[Federal Register Volume 59, Number 242 (Monday, December 19, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-31040]


[[Page Unknown]]

[Federal Register: December 19, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35079; File No. SR-MSRB-94-13]

 

Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Approving a Proposed Rule Change Relating to Depository 
Eligibility of New Issue Municipal Securities

December 9, 1994.
    On August 17, 1994, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-MSRB-94-13) 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'').\1\ Notice of the proposal was published on September 6, 
1994, in the Federal Register to solicit comments on the proposed rule 
change.\2\ Eleven comment letters were received.\3\ For reasons 
discussed below, the Commission is approving the proposed rule change.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\Securities Exchange Act Release No. 34607 (August 26, 1994), 
59 FR 46075.
    \3\Ten of the comment letters were received by the MSRB prior to 
publication of the notice. Letters from Gregory P. Vitt, Vice 
President, Cashier Department, A.G. Edwards & Sons, Inc., to Judith 
A. Somerville, MSRB (May 1, 1994) (``A.G. Edwards letter''); Walter 
J. Roesch, President, The Cashiers' Association of Wall Street, 
Inc., to Judith Somerville, MSRB (June 2, 1994) (``Cashiers 
letter''); John J. Flynn, Senior Vice President, Fleet Securities, 
to Judith Somerville, Uniform Practice Specialist (``Specialist''), 
MSRB (June 23, 1994) (``Fleet letter''); Edward C. Brisotti, Vice 
President, Operations Division, Goldman, Sachs & Co., to Judith 
Somerville, Specialist, MSRB (May 18, 1994) (``Goldman letter''); 
Jill M. Considine, President, New York Clearing House, to Judith 
Somerville, Specialist, MSRB (May 27, 1994) (``NYCH letter''); 
George Brakatselos, Vice President, Public Securities Association, 
to Judith Somerville, Specialist, MSRB (July 5, 1994) (``PSA 
letter''); Bruce L. Vernon, President, and Thomas Sargant, Vice 
President, The Regional Municipal Operations Association, to Judith 
Somerville, MSRB (May 23, 1994, and September 23, 1994) (``RMOA 
letters''); Marc E. Lackritz, President, Securities Industry 
Association, to Judith Somerville, Uniform Practice Specialist, MSRB 
(June 16, 1994) (``SIA letter''); Duane H. Thieme, Treasurer, 
Summers & Company, Inc., to Judith Somerville, Specialist, MSRB (May 
20, 1994) (``Summers letter''); and Nicholas M. Ricciardi, Assistant 
Vice President, Dean Witter Discover and Co., Dean Witter Reynolds, 
Inc., to Judith Somerville, Specialist, MSRB (May 27, 1994) (``Dean 
Witter letter'').
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I. Description

    The proposed rule change amends MSRB Rule G-34 to require generally 
that dealers acquiring new issue municipal securities apply for 
depository eligibility. This amendment is designed to facilitate the 
movement of municipal securities to a three business day (``T+3'') 
settlement time frame.\4\ Because interdealer and institutional 
customer 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 the settlement date. The 
physical delivery of securities certificates, however, is relatively 
time-consuming and inefficient as compared to book-entry delivery 
through a securities depository. A shortened settlement cycle will 
provide dealers, institutional customers, and their clearing agents 
with less time to deal with the processing requirements and inevitable 
problems that arise in connection with transportation, delivery, and 
acceptance of physical securities certificates.
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    \4\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. The rule 
becomes effective June 7, 1995. Securities Exchange Act Release Nos. 
33023 (October 6, 1993), 58 FR 52891 and 34952 (November 9, 1994), 
59 FR 59137. 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. 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 will be needed in the 
municipal securities market in a T+3 environment. The T+3 Report 
discussed the need to increase the number of securities made 
depository eligible in order to minimize the use of physical 
securities certificates to settle interdealer and institutional 
customer transactions.
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    MSRB Rules G-12(f)(ii) and G-15(d)(iii) require essentially all 
interdealer and institutional customer transactions be settled by book-
entry when the securities involved in the transactions are listed as 
eligible for deposit in a depository. The proposed rule change 
facilitates book-entry settlement of transactions in municipal 
securities by requiring, with limited exceptions, that dealers that 
acquire new issue municipal securities apply for depository 
eligibility.
    Under the proposed rule change, brokers, dealers, and municipal 
securities dealers are required to apply for depository eligibility 
within one business day of the date of sale of a new issue municipal 
security.\5\ The proposed rule change exempts (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 provides an exemption until July 1, 1996, 
for issues under $1 million in par value.
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    \5\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.
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    MSRB has asked that the proposed rule change become effective sixty 
days from the date of approval. Therefore, the proposed rule change 
will be effective on February 7, 1995.

II. Comments

    In March 1994, MSRB requested comment on a draft of the amendment 
to Rule G-34 (``Draft Amendment''). 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 eleven comment letters in response to the draft amendments.\6\ 
The comments generally supported the MSRB's proposal. Five commenters 
felt that the proposed rule change could facilitate T+3 settlement.\7\ 
Two commenters noted that settlement through a depository was more 
efficient and provided greater cost savings than settlement with 
physical certificates.\8\ Some commenters, however, suggested 
modifications to the draft amendments. In response to these comments, 
the MSRB amended their proposal prior to filing the proposed rule 
change with the Commission.\9\
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    \6\Comment letters are set forth supra note 3.
    \7\Dean Witter letter, Cashiers letter, NYCH letter, PSA letter, 
and SIA letter.
    \8\Cashiers letter and Goldman letter.
    \9\The MSRB amended the proposed rule to require that the 
application to a depository be made within one business day of the 
date of sale of the issue instead of ten days prior to closing. The 
MSRB also added the exemption for issues maturing in sixty days or 
less.
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A. 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.\10\ Nine commenters urged the MSRB to include 
issues under $1 million in par value within the scope of the rule with 
most citing the need for increased settlement efficiencies offered by 
book-entry when T+3 becomes effective.\11\ Two commenters noted that 
ultimately all issues should be included within the scope of the rule 
but suggested a temporary exemption for small issues because of their 
belief that some underwriters of small issues may need time to adjust 
their procedures for book-entry distribution.\12\ Only the Summers 
letter stated that a permanent exemption for small issues should be 
included. In response to these comments, the MSRB amended its proposal 
prior to filing with the Commission to include issues under $1 million 
in par value but to provide a temporary exemption for such issues until 
July 1, 1996.\13\
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    \10\This exemption was included because some dealers believed 
physical settlements should be permissible for small issues with 
limited distribution.
    \11\A.G. Edwards letter, Cashiers letter, Dean Witter letter, 
Fleet letter, Goldman letter, NYCH letter, PSA letter, RMOA letters, 
and SIA letter.
    \12\Dean Witter and NYCH letters.
    \13\Four commenters suggested that a reduction in depository 
application fees would reduce the need for an exemption for small 
issues. A.G. Edwards letter, RMOA letters, Summers letter, and NYCH 
letter.
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B. Other Suggested Exemptions

    The Summers letter suggested exempting municipal leases municipal 
notes, and municipal bonds sold to nondepository participants. The MSRB 
rejected this suggestion, stating that it was not aware of any reason 
that these types of securities should be treated differently than other 
municipal securities.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder and particularly with the requirements of Section 
15B(b)(2)(C).\14\ Section 15B(b)(2)(C) requires that the rules of the 
MSRB be designed to foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, and facilitating 
transactions in municipal securities. The proposed rule change meets 
this requirement by creating a more efficient, safe, and cohesive 
environment for the transfer of municipal securities.
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    \14\15 U.S.C. 78o-4(b)(2)(C) (1988).
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    By requiring dealers acquiring new issue municipal securities to 
apply for depository eligibility, the proposal will help 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) should increase greatly. 
By increasing the number of book-entry settlements and by limiting the 
number of physical deliveries that occur, the rule will enhance the 
efficiency of the clearance and settlement of municipal securities. As 
a consequence, a safer environment in which to facilitate transactions 
in municipal securities will exist. The proposed rule change also 
facilitates the conversion to T+3 settlement of municipal securities 
and thus promotes cooperation and coordination with persons engaged in 
regulating, clearing, and settling municipal securities.
    The Commission believes that the limited exemption for issues under 
$1 million in par value adequately addresses the concerns of the 
commenters. The PSA noted that almost 20% of the new issues in 1992 
would have been eligible for the small issue exemption. The Commission 
believes that it is important that the vast majority of securities be 
made depository eligible. There are concerns, however, that 
underwriters of smaller issues may not be prepared for book-entry 
distribution. The Commission believes that the temporary exemption will 
give underwriters of smaller issues an opportunity to adapt to book-
entry distribution while establishing a definite date by which smaller 
issues must be made depository eligible.
    The Commission also agrees with the MSRB's determination not to 
exempt municipal leases, municipal notes, and municipal bonds sold to 
nondepository participants. The Commission believes that every effort 
should be made to make as many types of municipal securities depository 
eligible as practicable.

IV. Conclusion

    On the basis of the foregoing, the Commission finds that the 
proposal is consistent with the requirements of the Act and 
particularly with Section 15B(b)(2)(C) of the Act and the rules and 
regulations thereunder.
    It is therefore ordered, pursaunt to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-MSRB-94-13) be, and hereby 
is, approved and will become effective February 7, 1995.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-31040 Filed 12-16-94; 8:45 am]
BILLING CODE 8010-01-M