[Federal Register Volume 60, Number 96 (Thursday, May 18, 1995)]
[Notices]
[Pages 26747-26752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12185]



[[Page 26747]]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35700; File No. SR-MSRB-95-4]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Customer Confirmations

May 10, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 
30, 1995, the Municipal Securities Rulemaking Board (``Board'' or 
``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change (File No. SR-MSRB-
95-4) as described in Items I, II and III below, which Items have been 
prepared by the self-regulatory organization.\1\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.

    \1\ Subsequently, the Board submitted a letter to extend the 
delay for effectiveness of the rule to 120 days following Commission 
approval. See letter from Marianne I. Dunaitis, Assistant General 
Counsel, MSRB, to Karl Varner, Staff Attorney, Division of Market 
Regulation, SEC, dated April 3, 1995.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Board is filing an amendment to rule G-15(a), on customer 
confirmations (hereinafter referred to as ``the proposed rule 
change''). The proposed rule change: (1) Will clarify the current 
customer confirmation requirements by reorganizing the rule and 
incorporating previous Board interpretations into the language of the 
rule; (2) will revise certain requirements in areas where the Board 
believes that more disclosure is necessary; and (3) will include 
certain other modifications to the current confirmation disclosure 
requirements.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Board 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 
text of these statements may be examined at the places specified in 
Item IV below. The Board 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

    (a) Rule G-15(a) states various requirements for the format and 
content of confirmations to customers. As part of the Board's ongoing 
customer protection review, the Board has reviewed rule G-15(a), and 
the written disclosures provided to municipal securities customers. The 
proposed rule change represents one of several Board efforts to ensure 
that important information is disclosed to customers.
    In response to market developments and regulatory concerns, rule G-
15(a) has been subject to numerous amendments and Board interpretive 
notices since it was adopted in 1977. The proposed rule change will 
revise certain requirements in areas where the Board believes that more 
disclosure is necessary. The proposed rule change will clarify the 
current customer confirmation requirements by reorganizing the rule and 
incorporating previous Board interpretations into the language of the 
rule to promote better compliance. Other modifications to the rule's 
requirements also are proposed to simplify and clarify the requirements 
and to promote better compliance. The proposed rule change also will 
respond to recent revisions by the SEC to its Rule 10b-10, the 
confirmation rule applicable to transactions in securities other than 
municipal securities, and to its proposed Rule 15c2-13, to require 
certain disclosures to be made on confirmations for transactions in 
municipal securities.\2\

    \2\ Securities Exchange Act Release No. 34962 (Nov. 10, 1994), 
59 FR 59612, corrected, Securities Exchange Act Release No. 34962A 
(Nov. 25, 1994), 59 FR 60555.
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Reorganization of Current Rule Including Codification of 
Interpretations
    The proposed rule change will clarify rule G-15(a) by reorganizing 
the rule and incorporating Board interpretations into the rule. Most 
requirements are subdivided by subject matter into three broad 
categories that comprise the content of municipal securities 
confirmations--terms of the transaction, securities identification, and 
securities description (listing the various features of the security). 
Under each category, Board rules and interpretations are organized by 
specific confirmation requirement. For example, under the securities 
identification section of the proposed rule change, all existing rules 
and Board interpretive notices specifying how the interest rate should 
be expressed on the confirmation for various categories of municipal 
securities transactions have been codified.\3\ This reorganization 
should assist operations personnel in programming automated systems for 
generating municipal securities confirmations since it will no longer 
be necessary to review all previous interpretive notices on 
confirmations to find those that may address the statement of interest 
rate for a particular type of municipal security.

    \3\ Categories include zero coupon securities, variable rate 
securities, securities with adjustable tender fees, stepped coupon 
securities, and stripped coupon securities.
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Revisions in Customer Confirmation Requirements
    The proposed rule change will revise some requirements that the 
Board feels will strengthen the disclosure and customer protection 
objectives of the rule while updating the requirements of the customer 
confirmation.
    Disclosure if a security is unrated. In November 1994, the SEC 
approved amendments to its Rule 10b-10 of the Securities Exchange Act, 
the confirmation rule applicable to transactions in securities other 
than municipal securities.\4\ At the same time, the SEC deferred 
consideration of proposed Rule 15c2-13 that would have established 
certain confirmation requirements applicable to transactions in 
municipal securities. The SEC's amendments to Rule 10b-10 require, 
among other things, that dealers disclose if a debt security, other 
than a governmental security, has not been rated by a nationally 
recognized statistical rating organization. The SEC also had proposed a 
similar requirement for municipal SEC confirmations in its proposed 
Rule 15c2-13. The SEC noted that this disclosure is not intended to 
suggest that an unrated security is inherently riskier than a rated 
security; instead, this disclosure is intended to alert customers that 
they may wish to obtain further information or clarification from their 
dealer. Previously, the Board indicated in its comment letter to the 
SEC that, if the SEC determined that such information were needed by 
investors in debt securities, the Board would amend rule G-15 to 
include this requirement. The proposed rule change will include this 
provision in rule G-15(a)(i)(C)(3)(f).

    \4\ Securities Exchange Act Release No. 34962 (Nov. 10, 1994), 
59 FR 59612, corrected, Securities Exchange Act Release No. 34962A 
(Nov. 25, 1994), 59 FR 60555.
    Call provisions. Currently, for many bonds, only a designation of 
``callable'' is required by rule G-15(a)(i)(E), along with the 
following legend provided by [[Page 26748]] rule G-15(a)(iii)(F) which 
can be indicated ``in a footnote or otherwise:'' ``Call features may 
exist which could affect yield; complete information will be provided 
upon request.'' Specifically, rule G-15(a)(i)(I) currently provides 
that disclosure of the date and price of the first in-whole call is 
required to be noted on the confirmation only if the security is priced 
to that call date. In addition, current rule G-15(a)(i)(I) requires 
that the price or yield calculated for a confirmation must be computed 
``to the first in-whole call'' if this produces a lower price or yield 
than a calculation of price or yield to maturity. The Board's 
interpretation of December 10, 1980, MSRB Manual at para. 3571 
describes the type of call features that are considered for purposes of 
these calculations (``pricing calls'').
    The proposed rule change, in rule G-15(a)(i)(C)(2)(a), will revise 
the existing confirmation requirements regarding call features. It 
requires that the date and price of the next pricing call always be 
disclosed.\5\ It also requires the following notation on the 
confirmation if any call features exist in addition to the next pricing 
call--``Additional call features exist that may affect yield; complete 
information will be provided upon request.'' The proposed rule change 
in rule G-15(a)(i)(E) will require this notation to be on the front of 
the confirmation. This substitutes for the current legend requirement, 
which typically has resulted in call legends being pre-printed on the 
back of the confirmation.

    \5\ The proposed rule change in rule G-15(a)(vi)(F) defines 
``pricing call'' as a call feature that represents ``an in-whole 
call'' of the type that may be used by the issuer without 
restriction in a refunding. Consistent with the current rule, 
pricing calls do not include catastrophe calls, that is, calls which 
occur as a result of events specified in the bond indenture which 
are beyond the control of the issuer or calls that may operate to 
call part of an outstanding issue. See Interpretation of Nov. 7, 
1977, published in MSRB Manual (CCH) at para. 3571.10.
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    The Board believes that disclosure of call features is particularly 
important to customers and that the pre-printed legend on the back of 
the confirmation was not always effective in alerting customers to the 
existence of call features. The proposed rule change will put customers 
clearly on notice as to the presence of call features on the front of 
the confirmation, including a specific date and price for the next 
pricing call (one of the most important elements of call information) 
and the existence of any other call features in addition to this call.
    Revenue bonds and additional obligors. Currently, with regard to 
revenue bonds, dealers are required under rule G-15(a)(i)(E) to 
disclose the source of revenue on the confirmation only ``if necessary 
for a materially complete description of the securities.'' The proposed 
rule change in rule G-15(a)(i)(C)(1)(a) will require dealers to put the 
primary revenue source for such bonds on the confirmation (e.g., 
project name) and deletes the language ``if necessary for a materially 
complete description of the securities.'' The Board believes that 
requiring disclosure of the primary revenue source of revenue bonds on 
the confirmation will help ensure that customers receive important 
information about such bonds.
    Additional obligors. Currently, with regard to additional obligors 
confirmation disclosure of such information currently is required under 
rule G-15(a)(i)(E) only ``if necessary for a materially complete 
description of the securities.'' In such instances, the confirmation 
must disclose the name of any company or other person in addition to 
the issuer obligated, directly or indirectly, with respect to debt 
service or, if there is more than one such obligor, the statement 
``multiple obligors'' may be shown. The proposed rule change in rule G-
15(a)(i)(C)(1)(b) will delete the language ``if necessary for a 
materially complete description of the securities;'' thus the amendment 
requires dealers always to identity the additional obligor on the 
confirmation or indicate ``multiple obligors'' if there is more than 
one additional obligor. The Board believes this will simplify and 
clarify the intent of the rule. The proposed rule change also will 
clarify that, if a letter of credit is used, the identity of the bank 
issuing the letter of credit must be noted.
    Limited tax. Currently, rule G-15(a)(i)(E) provides that the 
description of the bonds should specify if they are ``limited tax.'' 
Traditionally, a limited tax bond is a general obligation bond secured 
by the pledge of a specified tax (usually the property tax) or category 
of taxes which is limited as to rate or amount. However, the meaning of 
this ``limited tax'' designation has become ambiguous as various states 
have implemented a variety of tax limitation measures and the Board is 
unaware of any clear standards that may be used to separate limited and 
unlimited tax municipal securities. The proposed rule change 
accordingly will delete the ``limited tax'' designation requirement.
    Dealers acting as agent and receiving ``other remuneration''. 
Currently, rule G-15(a)(ii) provides that, in agency transactions, 
remuneration paid by the customer always must be disclosed, but if a 
dealer receives ``other'' remuneration (i.e., remuneration from a 
source other than the customer), it is sufficient to indicate that 
other remuneration was received and that details will be furnished to 
the customer upon written request. The Board has received inquiries 
whether the ``discount'' received by a dealer in an inter-dealer 
transaction undertaken as agent for a customer should be considered as 
``other remuneration.'' The proposed rule change in rule G-
15(a)(i)(A)(1)(e) will clarify this by stating that in an agency 
transaction for a customer, if a dealer acquires a bond from another 
dealer at a discount (e.g., ``net'' price less concession) and the 
customer pays the ``net'' price, the inter-dealer discount or 
concession received by the dealer cannot be considered ``other 
remuneration,'' but rather should be considered remuneration received 
from the customer. Thus, the proposed rule change will clarify that the 
amount of the ``discount'' or concession must be disclosed on the 
confirmation in these agency transactions pursuant to proposed rule G-
15(a)(i)(A)(1)(e).
    ``Ex legal'' delivery designation. Currently, rule G-
15(a)(iii)(I)(1) requires that the confirmation must note whether a 
transaction is ``ex-legal.'' This term refers to the absence of a 
written copy of the legal opinion to be included with the physical 
delivery of a bond certificate. This provision was adopted when nearly 
all deliveries of municipal securities were accomplished with physical 
deliveries of certificates which included a copy of the legal opinion. 
With the movement away from physical deliveries and the high percentage 
of book-entry-only securities in the market, the Board believes that 
this requirement is no longer necessary and the proposed rule change 
will delete the ``ex-legal'' delivery designation.
    Zero coupon bonds. Currently, rule G-15(a)(v) provides a number of 
specific confirmation requirements for zero coupon bonds, including 
disclosure that the interest rate is 0% and, if the securities are 
callable and available in bearer form, a statement to that effect which 
can be satisfied by the following legend: ``No periodic payments--
callable below maturity value without prior notice by mail to holder 
unless registered.'' The proposed rule change will retain these 
requirements.
    In addition, the proposed change to rule G-15(a)(i)(A)(6)(h) will 
require that the amount of any premium paid over accreted value for 
callable zero coupon bonds be included on confirmations. The accreted 
value for a zero coupon bond reflects the increase in the security's 
value as it approaches the maturity date. For zero coupon bonds that 
are callable, the call price is [[Page 26749]] generally at the 
accreted value. The Board believes it is important for customers to 
know that such securities may be affected by an early call and that a 
premium over the accreted value is being paid in the purchase price. In 
general, a customer purchasing a typical, interest-paying municipal 
security understands that a price above ``100'' indicates a premium 
price and that, if the security contains any call features, such 
features should be considered carefully. The importance of reviewing 
call features, however, is not as apparent with callable zero coupon 
securities, where a customer may not be aware of the relationship 
between a potential call price and the accreted value of the security 
being purchased. Accordingly, the proposed rule change will require 
dealers to disclose on the confirmation any premium paid over the 
accreted value for callable zero coupon bonds.
    Original issue discount securities. Currently, a dealer must 
disclose on the confirmation whether securities are sold as ``original 
issue discount'' securities pursuant to rule G-15(a)(iii)(H). The 
proposed change to rule G-15(a)(i)(C)(4)(c) also will require the 
dealer to disclose the initial public offering price for the original 
issue discount security. The Board believes that this information is 
particularly important to customers since it may be needed for tax 
reasons also may be important if the security is subject to any early 
call.
    First interest payment date (including if not semi-annual). 
Currently, rule G-15(a)(III)(A) states that the confirmation shall 
provide, if it affects the price or interest calculation, the first 
interest payment date if other than semi-annual. This provision is 
ambiguous as to whether the first interest payment date must be 
included on the confirmation in all instances in which there is no 
regular semi-annual interest payment, or only if the first payment date 
is necessary for purposes of calculation of final monies. The proposed 
change to rule G-15(a)(i)(A)(6)(g) will clarify that the first interest 
payment date is required on the confirmation only in those cases in 
which it is necessary for the calculation of final money. If would, for 
example, not be required for transactions in the issue occurring after 
the first interest payment date.\6\

    \6\ Of course, the proposed change to rule G-15(a)(i)(C)(2)(e), 
consistent with current rule G-15(a)(iii)(I), provides if securities 
pay interest on other than semi-annual basis, a statement of the 
basis on which interest is paid.
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    Yield information. Currently, there is not a specific exemption for 
statement of yield on transactions in defaulted bonds, bonds that 
prepay principal and variable rate securities that are not sold on 
basis of yield to put. The proposed change to rule G-15(a)(i)(A)(5)(d) 
will include specific exemptions for these types of transactions.
    Disclosure regarding CMOs. The SEC's amendment to its Rule 10b-10 
provides that the dealer must include a statement on the confirmation 
indicating that the actual yield of non-municipal collateralized 
mortgage obligations (``CMOs'') may vary according to the rate at which 
the underlying receivables or other financial assets are prepaid, and a 
statement of the fact that information concerning the factors that 
affect yield (including, at a minimum, estimated yield, weighted 
average life, and the prepayment assumptions underlying yield) will be 
furnished upon the written request of a customer. The proposed change 
to rule G-15(a)(i)(D)(2) will include a similar provision regarding 
municipal CMOs.
Modifications and Clarifications to Confirmation Format
    Multi-transaction data should not be aggregated on one 
confirmation. Currently, rule G-15(a) provides that, at or before the 
completion of a transaction in municipal securities, dealers must 
provide the customer with a written confirmation of the transaction. 
The current rule does not specifically indicate that customers should 
receive a separate confirmation for each transaction. The Board 
previously has stated that, if a customer purchased from a dealer 
several different securities of one issuer, it would be inappropriate 
for the dealer to aggregate on the confirmation the accrued interest 
for all the bonds acquired or to aggregate yield data and disclose the 
``yield to the average life'' rather than providing yield to maturity 
information for each bond acquired.\7\ The proposed change to G-
15(a)(ii) will clarify that a separate confirmation should be provided 
for each municipal securities transaction whenever several transactions 
are done at one time.

    \7\ MSRB Interpretation of July 27, 1981, MSRB Manual (CCH) 
Paras. 3571.35 and 3571.41.
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    Clarification of confirmation format. The proposed rule change will 
require that all disclosure, with certain exceptions, be clearly and 
specifically indicated on the front of the confirmation. To address 
concerns about the ``crowding'' of information on the front side of the 
confirmation, the proposed rule change will allow certain requirements 
to be met by statements on the back of the confirmation, namely: (1) 
The required legend for zero coupon bonds; (2) the requirement that 
permits a dealer in agency transactions, rather than naming the person 
from whom the securities were purchased or to whom the securities were 
sold, to include a statement that this information will be furnished 
upon the written request of the customer; and (3) the requirement that 
permits a dealer, rather than indicating the time of execution, to 
include a statement that the time of execution will be furnished upon 
the written request of the customer. In addition, consistent with the 
SEC's amendment to Rule 10b-10, the amendment will not require the 
disclosure statement for transactions in municipal collateralized 
mortgage obligations required in proposed rule change G-15(a)(i)(D)(2) 
to be on the front of the confirmation.
    (b) The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act, which provides that the Board's rules 
shall.

    Be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, 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 
the public interest.

    The Board believes that the proposed rule change will protect 
investors and the public interest because it clarifies the current 
customer confirmation requirements by reorganizing the rule and 
incorporating previous Board interpretations into the language of the 
rule and it revises certain requirements in areas where the Board 
believes more disclosure is necessary.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change, which 
will have an equal impact on dealers, will have any impact on 
competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

June 1994 Request for Comments
    In June 1994, as part of the Board's ongoing customer protection 
review, the Board requested comments on the proposed rule change, 
which was designed to clarify the current customer confirmation 
requirements by reorganizing the rule and incorporating previous 
Board interpretations into the language of the rule, and which also 
revised certain requirements where the Board [[Page 26750]] believed 
more disclosure was necessary.\8\ The draft amendments published for 
comment were substantially similar to the proposed rule change.\9\

    \8\ The Board also requested comment on broader issues 
associated with disclosure to customers and the role of the customer 
confirmation in providing such disclosure. The Board is not, 
however, proposing rulemaking in these areas at the present time.
    \9\ After reviewing comments received, the Board decided not to 
include in the proposed rule change certain provisions that were 
included in the draft rule. For example, the Board decided to retain 
disclosure on the confirmation if municipal securities are available 
only in book-entry form. The Board also determined not to require 
that the dated date always be included on the confirmation or that 
the confirmation indicate if a municipal security was issued without 
a legal opinion.

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    The Board received 12 comment letters from the following:

Automatic Data Processing (``ADP I'')
Beta Systems (``BETA'')
JB Hanauer & Co. (``Hanauer'')
Edward D. Jones & Co. (``Jones'')
Kenny S&P Information Services (``Kenny'')
Liberty Bank and Trust Co. (``Liberty'')
Pershing
Public Securities Association (``PSA'')
Rauscher Pierce Refsnes, Inc. (``Rauscher'')
Regional Municipal Operations Association (``RMOA'')
Securities Industry Software Corp./Division of ADP (``ADP II'')
Sweeney Cartwright & Co. (``Sweeney'')

    In general, the codification and reorganization of the rule 
received favorable comment, but some commentators raised concerns with 
certain provisions.
Comments Received
    Call provisions. The draft amendment proposed to alter call 
disclosure on the confirmation in several ways. It would have required 
that the date and price of the first refunding call always be 
disclosed. It would have deleted the legend that generally is pre-
printed on the back of the confirmation. Instead, if there were any 
call features in addition to the first refunding call, it would have 
required that disclosure be made on the front of the confirmation that 
``special call features exist.''
    Several commentators commented on the Board's proposal to improve 
the disclosure of call features on the customer confirmation. With 
regard to the proposed disclosure of the first in-whole call, two 
commentators believed that such disclosure would be beneficial to 
investors. Another commentator, however, suggested that the Board may 
wish to modify the draft language to require the date and price of the 
``next'' pricing call, instead of the ``first pricing call, because 
after the first pricing call has passed, the ``next'' pricing call 
should be noted on the confirmation. The proposed rule change will 
incorporate this suggestion.
    Some commentators supported the replacement of the current legend 
``Call features may exist which could affect yield; complete 
information will be provided upon request,'' that generally is 
contained on the back of the confirmation, with the notation on the 
front of the confirmation that ``special call features exist,'' because 
they believed that an affirmative statement as to the presence of other 
call features would be beneficial to investors. In this regard, one 
commentator suggested the draft legend could be clarified by noting 
``other call features exist'' instead of ``special call features 
exist.''
    Other commentators, however, expressed concern because they 
believed that dealers, if their knowledge of a bond is incomplete, 
should be able to use the current legend. Another commentator supported 
deletion of the current legend, but opposed placing an affirmative 
notation regarding the presence of call features on the front of the 
confirmation because of the practical difficulties in obtaining call 
information. However, with regard to the availability of information 
regarding the presence of these call features, a number of commentators 
indicated that sufficient data regarding call features is available to 
support the disclosures being proposed.
    The Board continues to believe that disclosure of call features is 
important to customers and that it is appropriate to improve existing 
disclosure by requiring an affirmative notation on the front of the 
confirmation if there are any calls in addition to the first in-whole 
pricing call. Dealers should have information regarding the presence of 
call features before they sell municipal securities to their customers 
and such information appears to be readily available for most municipal 
securities. Thus, the proposed rule change will delete the current 
legend that permits dealers to indicate generally in a pre-printed 
format that other call features may exist.
    After reviewing the wide variety of comments on this aspect of the 
draft amendment, the Board changed the notation ``Special call features 
exist'' to ``Additional call features exist that may affect yield'' to 
better reflect the potential types of calls that might exist. The Board 
believes that this statement will best reflect the potential types of 
calls that might exist. Additionally, the Board added the second half 
of the existing legend ``complete information will be provided upon 
request'' to the notation to ensure that customers recognize that they 
can request additional information regarding call features.
    Revenue bonds. Five commentators opposed the provision of the draft 
amendment to require that the revenue source for revenue bonds always 
be disclosed. In general, these commentators noted difficulties 
describing the revenue source for certain bonds, particularly those 
with complex sources of revenue or those that have a lengthy list of 
revenue sources or too complex a funding scheme to allow for full 
disclosure on a confirmation. Because of confirmation space concerns, 
one commentator suggested that only the most significant sources of 
revenue be disclosed on the confirmation. With regard to the 
availability of information regarding revenue sources, two 
commentators, however, noted that the project or company name which 
identifies the revenue source currently is available.
    In response to commentators' concerns about the practical 
difficulties in listing numerous revenue sources, the proposed rule 
change will require dealers to put only the primary revenue source for 
revenue bonds on the confirmation (e.g., project name). The Board 
believes that this information is available and would be helpful to 
customers.
    Limited tax. Several commentators commented on the proposal to 
delete the ``limited tax'' designation. One supported the deletion of 
the limited tax designation because it believed that investors should 
refer to the official statement as a source of such information. 
However, other commentators questioned whether deletion of this 
provision would further the Board's objective of improving disclosure 
to customers. Two such commentators recognized that the meaning of 
``limited tax'' is ambiguous in today's markets, but nevertheless 
suggested the ``limited tax'' should be retained because they believed 
the ``limited tax'' designation is useful information.
    The proposed rule change will delete the ``limited tax'' 
designation because the Board believes that its meaning has become so 
ambiguous and so subject to differing views as to its applicability 
that is of doubtful use to investors. The Board notes, however, that 
deletion of this provision does not affect a dealer's obligation to 
disclose all material facts to the customer at the time of the 
transaction. If a general obligation bond has a limitation on taxes 
that is material to the investment decision, dealers must 
[[Page 26751]] ensure that their customers are aware of the relevant 
facts, at or before the time of the transaction.
    Dealers acting as agent and receiving ``other remuneration''. Four 
commentators commented on the proposal to clarify when it would be 
sufficient for a dealer to indicate that it received ``other 
remuneration'' in a transaction and that details will be furnished to 
the customer upon written request. In general, commentators supported 
the proposal, but some commentators suggested that the Board provide 
clarification regarding this provision.
    The proposed rule change will clarify when it is appropriate to 
disclose ``other remuneration'' on the confirmation by providing that 
in an agency transaction if a dealer acquires a bond from another 
dealer at discount and the customer pays the ``net'' price, the inter-
dealer discount cannot be considered ``other remuneration'' but rather 
should be considered remuneration received from the customer and 
disclosed pursuant to proposed rule G-15(a)(i)(A)(6)(f). The Board 
believes that the clarification included in the proposed rule change 
should ensure that dealers only disclose ``other remuneration'' in 
those situations where such a designation is appropriate.
    ``Ex legal'' delivery designation. Two commentators supported the 
proposed deletion of the current requirement that the confirmation 
indicate if a bond certificate is physically delivered without a legal 
opinion attached. Another commentator recognized that, with the 
movement away from the delivery of certificates, this provision is 
seldom noted on a confirmation. Nevertheless, this commentator believed 
this provision should be retained.
    The Board believes that, with the general movement away from the 
physical delivery of certificates, it is no longer appropriate for the 
confirmation rule to focus on the physical delivery of a legal opinion. 
Since the concept of ``ex legal'' has no applicability except in cases 
involving physical delivery of certificates, the Board believe that, as 
part of the update of the customer confirmation rule, this provision 
should be deleted. Of course, even with the deletion of this 
requirement, given facts and circumstances of a specific transaction, 
if it was material that a municipal security was delivered without a 
legal opinion, this fact would have to be disclosed to the customer at 
or before the execution of the transaction as part of a dealer's duties 
under rule G-17.
    Zero coupon bonds. Numerous commentators commented on the proposed 
disclosure requirements for zero coupon bonds. One commentator 
supported the proposed rule change to require disclosure of any premium 
over accreted value even though it would require additional programming 
for dealers. Several other commentators, however, opposed the 
disclosure of any premium over accreted value for transactions in zero 
coupon bonds. Two commentators believed it would be difficult to obtain 
this information and another commentator noted that some reprogramming 
would be required to include this information on the confirmation. One 
commentator suggested that the Board may wish to consider requiring 
that the rate of accretion for a zero coupon bond be disclosed on the 
confirmation because this would be more important to investors than 
being informed of any premium they paid over accreted value.
    The Board originally proposed that the premium over accreted value 
be disclosed for all zero coupon bonds, but the amendment only requires 
that this premium be disclosed for zero coupon bonds that are callable. 
As discussed above, the accreted value of zero coupon bonds reflects 
the increase in the security's value as it approaches the redemption 
date, and if the bond is called prior to maturity it generally would be 
called at a price reflecting that value. The Board believes that 
requiring dealers to disclose any premium over the accreted value for 
callable zero coupon bonds is necessary so that customers are provided 
with sufficient information to assess the transaction. The Board 
believes that although informing customers of the rate of accretion 
could be helpful if supplemented with appropriate time of trade 
disclosure regarding the current accreted value of the bonds, the most 
appropriate mechanism to ensure that customers understand these 
possible risks associated with callable zero coupon bonds is to require 
the bond's accreted value on the confirmation.
    Another commentator suggested that the Board consider a different 
approach because it believed that a discount or premium to the accreted 
value of a bond is equally important for any callable original issue 
discount bond (``OID''). This commentator suggested the following 
statement on confirmations relating to transactions in original issue 
discount bonds which are callable in part at an accreted value: ``If a 
premium was paid, a lower yield may result from early call.'' Although 
the Board does not believe this legend is appropriate for OID municipal 
securities, the Board does believe that additional information is 
necessary for such securities, and, as discussed above, the proposed 
rule change will require that the initial public offering price be 
disclosed for OID issues.
    Additional obligors. Five commentators commented on the provision 
to require that dealers always be required to disclose information 
regarding additional obligors. In general, these commentators opposed 
requiring dealers to provide complete information regarding obligors. 
One commentator believed that the existence of obligors should be 
disclosed on the confirmation, but customers should rely on credit 
ratings to judge the risk factors represented by such obligors because 
they believe it could be difficult to obtain such information. This 
commentator also suggested that banks or other providers of letters of 
credit should be disclosed on the confirmation. Another commentator 
suggested the official statement should be used as a source if an 
investor has questions regarding obligors.
    The Board believes that it is always important for customers to 
understand if there are any obligors in addition to the issuer and the 
Board believes this information should always be placed on the 
confirmation rather than making customers review official statements. 
The Board, however, recognizes that it could be difficult in certain 
instances for dealers to include on the confirmation complete 
information regarding obligors, if there are numerous obligors. The 
proposed rule change accordingly will permit dealers in such instances 
to note ``multiple obligors'' on the confirmation.
    Multi-transaction data should not be aggregated on one 
confirmation. In general, commentators supported this clarification as 
the believed it will be beneficial for customers to have a separate 
confirmation for each transaction if they acquire several municipal 
securities. One commentator, however, suggested that, if a customer 
executes multiple transactions, the dealer should be able to send a 
single document that would provide all required information, except 
that certain information such as purchase/sale and settlement data 
would not have to be listed for each transaction. The Board does not 
believe that it is too burdensome for dealers to ensure that the 
confirmation data for each transaction is complete. Accordingly, the 
proposed rule change will require a separate confirmation for each 
transaction.
    New sections to clarify confirmation format. The draft amendment as 
published proposed that all confirmation requirements, except the 
[[Page 26752]] zero coupon legend, be clearly and specifically noted on 
the front of the confirmation. Several commentators supported this 
format because they believed that disclosing more provisions on the 
front of the confirmation rather than pre-printed on the back, would be 
beneficial to customers.
    One commentator, however, suggested that dealers be permitted to 
continue to put two notations on the back of the confirmation. First, 
for agency transactions, rule G-15(a)(ii)(A) currently provides that 
the dealer shall indicate on the confirmation either the name of the 
person from whom the securities were purchased or to whom the 
securities were sold for the customer or a statement that this 
information will be furnished upon written request of the customer. 
Second, rule G-15(a)(i)(G) currently provides that a dealer shall 
indicate on the confirmation the time of execution or a statement that 
the time of execution will be furnished upon written request of the 
customer. The amendment incorporates these suggestions because, in view 
of concerns regarding confirmation crowding, the Board does not believe 
these statements are so crucial to a typical customer that it is 
necessary to include these statements on the front of the confirmation. 
In addition, consistent with the SEC's amendment to Rule 10b-10, the 
amendment will not require that the statement regarding factors 
affecting the yield for municipal CMOs be placed on the front of the 
confirmation.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Board requests that the Commission delay effectiveness of the 
proposed rule change until 120 days after approval by the Commission is 
published in the Federal Register to ensure that firms' confirmation 
practices are in compliance.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons 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 submission, 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
MSRB. All submissions should refer to File No. SR-MSRB-95-4 and should 
be submitted by June 8, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-12185 Filed 5-17-95; 8:45 am]
BILLING CODE 8010-01-M