[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