[Federal Register Volume 59, Number 171 (Tuesday, September 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-21812]
[[Page Unknown]]
[Federal Register: September 6, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34607; File No. SR-MSRB-94-13]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change Relating to Depository
Eligibility of New Issue Municipal Securities
August 26, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on August 17, 1994, the
Municipal Securities Rulemaking Board (``MSRB'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared primarily by MSRB. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The proposed rule change will amend MSRB Rule G-34 on CUSIP Numbers
and Dissemination of Initial Trade Date Information concerning
depository eligibility of new issue municipal securities. MSRB requests
that the Commission delay the effectiveness of the proposed rule change
until sixty (60) days after Commission approval to allow dealers to
adjust their underwriting procedures to obtain compliance.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, MSRB included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
texts of these statements may be examined at the places specified in
Item IV below. MSRB has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
On October 6, 1993, the Commission adopted Rule 15c6-1 under the
Act, which establishes three business days after the trade date
(``T+3'') instead of five business days (``T+5'') as the standard
settlement timeframe for most broker-dealer transactions.\2\ The rule
becomes effective June 1, 1995. Although municipal securities were not
included within the scope of Rule 15c6-1, the Commission did request
that MSRB provide a plan for implementing T+3 settlement in the
municipal securities market.\3\ In response, MSRB submitted to the
Commission its Report of the Municipal Securities Rulemaking Board on
T+3 Settlement for the Municipal Securities Market (March 17, 1994)
(``T+3 Report''). The T+3 Report detailed changes in operational
practices and regulatory actions that would be necessary in a T+3
environment for municipal securities.
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\2\Securities Exchange Act Release No. 33023 (October 6, 1993),
58 FR 52891.
\3\Letter from Arthur Levitt, Chairman, SEC, to David Clapp,
Chairman, MSRB (October 7, 1993).
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The T+3 Report discussed the need for changes concerning the use of
physical securities certificates to settle interdealer and
institutional customer transactions. Because these transactions are
settled on a delivery vs. payment or receipt vs. payment (``DVP/RVP'')
basis, it is critical that the delivery of securities be made in a
timely manner on settlement date. The physical delivery of securities
certificates, however, is a relatively time-consuming and inefficient
practice as compared to book-entry delivery through a securities
depository. A shortened settlement cycle will provide dealers,
institutional customers, and their clearing agents with considerably
less time to deal with the processing requirements and inevitable
problems that arise in connection with transportation, delivery, and
acceptance of physical securities certificates.
In 1993, MSRB amended MSRB Rules G-12(f)(ii) and G-15(d)(iii) to
require essentially all interdealer and institutional customer
transactions to be settled by book-entry when the securities involved
in the transactions are listed as eligible for deposit in a depository.
While these rules have assisted the municipal securities industry in
moving toward more universal use of book-entry settlement, the rules
only apply to transactions in securities that are depository-eligible.
The proposed rule change will facilitate book-entry settlement of
transactions in municipal securities by requiring, with limited
exceptions, dealers acquiring new issue municipal securities to apply
for depository eligibility. This requirement will serve to ensure that
the great majority of new issue municipal securities are made
depository eligible. As a result, the number of interdealer and
institutional customer transactions that must be settled by book-entry
under MSRB Rules G-12(f)(ii) and G-15(d)(iii) will greatly increase.
This will facilitate the conversion to T+3 settlement and will enhance
the efficiency of clearance and settlement of municipal securities by
reducing the number of physical deliveries of interdealer and
institutional customer transactions in favor of book-entry settlement.
Under the proposed rule change, brokers, dealers, and municipal
securities dealers will be required to apply for depository eligibility
within one business day of the date of sale of a new issue municipal
security.\4\ The proposed rule change will exempt (1) issues not
meeting the eligibility criteria of all depositories that accept
municipal securities for deposit and (2) issues maturing in sixty days
or less. The proposed rule change also will provide an exemption until
July 1, 1996, for issues under $1 million in par value. MSRB has
adopted the rule change pursuant to Section 15B(b)(2)(C) of the Act,
which provides that MSRB has the authority to adopt rules:
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\4\For competitively sold issues, the date of award from the
issuer is considered the date of sale. For negotiated issues, the
date of execution of the contract to purchase the securities from
the issuer is considered the date of sale.
To foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect
to, and facilitating transactions in municipal securities, to remove
impediments to and perfect the mechanism of a free and open market
in municipal securities, and, in general, to protect investors and
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the public interest.***
As noted above, MSRB believes that the proposed rule change will
facilitate clearance and settlement of municipal securities and,
therefore, is consistent with the provisions of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
MSRB does not believe that the rule change will impose any burden
on competition not necessary or appropriate in furtherance of the
purposes of the Act because it will apply equally to all brokers,
dealers, and municipal securities dealers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In March 1994, MSRB requested comment on a draft amendment to Rule
G-34 that would require dealers to apply for depository eligibility of
all new issue municipal securities. The draft amendment included
exemptions for issues not meeting the criteria set by depositories for
eligibility and for new issues under $1 million in par value. MSRB
received ten comment letters in response to the draft amendments.\5\
The comments were generally supportive; however, some commenters
suggested modifications to the draft amendments.
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\5\Letters from A.G. Edwards & Sons, Inc.; The Cashiers'
Association of Wall Street, Inc.; Fleet Securities; Goldman, Sachs &
Co.; The New York Clearing House; The Public Securities Association;
The Regional Municipal Operations Association; The Securities
Industry Association; Summers & Company, Inc.; and Dean Witter
Reynolds, Inc.
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The Ten-day Application Period
The draft amendment would have required dealers to apply to a
depository at least ten days prior to the closing date of a new issue
to establish depository eligibility. This provision was intended to
support the routine practice recommended by depositories even though
depositories can and do make new issues eligible on shorter notice when
it is necessary. A majority of commenters, however, believe that the
ten day application period is inappropriate for an MSRB rule in light
of the need of underwriters occasionally to settle a new issue with an
issuer on short notice. Three commenters proposed a different approach
that would tie the application requirement to the date of sale rather
than the date of closing. These commenters suggested that the provision
be changed to require the application to be made within twenty-four
hours of the award of the issue.
MSRB notes that this suggestion will avoid potential problems that
might occur in the occasional cases in which there is less than ten
days between the date of award of a competitively sold issue and the
settlement of the issue. At the same time, the requirement for
underwriters to apply to a depository on the day after the date of sale
gives depositories the maximum amount of time available to establish
eligibility and prepare for a book-entry distribution. Therefore, MSRB
has included in the proposed rule change a provision requiring that the
application to a depository must be made within one business day of the
date of sale of the issue. The proposed rule change also includes a
requirement that if the full documentation and information required to
establish depository eligibility is not available from the underwriter
at the time the initial application is submitted to the depository, the
underwriter shall forward such documentation to the depository as soon
as it is available.
Exemption Until July 1, 1996, for Issues Under $1 Million in Par Value
The draft amendment included exemptive language for issues under $1
million in par value. This exemption was included because of concerns
that had been expressed by some dealers relating to their desire to
continue to use physical settlements for small issues with limited
distribution. Eight commenters urged MSRB to include issues under $1
million in par value within the rule with most citing the need for
increased settlement efficiencies offered by book-entry when T+3
becomes effective. Two commenters suggested a temporary exemption for
small issues and noted that ultimately all issues should be included
within the scope of the rule but that some underwriters of small issues
may need time to adjust their procedures associated with clearance and
settlement of small issues. MSRB believes that this is a reasonable
approach and has adopted a provision in the proposed rule change that
will exempt issues under $1 million in par value until July 1, 1996.
Four commenters suggested that a reduction in depository
application fees would reduce the need for an exemption for small
issues. MSRB, however, has no authority to change the fees charged by
depositories.
Exemption for Issues Maturing in Sixty Days or Less
Three commenters suggested an exemption for issues maturing in
sixty days or less and noted that these issues typically do not trade
in the secondary market. MSRB is not aware of any substantial trading
in such short-term securities and agrees that an exemption for issues
maturing in sixty days or less would be appropriate. The exemption
accordingly has been included within the proposed rule change.
Other Suggested Exemptions
One commenter suggested exempting leases, notes, and bonds sold to
nondepository participants. MSRB is not aware of any reason that these
types of securities should be treated differently than other municipal
securities. It accordingly has not provided exemptions for these types
of issues in the proposed rule change.
Depository Eligibility Criteria
MSRB understands that of the three depositories accepting municipal
securities for deposit, the eligibility criteria is essentially the
same and that nearly all municipal securities meet the criteria for
depository eligibility. If, however, an issue could not be made
eligible at any of these depositories, the proposed rule change will
not require the underwriter to make an application.\6\ One commenter
urged that depositories reach agreement on uniform minimum guidelines
to minimize the burden on underwriters and inefficiencies that might be
caused by any differing eligibility criteria among the depositories.,
While MSRB agrees with this goal, MSRB does not have regulatory
authority over depositories. MSRB will continue to monitor any problems
created by differing eligibility criteria and may suggest remedial
actions to the Commission in the future if differing eligibility
criteria create problems under the proposed rule change.
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\6\The exception in the proposed rule change for new issues that
do not meet a depository's eligibility criteria is necessary because
the terms of a new issue ultimately are controlled by the issuer of
the securities, which is not subject to MSRB rules.
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III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within thirty-five days of the date of publication of this notice
in the Federal Register or within such longer period (i) as the
Commission may designate up to ninety days of such date if it finds
such longer period to be appropriate and publishes its reasons for so
filing or (ii) as to which the self-regulatory organization consents,
the Commission will:
(A) by order approve such proposed rule change or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
MSRB requests that the Commission delay effectiveness of the
proposed rule change until sixty days after Commission approval to
allow dealers to adjust their underwriting procedures to obtain
compliance.
IV. Solicitation of Comments
Interested people are invited to submit written data, views, and
arguments concerning the foregoing. People making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. Copies
of the submissions, all subsequent amendments, all written statements
with respect to the proposed rule change that are filed with the
Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street NW., Washington,
DC. 20549. Copies of the filing will also be available for inspection
and copying at MSRB's principal offices. All submissions should refer
to File No. SR-MSRB-94-13 and should be submitted by September 27,
1994.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-21812 Filed 9-2-94; 8:45 am]
BILLING CODE 8010-01-M