Notice of Approval
| Municipal
Fund Securities—Rule Changes Approved by the Securities and Exchange
Commission
|
|
Route To:
|
Amendments ApprovedThe Securities and Exchange Commission has approved a series of rule changes relating to municipal fund securities: Rules D-12, A-13, G-3, G-8, G-14, G-15, G-26, G-32 and G-34. |
Questions about the amendments may be directed to Ernesto A. Lanza, Associate General Counsel.
On January 18, 2001, the Securities and Exchange Commission (the “SEC”) approved certain rule changes relating to municipal fund securities filed by the Municipal Securities Rulemaking Board (the “MSRB” or “Board”).[1] The rule changes consist of (i) new rule D-12, on the definition of municipal fund security; (ii) amendments to rule A-13, on underwriting and transaction assessments for brokers, dealers and municipal securities dealers, rule G-3, on classification of principals and representatives, numerical requirements, testing and continuing education requirements, rule G-8, on books and records to be made by brokers, dealers and municipal securities dealers, rule G-14, on reports of sales or purchases, rule G-15, on confirmation, clearance and settlement of transactions with customers, rule G-26, on customer account transfers, rule G-32, on disclosures in connection with new issues, and rule G-34, on CUSIP numbers and new issue requirements; and (iii) an MSRB interpretation relating to sales of municipal fund securities in the primary market. The rule changes are effective immediately.
BACKGROUND
The MSRB has reviewed two types of state or local governmental programs involving investment interests in which brokers, dealers and municipal securities dealers (“dealers”) may effect transactions: pooled investment funds under trusts established by state or local governmental entities (“local government pools”)[2]and higher education savings plan trusts established by states (“higher education trusts”).[3] The MSRB believes that at least some interests in local government pools and higher education trusts are municipal securities within the meaning of Section 3(a)(29) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). A dealer transaction in such an interest that is a municipal security is subject to MSRB rules.[4]
MSRB rules do not apply to any interest in a local government pool or higher education trust that is not a municipal security. In addition, MSRB rules apply only to activities of dealers that effect municipal securities transactions. Thus, MSRB rules do not apply to an issuer of, or a non-dealer entity providing advice to issuers in regard to, municipal securities, including municipal fund securities. However, to the extent that interests in a local government pool or a higher education trust are municipal securities and dealers are effecting transactions in them, MSRB rules automatically apply to such dealer transactions by virtue of the provisions of the Exchange Act.
Description of Rule ChangeS
Rule D-12 – Definition of Municipal Fund Security. A municipal fund security is defined in new rule D-12 as a municipal security issued by an issuer that, but for Section 2(b) of the Investment Company Act of 1940 (the “Investment Company Act”),[5] would constitute an investment company under the Investment Company Act. A municipal fund security is, 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.[6]
Thus, MSRB rules on municipal fund securities apply to interests in a state or local governmental trust, such as local government pools and higher education trusts,[7] only if the following three conditions are met:
1. A dealer is engaging in transactions in such interests;
2. Such interests, in fact, constitute municipal securities; and
3. Such interests are issued by an issuer that, but for the exemption under Section 2(b) of the Investment Company Act, would be considered an investment company within the meaning of that Act.
For a security to constitute a municipal fund security, the security must first constitute a municipal security. If an investment is a municipal fund security, then dealer transactions in such investments are subject to all MSRB rules as a municipal security but receive special treatment in those instances where provisions have been added relating specifically to municipal fund securities.
Rule A-13 – Assessments. Amended rule A-13 exempts the sale of municipal fund securities from the underwriting assessment imposed under section (b) thereof.
Rule G-3 – Professional Qualifications. Amended rule G-3 permits an associated person qualified as an investment company limited representative to effect transactions in municipal fund securities (but no other municipal securities).[8] However, a dealer must continue to 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 has been amended to ensure consistency with rules G-3 and G-15, as amended. Thus, amended rule G-8 recognizes that municipal fund securities do not have par values, dollar prices, yields and accrued interest and that investment company limited representatives may be permitted to effect transactions in municipal fund securities. In addition, amended rule G-8 requires that dealers retain copies of all periodic statements delivered to customers in lieu of individual confirmations with respect to transactions in municipal fund securities under amended rule G-15. Furthermore, amended rule G-8 permits a dealer effecting transactions in municipal fund securities to meet its books and records requirements by means of books and records maintained by a transfer agent for such municipal fund securities so long as those books and records meet the requirements of rule G-8 and such dealer remains responsible for the accurate maintenance and preservation of such books and records.
Rule G-14 – Transaction Reporting. Rule G-14(b)(i) has been amended 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. The Transaction Reporting Procedures have been amended to expressly exempt any transaction in municipal fund securities from the customer transaction reporting system.
Rule G-15 – Customer Confirmations. Various amendments have been made to rule G-15 to effect changes relating to the concepts of par value, yield, dollar price, maturity date and interest, none of which appropriately apply to a municipal fund security. Thus, on a confirmation of a municipal fund security transaction, a dealer is required to use the purchase or sale price of the security (as appropriate) rather than par value and may omit yield, dollar price, accrued interest, extended principal, maturity date and interest rate. Dealers selling municipal fund securities are required to include the purchase price of each share or unit (rather than denomination) as well as the number of shares or units to be delivered. Confirmations of municipal fund securities transactions are required to include a disclosure to the effect that a deferred commission or other charge may be imposed upon redemption, if applicable.[9] The amendment also makes clear that dealers must confirm redemptions of municipal fund securities. In addition, the confirmation must include the name used by the issuer to identify the security and, to the extent necessary to differentiate the security from other municipal fund securities of the issuer, any separate program series, portfolio or fund designation. However, a confirmation of a municipal fund security transaction need not show the information otherwise required under paragraph (a)(i)(C) of the rule.
In addition, amended rule G-15(a)(viii) permits a dealer effecting transactions in municipal fund securities under a periodic municipal fund security plan (a “periodic plan”) or a non-periodic municipal fund security program (a “non-periodic program”) to use periodic statements in lieu of individual transaction confirmations, subject to meeting certain specified requirements.[10] Both periodic plans and non-periodic programs involve a written authorization or arrangement for a dealer, acting as agent,[11] to purchase, sell or redeem specific municipal fund securities, setting forth the commissions or charges to be paid by the customer. In the case of a periodic plan, the authorization or arrangement must specify a specific amount of securities and specific time intervals for these transactions. In the case of a non-periodic program, the authorization or arrangement must instead provide for the purchase, sale or redemption of the securities at the direction of the customer.[12] The amendment permits dealers to use periodic statements in lieu of transaction-by-transaction confirmations, without obtaining any consents, for any customer that is not a natural person that participates in either a periodic plan or a non-periodic program or for any customer who is a natural person who participates in a periodic plan that constitutes a group plan (e.g., an employer-sponsored salary reduction plan). In the case of a natural person participating in a periodic plan other than a group plan or in any non-periodic program, the consent of either such person or of the issuer of the municipal fund securities to use of a periodic statement in lieu of individual transaction confirmations is required.[13]
Rule G-15(a)(viii)(B) permits dealers to consolidate on a periodic statement certain information relating to deferred commissions or other charges, the capacity of the dealer and the time of execution that may be identical for all transactions disclosed on the statement. In addition, such information may be omitted from the periodic statement if it is disclosed in a separate document that has previously been delivered to the customer and the periodic statement clearly indicates that such information is included in such document. Of course, a dealer would not be able to rely on this provision if such document has not in fact been delivered to the customer or if the information included in such document is not accurate with respect to any transaction disclosed on the periodic statement (e.g., if the information has subsequently been changed).
Rule G-26 – Customer Account Transfers. The definition of “nontransferable asset” and provisions for further instructions relating to nontransferable assets in rule G-26 have been amended 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-32 – Disclosures in Connection with New Issues. Amended rule G-32 permits a dealer to sell, pursuant to a periodic plan or a non-periodic program, a municipal fund security to a customer who has previously received the official statement so long as it sends to the customer a copy of any new, supplemented, amended or stickered official statement promptly upon receipt from the issuer (i.e., actual delivery by settlement is not required). The dealer is permitted to satisfy this delivery requirement by delivering the amendment alone (including a notice that the complete official statement is available upon request) so long as the customer already has the official statement that is being amended and the dealer ensures that the amendment makes clear what constitutes the complete official statement (as amended). In addition, in the case of sales of municipal fund securities for which periodic statements in lieu of transaction confirmations are used, the amendment excepts such sales from the requirement that information on the underwriting arrangements be provided to customers by settlement so long as such information is disclosed at least annually and information on any fee changes paid by the issuer to the dealer be sent to customers simultaneously with or prior to the sending of the next periodic statement.
Rule G-34 – CUSIP Numbers and Depository Eligibility. Municipal fund securities are exempted from the requirements of rule G-34.
Interpretation Relating to Sales of Municipal Fund Securities in the Primary Market. Interpretive guidance is provided in connection with the application of rules G-23, G-32, G-36, G-37 and G-38 to dealer transactions in municipal fund securities.
January 19, 2001
TEXT OF AMENDMENTS[14]
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 A-13. Underwriting and Transaction Assessments for Brokers, Dealers and Municipal Securities Dealers
(a) Underwriting Assessments – Scope. Each broker, dealer and municipal securities dealer shall pay to the Board an underwriting fee as set forth in section (b) for all municipal securities purchased from an issuer by or through such broker, dealer or municipal securities dealer, whether acting as principal or agent, as part of a primary offering, provided that section (b) of this rule shall not apply to a primary offering of securities if all such securities in the primary offering:
(i)-(ii) No change.
(iii)
at the option of the holder thereof, may be tendered to an issuer of such
securities or its designated agent for redemption or purchase at par value or
more at least as frequently as every nine months until maturity, earlier
redemption, or purchase by an issuer or its designated agent; or
(iv) have authorized denominations of $100,000 or more and are sold to no more than thirty-five persons each of whom the broker, dealer or municipal securities dealer reasonably believes: (A) has the knowledge and experience necessary to evaluate the merits and risks of the investment; and (B) is not purchasing for more than one account, with a view toward distributing the securities; or
(v) constitute municipal fund securities.
If a syndicate or similar account has been formed for the purchase of the securities, the underwriting fee shall be paid by the managing underwriter on behalf of each participant in the syndicate or similar account.
(b)-(f) No change.
Rule G-3. Classification of Principals and Representatives; Numerical Requirements; Testing; Continuing Education Requirements
No broker, dealer or municipal securities dealer or person who is a municipal securities representative, municipal securities principal, municipal securities sales principal or financial and operations principal (as hereafter defined) shall be qualified for purposes of rule G-2 unless such broker, dealer or municipal securities dealer or person meets the requirements of this rule.
(a) Municipal Securities Representative.
(i) No change.
(ii) Qualification Requirements.
(A)-(B) No change.
(C) The requirements of subparagraph (a)(ii)(A) of this rule shall not apply to any person who is duly qualified as a limited representative – investment company and variable contracts products by reason of having taken and passed the Limited Representative – Investment Company and Variable Contracts Products Examination, but only if such person’s activities with respect to municipal securities described in paragraph (a)(i) of this rule are limited solely to municipal fund securities.
(D) Any person who ceases to be associated with a broker,
dealer or municipal securities dealer (whether as a municipal securities
representative or otherwise) for two or more years at any time after having
qualified as a municipal securities representative in accordance with
subparagraphs (a)(ii)(A), (B) or (C) or (B) shall again
meet the requirements of subparagraphs (a)(ii)(A), (B) or (C) or
(B) prior to being qualified as a municipal securities representative.
(iii) Apprenticeship.
(A) Any person who first becomes
associated with a broker, dealer or municipal securities dealer in a
representative capacity (whether as a municipal securities representative,
or general securities representative or limited representative –
investment company and variable contracts products) without having
previously qualified as a municipal securities representative, or
general securities representative or limited representative – investment
company and variable contracts products shall be permitted to function in a
representative capacity without qualifying pursuant to subparagraph[s]
(a)(ii)(A), (B) or (C) or (B) for a period of at least 90 days
following the date such person becomes associated with a broker, dealer or
municipal securities dealer, provided, however, that such person shall not
transact business with any member of the public with respect to, or be
compensated for transactions in, municipal securities during such 90 day period,
regardless of such person’s having qualified in accordance with the examination
requirements of this rule. A person subject to the requirements of this
paragraph (a)(iii) shall in no event continue to perform any of the functions
of a municipal securities representative after 180 days following the
commencement of such person’s association with such broker, dealer or
municipal securities dealer, unless such person qualifies as a municipal
securities representative pursuant to subparagraphs (a)(ii)(A), (B)
or (C) or (B).
(B) Prior experience, of at least 90 days, as a general
securities representative, limited representative – investment company and
variable contracts products mutual fund salesperson or limited
representative – government securities representative, will meet the
requirements of this paragraph (a)(iii).
(b)-(h) No change.
Rule G-8. Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers
(a) Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:
(i) Records of Original Entry. “Blotters” or other records of original entry containing an itemized daily record of all purchases and sales of municipal securities, all receipts and deliveries of municipal securities (including certificate numbers and, if the securities are in registered form, an indication to such effect), all receipts and disbursement of cash with respect to transactions in municipal securities, all other debits and credits pertaining to transactions in municipal securities, and in the case of brokers, dealers and municipal securities dealers other than bank dealers, all other cash receipts and disbursements if not contained in the records required by any other provision of this rule. The records of original entry shall show the name or other designation of the account for which each such transaction was effected (whether effected for the account of such broker, dealer or municipal securities dealer, the account of a customer, or otherwise), the description of the securities, the aggregate par value of the securities, the dollar price or yield and aggregate purchase or sale price of the securities, accrued interest, the trade date, and the name or other designation of the person from whom purchased or received or to whom sold or delivered. With respect to accrued interest and information relating to “when issued” transactions which may not be available at the time a transaction is effected, entries setting forth such information shall be made promptly as such information becomes available. Dollar price, yield and accrued interest relating to any transaction shall be required to be shown only to the extent required to be included in the confirmation delivered by the broker, dealer or municipal securities dealer in connection with such transaction under rule G-12 or rule G-15.
(ii)-(viii) No change.
(ix) Copies of Confirmations, Periodic Statements and Certain Other Notices to Customers. A copy of all confirmations of purchase or sale of municipal securities, of all periodic written statements disclosing purchases, sales or redemptions of municipal fund securities pursuant to rule G-15(a)(viii) and, in the case of a broker, dealer or municipal securities dealer other than a bank dealer, of all other notices sent to customers concerning debits and credits to customer accounts or, in the case of a bank dealer, notices of debits and credits for municipal securities, cash and other items with respect to transactions in municipal securities.
(x) No change.
(xi) Customer Account Information. A record for each customer, other than an institutional account, setting forth the following information to the extent applicable to such customer:
(A)-(G) No change.
(H) signature of municipal securities representative, and
general securities representative or limited representative – investment
company and variable contracts products introducing the account and
signature of a municipal securities principal, municipal securities sales
principal or general securities principal indicating acceptance of the account;
(I)-(K) No change.
For purposes of this
subparagraph, the terms “general securities representative,” and
“general securities principal” and “limited representative – investment
company and variable contracts products” shall mean such persons as so
defined by the rules of a national securities exchange or registered securities
association. For purposes of this subparagraph, the term “institutional
account” shall mean the account of (i) a bank, savings and loan association,
insurance company, or registered investment company; (ii) an investment adviser
registered either with the Commission under Section 203 of the Investment
Advisers Act of 1940 or with a state securities commission (or any agency or
office performing like functions); or (iii) any other entity (whether a natural
person, corporation, partnership, trust, or otherwise) with total assets of at
least $50 million. Anything in this subparagraph to the contrary
notwithstanding, every broker, dealer and municipal securities dealer shall
maintain a record of the information required by items (A), (C), (F), (H), (I)
and (K) of this subparagraph with respect to each customer which is an
institutional account.
(xii)-(xix) No change.
(b)-(f) No change.
(g) Transactions in Municipal Fund Securities.
(i) Books and Records Maintained by Transfer Agents. Books and records required to be maintained by a broker, dealer or municipal securities dealer under this rule solely with respect to transactions in municipal fund securities may be maintained by a transfer agent registered under Section 17A(c)(2) of the Act used by such broker, dealer or municipal securities dealer in connection with such transactions; provided that such broker, dealer or municipal securities dealer shall remain responsible for the accurate maintenance and preservation of such books and records.
(ii) 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 (A) 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 (B) in the case of a sale or tender for redemption of a municipal fund security by a customer, the sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.
Rule G-14. Reports of Sales or Purchases
(a) No change.
(b) Transactions Reporting Requirements.
(i) Each broker, dealer or municipal securities dealer shall report to the Board or its designee information about its transactions in municipal securities to the extent required by, and using the formats and within the timeframes specified in, Rule G-14 Transaction Reporting Procedures. Transaction information collected by the Board under this rule will be used to make public reports of market activity and prices and to assess transaction fees. The transaction information will be made available by the Board to the Commission, securities associations registered under Section 15A of the Act and other appropriate regulatory agencies defined in Section 3(a)(34)(A) of the Act to assist in the inspection for compliance with and the enforcement of Board rules.
(ii)-(iii) No change.
Rule G-14 Transaction Reporting Procedures
(a) No change.
(b) Customer Transactions.
(i)-(ii) No change.
(iii) The following transactions shall not be required to be reported under this section (b):
(A) A a transaction in a municipal
security that is ineligible for assignment of a CUSIP number by the Board or
its designee; and shall not be required to be reported under this
section (b).
(B) a transaction in a municipal fund security.
(iv) No change.
Rule G-15. Confirmation, Clearance and Settlement of Transactions with Customers
(a) Customer Confirmations
(i) At or before the completion of a transaction in municipal securities with or for the account of a customer, each broker, dealer or municipal securities dealer shall give or send to the customer a written confirmation that complies with the requirements of this paragraph (i):
(A) Transaction information. The confirmation shall include information regarding the terms of the transaction as set forth in this subparagraph (A):
(1)-(2) No change.
(3) Par value. The par value of the securities shall be shown, with special requirements for the following securities:
(a) No change.
(b) Municipal fund securities. For municipal fund securities, in place of par value, the confirmation shall show (i) in the case of a purchase of a municipal fund security by a customer, the total purchase price paid by the customer, exclusive of any commission, and (ii) in the case of a sale or tender for redemption of a municipal fund security by a customer, the total sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.
(4) No change.
(5) Yield and dollar price. Yields and dollar prices shall be computed and shown in the following manner, subject to the exceptions stated in subparagraph (A)(5)(d) of this paragraph:
(a)-(c) No change.
(d) Notwithstanding the requirements noted in subparagraphs
(A)(5)(a) through (c) of this paragraph, above:
(i)-(v) No change.
(vi) Municipal fund securities. For municipal fund securities, neither yield nor dollar price shall be shown.
(6) Final Monies. The following information relating to the calculation and display of final monies shall be shown:
(a) No change.
(b) amount of accrued interest, with special requirements for the following securities:
(i)-(ii) No change.
(iii) Municipal fund securities. For municipal fund securities, no figure for accrued interest shall be shown;
(c) if the securities pay interest on a current basis but are traded without interest, a notation of “flat;”
(d) extended principal amount, with special requirements for the following securities:
(i) No change.
(ii) Municipal fund securities. For municipal fund securities, no extended principal amount shall be shown;
(e)-(h) No change.
(7) Delivery of securities. The following information regarding the delivery of securities shall be shown:
(a) Securities other than bonds or municipal fund securities. For securities other than bonds or municipal fund securities, denominations to be delivered;
(b) No change.
(c) Municipal fund securities. For municipal fund securities, the purchase price, exclusive of commission, of each share or unit and the number of shares or units to be delivered;
(d) Delivery instructions. Instructions, if
available, regarding receipt or delivery of securities, and form of
payment, if other than as usual and customary between the parties.
(8) No change.
(B) Securities identification information. The confirmation shall include a securities identification which includes, at a minimum:
(1) the name of the issuer, with special requirements for the following securities:
(a) For stripped coupon securities, the trade name and series designation assigned to the stripped coupon municipal security by the broker, dealer or municipal securities dealer sponsoring the program must be shown;
(b) Municipal fund securities. For municipal fund securities, the name used by the issuer to identify such securities and, to the extent necessary to differentiate the securities from other municipal fund securities of the issuer, any separate program series, portfolio or fund designation for such securities must be shown;
(2) No change.
(3) maturity date, if any, with special requirements for the following securities:
(a) No change.
(b) Municipal fund securities. For municipal fund securities, no maturity date shall be shown;
(4) interest rate, if any, with special requirements for the following securities:
(a)-(e) No change.
(f) Municipal fund securities. For municipal fund securities, no interest rate shall be shown;
(5) No change.
(C) Securities descriptive information. The confirmation shall include descriptive information about the securities which includes, at a minimum:
(1)-(4) No change.
(5) Municipal fund securities. For municipal fund securities, the information described in clauses (1) through (4) of this subparagraph (C) is not required to be shown.
(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.
(E) Confirmation format. All requirements must be clearly and specifically indicated on the front of the confirmation, except that the following statements may be on the reverse side of the confirmation:
(1) The disclosure statements required in subparagraph (D)(1) and (2)
, (D)(2) or (D)(3)
of this paragraph, provided that their specific applicability is noted on the
front of the confirmation.
(2)-(3) No change.
(ii)-(iii) No change.
(iv) Confirmation to customers who tender put option bonds or municipal fund securities. A broker, dealer, or municipal securities dealer that has an interest in put option bonds (including acting as remarketing agent) and accepts for tender put option bonds from a customer, or that has an interest in municipal fund securities (including acting as agent for the issuer thereof) and accepts for redemption municipal fund securities tendered by a customer, is engaging in a transaction in such municipal securities and shall send a confirmation under paragraph (i) of this section.
(v) No change.
(vi) Definitions. For purposes of this rule, the following terms shall have the following meanings:
(A)-(F) No change.
(G) The term “periodic municipal fund security plan” shall mean any written authorization or arrangement for a broker, dealer or municipal securities dealer, acting as agent, to purchase, sell or redeem for a customer or group of customers one or more specific municipal fund securities, in specific amounts (calculated in security units or dollars), at specific time intervals and setting forth the commissions or charges to be paid by the customer in connection therewith (or the manner of calculating them).
(H) The term “non-periodic municipal fund security program” shall mean any written authorization or arrangement for a broker, dealer or municipal securities dealer, acting as agent, to purchase, sell or redeem for a customer or group of customers one or more specific municipal fund securities, setting forth the commissions or charges to be paid by the customer in connection therewith (or the manner of calculating them) and either (1) providing for the purchase, sale or redemption of such municipal fund securities at the direction of the customer or customers or (2) providing for the purchase, sale or redemption of such municipal fund securities at the direction of the customer or customers as well as authorizing the purchase, sale or redemption of such municipal fund securities in specific amounts (calculated in security units or dollars) at specific time intervals.
(vii) Price substituted for par value of municipal fund securities. For purposes of this rule, each reference to the term “par value,” when applied to a municipal fund security, shall be substituted with (i) in the case of a purchase of a municipal fund security by a customer, the purchase price paid by the customer, exclusive of any commission, and (ii) in the case of a sale or tender for redemption of a municipal fund security by a customer, the sale price or redemption amount paid to the customer, exclusive of any commission or other charge imposed upon redemption or sale.
(viii) Alternative periodic reporting for certain transactions in municipal fund securities. Notwithstanding any other provision of this section (a), a broker, dealer or municipal securities dealer may effect transactions in municipal fund securities with customers without giving or sending to such customer the written confirmation required by paragraph (i) of this section (a) at or before completion of each such transaction if:
(A) such transactions are effected pursuant to a periodic municipal fund security plan or a non-periodic municipal fund security program; and
(B) such broker, dealer or municipal securities dealer gives or sends to such customer within five business days after the end of each quarterly period, in the case of a customer participating in a periodic municipal fund security plan, or each monthly period, in the case of a customer participating in a non-periodic municipal fund security program, a written statement disclosing, for each purchase, sale or redemption effected for or with, and each payment of investment earnings credited to or reinvested for, the account of such customer during the reporting period, the information required to be disclosed to customers pursuant to subparagraphs (A) through (D) of paragraph (i) of this section (a), with the information regarding each transaction clearly segregated; provided that it is permissible:
(1) for the name and address of the broker, dealer or municipal securities dealer and the customer to appear once at the beginning of the periodic statement; and
(2) for information required to be included pursuant to subparagraph (A)(1)(d), (A)(2)(a) or (D)(3) of paragraph (i) of this section (a) to:
(a) appear once in the periodic statement if such information is identical for all transactions disclosed in such statement; or
(b) be omitted from the periodic statement, but only if such information previously has been delivered to the customer in writing and the periodic statement includes a statement indicating that such information has been provided to the customer and identifying the document in which such information appears; 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 periodic basis in lieu of an immediate confirmation for each transaction; and
(E) such customer has consented in writing to receipt of the written information referred to in subparagraph (B) of this paragraph (viii) on a periodic basis in lieu of an immediate confirmation for each transaction; provided, however, that such customer consent shall not be required if:
(1) the customer is not a natural person;
(2) the customer is a natural person who participates in a periodic municipal fund security plan described in subparagraph (C) of this paragraph (viii); or
(3) the customer is a natural person who participates in a periodic municipal fund security plan (other than a plan described in subparagraph (C) of this paragraph (viii)) or a non-periodic municipal fund security program and the issuer has consented in writing to the use by the broker, dealer or municipal securities dealer of the periodic written information referred to in subparagraph (B) of this paragraph (viii) in lieu of an immediate confirmation for each transaction with each customer participating in such plan or program.
(b)-(e) No change.
Rule G-26. Customer Account Transfers
(a) Definitions. For purposes of this rule, the following terms have the following meanings:
(i)-(ii) No change.
(iii) The term “nontransferable asset” means an asset that is incapable of being transferred from the carrying party to the receiving party because (A) it is an issue in default for which the carrying party does not possess the proper denominations to effect delivery and no transfer agent is available to re-register the securities, or (B) it is a municipal fund security which the issuer requires to be held in an account carried by one or more specified brokers, dealers or municipal securities dealers that does not include the receiving party.
(b) No change.
(c) Transfer Instructions.
(i) No change.
(ii) If an account includes any nontransferable assets, the carrying party must request, in writing and prior to or at the time of validation of the transfer instruction, further instructions from the customer with respect to the disposition of such assets. Such request shall provide the customer with the following alternative methods of disposition of nontransferable assets, if applicable:
(A) No change.
(B) retention by the carrying party for the customer’s benefit; or
(C) in the case of a nontransferable asset described in section (a)(iii)(B), transfer to another broker, dealer or municipal securities dealer, if any, which the issuer has specified as being permitted to carry such asset.
(d)-(i) No change.
Rule G-32. Disclosures in Connection with New Issues
(a) Customer Disclosure Requirements. No broker, dealer or municipal securities dealer shall sell, whether as principal or agent, any new issue municipal securities to a customer unless such broker, dealer or municipal securities dealer delivers to the customer no later than the settlement of the transaction:
(i) a copy of the official statement in final form prepared by or on behalf of the issuer or, if an official statement in final form is not being prepared by or on behalf of the issuer, a written notice to that effect together with a copy of an official statement in preliminary form, if any; provided, however, that:
(A) if a customer who participates in a periodic municipal fund security plan or a non-periodic municipal fund security program has previously received a copy of the official statement in final form in connection with the purchase of municipal fund securities under such plan or program, a broker, dealer or municipal securities dealer may sell additional shares or units of the municipal fund securities under such plan or program to the customer if such broker, dealer or municipal securities dealer sends to the customer a copy of any new, supplemented, amended or “stickered” official statement in final form, by first class mail or other equally prompt means, promptly upon receipt thereof; provided that, if the broker, dealer or municipal securities dealer sends a supplement, amendment or sticker without including the remaining portions of the official statement in final form, such broker, dealer or municipal securities dealer includes a written statement describing which documents constitute the complete official statement in final form and stating that the complete official statement in final form is available upon request; or
(B) if an official statement in final form is being prepared for new issue municipal securities issued in a primary offering that qualifies for the exemption set forth in paragraph (iii) of section (d)(1) of Securities Exchange Act Rule 15c2-12, a broker, dealer or municipal securities dealer may sell such new issue municipal securities to a customer if such broker, dealer or municipal securities dealer:
(A)-(B) Renumbered as (1)-(2).
(ii) in connection with a negotiated sale of new issue municipal securities, the following information concerning the underwriting arrangements:
(A) the underwriting spread, if any;
(B) the amount of any fee received by the broker, dealer or municipal securities dealer as agent for the issuer in the distribution of the securities; provided, however, that if a broker, dealer or municipal securities dealer selling municipal fund securities provides periodic statements to the customer pursuant to rule G-15(a)(viii) in lieu of individual transaction confirmations, this paragraph (ii)(B) shall be deemed to be satisfied if the broker, dealer or municipal securities dealer provides this information to the customer at least annually and provides information regarding any change in such fee on or prior to the sending of the next succeeding periodic statement to the customer; and
(C) except with respect to an issue of municipal fund securities, the initial offering price for each maturity in the issue that is offered or to be offered in whole or in part by the underwriters, including maturities that are not reoffered.
(b) Inter-Dealer
Disclosure Requirements. Every broker, dealer or municipal securities
dealer shall send, upon request, the documents and information referred to in this
section (a) to any broker, dealer or municipal securities dealer to which it
sells new issue municipal securities no later than the business day following
the request or, if an official statement in final form is being prepared but
has not been received from the issuer or its agent, no later than the business
day following such receipt. Such items shall be sent by first call mail or
other equally prompt means, unless the purchasing broker, dealer or municipal
securities dealer arranges some other method of delivery and pays or agrees to
pay for such delivery.
(b)-(c) Relettered as (c)-(d).
Rule G-34. CUSIP Numbers and New Issue Requirements
(a)-(b) No change.
(c) CUSIP Number Eligibility Exemptions. The
provisions of this rule shall not apply to an issue of municipal securities (or
for the purpose of section (b) any part of an outstanding maturity of an issue)
which (i) does not meet the eligibility criteria for CUSIP number
assignment or (ii) consists entirely of municipal fund securities.
* * * * * * * * * *
text of Interpretation
Interpretation Relating to Sales of Municipal Fund Securities in the Primary Market
The Municipal Securities Rulemaking Board (the “Board”) has learned that sales of certain interests in trust funds held by state or local governmental entities may be effected by or through brokers, dealers or municipal securities dealers (“dealers”). In particular, the Board has reviewed two types of state or local 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”)[15]and higher education savings plan trusts established by states (“higher education trusts”).[16] In response to a request of the Board, staff of the Division of Market Regulation of the Securities and Exchange Commission (the “SEC”) has stated that “at least some interests in local government pools and higher education trusts may be, depending on the facts and circumstances, ‘municipal securities’ for purposes of the [Securities] Exchange Act [of 1934].”[17] Any such interests that may, in fact, constitute municipal securities are referred to herein as “municipal fund securities.” To the extent that dealers effect transactions in municipal fund securities, such transactions are subject to the jurisdiction of the Board pursuant to Section 15B of the Securities Exchange Act of 1934 (the “Exchange Act”).
With respect to the applicability to municipal fund securities of Exchange Act Rule 15c2-12, relating to municipal securities disclosure, staff of the SEC’s Division of Market Regulation has stated:
[W]e note that Rule 15c2-12(f)(7) under the Exchange Act defines a “primary offering” as including an offering of municipal securities directly or indirectly by or on behalf of an issuer of such securities. Based upon an analysis of programs that have been brought to our attention, it appears that interests in local government pools or higher education trusts generally are offered only by direct purchase from the issuer. Accordingly, we would view those interests as having been sold in a “primary offering” as that term is defined in Rule 15c2-12. If a dealer is acting as an “underwriter” (as defined in Rule 15c2-12(f)(8)) in connection with that primary offering, the dealer may be subject to the requirements of Rule 15c2-12.[18]
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.”[19]
Consistent with SEC staff’s view regarding the sale in primary offerings of municipal fund securities, dealers acting as underwriters in primary offerings of municipal fund securities generally would be subject to the requirements of rule G-36, on delivery of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to Board or its designee. Thus, unless such primary offering falls within one of the stated exemptions in Rule 15c2-12, the Board expects that the dealer would receive a final official statement from the issuer or its agent under its contractual agreement entered into pursuant to Rule 15c2-12(b)(3).[20] Such final official statement should be received from the issuer in sufficient time for the dealer to send it, together with Form G-36(OS), to the Board within one business day of receipt but no later than 10 business days after any final agreement to purchase, offer, or sell the municipal fund securities, as required under rule G-36(b)(i).[21] “Final official statement,” as used in rule G-36(b)(i), has the same meaning as in Rule 15c2-12(f)(3), which states, in relevant part:
The term final official statement means a document or set of documents prepared by an issuer of municipal securities or its representatives that is complete as of the date delivered to the Participating Underwriter(s) and that sets forth information concerning the terms of the proposed issue of securities; information, including financial information or operating data, concerning such issuers of municipal securities and those other entities, enterprises, funds, accounts, and other persons material to an evaluation of the Offering; and a description of the undertakings to be provided pursuant to paragraph (b)(5)(i), paragraph (d)(2)(ii), and paragraph (d)(2)(iii) of this section, if applicable, and of any instances in the previous five years in which each person specified pursuant to paragraph (b)(5)(ii) of this section failed to comply, in all material respects, with any previous undertakings in a written contract or agreement specified in paragraph (b)(5)(i) of this section.[22]
The Board understands that issuers of municipal fund securities typically issue and deliver the securities continuously as customers make purchases, rather than issuing and delivering a single issue on a specified date. As used in Board rules, the term “underwriting period” with respect to an offering involving a single dealer (i.e., not involving an underwriting syndicate) is defined as the period (A) commencing with the first submission to the dealer of an order for the purchase of the securities or the purchase of the securities from the issuer, whichever first occurs, and (B) ending at such time as the following two conditions both are met: (1) the issuer delivers the securities to the dealer, and (2) the dealer no longer retains an unsold balance of the securities purchased from the issuer or 21 calendar days elapse after the date of the first submission of an order for the securities, whichever first occurs.[23] Since an offering consisting of securities issued and delivered on a continuous basis would not, by its very nature, ever meet the first condition for the termination of the underwriting period, such offering would continuously remain in its underwriting period.[24] Further, since rule G-36(d) requires a dealer that has previously provided an official statement to the Board to send any amendments to the official statement made by the issuer during the underwriting period, such dealer would remain obligated to send to the Board any amendments made to the official statement during such continuous underwriting period. However, in view of the increased possibility that an issuer may change the dealer that participates in the sale of its securities during such a continuous underwriting period, the Board has determined that rule G-36(d) would require that the dealer that is at the time of an amendment then serving as underwriter for securities that are still in the underwriting period send the amendment to the Board, regardless of whether that dealer or another dealer sent the original official statement to the Board.
In addition, municipal fund securities sold in a primary offering would constitute new issue municipal securities for purposes of rule G-32, on disclosures in connection with new issues, so long as the securities remain in their underwriting period. Rule G-32 generally requires that a dealer selling a new issue municipal security to a customer must deliver the official statement in final form to the customer by settlement of such transaction. Thus, a dealer effecting transactions in municipal fund securities that are sold during a continuous underwriting period would be required to deliver to the customer the official statement by settlement of each such transaction. However, in the case of a customer purchasing such securities who is a repeat purchaser, no new delivery of the official statement would be required so long as the customer has previously received it in connection with a prior purchase and the official statement has not been changed from the one previously delivered to that customer.[25]
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, dealers are reminded that the definition of “municipal securities business” under rule G-37, on political contributions and prohibitions on municipal securities business, and rule G-38, on consultants, 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 affect such dealer’s obligations under rules G-37 and G-38. In addition, rule G-23, on activities of financial advisors, applies to a dealer’s financial advisory or consultant services to an issuer with respect to a new issue of municipal securities.