    Finally, the amendments contain a clarifying amendment to rule G-38(b)(i)(B), and a technical amendment to rule G-37(e)(i)(D) to conform to the amendments to rule G-38.¹¹

December 9, 1999

 

TEXT OF AMENDMENTS¹²

Rule G-38. Consultants

(a) Definitions.

        (i)-(v) No change.

        (vi) The term "reportable political contribution" means:

       (A) if the consultant has had direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer, a political contribution to an official(s) of such issuer made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those political contributions to official(s) of an issuer made by any individual referred to in subparagraph (b)(i)(A) or (B) of this rule who is entitled to vote for such official if the contributions made by such individual, in total, are not in excess of $250 to any official of such issuer, per election.

(vii) The term "reportable political party payment" means:

        (A) if a political party of a state or political subdivision operates within the geographic area of an issuer with which the consultant has had direct or indirect communication to obtain or retain municipal securities business on behalf of the broker, dealer or municipal securities dealer, a payment to such party made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those payments to political parties of a state or political subdivision made by any individual referred to in subparagraph (b)(i)(A) or (B) of this rule who is entitled to vote in such state or political subdivision if the payments made by such individual, in total, are not in excess of $250 per political party, per year.

(viii) The term "official of such issuer" or "official of an issuer" shall have the same meaning as in rule G-37(g)(vi).

(b) Written Agreement.

        (i) Each broker, dealer or municipal securities dealer that uses a consultant shall evidence the consulting arrangement by a writing setting forth, at a minimum, the name, company, business address, role and compensation arrangement of each such consultant ("Consultant Agreement"). In addition, the Consultant Agreement shall include a statement that the consultant agrees to provide the broker, dealer or municipal securities dealer with a list by contributor category, in writing, of any reportable political contributions and any reportable political party payments during each calendar quarter made by:

        (A) the consultant;

        (B) if the consultant is not an individual, any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and

        (C) any political action committee controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer.

        (ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.

        (iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.

        (iv) Such The Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer.

(c) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.

        (i) A broker, dealer or municipal securities dealer is required to obtain information on its consultant’s reportable political contributions and reportable political party payments beginning with a consultant's first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).

        (ii) The requirement to obtain the information referred to in paragraph (c)(i) of this rule shall end upon the termination of the Consultant Agreement.

        (iii) A broker, dealer or municipal securities dealer will not violate this section if it fails to receive from its consultant all required information on reportable political contributions and reportable political party payments and thus fails to report such information to the Board if the broker, dealer or municipal securities dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. Reasonable efforts shall include:

        (A) a statement in the Consultant Agreement that Board rules require disclosure of consultant contributions to issuer officials and payments to state and local political parties;

        (B) the broker, dealer or municipal securities dealer sending quarterly reminders to its consultants of the deadline for their submissions to the broker, dealer or municipal securities dealer of the information concerning their reportable political contributions and reportable political party payments;

        (C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:

        (1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and

        (2) no further payments, including payments owed for services performed prior to the date of termination, shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and

        (D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

(d) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, business address, role and compensation arrangement of any consultant used, directly or indirectly, by the broker, dealer or municipal securities dealer to attempt to obtain or retain municipal securities business with each such issuer. Such information shall be submitted to the issuer either:

        (i) – (ii) No change.

(d) (e) Disclosure to Board. Each broker, dealer and municipal securities dealer shall send to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports of all consultants used by the broker, dealer or municipal securities dealer during each calendar quarter. Two copies of the reports must be sent to the Board on Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31, and October 31). Such reports shall include, for each consultant, in the prescribed format, the consultant's name, company, business address, role, and compensation arrangement, any municipal securities business obtained or retained by the consultant with each such business listed separately, and, if applicable, dollar amounts paid to the consultant connected with particular municipal securities business. In addition, s Such reports shall indicate the total dollar amount of payments made to each consultant during the report period and, if any such payments are related to the consultant's efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified. In addition, such reports shall include the following information to the extent required to be obtained during such calendar quarter pursuant to paragraph (c)(i) of this rule:

        (i)(A) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving reportable political contributions or reportable political party payments, listed by state; and

        (B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or

        (ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or

        (iii) if applicable, a statement that the consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.

Once a contribution or payment has been disclosed on a report, the dealer should not continue to disclose that particular contribution or payment on subsequent reports.

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) - (xvii) No change.

        (xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:

        (i) (A) a listing of the name, company, business address, role and compensation arrangement of each consultant;

        (ii) (B) a copy of each Consultant Agreement referred to in rule G-38(b);

        (iii) (C) a listing of the compensation paid in connection with each such Consultant Agreement;

(iv) (D) where applicable, a listing of the municipal securities business obtained or retained through the activities of each consultant;

        (v) (E) a listing of issuers and a record of disclosures made to such issuers, pursuant to rule G-38(c)(d), concerning each consultant used by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with each such issuer; and

        (vi) (F) records of each reportable political contribution (as defined in rule G-38(a)(vi)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions; and

(3) the amounts and dates of such contributions;

    (G) records of each reportable political party payment (as defined in rule G-38(a)(vii)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such payments; and

(3) the amounts and dates of such payments;

    (H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));

    (I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and

    (J) the date of termination of any consultant arrangement.

(xix) No change.

(b) - (f) No change.

 

Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business

(a)–(d) No change.

(e)(i)(A) – (C) No change.

(D) any information required to be disclosed pursuant to section (d) (e) of rule G-38; and

(E) No change.

        (ii) – (iii) No change.

(f) – (i) No change.

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ENDNOTES

1. Securities Exchange Act Release No. 42205 (December 7, 1999).

2. Rule G-38(a)(i) defines the term "consultant" as any person used by a dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on the dealer’s behalf where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the dealer or any other person.

3. A "consultant" in rule G-38 can refer to an individual or a company. For example, if an individual is a consultant, this individual would report to the dealer only his or her contributions and payments and the contributions of any PAC controlled by such individual. If the consultant is a company, the company would report its contributions and payments to the dealer, as well as those made by any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer, and any PAC controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with issuers to obtain municipal securities business on behalf of the dealer.

4. A dealer must disclose contributions with respect to those issuers from which a consultant is seeking municipal securities business on behalf of the dealer, regardless of whether contributions are going to and communications are occurring with the same or different personnel within that particular issuer.

5. Rule G-38 requires dealers that use consultants to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"). The Consultant Agreement, at a minimum, must include the name, company, role and compensation arrangement of each consultant used by the dealer. The Consultant Agreement must be entered into before a consultant engages in any direct or indirect communication with an issuer on the dealer’s behalf.

6. The de minimis exception for contributions to official(s) of an issuer provides that a consultant need not provide to a dealer information about contributions of the consultant (but only if the consultant is an individual) or by any partner, director, officer or employee of the consultant (if the consultant is a company) who communicates with issuers to obtain municipal securities business on behalf of the dealer made to any official of an issuer for whom such individual is entitled to vote if such individual’s contributions, in total, are not in excess of $250 to each official of such issuer, per election. Similarly, the de minimis exception for payments provides that a consultant need not provide to a dealer information about payments of the consultant to political parties of a state or political subdivision (but only if the consultant is an individual) or by any partner, director, officer or employee of the consultant (if the consultant is a company) who communicates with issuers to obtain municipal securities business on behalf of the dealer and who is entitled to vote in such state or political subdivision if the payments made by the individual, in total, are not in excess of $250 per political party, per year.

7. Such contributions and payments become reportable in the calendar quarter in which the consultant first communicates with the issuer. Thus, for the quarter in which a consultant first communicates with the issuer, the dealer would be required to collect from the consultant its reportable political contributions and reportable political party payments for such quarter and, pursuant to the six-month look-back, for the six-month period preceding such first communication.

8. Contributions and payments made simultaneously with or after the consultant’s first communication with the issuer are reportable in the calendar quarter in which they are made.

9. A dealer that terminates a Consultant Agreement would of course be obligated to obtain information regarding contributions and payments made up to the date of termination.

10. The amendments also require dealers to report the consultant’s business address on Form G-37/G-38.

11. Rule G-8(a)(xviii) was also amended to require a dealer to maintain a record of a consultant’s business address.

12. Underlining indicates new language; strikethrough denotes deletions.

 

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

Proposed Amendments Filed to Pending Amendments at the SEC: Rules G-38, G-37 and G-8

        On August 26, 1999, the Board filed additional amendments to the pending amendments at the Securities and Exchange Commission ("SEC") concerning the disclosure of consultants’ contributions.¹ The pending amendments to rules G-38, on consultants, and G-8, on books and records, and revisions to the attachment page to Form G-37/G-38 would require dealers to obtain from their consultants² information on the consultants’ political contributions to official(s) of an issuer and payments to state and local political parties (hereafter collectively referred to as "contributions") and to require dealers to report such information to the Board on Form G-37/G-38.³ The pending amendments contain a reasonable efforts provision which provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. The proposed amendments, among other things, add two additional requirements to the reasonable efforts provision. The Board has requested that the SEC delay the effective date of the amendments until April 1, 2000.

BACKGROUND

        The Board believes it is reasonable to allow dealers to rely in good faith on information received from their consultants regarding contributions and that it would be almost impossible and unduly burdensome for dealers to investigate for contributions that were not reported by their consultants. As noted above, the pending amendments contain a reasonable efforts provision. This provision states that reasonable efforts include having a dealer: (1) state in the Consultant Agreement⁴ that Board rules require disclosure of consultant contributions, and (2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information.

        After the Board filed the pending amendments with the SEC, the SEC staff recommended to Board staff that the reasonable efforts provision contain two additional requirements: (1) the dealer must disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule, and (2) the dealer must terminate the contract should the consultant fail to provide such report by the next calendar quarter after it was due, and the dealer must not make any further payments pursuant to the Consultant Agreement. The SEC staff stated that these additional requirements to the reasonable efforts provision should help ensure that all required information on contributions is obtained from consultants.

        On April 19, 1999, the Board published the SEC’s additional requirements so that dealers could be given the opportunity to comment to the Board about the practical implications of the requirements.⁵ The Board has reviewed the comments received on the notice and has determined to adopt the SEC’s additional requirements and file rule language to include these requirements in the amendments pending at the SEC.

SUMMARY OF COMMENTS

        The Board received five comments in response to its request for comments about the draft amendments incorporating the SEC’s additional requirements. Most of the commentators did not limit their comments specifically to the draft amendments, which were the subject of the notice requesting comment. The commentators addressed various aspects of both the draft amendments and those amendments pending approval at the SEC. In general, none of the commentators offered support for the draft amendments.

        There was concern expressed by commentators about terminating the Consultant Agreement for failure by consultants to provide the required information. In addition, commentators were concerned about the prohibition from paying a consultant once the Consultant Agreement has been terminated because the consultant could be owed payment for work performed prior to the date of termination. The Board feels strongly that rule G-38 should require the disclosure of consultants’ contributions and dealers should be able to avail themselves of a reasonable efforts defense if they wish to do so. The provision relating to termination of the Consultant Agreement with a consultant that does not provide the required information is a pre-condition to invoking the reasonable efforts defense. A dealer that does not terminate the Consultant Agreement in these instances does not violate rule G-38, but it does lose its ability to invoke the reasonable efforts defense.

        The Board believes that the issue of a prohibition on further payments to a consultant at the time of termination of the Consultant Agreement can be addressed by dealers including a specific provision in their Consultant Agreements. This provision can indicate that, on the date of termination of the Consultant Agreement by the dealer because of the consultant’s failure to report the required information, no further payments will be provided by the dealer to the consultant, including payments for services performed by the consultant prior to the date of termination. In addition, to address any uncertainty in the rule language about payments for prior services, the proposed amendments filed with the SEC revise rule G-38 to note specifically that the prohibition on further payments at the time of termination of the Consultant Agreement includes payments for services performed prior to the date of termination.

SUMMARY OF PROPOSED AMENDMENTS

        As noted above, the SEC staff recommended that the reasonable efforts provision require that a dealer disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule. The pending amendments require dealers to receive from their consultants reports on any reportable contributions but do not contain a requirement for dealers to receive reports if no such contributions were made. In order to establish a complete record of the information being reported by consultants, the proposed amendments revise the pending amendments to require all dealers using consultants to receive reports every quarter from their consultants listing all reportable contributions or stating that the consultants made no reportable contributions, as appropriate. The dealer would then indicate the contributions reported or that the consultant had no contributions to report, as appropriate, on its Form G-37/G-38 for the applicable quarter. Pursuant to the SEC staff’s recommendation, the proposed amendments also require dealers to disclose if they did not receive a report from a consultant during a particular quarter. Thus, if a consultant does not submit a report to the dealer for a particular quarter, the dealer must report that fact on its Form G-37/G-38. These additional requirements would constitute affirmative obligations on all dealers submitting Forms G-37/G-38 who use consultants, not merely pre-conditions to invoking the reasonable efforts defense.

        The SEC staff’s second suggested requirement for the reasonable efforts provision is that a dealer must terminate the Consultant Agreement should a consultant fail to provide the required information by the next calendar quarter after it was due, and the dealer must not make any further payments to the consultant pursuant to the Consultant Agreement.

        The proposed amendments revise the pending amendments to require dealers that wish to rely on a reasonable efforts defense to include language in their Consultant Agreements to the effect that the Consultant Agreement will be terminated if the consultant fails to provide the dealer a report of the required information within the required time frame and that no further payments will be made to the consultant from the date of termination of the Consultant Agreement if the Consultant Agreement is terminated because the consultant did not provide the required information.

        If, for any calendar quarter, a consultant fails to provide the dealer with a report of its contributions or a report noting that the consultant made no reportable contributions and such failure continues up to the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, the proposed amendments requires the dealer, if it wishes to rely on the reasonable efforts defense, to terminate the Consultant Agreement by the date the form for such second quarter must be sent to the Board (i.e., January 31, April 30, July 31 or October 31).6 When a Consultant Agreement is terminated by the dealer because of a consultant’s failure to provide reports about its reportable contributions, the proposed amendments require a dealer that wishes to rely on a reasonable efforts defense to note on its Form G-37/G-38 that the Consultant Agreement has been terminated for this reason and the date of termination. The proposed amendments also clarify that dealers that wish to rely on a reasonable efforts defense will not be permitted to make any further payments pursuant to the Consultant Agreement from the date of termination, even if money is owed to the consultant for services already rendered.

        The failure by a dealer to include the termination and non-payment provisions in a Consultant Agreement or to enforce any such provisions that may be contained in the Consultant Agreement would not, in and of itself, constitute a violation of rule G-38. Such failure would instead preclude the dealer from invoking the reasonable efforts provision as a defense against a possible violation for failing to disclose consultant contribution information which the consultant may have withheld from the dealer.

        The proposed amendments also contain a clarifying amendment to rule G-38(b)(i)(B), and a technical amendment to rule G-37(e)(i)(D) to conform to the amendments to rule G-38.

        Finally, as noted above, the Board has requested that the SEC delay the effective date of the amendments until April 1, 2000. This delayed effective date should provide dealers with time to amend their Consultant Agreements to conform to the amendments and to revise their procedures for compliance with rules G-38 and G-8. Dealers should be aware that the amendments pending at the SEC contain a six-month "look-back" provision from the date of communication with an issuer. Thus, if a consultant communicates with an issuer on April 1, 2000, the consultant must disclose to the dealer the reportable contributions made by the consultant to the issuer from October 1, 1999, and the dealer must then disclose these contributions on the Form G-37/G-38 it files for the second quarter of 2000.

August 26, 1999

 

Text of Proposed Amendments Incorporated into Pending Amendments⁷

Rule G-38. Consultants

(a) No additional changes.

(b) Written Agreement

(i) No additional changes.

(A) No additional changes.

(B) if the consultant is not an individual, any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and

(C) No additional changes.

(ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.

(iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.

(iv) No additional changes.

(c) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.

(i) A broker, dealer or municipal securities dealer is required to obtain information on its consultant’s reportable political contributions and reportable political party payments beginning with a consultant=s first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).

(ii) No additional changes.

(iii) No additional changes.

(A) – (B) No additional changes.

(C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:

(1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and

(2) no further payments, including payments owed for services performed prior to the date of termination, shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and

(D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

(d) No additional changes.

(e) No additional changes.

(i)(A) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving reportable political contributions or reportable political party payments, listed by state; and (B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or

(ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or

(iii) No additional changes.

 

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

(a) No change.

(i) - (xvii) No change.

(xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:

(A) – (G) No additional changes.

(H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));

(I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and

(J) the date of termination of any consultant arrangement.

(xix) No change.

(b) - (f) No change.

 

Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business

(a)– (d) No change.

(e)(i)(A) – (C) No change.

(D) any information required to be disclosed pursuant to section (d) (e) of rule G-38; and

(E) No change.

(ii) – (iii) No change.

(f) – (i) No change.

---

ENDNOTES

1. File No. SR-MSRB-98-8, Amendment No. 1. Comments submitted to the SEC should refer to this file number.

2. Rule G-38(a) defines a consultant as "any person used by a broker, dealer or municipal securities dealer to obtain or retain municipal securities business though direct or indirect communication by such person with an issuer on behalf of such broker, dealer or municipal securities dealer where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the broker, dealer or municipal securities dealer or any other person."

3. For more information about the pending amendments at the SEC, see "Requirements for Dealers to Report Their Consultants’ Political Contributions and Payments to Political Parties: Rules G-38 and G-8," MSRB Reports, Vol. 18, No. 2 (August 1998) at 3-10. The notice is also posted on the Board’s web site at www.msrb.org.

4. Rule G-38 requires dealers who use consultants to evidence the consulting arrangement in writing (referred to as a "Consultant Agreement"). The rule requires that the Consultant Agreement, at a minimum, include the name, company, role and compensation arrangement of each consultant used by the dealer. The Consultant Agreement must be entered into before a consultant engages in any direct or indirect communication with an issuer on the dealer’s behalf.

5. See "Additional Requirements for Pending Amendments on Disclosure of Consultants’ Contributions: Rule G-38," MSRB Reports, Vol. 19, No. 2 (April 1999) at 3-7.

6. Rule G-37(e)(i) provides that each dealer must send to the Board two copies of Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31).

7. Underlining indicates new language; strikethrough denotes deletions.

Rule G-38 Question and Answer

Agreement to Jointly Seek Underwriting Assignments

Q: Dealer Firm A and Dealer Firm B have entered into an agreement to jointly seek underwriting assignments. As part of this agreement, the two dealers have jointly submitted proposals to issuers. Dealer Firm A ultimately is selected to underwrite a negotiated sale of a primary offering of municipal securities (i.e., "municipal securities business" as defined in rule G-37). Dealer Firm B will not act as an underwriter on this offering but will assist Dealer Firm A in structuring the transaction. Dealer Firm A will compensate Dealer Firm B for the work it provides on the transaction. Is Dealer Firm B a consultant to Dealer Firm A pursuant to rule G-38, on consultants?

A: Yes. Dealer Firm B is a consultant to Dealer Firm A because, pursuant to the definition of consultant in rule G-38(a)(i), Dealer Firm B is: (1) used by Dealer Firm A to obtain municipal securities business, (2) through direct or indirect communication with an issuer on behalf of Dealer Firm A, and (3) the communication is undertaken by Dealer Firm B in exchange for, or with the understanding of receiving, payment from Dealer Firm A. Moreover, Dealer Firm B is not exempt from the definition of consultant since it is not a municipal finance professional, and its sole basis of compensation is not the actual provision of legal, accounting or engineering advice, services or assistance. In addition, the Board believes that, even though Dealer Firm B is providing substantive work on the transaction, any dealer used by another dealer (other than a member of the syndicate) to assist in obtaining or retaining municipal securities business is acting as a consultant pursuant to rule G-38.

 March 4, 1999

 

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

Comments Requested on Additional Requirements for Pending Amendments on Disclosure of Consultants’ Contributions

* * *

        The Board is requesting comments regarding draft amendments to the reasonable efforts provision contained in proposed amendments to rule G-38, on consultants, pending at the SEC. Comments should be submitted to the Board no later than May 28, 1999, and may be directed to Ronald W. Smith, Senior Legal Associate. Written comments will be available for public inspection.

* * *

        On June 16, 1998, the Board filed with the Securities and Exchange Commission ("SEC") proposed amendments to rules G-38 and G-8, and revisions to the attachment page to Form G-37/G-38, to require dealers to obtain from their consultants¹ information on the consultants’ political contributions to official(s) of an issuer and payments to state and local political parties (hereafter collectively referred to as "contributions") and to require dealers to report such information to the Board on Form G-37/G-38.²

"REASONABLE EFFORTS" PROVISION

        The proposed amendments contain a "reasonable efforts" provision. The Board believes it is reasonable to allow dealers to rely in good faith on information received from their consultants regarding contributions and that it would be almost impossible and unduly burdensome for dealers to investigate for contributions that were not reported by their consultants. The reasonable efforts provision provides that a dealer will not be found to have violated rule G-38 if the dealer fails to receive from its consultants all required contribution information and thus fails to report such information to the Board if the dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. The proposed amendments state that reasonable efforts include having a dealer: (1) state in the Consultant Agreement that Board rules require disclosure of consultant contributions, and (2) send quarterly reminders to consultants of the deadline for their submissions to the dealer of contribution information. The Board stated in its filing of the amendments that, while the Board does not believe dealers have a duty to investigate whether the contribution information provided is accurate or complete, the Board would expect a dealer to vigorously enforce its contract with a consultant if the dealer becomes aware that the consultant is not providing it with materially complete or accurate information concerning contributions on a timely basis.

DRAFT AMENDMENTS

        The SEC staff has recommended that the reasonable efforts provision contain two additional requirements: (1) the dealer must disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule, and (2) the dealer must terminate the contract should the consultant fail to provide such report by the next calendar quarter after it was due, and the dealer must not make any further payments pursuant to the Consultant Agreement. The SEC staff has stated that these additional requirements to the reasonable efforts provision should help ensure that all required information on contributions is obtained from consultants.

Disclosure of Any Consultant that Does Not Provide the Required Report

        As noted above, the SEC staff has recommended that the reasonable efforts provision require that a dealer disclose in its quarterly filings any consultant that does not provide a report of the information required by the rule. The pending proposed amendments currently require dealers to receive from their consultants reports on any reportable contributions but the amendments do not contain a requirement for dealers to receive reports if no such contributions were made. In order to establish a complete record of the information being reported by consultants, the draft amendments would revise the pending proposed amendments to require all dealers to receive reports every quarter from their consultants listing all reportable contributions or stating that the consultants made no reportable contributions, as appropriate. The dealer would then indicate the contributions reported or that the consultant had no contributions to report, as appropriate, on its Form G-37/G-38 for the applicable quarter. The Board believes it would be helpful for the general requirements in the rule language (and not the reasonable efforts provision) also to require dealers to disclose if they did not receive a report from a consultant during a particular quarter. Thus, if a consultant does not submit a report to the dealer for a particular quarter, the dealer must report that fact on its Form G-37/G-38.

Termination of Contract and No Further Payments

        The SEC staff’s second suggested requirement for the reasonable efforts provision is that a dealer must terminate the contract should a consultant fail to provide the required information by the next calendar quarter after it was due, and the dealer must not make any further payments to the consultant pursuant to the Consultant Agreement.

        The draft amendments would revise the pending proposed amendments to require dealers that wish to rely on a reasonable efforts defense to include language in their Consultant Agreements to the effect that the Consultant Agreement will be terminated if the consultant fails to provide the dealer a report of the required information within the required time frame and that no further payments will be made to the consultant from the date of termination of the Consultant Agreement if the Consultant Agreement is terminated because the consultant did not provide the required information. When a Consultant Agreement is terminated by the dealer because of a consultant’s failure to provide reports about its reportable contributions, the draft amendments would require a dealer that wishes to rely on a reasonable efforts defense to note on its Form G-37/G-38 that the Consultant Agreement has been terminated for this reason and the date of termination.

        If, for any calendar quarter, a consultant fails to provide the dealer with a report of its contributions or a report noting that the consultant made no reportable contributions and such failure continues up to the date by which the dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, the dealer must terminate the Consultant Agreement by the date the form for such second quarter must be sent to the Board (i.e., January 31, April 30, July 31 or October 31) in order to rely on the reasonable efforts provision.³ Dealers that wish to rely on a reasonable efforts defense would not be permitted to make any further payments pursuant to the Consultant Agreement from the date of termination, even if money is owed to the consultant for services already rendered.

REQUEST FOR COMMENTS

        The Board is requesting comments from interested parties about the draft amendments, including the requirements to require consultants to report to dealers that no reportable contributions were made, if applicable, and to require dealers to disclose to the Board when no reports have been received from their consultants.⁴ While dealers do not have to rely on the reasonable efforts provision, most dealers that have contacted the Board regarding the proposed amendments have indicated that they would try to do so. As to the additional requirements to the reasonable efforts provision, the Board asks for comments particularly on the contractual provision that would require termination if a consultant fails to provide the required report after two quarters. In addition, the Board asks for comments on the requirement to cease paying the consultant pursuant to the Consultant Agreement as of the termination date.

April 19, 1999

Text of Amendments⁵

Rule G-38. Consultants

(a) Definitions.

(i)-(v) No change.

(vi) The term Areportable political contribution@ means:

        (A) if the consultant has had direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer, a political contribution to an official(s) of such issuer made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those political contributions to official(s) of an issuer made by any individual referred to in subparagraphs (b)(i)(A) or (B) of this rule who is entitled to vote for such official if the contributions made by such individual, in total, are not in excess of $250 to any official of such issuer, per election.

(vii) The term Areportable political party payment@ means:

        (A) if a political party of a state or political subdivision operates within the geographic area of an issuer with which the consultant has had direct or indirect communication to obtain or retain municipal securities business on behalf of the broker, dealer or municipal securities dealer, a payment to such party made by any contributor referred to in paragraph (b)(i) during the period beginning six months prior to such communication and ending six months after such communication;

        (B) the term does not include those payments to political parties of a state or political subdivision made by any individual referred to in subparagraphs (b)(i)(A) or (B) of this rule who is entitled to vote in such state or political subdivision if the payments made by such individual, in total, are not in excess of $250 per political party, per year.

(viii) The term Aofficial of such issuer@ or Aofficial of an issuer@ shall have the same meaning as in rule G-37(g)(vi).

(b) Written Agreement

        (i) Each broker, dealer or municipal securities dealer that uses a consultant shall evidence the consulting arrangement by a writing setting forth, at a minimum, the name, company, business address, role and compensation arrangement of each such consultant (AConsultant Agreement@). In addition, the Consultant Agreement shall include a statement that the consultant agrees to provide the broker, dealer or municipal securities dealer with a list by contributor category, in writing, of any reportable political contributions and any reportable political party payments during each calendar quarter made by:

        (A) the consultant;

        (B) any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer; and

        (C) any political action committee controlled by the consultant or any partner, director, officer or employee of the consultant who communicates with an issuer to obtain municipal securities business on behalf of the broker, dealer or municipal securities dealer.

       (ii) The Consultant Agreement shall require that, if applicable, the consultant shall provide to the broker, dealer or municipal securities dealer a report that no reportable political contributions or reportable political party payments were made during a calendar quarter.

        (iii) The Consultant Agreement shall require that the consultant provide the reportable political contributions and political party payments for each calendar quarter, or report that no reportable political contributions or political party payments were made for a particular calendar quarter, to the broker, dealer or municipal securities dealer in sufficient time for the broker, dealer or municipal securities dealer to meet its reporting obligations under paragraph (e) of this rule.

        (iv) Such The Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer.

(c) Information Concerning Political Contributions to Official(s) of an Issuer and Payments to State and Local Political Parties made by Consultants.

        (i) A broker, dealer or municipal securities dealer is required to obtain information on its consultant’s reportable political contributions and reportable political party payments beginning with a consultant=s first direct or indirect communication with an issuer on behalf of the broker, dealer or municipal securities dealer to obtain or retain municipal securities business for such broker, dealer or municipal securities dealer. The broker, dealer or municipal securities dealer shall obtain from the consultant the information concerning each reportable political contribution required to be recorded pursuant to rule G-8(a)(xviii)(F) and each reportable political party payment required to be recorded pursuant to rule G-8(a)(xviii)(G) or, if applicable, a report indicating that the consultant made no reportable political contributions and no reportable political party payments required to be recorded pursuant to rule G-8(a)(xviii)(H).

        (ii) The requirement to obtain the information referred to in paragraph (c)(i) of this rule shall end upon the termination of the Consultant Agreement.

        (iii) A broker, dealer or municipal securities dealer will not violate this section if it fails to receive from its consultant all required information on reportable political contributions and reportable political party payments and thus fails to report such information to the Board if the broker, dealer or municipal securities dealer can demonstrate that it used reasonable efforts in attempting to obtain the necessary information. Reasonable efforts shall include:

        (A) a statement in the Consultant Agreement that Board rules require disclosure of consultant contributions to issuer officials and payments to state and local political parties; and

        (B) the broker, dealer or municipal securities dealer sending quarterly reminders to its consultants of the deadline for their submissions to the broker, dealer or municipal securities dealer of the information concerning their reportable political contributions and reportable political party payments;

        (C) the broker, dealer or municipal securities dealer including in the Consultant Agreement provisions to the effect that:

        (1) the Consultant Agreement will be terminated by the broker, dealer or municipal securities dealer if, for any calendar quarter, the consultant fails to provide the broker, dealer or municipal securities dealer with information about its reportable political contributions or reportable political party payments, or a report noting that the consultant made no reportable political contributions or no reportable political party payments, and such failure continues up to the date to be determined by the dealer, but no later than the date by which the broker, dealer or municipal securities dealer is required to send Form G-37/G-38 to the Board with respect to the next succeeding calendar quarter, such termination to be effective upon the date the broker, dealer or municipal securities dealer must send its Form G-37/G-38 to the Board (i.e., January 31, April 30, July 31 or October 31); and

        (2) no further payments shall be made to the consultant by or on behalf of the broker, dealer or municipal securities dealer as of the date of such termination; and

        (D) the broker, dealer or municipal securities dealer enforcing the Consultant Agreement provisions described in paragraph (c)(iii)(C) of this rule in a full and timely manner and indicating the reason for and date of the termination on its Form G-37/G-38 for the applicable quarter.

(d) Disclosure to Issuers. Each broker, dealer or municipal securities dealer shall submit in writing to each issuer with which the broker, dealer or municipal securities dealer is engaging or is seeking to engage in municipal securities business, information on consulting arrangements relating to such issuer, which information shall include the name, company, business address, role and compensation arrangement of any consultant used, directly or indirectly, by the broker, dealer or municipal securities dealer to attempt to obtain or retain municipal securities business with each such issuer. Such information shall be submitted to the issuer either:

        (i) – (ii) No change.

(d) (e) Disclosure to Board. Each broker, dealer and municipal securities dealer shall send to the Board by certified or registered mail, or some other equally prompt means that provides a record of sending, and the Board shall make public, reports of all consultants used by the broker, dealer or municipal securities dealer during each calendar quarter. Two copies of the reports must be sent to the Board on Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31, and October 31). Such reports shall include, for each consultant, in the prescribed format, the consultant=s name, company, business address, role, and compensation arrangement, any municipal securities business obtained or retained by the consultant with each such business listed separately, and, if applicable, dollar amounts paid to the consultant connected with particular municipal securities business. In addition, s Such reports shall indicate the total dollar amount of payments made to each consultant during the report period and, if any such payments are related to the consultant=s efforts on behalf of the broker, dealer or municipal securities dealer which resulted in particular municipal securities business, then that business and the related dollar amount of the payment must be separately identified. In addition, such reports shall include the following information to the extent required to be obtained during such calendar quarter pursuant to paragraph (c)(i) of this rule:

        (i)(A) the name and title (including any city/county/state or political subdivision) of each official of an issuer and political party receiving reportable political contributions or reportable political party payments, listed by state; and

        (B) contribution or payment amounts made and the contributor category of the persons and entities described in paragraphs (b)(i) of this rule; or

        (ii) if applicable, a statement that the consultant reported that no reportable political contributions or reportable political party payments were made; or

        (iii) if applicable, a statement that the consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments.

Once a contribution or payment has been disclosed on a report, the dealer should not continue to disclose that particular contribution or payment on subsequent reports.

 

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) - (xvii) No change.

        (xviii) Records Concerning Consultants Pursuant to Rule G-38. Each broker, dealer and municipal securities dealer shall maintain:

        (i) (A) a listing of the name, company, business address, role and compensation arrangement of each consultant;

        (ii) (B) a copy of each Consultant Agreement referred to in rule G-38(b);

        (iii) (C) a listing of the compensation paid in connection with each such

Consultant Agreement;

        (iv) (D) where applicable, a listing of the municipal securities business obtained or retained through the activities of each consultant;

        (v) (E) a listing of issuers and a record of disclosures made to such issuers, pursuant to rule G-38(c) (d), concerning each consultant used by the broker, dealer or municipal securities dealer to obtain or retain municipal securities business with each such issuer; and

        (vi) (F) records of each reportable political contribution (as defined in rule G-38(a)(vi)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such contributions; and

(3) the amounts and dates of such contributions;

        (G) records of each reportable political party payment (as defined in rule G-38(a)(vii)), which records shall include:

(1) the names, city/county and state of residence of contributors;

(2) the names and titles (including any city/county/state or other political subdivision) of the recipients of such payments; and

(3) the amounts and dates of such payments;

        (H) records indicating, if applicable, that a consultant made no reportable political contributions (as defined in rule G-38(a)(vi)) or no reportable political party payments (as defined in rule G-38(a)(vii));

        (I) a statement, if applicable, that a consultant failed to provide any report of information to the dealer concerning reportable political contributions or reportable political party payments; and

        (J) the date of termination of any consultant arrangement.

(xix) No change.

(b) - (f) No change.

Rule G-37. Political Contributions and Prohibitions on Municipal Securities Business

(a) – (d) No change.

(e)(i)(A) – (C) No change.

        (D) any information required to be disclosed pursuant to section (d) (e) of rule G-38; and

        (E) No change.

(ii) – (iii) No change.

(f) – (i) No change.

---

ENDNOTES

1. Rule G-38 defines a consultant as "any person used by a broker, dealer or municipal securities dealer to obtain or retain municipal securities business through direct or indirect communication by such person with an issuer on behalf of such broker, dealer or municipal securities dealer where the communication is undertaken by such person in exchange for, or with the understanding of receiving, payment from the broker, dealer or municipal securities dealer or any other person." Specifically excluded from the definition of "consultant" in rule G-38 are municipal finance professionals of the broker, dealer or municipal securities dealer and "any person whose sole basis of compensation from the broker, dealer or municipal securities dealer is the actual provision of legal, accounting or engineering advice, services or assistance in connection with the municipal securities business that the broker, dealer or municipal securities dealer is seeking to obtain or retain." The definition does not exclude any dealer used by another dealer (other than a member of the syndicate) that assists in obtaining or retaining municipal securities business. See Question and Answer to rule G-38 dated March 4, 1999, MSRB Manual (CCH), � 3686.

2. Rule G-38(b) requires each dealer that uses a consultant to evidence the consulting arrangement by a writing setting forth, at a minimum, the name, company, role and compensation arrangement of each such consultant ("Consultant Agreement"). The Consultant Agreement must be entered into before the consultant engages in any direct or indirect communication with an issuer on behalf of the dealer. The proposed amendments require a dealer to include within its Consultant Agreement a statement that the consultant agrees to provide the dealer each quarter with a listing of reportable political contributions to official(s) of an issuer and report payments to political parties of states and political subdivisions during such quarter. The Consultant Agreement must require the consultant to provide the required information to the dealer in sufficient time for the dealer to meet its reporting obligations under rule G-38. For a more complete description of the proposed amendments, see "Requirements for Dealers to Report Their Consultants’ Political Contributions and Payments to Political Parties: Rules G-38 and G-8," MSRB Reports, Vol. 18, No. 2 (August 1998) at 3-10. This notice is also available on the Board’s Web site at www.msrb.org.

3. Rule G-37(e)(i) provides that each dealer must send to the Board two copies of Form G-37/G-38 by the last day of the month following the end of each calendar quarter (these dates correspond to January 31, April 30, July 31 and October 31).

4. The draft amendments also include a technical amendment to rule G-37(e)(i)(D) to conform to the draft amendments to rule G-38.

5. Underlining indicates proposed amendments pending at the SEC; strikethrough indicates deletions; and bold with underlining indicates draft amendments.

 

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

Press Release for Health Care Financing Steering Committee

On January 21, 1999, the Municipal Securities Rulemaking Board sponsored a meeting in Chicago for issuers and analysts to discuss improving disclosure in connection with health care financings. The meeting was part of a series of discussions hosted by the Board and designed to facilitate disclosure improvements in the land-based, health care and housing financing areas. MSRB Chairman Scott C. Sollers hosted the meeting. Attending the meeting were, MSRB Vice-Chairman Dean Pope, Board member Lynn Hampton, Kit Taylor and Carolyn Walsh from the MSRB staff and representatives from the National Federation of Municipal Analysts, the National Council of Health Facilities Financing Authorities, Healthcare Financial Management Association, American Hospital Association and Van Kampen Funds. This group will be known as the Health Care Financing Steering Committee.

MSRB Chairman Scott C. Sollers stated, "We are pleased to see that in the health care financing sector issuer and investor groups already are making progress in the area of improving disclosure practices. The Steering Committee consensus was that the disclosure guidelines developed by the Healthcare Financial Management Association are a significant starting point. Representatives from the National Federation of Municipal Analysts intend to work with the Healthcare Financial Management Association, the American Hospital Association, and the National Council of Health Facilities Financing Authorities, to build upon these guidelines to develop voluntary national standards for disclosure and best practices. These groups are willing to work together to develop a consensus on the appropriate levels and types of disclosures in both the primary and secondary market."

The Steering Committee intends to monitor the developments and discuss progress in late spring. The MSRB will continue to assist the market participants in the development of these standards primarily through the hosting of discussion forums and/or education efforts. The MSRB also will work with industry participants toward the goal of achieving market-place adherence to the standards once they are developed.

January 25, 1999

 

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

BOARD WILL HOST FORUMS ON LAND-SECURED DISCLOSURE

        The Board will be hosting three forums on land–secured disclosure in September. The decision to host a series of forums focused on land-secured financing transaction disclosure is an outgrowth of the MSRB Forum on Disclosure held last November in Washington, D.C. During that forum, many participants urged the Board to promote similar forums focused on specific market sectors.

        The Board has been working with numerous land-secured market participants to put together these forums. The forums, which will be held in Washington, D.C., Houston, Texas, and Costa Mesa, California, will provide an opportunity for all participants in land-secured financing transactions to discuss issues of concern and possible mechanisms to improve land-secured disclosure.

        The forums will consist of sections discussing: (1) the recently released NFMA Draft Best Practices for Land-Secured Disclosure; (2) the role of developers in providing disclosure; (3) how to best represent value in land-secured transactions; and (4) issues involving dissemination of disclosure information. Paul Maco, Director of the SEC’s Office of Municipal Securities, will be the luncheon speaker at the forums.

        The specific dates and locations for the forums are:

Tuesday, September 14, 1999 � Washington, D.C. forum to be held at the Sheraton Crystal City, 1800 Jefferson Davis Highway, Arlington, Virginia.

Wednesday, September 15, 1999 � Houston, Texas forum to be held at the Sheraton North Houston, George Bush Intercontinental Airport, 15700 John F. Kennedy Blvd., Houston, Texas.

Thursday, September 16, 1999 � Costa Mesa, California forum to be held at the Westin South Coast Plaza, 686 Anton Blvd., Costa Mesa, California.

        The Board is charging a $100 registration fee for attendance. Participants must complete a registration form and submit the form along with the registration fee in advance. A registration form may be obtained by calling the Board’s office at (202) 223-9347 or by downloading from below. Also, a tentative schedule for the forums may be downloaded from below.

July 15, 1999

Registration Form      Tentative Schedule

 

 

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

Release Regarding the Land-Secured Financing Steering Committee

On January 26, 1999 the Land-Secured Financing Steering Committee met by conference call and had an extensive discussion about the ongoing process of developing national disclosure guidelines for land-secured financing. The Steering Committee agreed that an appropriate first step is to have the NFMA produce a working draft statement of disclosure guidelines. The working draft, which the NFMA hopes to create by the end of May, can then be circulated and used as a starting point for in-depth disclosure discussions that will be open to all interested industry participants. The Steering Committee will reconvene in March to discuss an appropriate timetable for the MSRB to host forums geared to solicit nationwide industry comment on the working draft. The forums will seek input on the substance of the draft guidelines from industry participants involved in the many aspects of land-secured financing.

January 29, 1999

 

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

Municipal Fund Securities

The Board is requesting comments regarding the application of existing Board rules and certain draft rule changes relating to municipal fund securities: rules A-13, G-3, G-8, G-14, G-15, G-26 and G-34 and draft rule D-12

        During the last year, 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 governmental 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 Exchange Act."⁽³⁾ 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 securities, such transactions would be subject to the jurisdiction of the Board pursuant to Section 15B of the Exchange Act.

        Although municipal fund securities constitute municipal securities, they may not have many of the features typically associated with traditional municipal securities. Instead, municipal fund securities appear to have features similar to investment company securities or variable contract products. For example, according to information provided to the Board by dealers (or their counsel) that participate in programs involving these types of interests, municipal fund securities 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 (either paid currently or at maturity) at a stated rate or discount, as is the case for traditional municipal securities. In addition, unlike traditional municipal securities, municipal fund securities do not have stated par values or maturity dates and cannot be priced based on yield or dollar price.⁽⁴⁾

        Although Board rules generally have been drafted to accommodate the characteristics of debt obligations and not investment interests such as municipal fund securities, the Board believes that most of its current rules can appropriately be applied to municipal fund securities. Nonetheless, the Board believes that certain rules should be amended to recognize the unique characteristics of municipal fund securities. The Board is seeking comment from industry participants regarding these draft rule changes as well as regarding the application of existing rules to municipal fund securities.

 

APPLICATION OF EXISTING RULES RELATING TO MUNICIPAL SECURITIES

        SEC View Regarding Applicability of Securities Exchange Act Rule 15c2-12. With respect to the applicability to municipal fund securities of Securities 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.⁽⁵⁾

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."⁽⁶⁾

Questions regarding application of Rule 15c2-12 should be directed to SEC staff.

        Board View Regarding Applicability of Existing Board Rules. Although the draft rule changes described below are designed to make the Board's rules better accommodate the nature of municipal fund securities, dealers should be aware that if they effect any transactions in municipal fund securities prior to completion by the Board of rulemaking in this area, they nonetheless are obligated to comply with all existing Board rules. Set forth below are certain principals that dealers should keep in mind in seeking to comply with Board rules.

        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.⁽⁷⁾ Since (as described below) the Board believes that 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.⁽⁸⁾

        In addition, 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 remain in their underwriting period. Since the Board understands that issuers of municipal fund securities, unlike issuers of traditional municipal 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.⁽⁹⁾ Thus, a dealer effecting a transaction in a municipal fund security would be required to deliver to the customer the official statement by settlement of 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.

        Certain other implications arise under Board rules as a result of the status, in the view of SEC staff, of sales of municipal fund securities as primary offerings. For example, the Board believes that all purchases of municipal fund securities from an issuer by or through a dealer, whether acting as principal or agent, as part of a primary offering are subject to the underwriting fee assessed under rule A-13, unless such primary offering meets the requirements of any of the existing exceptions in the rule. Furthermore, dealers are reminded that the definition of "municipal securities business" under rules G-37 and G-38 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.

        Dealers that effect transactions in municipal fund securities prior to completion of the Board's rulemaking process should contact Board staff with any questions regarding application of existing Board rules.

 

Draft Rule Changes

        The draft rule changes would provide a definition, "municipal fund securities," that is designed to include interests in local government pools and higher education trusts as they have been described to the Board. As a general matter, the draft rule changes have been drafted with the view that municipal fund securities should be treated differently from other municipal securities only under circumstances where current rules clearly would not apply properly. In addition, the Board has not attempted to draft any rule changes intended to address secondary market transactions in municipal fund securities since the Board understands that no such market now exists. The Board would undertake appropriate action should a secondary market develop in municipal fund securities.

        Rule D-12 - Definition of Municipal Fund Security. New rule D-12 would define municipal fund security as, in essence, a municipal security that would qualify as a security of an investment company under the Investment Company Act if it had not been issued by a state or local governmental entity.⁽¹⁰⁾ If an investment is a municipal fund security, then dealer transactions in such investments are subject to all Board rules as a municipal security but would receive special treatment in those instances where provisions are added relating specifically to municipal fund securities.

        The draft definition of municipal fund security is not strictly limited to interests in local government pools or higher education trusts but would apply as well to any other municipal security issued under a program that would, but for the identity of the issuer as a state or local governmental entity, constitute an investment company under the Investment Company Act. Furthermore, the Board recognizes that investments having substantially the same purpose as do interests in local government pools or higher education trusts could fail to meet the definition of municipal fund security if the investment program is structured in a manner substantially different from the programs described in this notice. The Board notes that, if such other investments in fact constitute municipal securities, dealer transactions in such investments would be subject to all Board rules as municipal securities.

        Rule A-13 - Assessments. Rule A-13 would be amended to impose, as a separate line item, an underwriting assessment on the sale of municipal fund securities in a primary offering. Since municipal fund securities do not have a par value, the assessment would be based on the purchase price paid by customers, less any commission.⁽¹¹⁾

        Rule G-3 - Professional Qualifications. Amended 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).⁽¹²⁾ However, a dealer must have one or two municipal securities principals as required under section (b) of rule G-3, even if the dealer's only municipal securities transactions are sales of municipal fund securities.

        Rule G-8 - Recordkeeping. Rule G-8 would be amended to ensure consistency with rules G-3 and G-15, as amended. Thus, amended 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.

        Rule G-14 - Transaction Reporting. The draft rule change would make a minor technical modification in rule G-14(b)(i) in order 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.⁽¹³⁾

        Rule G-15 - Customer Confirmations. Various amendments would be made to rule G-15 to deal with the concepts of par value, yield, dollar price, maturity date and interest, none of which appropriately apply to a municipal fund security. Thus, in connection with a confirmation of a transaction in municipal fund securities, 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 of such securities as well as the number of such shares or units to be delivered. In addition, a confirmation of a municipal fund security transaction would require a disclosure to the effect that a deferred commission or other charge may be imposed upon redemption, if applicable.⁽¹⁴⁾ The amendment also would make clear that dealers must confirm redemptions of municipal fund securities by customers. Finally, the amendment would permit dealers to use quarterly statements, rather than transaction-by-transaction confirmations, if customers are purchasing municipal fund securities in an agreed amount on a periodic basis. This quarterly report alternative is essentially identical with the periodic reporting provision under SEC Rule 10b-10, with some consolidation to focus exclusively on municipal fund securities and the incorporation of an existing no-action position of the SEC applicable to certain investment company plans.⁽¹⁵⁾

        Rule G-26 - 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.

        Rule G-34 - CUSIP Numbers and Depository Eligibility. Municipal fund securities would be exempted from the requirements of rule G-34 since no secondary market is expected to develop.⁽¹⁶⁾

* * * * *

        Comments from all interested parties are welcome. Comments should be submitted no later than May 15, 1999 and may be directed to Ernesto A. Lanza, Associate General Counsel. Written comments will be available for public inspection.

March 17, 1999

TEXT OF DRAFT AMENDMENTS⁽¹⁷⁾

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

(a) No change.

(b) Underwriting Assessments – Amount. For those primary offerings subject to assessment under section (a) above, the amount of the underwriting fee is:

        (i) No change.

        (ii) for primary offerings in which all securities offered, 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 two years until maturity, earlier redemption, or purchase by an issuer or its designated agent, .001% ($.01 per $1,000) of the par value; and

        (iii) for primary offerings in which all securities offered constitute municipal fund securities, ____% ($.___ per $1,000) of the purchase price paid by customers, exclusive of any commission; and

        (iv) for all other primary offerings subject to this rule, .003% ($.03 per $1,000) of the par value.

 

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

(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).

 

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 municipal securities 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 municipal securities 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)-(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 under Section 203 of the Investment Advisers Act of 1940; 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 municipal securities 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; 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 denomination or 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)-(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) No change.

        (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 for a broker, dealer or municipal securities dealer, acting as agent, to purchase, sell or redeem for a customer a specific municipal fund security or 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).

        (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 transactions in municipal fund securities pursuant to a periodic municipal fund security plan. 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; 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 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; and

        (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 quarterly basis in lieu of an immediate confirmation for each transaction, and such customer has consented in writing.

(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-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. 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.

2. The Board understands that higher education trusts 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.

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 (the "February 26 SEC Letter").

4. See New York State College Choice Tuition Savings Program, SEC No-Action Letter (Sept. 10, 1998), and incoming letter from Steven B. Boehm, Sutherland Asbill & Brennan LLP, dated August 31, 1998; New Hampshire Higher Education Savings Plan Trust, SEC No-Action Letter (June 30, 1998), and incoming letter from Georgie A. Thomas, Treasurer, State of New Hampshire, and Gregory A. Sandomirsky and Leonard Weiser-Varon, Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., dated April 4, 1998.

5. February 26 SEC Letter. See also Teachers Personal Investors Services, Inc. and TIAA-CREF Individual and Institutional Services, Inc., SEC No-Action Letter (Sept. 10, 1998).

6. 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 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).

8. Rule G-36(d) provides that a dealer that has previously provided an official statement to the Board is required to send any amendments to the official statement 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 believes that this provision of the rule should be read 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.

9. Rule G-32 defines underwriting period for securities purchased by a dealer (i.e., not by 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.

10. This should be distinguished from shares in a mutual fund registered under the Investment Company Act with assets invested in municipal securities, which shares would not constitute municipal fund securities.

11. The actual amount of such assessment is not reflected in the draft amendment since the Board has recently begun a review of all Board fees and expects to consider the level of assessments relating to offerings of municipal fund securities in conjunction with this review.

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

13. A number of factors unique to municipal fund securities have contributed to the Board's determination to exempt such securities from rule G-14 at this time. In particular, municipal fund securities do not trade in the secondary market. Thus, for example, unlike the bulk of data currently received by the Board through the system, any data obtained regarding transactions in municipal fund securities would be limited to one-time sales to customers upon initial issuance and one-time purchases (or redemptions) from customers upon cashing out. Municipal fund securities are sold by dealers on an agency basis generally without payment of commissions by customers; therefore, dealers effecting transactions in municipal fund securities would have little opportunity to alter the pricing on such securities from that set by the issuer. Furthermore, certain critical data elements which the transaction reporting system is currently structured to collect (e.g., dollar price, yield, etc.) would not apply to transactions in such securities. Nonetheless, should the Board in the future receive information that practices have developed in the municipal fund security market that merit reporting of transaction information, the Board would consider whether to revisit the exemption from rule G-14.

14. Disclosure of deferred commissions or other charges would cover, for example, any deferred sales load as is sometimes seen with traditional mutual funds 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.

15. See College Retirement Equities Fund, SEC No-Action Letter (Jan. 31, 1991).

16. The requirements of rule G-34 had been imposed on dealers principally to improve secondary market efficiencies and therefore would provide little or no benefit in connection with municipal fund securities. However, 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.

17. Underlining indicates additions; strikethrough indicates deletions.

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

MSRB and NCSHA Announce Test Program for the Electronic Submission of Continuing Disclosure Information to the MSRB

        Today the MSRB and the National Council of State Housing Agencies ("NCSHA") are announcing the implementation of a test program for the electronic submission and dissemination of continuing disclosure information, including quarterly financial information. The NCSHA and a group of state housing financing agencies ("HFAs") have been working to develop an initiative in electronic dissemination of disclosure information. The MSRB has joined with the NCSHA and certain HFAs to test a mechanism through which electronic disclosure can be provided to the market. The test program ("CDINet Web Test") will allow certain HFAs to submit financial reports and material event notices, in Microsoft Word and Excel formats, to the MSRB’s CDINet Web Test through the use of a Web browser with a connection to the Internet. The MSRB will forward the test information electronically to recipients that have agreed to participate as Test Subscribers to CDINet Web Test. The MSRB emphasizes that CDINet Web Test is only a test program and the MSRB cannot be considered by Test Submitters or Test Subscribers to be officially broadcasting information for purposes of SEC Rule 15c2-12.

        The MSRB and NCSHA are pleased to be participating in this test program. Electronic dissemination of disclosure information should result in faster dissemination of such information in a format that is easier to use by market participants. The MSRB intends to have the CDINet Web Test begin on May 24, 1999.

        If you have any questions or are interested in subscribing to the CDINet Web Test, please contact Thomas A. Hutton at the address below:

Thomas A. Hutton
Director of MSIL and Computer Systems
Municipal Securities Rulemaking Board
1640 King Street, Suite 300
Alexandria, VA 22314
Voice: (202) 223-9503
Fax: (703) 683-3634
Thutton@msrb.org

May 20, 1999

 

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

Timely Dissemination of Information on Advance Refunded Securities

Recently, the Municipal Securities Rulemaking Board discussed the difficulties that market participants are having in obtaining timely information about which CUSIP numbers are being refunded in advance refunded securities transactions. The Board believes that it is important for investors and other market participants to know as early as possible whether the issues they hold are advance refunded, or are subject to a plan of advance refunding. The Board also believes that, in the case of partial refunding of a maturity, investors need to know as soon as possible the portion of their holdings that have been advance refunded. This information is particularly important to bond funds because they must price securities in the portfolio accurately each day. In addition, diversification requirements for a bond fund might prevent the fund from buying an issuer’s securities if the fund cannot readily determine the portion of its existing securities of that issuer that have been advance refunded.

The Board believes that not all market participants recognize the importance to investors of knowing as soon as possible the information described above. This may explain why such information is sometimes delayed in reaching the market. Also, it is possible that parties responsible for ordering lotteries are unaware that investors and other market participants need lotteries to be conducted on partially pre-refunded maturities as soon as possible so that the market has adequate information to price the specific securities held by investors.

The Board is taking the opportunity to raise industry awareness of these issues by posting this notice on its Web site, publishing the notice in MSRB Reports, and providing similar letters to organizations whose members have a role in the dissemination of information on advance refunded securities. The Board believes that all industry professionals dealing with advance refunding information should be aware that the market value of outstanding securities might be affected by advance refunding activities. Therefore, market professionals in control of information about advance refunding plans should make certain that public information about the identity of issues that are targeted to be advance refunded is communicated to the market through information vendors or other means. Taking such steps will ensure that trading in the secondary market issues will be fair and will occur without unnecessary disparities in information. In particular, the Board believes that information identifying specific CUSIP numbers that are planned to be advance refunded, along with any early call dates and call prices for pre-refunded issues, should be communicated to the market as soon as possible. The Board is not aware of any reason that such information could not be provided by or at least shortly after, the date of sale of the refunding issue. The Board also believes that, if permitted by the bond resolution or trust indenture, lotteries for partially pre-refunded maturities should take place immediately after the closing of the advance refunded issue and the funding of the escrow. The Board urges the drafters of bond resolutions and trust indentures to provide for lotteries to take place on this timetable rather than requiring lotteries to be delayed until near the time of the early redemption date set by the pre-refunding.

* * *

The Board anticipates that through improved education and communication about these issues market participants will have more timely access to information about advance refunded issues. Moreover, widespread dissemination of this information will promote efficient trading in the securities.

April 22, 1999

 

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

PUBLIC REPORTING OF

INDIVIDUAL TRANSACTIONS IN FREQUENTLY TRADED

MUNICIPAL SECURITIES: RULE G-14

 

Service Approved

        On December 16, 1999, the Commission approved a service to provide a daily public report containing information on individual transactions in frequently traded municipal securities reported to the Board by dealers under Board rule G-14. To obtain a subscription to the new report service, it will be necessary to sign a subscription agreement, but there will be no fee.

        Questions about subscriptions to the service may be directed to Thomas A. Hutton, Director, Municipal Securities Information Library. Questions about rule G-14 and criteria for including trades in the Daily Transaction Report may be directed to Harold L. Johnson, Deputy General Counsel, or Larry M. Lawrence, Policy and Technology Advisor.

 

DAILY TRANSACTION REPORT

        On December 16, 1999, the Securities and Exchange Commission ("Commission") approved the Board’s plan to produce a daily report containing information on individual transactions in frequently traded municipal securities (the "Daily Transaction Report").¹ The transaction information on the report will come from dealer reports made to the Board under Board rule G-14 on transaction reporting. This rule requires dealers to report essentially all inter-dealer and customer transactions in municipal securities to the Board by midnight of trade date.

        The new report will be the third product offered by the Board to increase the amount of price transparency in the municipal securities market. Like the Board’s current Combined and Inter-Dealer Daily Reports, the Daily Transaction Report will provide information on "frequently traded" issues – issues on which at least four transaction reports were received for a given trade date. Also like the current Daily Reports, the new report will be produced and made available electronically by approximately 7:00 a.m. on the day following trade date. Electronic reports will be produced in the same three formats – printable, comma-delimited, and fixed record length – as the current Daily Reports.² However, unlike the current Daily Reports, the Daily Transaction Report will provide transaction detail on each reported trade in a frequently traded issue, rather than merely providing the daily high, low and average prices.³

Description of Report

        The Daily Transaction Report will display, for each transaction in a frequently traded security: the CUSIP number, a short description of the issue, the par value traded, the time of trade reported by the dealer, and the price of the transaction.⁴ Transactions will be categorized as in one of three transaction "types": (i) sales by dealers to customers; (ii) purchases by dealers from customers; or (iii) inter-dealer trades. Reports will be organized by issue, with the most frequently traded issues listed first. Within an issue, trades will be listed in order of time of trade, from the earliest reported time of trade to the latest.⁵ Although the size of each day's report will depend on market activity, it is expected that the Daily Transaction Report on average will provide information on approximately 9,000 individual transactions in approximately 1,000 frequently traded issues. Sample copies showing the appearance of the Daily Transaction Report can be obtained at the Board’s web site at www.msrb.org.

Subscriptions

        The Daily Transaction Report will be available by subscription. To obtain a subscription, it will be necessary to sign a subscription agreement, but there will be no fee. The subscription agreement outlines the Board’s disclaimer of liability, the proprietary nature of and usage restrictions on the CUSIP numbers and CUSIP descriptions contained in the report, and certain other matters.

       The Board expects to disseminate the Daily Transaction Report to subscribers via the Internet. Information on how to subscribe, a downloadable subscription agreement, instructions for accessing files via the Internet and a set of sample files are available from  www.msrb.org. In addition, recent Daily Transaction Reports will be available for examination, also free of charge, in the Board’s Public Access Facility in Alexandria, Virginia. The Board expects that the new Daily Transaction Report will be made available by mid-January 2000.

 

BOARD TO CONSIDER EXPANDED TRANSPARENCY

        A long-standing goal of the Board is to provide market participants with information about the value of securities.⁶ Over the past five years, with the advent of the Transaction Reporting Program, the Board has been working toward making transaction price information "transparent" in the marketplace and seeking ways to make that transparency information more comprehensive and contemporaneous.⁷ The new Daily Transaction Report represents the next step in this continuing process.

        As part of its ongoing effort, the Board intends to monitor the impact of the new report in the market. After the report has been operational for a period of time, the Board will review its operation and will consider whether to lower the "frequently traded" threshold. Doing so would have the effect of listing more issues and more prices in each day’s report and would make the report even more comprehensive in its representation of market activity.

        The Board also is reviewing various options for collecting and disseminating transaction transparency information on a more contemporaneous basis. As part of this effort, the Board has created a web-based demonstration system that simulates the kind of information that a "real-time" transparency system might provide and how it might be presented to investors. This demonstration system is available at the Board’s web site at www.msrb.org. Comments from market participants on the demonstration system are welcome. The Board will draw upon its experience with the "real-time" demonstration system as it considers further steps toward expanded municipal securities market transparency.

December 29, 1999

---

ENDNOTES

1. See Securities Exchange Act Release No. 42241 (December 16, 1999).

2. The "printable" format can be printed with little or no change by an end-user. The "comma-delimited" and "fixed record length" files can easily be sorted or converted by an end-user’s spreadsheet or other application program (e.g., Microsoft Excel).

3. The Board also will continue to use all the transaction information reported by dealers to maintain a market surveillance database. The surveillance database is available to the Commission, the National Association of Securities Dealers Regulation (NASDR) and the bank regulatory agencies responsible for enforcement of Board rules.

4. The report displays a dollar price for each transaction. If the dealer submits a yield with the transaction report, the yield is included on the Daily Transaction Report with the dollar price. There are instances, however, when yields are not reported. For example, dealers for secondary market inter-dealer transactions do not submit yields because the automated comparison system used to report inter-dealer trades cannot accept yield information on those transactions. In certain customer transactions, such as those in defaulted or variable rate securities, it also may be impossible for the dealer to submit a yield. Transactions with customers or dealers in new issues for which no settlement date has been set may be effected and reported by dealers either with a dollar price or a yield. It is not possible for the dealer to report both yield and dollar price on these transactions. The MSRB Transaction Reporting System will calculate a dollar price from yields submitted for these transactions, using an assumed settlement date if necessary. There must be, however, sufficient securities data available to make the calculation (e.g., coupon, dated date, maturity date, first interest payment date, etc.). For additional information, see "Public Reporting of Transactions in Municipal Securities: Rule G-14," MSRB Reports, Vol. 18, No. 2 (August 1998) at 25-27.

5. Where trades are submitted by dealers with an invalid time or no time of trade, the report shows the time of trade as "0."

6. See, e.g., "From the Chairman," MSRB Reports, Vol. 8, No. 5 (December 1988) at 2.

7. See, e.g., "Board to Proceed with Pilot Program to Disseminate Inter-Dealer Transaction Information," MSRB Reports, Vol. 14, No. 1 (January 1994) at 13; "Reporting Inter-Dealer Transactions to the Board: Rule G-14," MSRB Reports, Vol. 14, No. 5 (December 1994) at 3-6; and "Transaction Reporting Program for Municipal Securities," MSRB Reports, Vol. 15, No. 1 (April 1995)

 

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

Revised Test Specifications and Study Outline for the Series 52 Examination

On June 9, 1999, the Board filed with the Securities and Exchange Commission a proposed rule change to revise the test specifications and the study outline for the Board’s Municipal Securities Representative Qualification Examination (Test Series 52). The Board requested that the Commission delay the effectiveness of the revised test specifications and study outline until August 1, 1999. The examination will remain a three-hour 100 question examination administered by NASD Regulation, Inc. using the PROCTOR system.

The study outline was revised to delete topics that are no longer relevant and to add or revise topics that reflect additions to or changes in practices, products and Board rules since the outline was last revised. The revised outline also provides for the inclusion of new Board rules as they are promulgated. You may view the revised study outline here.

Test specifications for an examination indicate the number of questions assigned to a specific topic area. The test specifications for the Series 52 examination have been revised to provide for greater emphasis under the topic areas of Economic Activity, Government Policy and the Factors Affecting Interest Rates and Federal Legal Considerations. The revised test specifications are as follows:

 

June 9, 1999

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 Download: Study Outline Municipal Securities Representative Qualification Examination. August 1999 Edition

 

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Technical Amendments Filed

The Board has filed with the SEC a series of technical amendments to rules A-3, A-5, A-7, A-11 through A-15, A-17, D-5, G-1 through G-3, G-5 through G-9, G-11 through G-16, G-18, G-20, G-23, G-27, G-28, G-32, G-34, G-36, G-37 and G-39. The technical amendments become operative on July 1, 1999.

        On May 28, 1999, the Board filed with the Securities and Exchange Commission (the "SEC") a series of technical amendments to rules A-3, A-5, A-7, A-11 Through A-15, A-17, D-5, G-1 Through G-3, G-5 Through G-9, G-11 Through G-16, G-18, G-20, G-23, G-27, G-28, G-32, G-34, G-36, G-37 and G-39¹. The technical amendments become operative on July 1, 1999.

        The Board adopted the technical amendments for the purpose of making certain non-substantive changes to the affected rules. These changes are designed to:

• ensure uniform usage of the term "brokers, dealers and municipal securities dealers" throughout all Board rules;

• eliminate the usage of the term "municipal securities business" in rules other than rules G-37 and G-38;

• make certain grammatical corrections;

• make all rule language gender neutral;

• correct certain cross-references to other Board rules, SEC rules or federal statutes, including updating the cross-reference in rule G-8(a)(xi) to Section 203 of the Investment Advisers Act of 1940 to take into account the reallocation of regulatory oversight of investment advisers between the SEC and the states effected by the National Securities Markets Improvement Act of 1996 and the rules promulgated thereunder;

• ensure uniform references to sections and paragraphs within Board rules; and

• eliminate duplicative, superfluous or obsolete rule language, including elimination of the cross-reference and related language in rule G-12(e)(xvi) regarding subparagraph (b)(i)(D) of rule G-33, which subparagraph was previously deleted by the Board.

May 28, 1999

 

Text of Technical Amendments²

Rule A-3 – Membership on the Board

(a) Number and Representation. The Board shall consist of 15 members, at all times equally divided among the following groups:

        (i) Public Representatives. Individuals who are not associated with any broker, dealer, or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling, any broker or dealer which is not a municipal securities broker, dealer or municipal securities dealer), at least one of whom shall be representative of investors in municipal securities, and at least one of whom shall be representative of issuers of municipal securities;

        (ii) Broker-Dealer Representatives. Individuals who are associated with and representative of municipal securities brokers, dealers and municipal securities dealers which are not banks or subsidiaries or departments or divisions of banks;

        (iii) No change.

(b) Increase or Decrease in Number. The total number of members of the Board may be increased or decreased from time to time by rule of the Board, but in no event shall the total number of members of the Board be less than 15. Any such increase or decrease shall be in multiples of six so that the total number of members of the Board shall always be an odd number, equally divided among the three groups of representatives enumerated in paragraph section (a) of this rule.

(c) Nomination and Election of Members.

        (i) Members shall be nominated and elected in accordance with the procedures specified by this rule. All members of the Board shall be elected for terms of three years, so that the terms of office of one-third of the whole Board shall expire each year. The terms of office of all members of the Board shall commence on October 1 of the year in which elected and shall terminate on September 30 of the year in which their terms expire. No member of the Board may succeed himself or herself in office and no broker-dealer representative or bank representative may be succeeded in office by any person associated with the municipal securities broker, dealer or municipal securities dealer with which such member was associated at the expiration of his such member’s term.

        (ii) The Board will appoint a Nominating Committee composed of nine members. The membership of the Nominating Committee shall consist of six Board members and three persons who are not members of the Board. Of the six Board members, two shall be associated with and representative of bank dealers bank representatives, two shall be associated with and representative of brokers, dealers, and municipal securities dealers other than bank dealers broker-dealer representatives, and two shall not be associated with any broker, dealer, or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling any broker or dealer which is not a municipal securities broker or municipal securities dealer) public representatives. Of the three non-Board members, one shall be associated with and representative of bank dealers, one shall be associated with and representative of brokers, dealers, and municipal securities dealers other than bank dealers, and one shall not be associated with any broker, dealer, or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling any broker or dealer which is not a municipal securities broker, dealer or municipal securities dealer). In appointing persons to serve on the Nominating Committee, factors to be considered include the need to achieve broad geographic representation on such Committee, as well as diversity in the size and type of brokers, dealers and municipal securities dealers represented on such Committee.

        (iii)-(v) No change.

        (vi) The public representatives on the Board will, prior to their assumption of office, be subject to approval by the Commission to assure that no one of them is associated with any broker, dealer or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling, any broker or dealer which is not a municipal securities broker, dealer or municipal securities dealer) and that at least one of the public representatives of the Board is representative of investors in municipal securities and at least one is representative of issuers of municipal securities.

        (vii) No change.

(d) Resignation and Removal of Members. A member may resign from the Board by submitting a written notice of resignation to the Chairman of the Board which shall specify the effective date of such member’s resignation. In no event shall such date be more than 30 days from the date of delivery of such notice to the Chairman. If no date is specified, the resignation shall become effective immediately upon its delivery to the Chairman. In the event the Board shall find that any member has willfully violated any provision of the Act, any rule or regulation of the Commission thereunder, or any rule of the Board or has abused his or her authority or has otherwise acted, or failed to act, so as to affect adversely the public interest or the best interests of the Board, the Board may, upon the affirmative vote of two-thirds of the whole Board (which shall include the affirmative vote of at least one public representative, one broker-dealer representative and one bank representative), remove such member from office.

(e) Vacancies. Vacancies on the Board shall be filled by vote of the members of the Board, subject to the Commission’s power of approval referred to in paragraph section (c) of this rule with respect to public representatives. Any person so elected to fill a vacancy shall serve for the term, or any unexpired portion of the term, for which such person’s predecessor was elected. For purposes of this rule, the term "vacancies on the Board" shall include any vacancy resulting from the resignation of any person duly elected to the Board prior to the commencement of his or her term.

(f) Compensation and Expenses. Members shall be entitled to an allowance for transportation expenses, to the extent provided by resolution of the Board, from their home to the site of a meeting of the Board and from the site of such meeting to their home, together with a per diem to be set by the Board for those days or fraction thereof on which they attend Board meetings or participate in other designated activities. Members of the Board shall also be entitled to reimbursement for actual and necessary expenses incurred by them in connection with any other official business of the Board. Except as provided in paragraph section (c) of rule A-6, no member of the Board shall be entitled to receive any other compensation from the Board.

 

Rule A-5 – Officers and Employees of the Board

(a) No change.

(b) Election of Officers of the Board. Officers of the Board shall be elected annually from among the members, by secret, written ballot of the members, at a meeting of the Board held prior to October 1 of each year according to procedures adopted by the Board. Officers shall serve for a term commencing on the October 1 next following their election and ending with the succeeding September 30; provided, however, that any officer may resign his or her office prior to the expiration of his or her term by filing a written notice of resignation with the Secretary to the Board which shall specify the effective date of such resignation. In no event shall such date be less than 10 days or more than 30 days from the date of filing of such notice. If no date is specified, the resignation shall become effective 10 days from the date of filing. The Board may remove any officer at any time by two-thirds vote of the whole Board. Vacancies in office shall be filled as soon as practicable by vote of the members and any person elected to fill a vacancy shall serve only for the remainder of his or her predecessor’s term.

(c)-(d) No change.

 

Rule A-7 – Assessments

The Board shall, by rule, provide for the costs and expenses of its operation and administration by levying such fees and charges on municipal securities brokers, dealers and municipal securities dealers as may be determined necessary or appropriate by the Board.

 

Rule A-11 – Indemnification of Members, Employees and Arbitrators

Each member and employee of the Board and each arbitrator selected by the Board under Rule G-35 shall be indemnified and held harmless against all liabilities and related expenses incurred in connection with the performance of his or her official duties, provided that such member, employee or arbitrator has acted, or omitted to act, in good faith and within the scope of his or her authority.

 

 

Rule A-12 – Initial Fee

Prior to effecting any transaction in or inducing or attempting to induce the purchase or sale of any municipal security, a broker, dealer, or municipal securities dealer shall pay to the Board an initial fee of $100, accompanied by a written statement setting forth the name, address and Securities and Exchange Commission registration number of the broker, dealer, or municipal securities dealer on whose behalf such fee is paid. The Commission registration number shall also be set forth on the face of the remittance. Such fee shall be payable at the offices of the Board. in Washington, D.C. In the event any person subject to this rule shall fail to pay the required fee, the Board may recommend to the Commission that the registration of such person with the Commission be suspended or revoked.

 

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 paragraph 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 this rule shall not apply to a primary offering of securities if all such securities in the primary offering:

        (i)-(iv) No change.

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)-(e) No change.

 (f) Definitions. (i) For purposes of this rule, the term "primary offering" shall mean an offering of municipal securities directly or indirectly by or on behalf of the issuer of such securities, including any remarketing of such securities directly by or on behalf of the issuer of such securities.

 

Rule A-14 – Annual Fee

In addition to any other fees prescribed by the rules of the Board, each broker, dealer and municipal securities dealer shall pay an annual fee to the Board of $200, with respect to each fiscal year of the Board in which the broker, dealer or municipal securities dealer conducts a municipal securities business activities. Such fee must be received at the office of the Board in Alexandria, Virginia no later than October 31 of the fiscal year for which the fee is paid, accompanied by the invoice sent to the broker, dealer or municipal securities dealer by the Board, or a written statement setting forth the name, address and Commission registration number of the broker, dealer or municipal securities dealer on whose behalf the fee is paid.

 

Rule A-15 – Notification to Board of Termination of Municipal Securities Business Activities and Change of Name or Address

(a) Procedure for Notifying Board of Termination. A broker, dealer, or municipal securities dealer that ceases to be engaged in a municipal securities business activities must promptly notify the Board of such broker’s, dealer’s or municipal securities dealer’s change of status by filing with the Board at its office in Washington, D.C. a written statement setting forth such broker’s, dealer’s or municipal securities dealer’s name, address and Commission registration number and the fact that such broker, dealer or municipal securities dealer is no longer engaging in a municipal securities business activities.

(b) Obligation to Pay Fees. A broker, dealer, or municipal securities dealer that files notification with the Board pursuant to paragraph section (a) of this rule shall be obligated to pay the fees owed to the Board at the time of filing of such notification.

 

Rule A-17 – Confidentiality of Examination Reports

Any report of an examination or of information extracted from a report of an examination ("examination report") of a municipal securities broker, dealer and municipal securities dealer furnished to the Board by the Securities and Exchange Commission pursuant to section 15(B)(c)(7)(B) of the Act and rule 15Bc7-1 thereunder shall be maintained and utilized in accordance with the following terms and conditions, in order to ensure the confidentiality of any information contained in such reports:

        (1) Any such examination report shall be reviewed only by authorized members of the Board’s staff; no member of the Board shall have access, directly or indirectly, to an examination report. Anything herein to the contrary notwithstanding, the staff of the Board may furnish to the Board or any appropriate committee thereof summaries or other communications relating to the examination reports, provided that such summaries or other communications shall not contain information which might make it possible to identify the municipal securities brokers, dealers or municipal securities dealers or associated persons which are the subject of the examination reports to which any such summary or other communication relates.

        (2)-(4) No change.

 

 

Rule D-5 – "Member and Initial Member"

 

The term "member" shall mean a member of the Board. The term "initial member" shall mean a member appointed by the Commission pursuant to the provisions of section 15B(b)(1) of the Act or to fill a vacancy on the Board resulting from the death, resignation or removal of an initial member prior to the expiration of his term of office.

 

Rule G-1 – Separately Identifiable Department or Division of a Bank

(a)-(c) No change.

(d) The fact that the bank’s municipal securities dealer activities are conducted in more than one geographic organizational or operational unit of the bank shall not preclude a finding that the bank has a separately identifiable department or division for purposes of this rule, provided, however, that all such units are identifiable and that the requirements of subparagraphs (1) and (2) of paragraph section (a) of this rule are met with respect to each such unit. All such geographic, organizational or operational units of the bank shall be considered in the aggregate as the separately identifiable department or division of the bank for purposes of this rule.

 

Rule G-2 – Standards of Professional Qualification

No municipal securities broker, dealer or municipal securities dealer shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any municipal security unless such municipal securities broker, dealer or municipal securities dealer and every natural person associated with such municipal securities broker, dealer or municipal securities dealer is qualified in accordance with the rules of the Board.

 

 

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)-(c) No change.

(d) Financial and Operations Principal.

        (i) Definition. The term "financial and operations principal" means a natural person associated with a broker, dealer or municipal securities dealer (other than a bank dealer or a broker, dealer or municipal securities dealer meeting the requirements of paragraph (a)(2) or (3) subparagraph (a)(2)(iv), (v) or (vi) of rule 15c3-1 under the Act or exempted from the requirements of rule 15c3-1 in accordance with paragraph (b)(3) thereof), whose duties include:

(A)-(G) No change.

        (ii) No change.

        (iii) Numerical Requirements. Every broker, dealer and municipal securities dealer (other than a bank dealer and a broker, dealer or municipal securities dealer meeting the requirements of paragraph (a)(2) or (3) subparagraph (a)(2)(iv), (v) or (vi) of rule 15c3-1 under the Act or exempted from the requirements of rule 15c3-1 in accordance with paragraph (b)(3) thereof) shall have at least one financial and operations principal, including its chief financial officer, qualified in accordance with paragraph (d)(ii) of this rule.

(e)-(f) No change.

(g) Waiver of Qualification Requirements.

        (i) The requirements of paragraphs (a)(ii), (a)(iii), b(ii) (b)(ii) and (c)(ii) may be waived in extraordinary cases for any associated person of a broker, dealer or municipal securities dealer who demonstrates extensive experience in a field closely related to the municipal securities business activities of such broker, dealer or municipal securities dealer. Such waiver may be granted by

(A)-(B) No change.

        (ii) No change.

(h) No change.

 

 

Rule G-5 – Disciplinary Actions by Appropriate Regulatory Agencies; Remedial Notices by Registered Securities Associations

(a) No municipal securities broker, dealer or municipal securities dealer shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any municipal security in contravention of any effective restrictions imposed upon such municipal securities broker, dealer or municipal securities dealer by the Commission pursuant to sections 15(b)(4) or (5) or 15B(c)(2) or (3) of the Act or by an appropriate regulatory agency pursuant to section 15B(c)(5) of the Act or by a registered securities association pursuant to rules adopted under section 15A(b)(7) of the Act, and no natural person shall be associated with a municipal securities broker, dealer or municipal securities dealer in contravention of any effective restrictions imposed upon such person by the Commission pursuant to sections 15(b)(6) or 15B(c)(4) of the Act or by an appropriate regulatory agency pursuant to section 15B(c)(5) of the Act or by a registered securities association pursuant to rules adopted under section 15A(b)(7) of the Act.

(b) No municipal securities broker, dealer or municipal securities dealer that is a member of a registered securities association shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any municipal security, or otherwise act in contravention of or fail to act in accordance with rules adopted by the association as of April 3, 1984, pertaining to remedial activities of members experiencing financial or operational difficulties, as if such rules were applicable to such municipal securities broker, dealer or municipal securities dealer.

 

Rule G-6 – Fidelity Bonding Requirements

No municipal securities broker, dealer or municipal securities dealer that is a member of a registered securities association shall be qualified for purposes of rule G-2 unless such broker, dealer or municipal securities dealer has met the fidelity bonding requirements set forth in the rules of such association, to the same extent as if such rules were applicable to such broker, dealer or municipal securities dealer.

 

Rule G-7 – Information Concerning Associated Persons

(a) No associated person (as hereinafter defined) of a municipal securities broker, dealer or municipal securities dealer shall be qualified for purposes of rule G-2 of the Board unless such associated person meets the requirements of this rule. The term "associated person" as used in this rule means (i) a municipal securities principal, (ii) a municipal securities sales principal, (iii) a financial and operations principal, and (iv) a municipal securities representative.

(b) Every municipal securities broker, dealer and municipal securities dealer shall obtain from each of its associated persons (as defined in paragraph section (a) of this rule), and each associated person shall furnish to the municipal securities broker, dealer or municipal securities dealer with which such person is or seeks to be associated, a questionnaire, which shall be signed by a municipal securities principal or general securities principal, containing at least the following information:

        (i) such person’s name, residence address, social security number, and the starting date or anticipated starting date of such person’s employment or other association with such municipal securities broker, dealer or municipal securities dealer;

        (ii)-(vii) No change.

        (viii) a record of any convictions of such person within the past ten years involving the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, or conspiracy to commit any such offense; or arising out of the conduct of the business of a broker, dealer, municipal securities dealer, investment advisor, bank, insurance company or fiduciary; or involving the larceny, theft, robbery, extortion, forgery, counterfeiting, fraudulent concealment, embezzlement, fraudulent conversion, or misappropriation of funds or securities; or involving the violation of section 152, 1341, 1342, or 1343 or chapter 25 or 47 of title 18, United States Code; and

        (ix)-(x) No change.

A completed Form U-4 or similar form prescribed by the Commission or a registered securities association for municipal securities brokers, dealers and municipal securities dealers other than bank dealers or, in the case of a bank dealer a completed Form MSD-4 or similar form prescribed by the appropriate regulatory agency for such bank dealer, containing the foregoing information, shall satisfy the requirements of this paragraph section.

(c) To the extent any information furnished by an associated person pursuant to paragraph section (b) of this rule is or becomes materially inaccurate or incomplete, such associated person shall furnish in writing to the municipal securities broker, dealer or municipal securities dealer with which such person is or seeks to be associated a statement correcting such information.

(d) For the purpose of verifying the information furnished by an associated person pursuant to paragraph section (b) of this rule, every municipal securities broker, dealer and municipal securities dealer shall make inquiry of all employers of such associated person during the three years immediately preceding such person’s association with such municipal securities broker, dealer or municipal securities dealer concerning the accuracy and completeness of such information as well as such person’s record and reputation as related to the person’s ability to perform his or her duties and each such prior employer which is a municipal securities broker, dealer or municipal securities dealer shall make such information available within ten business days following a request made pursuant to the requirements of this paragraph section (d).

(e) Every municipal securities broker, dealer and municipal securities dealer shall maintain and preserve a copy of the questionnaire furnished pursuant to paragraph section (b) of this rule, and of any additional statements furnished pursuant to paragraph section (c) of this rule, until at least three years after the associated person’s employment or other association with such municipal securities broker, dealer or municipal securities dealer has terminated.

(f) Every municipal securities broker, dealer and municipal securities dealer shall maintain and preserve a record of the name and residence address of each associated person, designated by the category of function performed (whether municipal securities principal, municipal securities sales principal, municipal securities representative or financial and operations principal) and indicating whether such person has taken and passed the qualification examination for municipal securities principals, municipal securities sales principals, or municipal securities representatives or financial and operations principals prescribed by the Board or was exempt from the requirement to take and pass such examination, indicating the basis for such exemption, until at least three years after the associated person’s employment or other association with such municipal securities broker, dealer or municipal securities dealer has terminated.

(g) Every municipal securities broker, dealer and municipal securities dealer which is a member of a registered securities association shall file with such association, every bank dealer shall file with the appropriate regulatory agency for such bank dealer, and every municipal securities broker, dealer or municipal securities dealer other than a bank dealer which is not a member of a registered securities association shall file with the Commission, such of the information prescribed by this rule as such association, agency, or the Commission, respectively, shall by rule or regulation require.

(h) Any records required to be maintained and preserved pursuant to this rule shall be preserved in accordance with the requirements of paragraphs sections (d), (e) and (f) of rule G-9 of the Board.

 

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 municipal securities 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 municipal securities 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.

        (ii) Account Records. Account records for each customer account and account of such municipal securities broker, dealer or municipal securities dealer. Such records shall reflect all purchases and sales of municipal securities, all receipts and deliveries of municipal securities, all receipts and disbursements of cash, and all other debits and credits relating to such account. A bank dealer shall not be required to maintain a record of a customer’s bank credit or bank debit balances for purposes of this subparagraph.

        (iii) Securities Records. Records showing separately for each municipal security all positions (including, in the case of a municipal securities broker, dealer or municipal securities dealer other than a bank dealer, securities in safekeeping) carried by such municipal securities broker, dealer or municipal securities dealer for its account or for the account of a customer (with all "short" trading positions so designated), the location of all such securities long and the offsetting position to all such securities short, and the name or other designation of the account in which each position is carried. Such records shall also show all long security count differences and short count differences classified by the date of physical count and verification on which they were discovered. Such records shall consist of a single record system. With respect to purchases or sales, such records may be posted on either a settlement date basis or a trade date basis, consistent with the manner of posting the records of original entry of such municipal securities broker, dealer or municipal securities dealer. For purposes of this subparagraph, multiple maturities of the same issue of municipal securities, as well as multiple coupons of the same maturity, may be shown on the same record, provided that adequate secondary records exist to identify separately such maturities and coupons. With respect to securities which are received in and delivered out by such municipal securities broker, dealer or municipal securities dealer the same day on or before the settlement date, no posting to such records shall be required. Anything herein to the contrary notwithstanding, a non-clearing municipal securities broker, dealer or municipal securities dealer which effects transactions for the account of customers on a delivery against payment basis may keep the records of location required by this subparagraph in the form of an alphabetical list or lists of securities showing the location of such securities rather than a record of location separately for each security. Anything herein to the contrary notwithstanding, a bank dealer shall maintain records of the location of securities in its own trading account.

        (iv) Subsidiary Records. Ledgers or other records reflecting the following:

(A) municipal securities in transfer;

(B) municipal securities to be validated;

(C) municipal securities borrowed or loaned; and

(D) municipal securities transactions not completed on settlement date.

Such records shall contain the following information:

(A)-(D) No change.

Such records shall be maintained as subsidiary records to the general ledger maintained by such municipal securities broker, dealer or municipal securities dealer. Anything herein to the contrary notwithstanding, the requirements of this subparagraph will be satisfied if the information described is readily obtainable from other records maintained by such municipal securities broker, dealer or municipal securities dealer.

        (v) Put Options and Repurchase Agreements. Records of all options (whether written or oral) to sell municipal securities (i.e., put options) and of all repurchase agreements (whether written or oral) with respect to municipal securities, in which such municipal securities broker, dealer or municipal securities dealer has any direct or indirect interest or which such municipal securities broker, dealer or municipal securities dealer has granted or guaranteed, showing the description and aggregate par value of the securities, and the terms and conditions of the option, agreement or guarantee.

        (vi) Records for Agency Transactions. A memorandum of each agency order and any instructions given or received for the purchase or sale of municipal securities pursuant to such order, showing the terms and conditions of the order and instructions, and any modification thereof, the account for which entered, the date and time of receipt of the order by such municipal securities broker, dealer or municipal securities dealer, the price at which executed, the date of execution and, to the extent feasible, the time of execution and, if such order is entered pursuant to a power of attorney or on behalf of a joint account, corporation or partnership, the name and address (if other than that of the account) of the person who entered the order. If an agency order is canceled by a customer, such records shall also show the terms, conditions and date of cancellation, and, to the extent feasible, the time of cancellation. Orders entered pursuant to the exercise of discretionary power by such municipal securities broker, dealer or municipal securities dealer shall be designated as such. For purposes of this subparagraph, the term "agency order" shall mean an order given to a municipal securities broker, dealer or municipal securities dealer to buy a specific security from another person or to sell a specific security to another person, in either case without such municipal securities broker, dealer or municipal securities dealer acquiring ownership of the security. Customer inquiries of a general nature concerning the availability of securities for purchase or opportunities for sale shall not be considered to be orders. For purposes of this subparagraph and subparagraph (vii) below, the term "memorandum" shall mean a trading ticket or other similar record. For purposes of this subparagraph, the term "instructions" shall mean instructions transmitted within an office with respect to the execution of an agency order, including, but not limited to, instructions transmitted from a sales desk to a trading desk.

        (vii) Records for Transactions as Principal. A memorandum of each transaction in municipal securities (whether purchase or sale) for the account of such municipal securities broker, dealer or municipal securities dealer, showing the price and date of execution and, to the extent feasible, the time of execution; and in the event such purchase or sale is with a customer, a record of the customer’s order, showing the date and time of receipt, the terms and conditions of the order, and the name or other designation of the account in which it was entered and, if such order is entered pursuant to a power of attorney or on behalf of a joint account, corporation, or partnership, the name and address (if other than that of the account) of the person who entered the order.

        (viii) No change.

        (ix) Copies of Confirmations and Certain Other Notices to Customers. A copy of all confirmations of purchase or sale of municipal securities and, in the case of a municipal securities 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) Financial Records. Every municipal securities broker, dealer and municipal securities dealer subject to the provisions of rule 15c3-1 under the Act shall make and keep current the books and records described in subparagraphs (a)(2), (a)(4)(iv) and (vi), and (a)(11) of rule 17a-3 under the Act.

        (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)-(K) No change.

For purposes of this subparagraph, the terms "general securities representative" and "general securities principal" 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 municipal securities 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) Customer Complaints. A record of all written complaints of customers, and persons acting on behalf of customers, and what action, if any, has been taken by such municipal securities broker, dealer or municipal securities dealer in connection with each such complaint. The term "complaint" shall mean any written statement alleging a grievance involving the activities of the municipal securities broker, dealer or municipal securities dealer or any associated persons of such municipal securities broker, dealer or municipal securities dealer with respect to any matter involving a customer’s account.

        (xiii) Records Concerning Deliveries of Official Statements. A record of all deliveries, to purchasers of new issue municipal securities, of official statements or other disclosures concerning the underwriting arrangements required under rule G-32.

        (xiv)-(xv) No change.

        (xvi) Records Concerning Political Contributions and Prohibitions on Municipal Securities Business Pursuant to Rule G-37. Records reflecting:

(A)-(G) No change.

(H) Dealers Brokers, dealers and municipal securities dealers shall maintain copies of the Forms G-37/G-38 and G-37x sent to the Board along with the certified or registered mail receipt or other record of sending such forms to the Board.

(I)-(K) No change.

        (xvii)-(xix) No change.

(b) Manner in which Books and Records are to be Maintained. Nothing herein contained shall be construed to require a municipal securities broker, dealer or municipal securities dealer to maintain the books and records required by this rule in any given manner, provided that the information required to be shown is clearly and accurately reflected thereon and provides an adequate basis for the audit of such information, nor to require a municipal securities broker, dealer or municipal securities dealer to maintain its books and records relating to transactions in municipal securities separate and apart from books and records relating to transactions in other types of securities; provided, however, that in the case of a bank dealer, all records relating to transactions in municipal securities effected by such bank dealer must be separately extractable from all other records maintained by the bank.

(c) Non-Clearing Municipal Securities Brokers, Dealers and Municipal Securities Dealers. A municipal securities broker, dealer or municipal securities dealer which executes transactions in municipal securities but clears such transactions through a clearing broker, dealer, or bank, or through a clearing agency, shall not be required to make and keep such books and records prescribed in this rule as are customarily made and kept by a clearing broker, dealer, bank or clearing agency; provided that, in the case of a municipal securities broker, dealer or municipal securities dealer other than a bank dealer, the arrangements with such clearing broker, dealer or bank meet all applicable requirements prescribed in subparagraph (b) of rule 17a-3 under the Act, or the arrangements with such clearing agency have been approved by the Commission or, in the case of a bank dealer, such arrangements have been approved by the appropriate regulatory agency for such bank dealer; and further provided that such municipal securities broker, dealer or municipal securities dealer shall remain responsible for the accurate maintenance and preservation of such books and records if they are maintained by a clearing agent other than a clearing broker or dealer.

(d) Introducing Municipal Securities Brokers, Dealers and Municipal Securities Dealers. A municipal securities broker, dealer or municipal securities dealer which, as an introducing municipal securities broker, dealer or municipal securities dealer, clears all transactions with and for customers on a fully disclosed basis with a clearing broker, dealer or municipal securities dealer, and which promptly transmits all customer funds and securities to the clearing broker, dealer or municipal securities dealer which carries all of the accounts of such customers, shall not be required to make and keep such books and records prescribed in this rule as are customarily made and kept by a clearing broker, dealer or municipal securities dealer and which are so made and kept; and such clearing broker, dealer or municipal securities dealer shall be responsible for the accurate maintenance and preservation of such books and records.

(e)-(f) No change.

Rule G-9 – Preservation of Records

(a) Records to be Preserved for Six Years. Every broker, dealer and municipal securities dealer shall preserve the following records for a period of not less than six years:

        (i)-(iv) No change.

        (v) the customer complaint records described in rule G-8(a)(xii); and

        (vi) if such municipal securities broker, dealer or municipal securities dealer is subject to rule 15c3-1 under the Act, the general ledgers described in paragraph (a)(2) of rule 17a-3 under the Act.;

        (vii) the record, described in rule G-27(b)(ii), of each person designated as responsible for supervision of the municipal securities activities of the broker, dealer, or municipal securities dealer and the designated principal’s supervisory responsibilities, provided that such record shall be preserved for the period of designation of each person designated and for at least six years following any change in such designation.;

        (viii) the records to be maintained pursuant to rule G-8(a)(xvi); provided, however, that copies of Forms G-37x shall be preserved for the period during which such Forms G-37x are effective and for at least six years following the end of such effectiveness.;

        (ix) the records regarding information on gifts and gratuities and employment agreements required to be maintained pursuant to rule G-8(a)(xvii).; and

        (x) the records required to be maintained pursuant to rule G-8(a)(xviii).

(b) Records to be Preserved for Three Years. Every broker, dealer and municipal securities dealer shall preserve the following records for a period of not less than three years:

        (i)-(vi) No change.

        (vii) if such municipal securities broker, dealer or municipal securities dealer is subject to rule 15c3-1 under the Act, the records described in subparagraphs (a)(4)(iv) and (vi) and (a)(11) of rule 17a-3 and subparagraphs (b)(5) and (b)(8) of rule 17a-4 under the Act;

        (viii) the following records, to the extent made or received by such municipal securities broker, dealer or municipal securities dealer in connection with its business as such municipal securities broker, dealer or municipal securities dealer and not otherwise described in this rule:

(A)-(B) No change.

(C) all written communications received and sent, including inter-office memoranda, relating to the conduct of the activities of such municipal securities broker, dealer or municipal securities dealer with respect to municipal securities;

(D) all written agreements entered into by such municipal securities broker, dealer or municipal securities dealer, including agreements with respect to any account; and

(E) No change.

        (ix)-(xiii) No change.

(c) Records to be Preserved for Life of Enterprise. Every municipal securities broker, dealer and municipal securities dealer other than a bank dealer shall preserve during the life of such municipal securities broker, dealer or municipal securities dealer and of any successor municipal securities broker, dealer or municipal securities dealer all partnership articles or, in the case of a corporation, all articles of incorporation or charter, minute books and stock certificate books.

(d) No change.

(e) Method of Record Retention. Whenever a record is required to be preserved by this rule, such record may be retained either as an original or as a copy or other reproduction thereof, or on microfilm, electronic or magnetic tape, or by the other similar medium of record retention, provided that such municipal securities broker, dealer or municipal securities dealer shall have available adequate facilities for ready retrieval and inspection of any such record and for production of easily readable facsimile copies thereof and, in the case of records retained on microfilm, electronic or magnetic tape, or other similar medium of record retention, duplicates of such records shall be stored separately from each other for the periods of time required by this rule.

(f) Effect of Lapse of Registration. The requirements of this rule shall continue to apply, for the periods of time specified, to any municipal securities broker, dealer or municipal securities dealer which ceases to be registered with the Commission, except in the event a successor registrant shall undertake to maintain and preserve the books and records described herein for the required periods of time.

(g) Compliance with Rules 17a-3 and 17a-4. Municipal securities brokers Brokers, dealers and municipal securities dealers other than bank dealers which are in compliance with rules 17a-3 and 17a-4 under the Act will be deemed to be in compliance with the requirements of this rule, provided that the records enumerated in paragraph section (f) of rule G-8 of the Board shall in any event be preserved for the applicable time periods specified in this rule.

 

Rule G-11 – Sales of New Issue Municipal Securities During the Underwriting Period

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

        (i)-(vi) No change.

        (vii) The term "related portfolio," when used with respect to a broker, dealer or municipal securities dealer, means a municipal securities investment portfolio of such broker, dealer or municipal securities dealer or of any person directly or indirectly controlling, controlled by or under common control with such broker, dealer or municipal securities dealer.

        (viii)-(x) No change.

(b) Disclosure of Capacity. Every broker, dealer or municipal securities dealer which is a member of a syndicate that submits an order to a syndicate or to a member of a syndicate for the purchase of municipal securities held by the syndicate shall disclose at the time of submission of such order if the securities are being purchased for its dealer account, for the account of a related portfolio of such broker, dealer or municipal securities dealer, for a municipal securities investment trust sponsored by such broker, dealer or municipal securities dealer, or for an accumulation account established in connection with such a municipal securities investment trust.

(c) Confirmations of Sale. Sales of securities held by a syndicate to a related portfolio, municipal securities investment trust or accumulation account referred to in section (b) above shall be confirmed by the syndicate manager directly to such related portfolio, municipal securities investment trust or accumulation account or for the account of such related portfolio, municipal securities investment trust or accumulation account to the broker, dealer or municipal securities dealer submitting the order. Nothing herein contained shall be construed to require that sales of municipal securities to a related portfolio, municipal securities investment trust or accumulation account be made for the benefit of the syndicate.

(d) Disclosure of Group Orders. Every broker, dealer or municipal securities dealer that submits a group order to a syndicate or to a member of a syndicate shall disclose at the time of submission of such order the identity of the person for whom the order is submitted. This section shall not apply to a qualified note syndicate as defined in paragraph (a)(x) above.

        (e)-(h) No change.

 

Rule G-12 – Uniform Practice

(a)-(d) No change.

(e) Delivery of Securities. The following provisions shall, unless otherwise agreed by the parties, govern the delivery of securities:

        (i)-(xiii) No change.

        (xiv) Delivery of Registered Securities

(A)-(D) No change.

(E) Form of Registration. Delivery of a certificate accompanied by the documentation required in this paragraph (xiv) shall constitute good delivery if the certificate is registered in the name of:

(1)-(2) No change.

(3) a member of a national securities exchange whose specimen signature is on file with the transfer agent or any other municipal securities broker, dealer or municipal securities dealer who has filed specimen signatures with the transfer agent and places a statement to this effect on the assignment; or

(4) No change.

        (xv) No change.

        (xvi) Money Differences. The following money differences shall not be sufficient to cause rejection of delivery:

 

 

The calculations of the seller shall be utilized in determining the maximum permissible differences and amount of payment to be made upon delivery. However, if the money difference is due to the computation by one party of the formula required under rule G-33 directly to the settlement date of the transaction, and the use by the other party of another computation method (including the dollar price interpolation method permitted under subparagraph (b)(i)(D) of rule G-33), the calculations of the party computing directly to the settlement date shall be deemed accurate, and payment made in accordance with such calculations. The parties shall seek to reconcile any such money differences within ten business days following settlement.

(f) Use of Automated Comparison, Clearance, and Settlement Systems.

        (i)-(ii) No change.

        (iii) For purposes of paragraph (i) of this section (f) a municipal securities broker, dealer or municipal securities dealer who clears a transaction through an agent who is a member of a registered clearing agency shall be deemed to be a member of such registered clearing agency with respect to such transaction.

(g) Rejections and Reclamations.

        (i)-(ii) No change.

        (iii) Basis for Reclamation and Time Limits. A reclamation may be made by the receiving party or a demand for reclamation may be made by the delivering party if, subsequent to delivery, information is discovered which, if known at the time of the delivery, would have caused the delivery not to constitute good delivery, provided such reclamation or demand for reclamation is made within the following time limits:

(A) Reclamation or demand for reclamation by reason of the following shall be made within one business day following the date of delivery:

(1)-(2) No change.

(3) not good delivery because a legal opinion or other documents referred to in paragraph (e)(xi) hereof were missing.; or

(B)-(D) No change.

(h) Close-Out. Transactions which have been confirmed or otherwise agreed upon by both parties but which have not been completed may be closed out in accordance with this section, or as otherwise agreed by the parties.

        (i) Close-Out by Purchaser. With respect to a transaction which has not been completed by the seller according to its terms and the requirements of this rule, the purchaser may close out the transaction in accordance with the following procedures:

(A)-(B) No change.

(C) Contents of Notices. Written notices sent in accordance with the requirements of subparagraphs (A) or (B) above shall contain the following information:

(1) The notice of close-out required under subparagraph (A) above shall set forth:

(a) the name and address of the municipal securities broker, dealer or municipal securities dealer originating the notice;

(b) the name and address of the municipal securities broker, dealer or municipal securities dealer to whom the notice is being sent;

(c)-(j) No change.

(2) The notice of retransmittal required under subparagraph (B) above shall set forth:

(a) the name and address of the municipal securities broker, dealer or municipal securities dealer retransmitting the notice;

(b) the name and address of the municipal securities broker, dealer or municipal securities dealer to whom the notice is being retransmitted;

(c) the name of the municipal securities broker, dealer or municipal securities dealer originating the notice;

(d)-(k) No change.

(3) The notice of extension of dates required under subparagraph (B) above shall set forth:

(a) the name and address of the municipal securities broker, dealer or municipal securities dealer originating the notice of close-out;

(b) the name and address of the municipal securities broker, dealer or municipal securities dealer retransmitting the notice;

(c) the name of the municipal securities broker, dealer or municipal securities dealer to whom the notice is being retransmitted;

(d)-(j) No change.

(D)-(G) No change.

        (ii) Close-Out by Seller. If a seller makes good delivery according to the terms of the transaction and the requirements of this rule and the purchaser rejects delivery, the seller may close out the transaction in accordance with the following procedures:

(A) No change.

(B) Content of Notice. The written notice sent in accordance with the requirements of subparagraph (A) above shall set forth:

(1) the name and address of the municipal securities broker, dealer or municipal securities dealer originating the notice;

(2) the name and address of the municipal securities broker, dealer or municipal securities dealer to whom the notice is being sent;

(3)-(10) No change.

(C)-(D) No change.

        (iii)-(iv) No change.

        (i)-(l) No change.

 

Rule G-13 – Quotations Relating to Municipal Securities

 

(a) General. The provisions of this rule shall apply to all quotations relating to municipal securities which are distributed or published, or caused to be distributed or published, by any municipal securities broker, dealer or municipal securities dealer or any person associated with and acting on behalf of a municipal securities broker, dealer or municipal securities dealer. For purposes of this rule, the term "quotation" shall mean any bid for, or offer of, municipal securities, or any request for bids for or offers of municipal securities, including indications of "bid wanted" or "offer wanted." The terms "distributed" or "published" shall mean the dissemination of quotations by any means of communication. Reference in this rule to a municipal securities broker, dealer or municipal securities dealer shall be deemed to include reference to any person associated with a municipal securities broker, dealer or municipal securities dealer.

(b) Bona Fide Quotations.

        (i) Except as provided below, no municipal securities broker, dealer or municipal securities dealer shall distribute or publish, or cause to be distributed or published, any quotation relating to municipal securities, unless the quotation represents a bona fide bid for, or offer of, municipal securities by such municipal securities broker, dealer or municipal securities dealer, provided, however, that all quotations, unless otherwise indicated at the time made, shall be subject to prior purchase or sale and to subsequent change in price. If such municipal securities broker, dealer or municipal securities dealer is distributing or publishing the quotation on behalf of another broker, dealer, or municipal securities dealer, such municipal securities broker, dealer or municipal securities dealer shall have no reason to believe that such quotation does not represent a bona fide bid for, or offer of, municipal securities. Nothing in this paragraph shall be construed to prohibit requests for bids or offers, including indications of "bid wanted" or "offer wanted," or shall be construed to prohibit nominal quotations, if such quotations are, at the time made, clearly stated or indicated to be such. For purposes of this paragraph, a "nominal quotation" shall mean an indication of the price given solely for informational purposes.

        (ii) No municipal securities broker, dealer or municipal securities dealer shall distribute or publish, or cause to be distributed or published, any quotation relating to municipal securities, unless the price stated in the quotation is based on the best judgment of such municipal securities broker, dealer or municipal securities dealer of the fair market value of the securities which are the subject of the quotation at the time the quotation is made. If a municipal securities broker, dealer or municipal securities dealer is distributing or publishing a quotation on behalf of another broker, dealer, or municipal securities dealer, such municipal securities broker, dealer or municipal securities dealer shall have no reason to believe that the price stated in the quotation is not based on the best judgment of the fair market value of the securities of the broker, dealer or municipal securities dealer on whose behalf such municipal securities broker, dealer or municipal securities dealer is distributing or publishing the quotation.

        (iii) For purposes of subparagraph (i), a quotation shall be deemed to represent a "bona fide bid for, or offer of, municipal securities" if the municipal securities broker, dealer or municipal securities dealer making the quotation is prepared to purchase or sell the security which is the subject of the quotation at the price stated in the quotation and under such conditions, if any, as are specified at the time the quotation is made.

        (iv) No municipal securities broker, dealer or municipal securities dealer shall knowingly misrepresent a quotation relating to municipal securities made by any other broker, dealer, or municipal securities dealer.

(c) Multiple Markets in the Same Securities. No municipal securities broker, dealer or municipal securities dealer participating in a joint account shall, together with one or more other participants in such account, distribute or publish, or cause to be distributed or published, quotations relating to the municipal securities which are the subject of such account if such quotations indicate more than one market for the same securities.

 

Rule G-14 – Reports of Sales or Purchases

 

(a)-(b) No change.

 

Rule G-14 Transaction Reporting Procedures

(a) No change.

(b) Customer Transactions

        (i) No change.

        (ii) The information submitted in accordance with this procedure shall include: the CUSIP number of the security; the trade date; the time of trade execution; the executing broker symbol identifying the broker, dealer or municipal securities dealer that effected the transaction; a symbol indicating the dealer’s capacity of the broker, dealer or municipal securities dealer as buyer or seller in the transaction; the par value traded; the dollar price of the transaction, exclusive of any commission; the yield of the transaction; a symbol indicating the dealer’s capacity of the broker, dealer or municipal securities dealer as agent for the customer or principal in the transaction; the commission, if any; the settlement date, if known to the broker, dealer or municipal securities dealer; a control number, determined by the broker, dealer or municipal securities dealer, identifying the transaction; and a symbol indicating whether the trade has previously been reported to the Board, and, if so, the dealer’s control number used by the broker, dealer or municipal securities dealer for the previous report.

        (iii)-(iv) No change.

 

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

(a) Customer Confirmation.

        (i)-(v) No change.

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

(A)-(D) No change.

(E) Stripped coupon securities. The term "stripped coupon securities" shall have the same meaning as in SEC staff letter (stripped coupon municipal securities) dated January 19, 1989 (Stripped Coupon Municipal Securities, SEC No-Action Letter, Fed. Sec. L. Rep. (CCH) � 78,949 (Jan. 19, 1989), reprinted in MSRB Reports, Vol. 9, No. 1 (March 1989) at 6-7. the MSRB Manual at � 3571.

(F) No change.

(b) No change.

(c) Deliveries to Customers. Except as provided in section (d) below, a delivery of securities by a broker, dealer, or municipal securities dealer to a customer or to another person acting as agent for the customer shall, unless otherwise agreed by the parties or otherwise specified by the customer, be made in accordance with the following provisions:

    (i) Securities Delivered.

(A) All securities delivered on a transaction shall be identical as to the applicable information set forth in paragraph section (a) of this rule. All securities delivered shall also be identical as to the call provisions and the dated date of such securities.

(B) CUSIP Numbers.

(1) The securities delivered on a transaction shall have the same CUSIP number as that set forth on the confirmation of such transaction pursuant to the requirements of paragraph section (a) of this rule; provided, however, that for purposes of this item (1), a security shall be deemed to have the same CUSIP number as that specified on the confirmation (a) if the number assigned to the security and the number specified on the confirmation differ only as a result of a transposition or other transcription error, or (b) if the number specified on the confirmation has been assigned as a substitute or alternative number for the number reflected on the security.

(2) No change.

        (ii) Delivery Ticket. A delivery ticket shall accompany the delivery of securities. Such ticket shall contain the information set forth in paragraph section (a) of this rule.

        (iii) Units of Delivery. Delivery of bonds shall be made in the following denominations:

(A)-(B) No change.

Delivery of other municipal securities shall be made in the denominations specified on the confirmation as required pursuant to paragraph section (a) of this rule.

        (iv)-(xi) No change.

        (xii) Delivery of Registered Securities.

(A) No change.

(B) Delivery to an Agent of the Customer. Registered securities delivered to an agent of a customer may be registered in the customer’s name or as otherwise directed by the customer. If such securities are not so registered, such securities shall be delivered in accordance with the following provisions:

(1)-(4) No change.

(5) Form of Registration. Delivery of a certificate accompanied by the documentation required in this subparagraph (B) shall constitute good delivery if the certificate is registered in the name of:

(a)-(b) No change.

(c) a member of a national securities exchange whose specimen signature is on file with the transfer agent or any other municipal securities broker, dealer or municipal securities dealer who has filed specimen signatures with the transfer agent and places a statement to this effect on the assignment; or

(d) No change.

(6) No change.

(C)-(D) No change.

(d)-(e) No change.

 

Rule G-16 – Periodic Compliance Examination

At least once each twenty-four months, each municipal securities broker, dealer and municipal securities dealer shall be examined in accordance with Section 15B(c)(7) of the Act to determine, at a minimum, whether such municipal securities broker, dealer or municipal securities dealer and its associated persons are in compliance with all applicable rules of the Board and all applicable provisions of the Act and rules and regulations of the Commission thereunder.

 

Rule G-18 – Execution of Transactions

Each broker, dealer and municipal securities dealer, when executing a transaction in municipal securities for or on behalf of a customer as agent, shall make a reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions. A municipal securities broker, dealer or municipal securities dealer acting as a "broker’s broker" shall be under the same obligation with respect to the execution of a transaction in municipal securities for or on behalf of a broker, dealer, or municipal securities dealer. For purposes of this rule, a municipal securities broker, dealer or municipal securities dealer acting as a "broker’s broker" shall mean a municipal securities broker, dealer or municipal securities dealer who effects transactions for the account of other brokers, dealers and municipal securities dealers on a regular basis.

 

Rule G-20 – Gifts and Gratuities

(a) Limitation on Value. No municipal securities broker, dealer or municipal securities dealer shall, directly or indirectly, give or permit to be given any thing or service of value, including gratuities, in excess of $100 per year to a person other than an employee or partner of such municipal securities broker, dealer or municipal securities dealer, if such payments or services are in relation to the municipal securities activities of the employer of the recipient of the payment or service. For purposes of this rule the term "employer" shall include a principal for whom the recipient of a payment or service is acting as agent or representative.

(b) No change.

(c) Compensation for Services. Notwithstanding the foregoing, the provisions of section (a) of this rule shall not apply to contracts of employment with or to compensation for services rendered by another person; provided, that there is in existence prior to the time of employment or before the services are rendered a written agreement between the municipal securities broker, dealer or municipal securities dealer subject to this rule and the person who is to perform such services; and provided, further, that such agreement shall include the nature of the proposed services, the amount of the proposed compensation, and the written consent of such person’s employer.

 

Rule G-23 – Activities of Financial Advisors

(a) No change.

(b) Financial Advisory Relationship. For purposes of this rule, 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. Notwithstanding the foregoing, a financial advisory relationship shall not be deemed to exist when, in the course of acting as an underwriter, a broker, dealer or municipal securities dealer renders advice to an issuer, including advice with respect to the structure, timing, terms and other similar matters concerning a new issue of municipal securities.

(c)-(i) No change.

 

Rule G-27 – Supervision

(a) Obligation to supervise. Each broker, dealer and municipal securities dealer ("dealer") shall supervise the conduct of its municipal securities business and the municipal securities activities of the dealer and its associated persons to ensure compliance with Board rules and the applicable provisions of the Act and rules thereunder ("applicable rules").

 

(b) Designation of principals.

        (i) General. Each dealer shall specifically designate one or more associated persons qualified as municipal securities principals, municipal securities sales principals, financial and operations principals in accordance with Board rules, or as general securities principals to be responsible for the supervision of its municipal securities business and the municipal securities activities of the dealer and its associated persons as required by this rule.

        (ii) No change.

        (iii) Appropriate principal. Each dealer shall designate a municipal securities principal as responsible for its supervision under sections (a) and (c) of this rule, except as provided in this section. A non-bank dealer shall, and a non-bank dealer meeting the requirements of Securities Exchange Act rule 15c3-1(a)(2) or (3) or the exemption under rule 15c3-1(b)(3) may, designate a financial and operations principal as responsible for the financial reporting duties specified in rule G-3(d)(i)(A-E) and with primary responsibility for books and records under section (c)(v) below; provided, however, that a non-bank dealer meeting the requirements of Securities Exchange Act rule 15c3-1(a)(2)(iv), (v) or (vi) or the exemption under rule 15c3-1(b)(3) may, but is not required to, designate a financial and operations principal as responsible for such financial reporting duties and with primary responsibility for such books and records. In addition, a municipal securities sales principal may be designated as responsible for supervision under sections (c)(ii), (iii) and (vii) of this rule, to the extent the activities pertain to sales to or purchases from a customer; a general securities principal may be designated as responsible for supervision under sections (c)(v) and (vii)(A) of this rule and under rules G-7(b) and G-21(e); and a financial and operations principal may be designated as responsible for supervision under section (c)(vi) of this rule.

(c) Written supervisory procedures. Each dealer shall adopt, maintain and enforce written supervisory procedures reasonably designed to ensure that the conduct of its municipal securities business and the municipal securities activities of the dealer and its associated persons are in compliance as required in section (a) of this rule. Such procedures shall codify the dealer’s supervisory system for ensuring compliance and, at a minimum, shall establish procedures

        (i)-(vii) No change.

(d) No change.

 

Rule G-28 – Transactions with Employees and Partners of Other Municipal Securities Professionals

(a) Account Instructions. No broker, dealer or municipal securities dealer shall open or maintain an account in which transactions in municipal securities may be effected for a customer who such broker, dealer or municipal securities dealer knows is employed by, or the partner of, another municipal securities broker, dealer or municipal securities dealer, or for or on behalf of the spouse or minor child of such person unless such broker, dealer, or municipal securities dealer first gives written notice with respect to the opening and maintenance of such account to the municipal securities broker, dealer or municipal securities dealer by whom such person is employed or of whom such person is a partner.

(b) Account Transactions. No broker, dealer, or municipal securities dealer shall effect a transaction in municipal securities with or for an account subject to section (a) of this rule unless such broker, dealer, or municipal securities dealer

        (i) sends simultaneously to the employing municipal securities broker, dealer or municipal securities dealer a duplicate copy of each confirmation sent to the customer, and

        (ii) acts in accordance with any written instructions which may be provided to the broker, dealer or municipal securities dealer by an employing municipal securities broker, dealer or municipal securities dealer with respect to transactions effected with or for such account.

 

Rule G-32 – Disclosures in Connection with New Issues

(a) No change.

(b) Responsibility of Managing Underwriters, and Sole Underwriters and Financial Advisors.

        (i)-(ii) No change.

(c) No change.

 

Rule G-34 – CUSIP Numbers and New Issue Requirements

(a) New Issue Securities.

        (i) Assignment of CUSIP Numbers.

(A) Except as otherwise provided in this section (a), each municipal securities broker, dealer or municipal securities dealer who acquires, whether as principal or agent, a new issue of municipal securities from the issuer of such securities for the purpose of distributing such new issue shall apply in writing to the Board or its designee for assignment of a CUSIP number or numbers to such new issue. The municipal securities broker, dealer or municipal securities dealer shall make such application as promptly as possible, but in no event later than, in the case of negotiated sales, a time sufficient to ensure assignment of a CUSIP number or numbers on or prior to the business day on which the contract to purchase the securities from the issuer is executed; or, in the case of competitive sales, the date of award. A municipal securities broker, dealer or municipal securities dealer acting as a financial advisor to an issuer in connection with a competitive sale of an issue shall ensure that application for a CUSIP number or numbers is made in sufficient time to permit assignment of CUSIP numbers prior to the date of award. The municipal securities broker, dealer or municipal securities dealer shall provide to the Board or its designee the following information:

(1)-(8) No change.

(B) The information required by subparagraph (i)(A) of this section (a) shall be provided in accordance with the provisions of this subparagraph. At the time application is made the municipal securities broker, dealer or municipal securities dealer making such application shall provide to the Board or its designee a copy of a notice of sale, official statement, legal opinion, or other similar documentation prepared by or on behalf of the issuer, or portions of such documentation, reflecting the information required by subparagraph (i)(A) of this section (a). Such documentation may be submitted in preliminary form if no final documentation is available at the time of application. In such event the final documentation, or the relevant portions of such documentation, reflecting any changes in the information required by subparagraph (i)(A) of this section (a) shall be submitted when such documentation becomes available. If no such documentation, whether in preliminary or final form, is available at the time application for CUSIP number assignment is made, such copy shall be provided promptly after the documentation becomes available.

(C) The provisions of paragraph (i) of this section (a) shall not apply with respect to any new issue of municipal securities on which the issuer or a person acting on behalf of the issuer has submitted an application for assignment of a CUSIP number or numbers to such issue to the Board or its designee.

(D) In the event that the proceeds of the new issue will be used, in whole or in part, to refund an outstanding issue or issues of municipal securities in such a way that part but not all of the outstanding issue or issues previously assigned a single CUSIP number is to be refunded to one or more redemption date(s) and price(s) (or all of an outstanding issue is to be refunded to more than one redemption date and price), the municipal securities broker, dealer or municipal securities dealer shall apply in writing to the Board or its designee for a reassignment of a CUSIP number to each part of the outstanding issue refunded to a particular redemption date and price and shall provide to the Board or its designee the following information on the issue or issues to be refunded:

(1)-(3) No change.

The municipal securities broker, dealer or municipal securities dealer also shall provide documentation supporting the information provided pursuant to the requirements of this subparagraph (D).

        (ii) Application for Depository Eligibility, CUSIP Number Affixture and Initial Communications. Each broker, dealer or municipal securities dealer who acquires, whether as principal or agent, a new issue of municipal securities from the issuer of such securities for the purpose of distributing such new issue ("underwriter") shall carry out the following functions:

(A) Except as otherwise provided in this subparagraph (ii)(A), the underwriter shall apply to a securities depository registered with the Securities and Exchange Commission, in accordance with the rules and procedures of such depository, to make such new issue depository-eligible. The application required by this subparagraph (ii)(A) shall be made as promptly as possible, but in no event later than one business day after award from the issuer (in the case of a competitive sale) or one business day after the execution of the contract to purchase the securities from the issuer (in the case of a negotiated sale). In the event that the full documentation and information required to establish depository eligibility is not available at the time the initial application is submitted to the depository, the underwriter shall forward such documentation as soon as it is available; provided, however, this subparagraph (ii)(A) of this rule shall not apply to:

(1) an issue of municipal securities that fails to meet the criteria for depository eligibility at all depositories that accept municipal securities for deposit; or

(2) any new issue maturing in 60 days or less.;

(3) any new issue that is less than $1 million in par value; provided, however, that this exemption shall expire July 1, 1996.

        (iii) No change.

(b)-(c) No change.

 

Rule G-36 – Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee

(a) No change.

(b) Delivery Requirements for Issues Subject to Securities Exchange Act Rule 15c2-12.

        (i) Each broker, dealer or municipal securities dealer that acts as an underwriter in a primary offering of municipal securities subject to Securities Exchange Act rule 15c2-12 shall send to the Board or its designee by certified or registered mail, or some other equally prompt means that provides a record of sending, within one business day after receipt of the official statement from the issuer or its designated agent, but no later than 10 business days after any final agreement to purchase, offer, or sell the municipal securities, the following documents and written information: two copies of the final official statement; and two copies of completed Form G-36 G-36(OS) prescribed by the Board, including the CUSIP number or numbers for the issue.

        (ii) No change.

(c)-(f) No change.

 

(g)(i) Delivery of Official Statements and Form G-36(OS) for Issues Prior to the Effective Date of Rule G-36. By August 29, 1990, each broker, dealer and municipal securities dealer that acts as an underwriter in a primary offering of municipal securities shall send to the Board or its designee by certified or registered mail, or some other equally prompt means that provides for a record of sending, the following documents and written information: official statements and Form G-36(OS) referred to in sections (b), (c) or (d), above, for each primary offering of municipal securities sold on or after January 1, 1990 to July 1, 1990.

        (ii) Delivery of Advance Refunding Documents for Issues Prior to the Effective Date of Rule G-36(b)(ii) and (c)(ii). By September 13, 1991, each broker, dealer and municipal securities dealer that acts as an underwriter in a primary offering of municipal securities shall send to the Board or its designee by certified or registered mail, or some other equally prompt means that provides for a record of sending, the following documents and written information: advance refunding documents and Form G-36(ARD) referred to in sections (b) and (c), above, for each primary offering of municipal securities sold on or after January 1, 1990, to July 13, 1991.

 

Rule G-37 – Political Contributions and Prohibitions on Municipal Securities Business

(a)-(f) No change.

(g) Definitions.

        (i)-(vi) No change.

        (vii) The term "municipal securities business" means:

(A) the purchase of a primary offering (as defined in rule A-13(d) A-13(f)) of municipal securities from the issuer on other than a competitive bid basis (i.e., e.g., negotiated underwriting); or

(B) the offer or sale of a primary offering of municipal securities on behalf of any issuer (i.e., e.g., private placement); or

(C)-(D) No change.

        (viii) No change.

(h) No change.

(i) A registered securities association with respect to a broker, dealer or municipal securities dealer who is a member of such association, or the appropriate regulatory agency as defined in Section 3(a)(34) of the Act with respect to any other broker, dealer or municipal securities dealer, upon application, may exempt, conditionally or unconditionally, a broker, dealer or municipal securities dealer who is prohibited from engaging in municipal securities business with an issuer pursuant to paragraph section (b) of this rule from such prohibition. In determining whether to grant such exemption, the registered securities association or appropriate regulatory agency shall consider, among other factors, whether:

        (i)-(ii) No change.

 

Rule G-39 – Telemarketing

(a) No broker, dealer or municipal securities dealer or person associated with a broker, dealer or municipal securities dealer shall:

 

        (a) (i) make outbound telephone calls to the residence of any person for the purpose of soliciting the purchase of municipal securities or related services at any time other than between 8 a.m. and 9 p.m. local time at the called person’s location, without the prior consent of the person; or

        (b) (ii) make an outbound telephone call to any person for the purpose of soliciting the purchase of municipal securities or related services without disclosing promptly and in a clear and conspicuous manner to the called person the following information:

(i) (A) the identity of the caller and the firm;

(ii) (B) the telephone number or address at which the caller may be contacted; and

(iii) (C) that the purpose of the call is to solicit the purchase of municipal securities or related services.

 

(c) (b) The prohibitions of paragraphs section (a) and (b) shall not apply to telephone calls by any person associated with a broker, dealer or municipal securities dealer, or another associated person acting at the direction of such person for the purpose of maintaining and servicing the accounts of existing customers of the broker, dealer or municipal securities dealer under the control of or assigned to such associated person:

        (i)-(iii) No change.

For the purpose of paragraph (c) section (b), the term "existing customer" means a customer for whom the broker, dealer or municipal securities dealer, or a clearing broker or dealer on behalf of such broker, dealer or municipal securities dealer, carries an account. The scope of this rule is limited to the telemarketing calls described herein; the terms of this rule shall not otherwise expressly or by implication impose on brokers, dealers or municipal securities dealers any additional requirements with respect to the relationship between a broker, dealer or municipal securities dealer and a customer or between a person associated with a broker, dealer or municipal securities dealer and a customer.

---

ENDNOTES

1.  File No. SR-MSRB-99-4. Comments submitted to the SEC should refer to this file number.

2.  Underlining indicates additions; strikethrough indicates deletions.

 

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

   

Customer Transaction Reporting Reminder on Transactions with Issuers and New Error Codes

Questions about this notice should be directed to John Baughman, Senior Data Analyst and Supervisor, at (202) 223-9347.

Reminder – New Issue Transactions with Issuers

MSRB rule G-14 requires that all transactions effected with customers must be reported to the MSRB by midnight on the day of the trade. The Board reminds submitters of transaction information to the Transaction Reporting System that MSRB rule D-9 defines "customer" as "...any person other than a broker, dealer, or municipal securities dealer acting in its capacity as such or an issuer in transactions involving the sale by the issuer of a new issue of its securities."¹ The Board has discovered that, in at least one instance, sales by an issuer of a new issue to the underwriter may have been reported as a customer trade. A sale by the issuer to the underwriter of a new issue underwriting should not be reported to the MSRB Transaction Reporting System. Of course, sales of the new issue by the underwriter to customers or to other dealers must be reported either as customer trades or inter-dealer trades, as appropriate.

Additional Error Codes

The Transaction Reporting System has added two additional error codes. Beginning Monday, April 26, 1999, two new error messages will become part of the Transaction Reporting System data edit routine. These error messages are:

Error 402 RCD IGNORED: Cannot amend CUSIP number

Error 403 RCD IGNORED: Cannot amend trade date

If an attempt is made to amend either the trade date or CUSIP number, the submitter will receive one of these error messages and the existing trade record that previously was submitted to the Transaction Reporting System will remain unchanged.

The Transaction Reporting System allows for some data elements to be amended. This might be necessary, for example, when the settlement date for a new issue changes, causing new prices to be computed. However, some data elements are so integral to a trade that they cannot be amended in the Transaction Reporting System. The Board previously noted in the User's Manual for Customer Transaction Reporting to the MSRB ² that the CUSIP number could not be amended for transactions submitted to the Transaction Reporting System. Similarly, the Board did not anticipate that there would be any general need to revise the trade date after the initial submission of a trade. Dealers wishing to amend a transaction CUSIP number or trade date should cancel the transaction record and send a new record with the correct information.

April 15, 1999

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ENDNOTES

1. MSRB Manual (CCH), � 3241 (emphasis added).

2. The User’s Manual for Customer Transaction Reporting to the MSRB is posted on the Board’s web site at www.msrb.org.

 

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