[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