Volume 16, Number 1 JANUARY 1996
NOTICE OF FILING Route To: Manager, Muni Department Sales Trading Public Finance
The proposed amendment makes several clarifying and technical changes to the text of rule G-15(a), which was completely revised in 1995.
Questions about the proposed amendment may be directed to Marianne I. Dunaitis, Assistant General Counsel.
On November 28, 1995, the Board filed with the Securities and Exchange Commission (Commission) a proposed amendment to rule G-15(a), regarding customer confirmations.1 The proposed amendment makes several clarifying and technical changes to the text of rule G-15(a), which was completely revised in 1995. The new rule language of the proposed amendment will be effective February 26, 1996. Delayed effectiveness will allow dealers an opportunity to revise their confirmation procedures to accommodate the clarified requirements set forth in the proposed amendment. One portion of the proposed amendment changes the current language in rule G-15(a)(i)(A)(6)(h) regarding disclosure of the "premium paid over accreted value" for transactions in callable zero coupon bonds. This specific disclosure requirement became effective on November 15, 1995. Because dealers have indicated technical difficulties in complying with the current language of the rule, the Board has requested that the November 15 version of the language be withdrawn immediately, to be replaced by the amended provision, for effectiveness on February 26, 1996.
On July 11, 1995, the Commission approved the Board's recent amendment to rule G-15(a), on customer confirmations, which became effective on November 15, 1995.2 This amendment constituted a major revision of the rule, which not only revised and reorganized the rule, but incorporated many interpretations that had been issued over the years.
The Board has identified a need for several technical amendments to clarify certain provisions of the revised rule language. First, the requirement in rule G-15(a)(i)(D)(1) to provide a two-part disclosure statement for zero coupon bonds should make clear that the latter part of the disclosure statement regarding call provisions is necessary on confirmations only if the bonds are callable. Therefore, the proposed amendment adds the language "if applicable" before the disclosure statement for call provisions. Second, rule G-15(a)(ii) requires dealers to provide a separate written confirmation for each transaction. The proposed amendment would clarify that separate confirmations may be printed as part of one document, as long as the information unique to each trade (e.g., securities description, yield, call information) is segregated and complies with the requirements of the rule.
Third, rule G-15(a)(i)(C)(1)(a) states that revenue bonds must be so identified, regardless of whether such designation appears in the title of the bond. In some cases, this provision leads to the revenue designation being stated twice on the confirmation, once in the title, and again in a separate information block. The proposed amendment makes clear that, if the bond is identified as a revenue bond in the title, there is no need to make an additional disclosure that the bond is a revenue bond. Fourth, dealers are required to disclose the initial public offering price of original issue discount securities in rule G-15(a)(i)(C)(4)(c). The proposed amendment would make clear that the initial public offering price should be expressed as a dollar price, rather than a yield.
Finally, rule G-15(a)(i)(A)(6)(h) states that the confirmation shall disclose any premium paid over the "accreted value" for callable zero coupon bonds. The rationale behind this provision was that customers purchasing callable zero coupon bonds sometimes do not understand that the price paid for the bonds in the secondary market can include a premium over the price at which all or some of the bonds may be called. This portion of the customer's investment is at risk to call.3 The Board believes that the most important information for the customer in this situation is the amount of the purchase price at risk to a call at the lowest price at which all or some of the customer's bonds can be called. While the current language of rule G-15(a)(i)(A)(6)(h) stated this information in terms of "premium over accreted value," it is not entirely accurate since a customer's bonds are not always callable at accreted value. For example, a call may be possible at a price that is a percentage of accreted value (e.g., 102% of accreted value).
Accordingly, the text of the proposed amendment states simply that the amount to be disclosed is the percentage of the purchase price at risk due to the lowest possible call price that might be experienced by the customer. It further clarifies that the percentage must be calculated as the ratio between (i) the difference between the price paid by the customer and the lowest possible call price, and (ii) the price paid by the customer. It also makes clear that such an at-risk percentage must be disclosed only if it is applicable to the transaction. The Board believes that the proposed amendment more clearly reflects the rationale behind the provision than the current language.
In order to simplify compliance for dealers, the Board requested that the current language in rule G-15(a)(i)(A)(6)(h) regarding disclosure of the "premium paid over accreted value" be withdrawn, effective upon filing. However, in order to allow dealers an opportunity to revise their confirmation procedures to accommodate the clarification provided by the proposed amendment, the new rule language of the proposed amendment will be effective February 26, 1996.
November 28, 1995
Rule G-15(a). Customer Confirmations (i) (A) (1) - (5) No change. (6) Final Monies. The following information relating to the calculation and display of final monies shall be shown: (a) - (g) No change. (h) for callable zero coupon securities, {any premium paid over the accreted value of the securities} *if applicable, the percentage of the purchase price at risk due to the lowest possible call, which shall be calculated based upon the ratio between (i) the difference between the price paid by the customer and the lowest possible call price, and (ii) the price paid by the customer.} (7) - (8) No change. (B) No change. (C) Securities descriptive information. The confirmation shall include descriptive information about the securities which includes, at a minimum: (1) Credit backing. The following information, if applicable, regarding the credit backing of the security: (a) Revenue securities. For revenue securities, a notation of that fact, {regardless of whether such designation appears in the formal title of the security,} and a notation of the primary source of revenue (e.g., project name). *This subparagraph will be satisfied if these designations appear on the confirmation in the formal title of the security or elsewhere in the securities description.* (b) No change. (2) - (3) No change. (4) Tax information. The following information that may be related to the tax treatment of the security: (a) - (b) No change. (c) Original issue discount securities. If the securities pay periodic interest and are sold by the underwriter as original issue discount securities a designation that they are "original issue discount" securities and a statement of the initial public offering price of the securities, *expressed as a dollar price.* (D) Disclosure statements: (1) The confirmation for zero coupon securities shall include a statement to the effect that "No periodic payments*," and, if applicable,* "callable below maturity value without notice by mail to holder unless registered." (2) No change. (E) No change. (ii) Separate confirmation for each transaction. Each broker, dealer or municipal securities dealer for each transaction in municipal securities shall give or send to the customer a separate written confirmation in accordance with the requirements of (i) above. *Multiple confirmations may be printed on one page, provided that each transaction is clearly segregated and the information provided for each transaction complies with the requirements of (i) above; provided, however, that if multiple confirmations are printed in a continuous manner within a single document, 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, rather than being included in the confirmation information for each transaction.* (iii) - (vi) No change.
[1] File No. SR-MSRB-95-18. Comments submitted to the Commission should refer to this file number.
[2] See Sec. Exchange Act Rel. No. 35953 (July 11, 1995).
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