Request for Comments on Official Communications

Comments on the proposed rule should be submitted no later than June 7, 2001 and may be directed to Justin R. Pica, Uniform Practice Assistant.  Written comments will be available for public inspection.

The MSRB requests comments on a draft amendment to rule G-15, on confirmation, clearance and settlement of transactions with customers.  The draft amendment concerns “official communications” such as default notices that are sometimes sent to beneficial owners by issuers or trustees.  The draft amendment would require brokers, dealers and municipal securities dealers (collectively “dealers”) to take reasonable efforts to pass on such communications to beneficial owners when an appropriate request to do so is received.

Background

The MSRB has become aware of investors who failed to receive a notice of default due to a dealer’s failure to retransmit the notice to the investors for whom it was safekeeping securities.  The MSRB believes that it is important for important official communications to be retransmitted in an efficient manner and thus is proposing a requirement for dealers safekeeping municipal securities to assist in this process. 

Summary of Draft Amendment

The draft amendment would require a dealer to respond to a request received from an issuer or trustee to pass on an official communication to the parties for whom the dealer is safekeeping municipal securities.  The draft amendment generally tracks similar requirements in the equity markets for forwarding of proxy and other materials pursuant to NASD rule 2260.

The draft amendment to rule G-15 would:

• Define “official communication to beneficial owners” to include notices of technical default, or defaults as to payment of interest or principal, requests for votes by bondholders, update memoranda from the trustee of a defaulted issue, as well as other official communications to bondholders of bonds that are not in default.[1]

• Require a dealer, upon receiving an official communication to beneficial owners and an appropriate request to forward such communication, to use reasonable efforts to forward promptly such communication to those persons for whom the dealer is safekeeping the securities.

• Outline factors relevant in determining whether “reasonable efforts” were used, including (1) CUSIP numbers, (2) compensation, (3) sufficient copies of official communications, (4) alternative actions for non-objecting beneficial owners, and (5) beneficial owners residing outside of the United States.

Reasonable Efforts

The draft amendment would require dealers to undertake “reasonable efforts” in retransmitting an official communication.  The following factors are relevant in determining what is reasonable; however, this list is not necessarily exhaustive.

CUSIP Numbers

A special problem in the municipal securities market is that some official communications may be received without CUSIP numbers on the communication.  Since dealers may encounter difficulty in determining the CUSIP numbers associated with a specific issuer document, the draft amendment states that, in such cases, the dealer shall use its best efforts to determine the CUSIP numbers, but would not violate the draft amendment if, after making such an effort, the dealer failed to correctly identify the CUSIP numbers to which the document applied.  Identifying CUSIP numbers accurately is crucial to identifying the parties to whom a communication should be sent.

Compensation

The draft amendment would require dealers to retransmit official communications if adequate compensation is offered.  This is the same principle used in the regulations governing forwarding of notices of proxy and other material in NASD rule 2260.  Since the types of communications a dealer may receive and the amount of work a dealer may have to perform in order to retransmit notices probably will vary greatly from case to case, there is no attempt in the draft amendment to specify what adequate compensation would be in each possible case. 

To give some guidance on this issue, the draft amendment references the rates of compensation for transmittal of documents detailed in NASD interpretation IM-2260 relating to forwarding of proxy and other materials.  Dealers may reference this interpretation in determining reasonable clerical expenses and other such expenses incurred in retransmitting an official communication.  This interpretation may be found in the NASD Manual under Conduct Rules. 

The draft amendment states that, if the total compensation sought will be less than $500, the dealer should begin retransmitting immediately and ask for the calculated compensation concurrently.  If the compensation sought will be more than $500, the dealer should seek specific agreement on the amount of compensation with the issuer or trustee, and may wait for receipt of the compensation prior to beginning the process.

Sufficient Copies of Official Communications

The draft amendment would not require dealers to provide duplication services for official communications.  If a dealer does not receive enough copies of official communications for the investors for whom it safekeeps securities, the dealer may elect to provide duplication services or may request the sufficient number of copies from the issuer or trustee.

Non-Objecting Beneficial Owners

The draft amendment would allow dealers the option of sending to an issuer a list of non-objecting beneficial owners along with these owners’ contact information in lieu of transmitting documents.  A non-objecting beneficial owner is a beneficial owner that does not object to the disclosure of its name, contact information and security positions.  Since some investors may not want their name and security positions disclosed, the draft amendment would require that dealers obtain an investor’s non-objecting status in writing and maintain it as a record.  This option is consistent with a recommendation outlined in the Joint Recommendations for Communicating with the Beneficial Owners of Defaulted Municipal Securities (“Joint Recommendations”).[2]  

Beneficial Owners Residing Outside of the United States

Dealers would not be required under the draft amendment to retransmit official communications to investors residing outside of the United States.  This clause is consistent with requirements in the equity markets for forwarding of proxy and other materials in NASD rule 2260.   

Request for Comments

The MSRB believes that dealers should undertake reasonable efforts to retransmit official communications that issuers or trustees send to their bondholders.  The MSRB requests comments on the draft amendment.  In particular, the MSRB solicits comment on whether the reasonable efforts described are adequate to accomplish the purpose and are fair to dealers.  Also, the MSRB would like feedback on whether $500 is a suitable threshold with respect to immediate retransmittal versus first concluding an agreement with the issuer or trustee.  Additionally, the MSRB would like to know whether other factors are relevant in determining reasonable efforts.    

March 28, 2001

Text of Draft Amendment *

Rule G-15. Confirmation, Clearance, and Settlement of and Other Uniform Practice Requirements With Respect to Transactions with Customers

(a) through (e) No change.

(f)  *Reserved for future use*

(g) Forwarding Official Communications

(i) If a broker, dealer or municipal securities dealer receives an official communication to beneficial owners applicable to an issue of municipal securities that the broker, dealer or municipal securities dealer has in safekeeping and is asked by the issuer, trustee or other party authorized by the issuer or trustee to forward such official communication to the applicable beneficial owners in compliance with rule G-15(g), the broker, dealer or municipal securities dealer shall use reasonable efforts to promptly retransmit the official communication to the parties for whom it is safekeeping the issue.

(ii) In determining whether reasonable efforts have been made to retransmit official communications, the following considerations are relevant:

(A)  CUSIP Numbers.  If CUSIP numbers are included on or with the official communication to beneficial owners, the broker, dealer or municipal securities dealer shall use such CUSIP number(s) in determining the issue(s) to which the official communication applies.  If CUSIP numbers are not included on or with the official communication, the broker, dealer or municipal securities dealer shall use reasonable efforts to determine the issue(s) to which the official communication applies; provided however, that it shall not be a violation of this rule if, after reasonable efforts are made, the issue(s) to which the official communication applies are not correctly identified by the broker, dealer or municipal securities dealer.

(B)   Compensation.  A broker, dealer or municipal securities dealer shall not be required by this rule to retransmit official communications without adequate compensation.  If compensation is explicitly offered in writing by the issuer, trustee, or party authorized by the issuer or trustee, the broker, dealer or municipal securities dealer shall proceed with the following actions, depending on the compensation required.  If total compensation would be $500.00 or less, the broker, dealer or municipal securities dealer shall effect the retransmission and seek compensation concurrently.  If total compensation would be more than $500.00, the broker, dealer or municipal securities dealer shall contact the issuer or trustee and inform the issuer or trustee of the amount of compensation required and obtain specific agreement on the amount of compensation prior to retransmitting the official communication and may wait for receipt of such compensation prior to proceeding.  In determining whether compensation is adequate, reference shall be made to the “Suggested Rates of Reimbursement” for expenses incurred in forwarding proxy material, annual reports, information statements and other material referenced in NASD Conduct Rule 2260 (g), taking into account revisions or amendments to such suggested rates as may be made from time to time.

(C)  Sufficient Copies of Official Communications.  A broker, dealer or municipal securities dealer is not required to provide duplication services for official communications but may elect to do so.  If sufficient copies of official communications are not received, and the broker, dealer or municipal securities dealer elects not to offer duplication services, the broker, dealer or municipal securities dealer shall request from the issuer or trustee or a designated representative for the issuer or trustee the correct number of copies of the official communication.

(D)  Non-Objecting Beneficial Owners.  In lieu of retransmitting official communications to beneficial owners who have indicated in writing that they do not object to the disclosure of their names and security positions, a broker, dealer or municipal securities dealer may instead promptly provide a list of such non-objecting beneficial owners and their addresses to the issuer or trustee or a designated representative for the issuer or trustee.

(E)   Beneficial Owners Residing Outside of the United States.  A broker, dealer or municipal securities dealer shall not be required to send official communications to persons outside of the United States of America, although brokers, dealers and municipal securities dealers may voluntarily do so.

(iii) Definitions

(A)  The terms “official communication to beneficial owners” and “official communication,” as used in this section (g), mean any document or collection of documents pertaining to a specific issue or issues of municipal securities that both:

(1)   is addressed to beneficial owners and that was prepared or authorized by an issuer of municipal securities, or prepared or authorized by a trustee for an issue of municipal securities in its capacity as trustee; and

(2)   contains official information about such issue or issues including, but not limited to, notices concerning monetary or technical defaults, financial reports, information statements, and material event notices.

*                      *                      *

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

(i) through (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) through (K) No change.

(L) with respect to official communications, customer’s written authorization, if any, that the customer does not object to the disclosure of their name, security position(s) and contact information to an issuer or trustee or a designated representative for the issuer or trustee for purposes of transmitting official communications as defined in G-15(g).