[Federal Register Volume 60, Number 137 (Tuesday, July 18, 1995)]
[Notices]
[Pages 36842-36845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17518]



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[[Page 36843]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35953; File No. SR-MSRB-95-4]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Customer Confirmations

July 11, 1995.
    On April 3, 1995,\1\ the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') a proposed rule change (File No. 
SR-MSRB-95-4) pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act''), 15 U.S.C. 78s(b)(1). The proposed rule change 
amends rule G-15(a), on customer confirmations. Notice of the proposed 
rule change, together with the substance of the proposal, was issued by 
Commission release (Securities Exchange Act Release No. 35700, May 10, 
1995) and by publication in the Federal Register 60 FR 26747, May 18, 
1995). Two comment letters were received. The Commission is approving 
the proposed rule change.

    \1\ The Municipal Securities Rulemaking Board initially 
submitted the proposed rule change on March 30, 1995. Amendment No. 
1, submitted on April 3, 1995, extended 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, Securities 
and Exchange Commission, dated April 3, 1995.
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I. Background

    In response to market developments and regulatory concerns, the 
present rule G-15(a) has been subject to numerous amendments and Board 
interpretive notices since it was adopted in 1977. In November 1994, 
the SEC approved amendments to Rule 10b-10 under the Act, governing 
confirmation disclosure in securities other than municipal 
securities.\2\ At the same time, the SEC deferred consideration of 
proposed Rule 15c2-13 that would have established confirmation 
disclosure requirements applicable to transactions in municipal 
securities.\3\ In response to revisions by the SEC to Rule 10b-10, to 
the SEC's proposed Rule 15c2-13 and to promote better compliance with 
the MSRB's rule, the MSRB is amending rule G-15(a).

    \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.
    \3\ 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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II. Description

    The change to rule G-15(a) will: (1) 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; (2) revise certain requirements in areas to provided 
more disclosure; and (3) include modifications to the current 
confirmation disclosure requirements.
    The rule change reorganizes the rule and incorporates previous 
Board interpretations into the rule. Most requirements are subdivided 
by subject matter into three board categories that comprised the 
content of municipal securities confirmations--terms of the 
transactions, securities identification, and securities confirmations--
terms of the transactions, securities identification, and securities 
description (listing the features of the security). Under each 
category, Board rules and interpretations are organized by the specific 
confirmation requirement.
    The rule change clarifies the confirmation format with the 
requirement that all disclosures, with certain exceptions, clearly and 
specifically be indicated on the front of the confirmation. To address 
concerns about the ``crowding'' of information on the front of the 
confirmation, certain requirements can 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 
to include a statement that the name of the person from whom the 
securities were purchased or sold will be furnished upon the written 
request of the customer; (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; and (4) the requirements for the disclosure statement 
of actual yield and factors affecting yield of municipal collateralized 
mortgage obligations (``CMOs'') in rule G-15(a)(i)(D)(2).
    The rule change revises customer confirmation requirements to 
provide that dealers disclose on the confirmation: (1) If a security 
has not been rated by a nationally recognized statistical rating 
organization; (2) if a letter of credit is used, the identify of the 
bank issuing the letter of credit; (3) if call features exist in 
addition to the next pricing call, that the additional call features 
will be provided on request; (4) if necessary for the calculation of 
final money, the first interest payment date; (5) if there is one 
additional obligor, the identity of the additional obligor; and (6) if 
there is more than one additional obligor, indication that there are 
``multiple obligors.''
    Furthermore, the rule change revises customer confirmation 
requirements to provide that dealers disclose on the confirmation: (1) 
A specific date and price for the next pricing call; (2) the primary 
revenue source for revenue bonds; (3) the amount of the dealer's 
``discount'' or concession in an agency transaction; (4) the amount of 
any premium paid over accreted value for callable zero coupon bonds; 
(5) the initial pubic offering price for an original issue discount 
(``OID'') security; (6) that the actual yield of municipal CMOs may 
vary according to the rate at which the underlying receivables or other 
financial assets are prepaid; and (7) that information concerning 
factors that affect yield of the municipal CMOs (including, at a 
minimum, estimated yield, weighted average life, and the prepayment 
assumptions underlying yield) will be furnished upon the customer's 
written request.
    However, the revisions to the customer confirmation requirements 
will: (1) Retain the specific confirmation requirements for zero coupon 
bonds; (2) delete the requirement for the ``limited tax'' and ``ex-
legal' designations of certificates; and (3) provide specific 
exemptions 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.
    Finally, the rule change modifies the confirmation requirement to 
require that a separate confirmation be provided for each municipal 
securities transaction whenever several transactions are done at one 
time.

III. Summary of Comments

    As noted above, the Commission received two comment letters on the 
proposal.\4\ Latham's clients generally support the proposed 
reorganization of rule G-15(a). However, Latham's clients believed the 
proposal should be modified to allow the issuance of a master 
confirmation that would not aggregate information nor omit any 
information that proposed rule G-15(a) requires to be included in a 
confirmation. Latham stated that the 

[[Page 36844]]
proposed addition of G-15(a)(ii) which requires delivery of a separate 
confirmation for each transaction creates an administrative burden on 
institutional investors that have multiple odd lot trades with the same 
dealer at one time. Latham stated that late in the trading day 
institutional investors are not receptive to the purchase of multiple 
remarketed odd lot securities because of the administrative burdens 
required to separately confirm the purchase of multiple securities 
issued by many different municipal issuers, with each security having a 
different CUSIP number. As a result of requiring a separate 
confirmation for each transaction, Latham stated that multiple 
remarketed odd lot securities often are not placed, which results in a 
loss to the seller and the institutional investors who would have 
purchased the securities late in the trading day.

    \4\ Letter from Roger M. Zaitzeff and Carlos Alvarez, Esq., 
Latham and Watkins (``Latham''), on behalf of unnamed clients to 
Jonathan G. Katz, Secretary, Commission (June 8, 1995); Letter from 
Robert B. Mayers, Senior Vice President/Group Executive, Wachovia 
Bank of North Carolina, N.A. (``Wachovia Bank'') to Jonathan G. 
Katz, Secretary, Commission (June 6, 1995).
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    The other commenter, Wachovia Bank, was generally in agreement with 
the proposed changes to the customer confirmation requirements for 
municipal securities transactions. however, Wachovia Bank believed: (1) 
That disclosing the remuneration received in an agency transition may 
mislead the customer, and (2) that disclosing the initial offering 
price for an OID security could present difficulties for the secondary 
municipal market because the information for older issues is not 
readily available, or may not be available at all.
    Wachovia Bank stated that disclosing any dealer concession or 
discount received as a result of an agency transaction may mislead the 
customer to conclude that the dealer through which the transaction was 
executed received some additional compensation, paid by the customer, 
that the customer would not have paid had the transaction been executed 
through another dealer. Furthermore, Wachovia Bank stated that the 
customer may mistakenly believe that the broker-dealer received other 
compensation or profit beyond the amount shown as remuneration from the 
customer and may not realize that the amount disclosed is the dealer's 
total compensation for the transaction. Wachovia Bank believed that it 
is the dealer's standing as a member of the broker-dealer community and 
the selling dealer's willingness to sell at less than the net price to 
another dealer, not to the customer, which allows the purchase at a 
discount or concession from another dealer.
    Finally, Wachovia Bank stated that disclosing the initial offering 
price for an OID security could present difficulties for the secondary 
municipal market because the information for older issues is not 
readily available, or may not be available at all. Wachovia Bank stated 
that older OID issues may become illiquid because a bidder may be 
precluded from bidding for an OID security if the initial public 
offering price is not known as the purchaser could not reoffer the 
bonds without the OID price.

IV. Discussion

    The Commission has considered the above comment letters. The 
Commission believes that a separate confirmation should be provided for 
each municipal securites transaction whenever several transactions are 
effected at one time. The Commission believes that separate 
confirmations are not too burdensome and that aggregating confirmation 
data has the potential to confuse the customers. If a customer 
purchases several different securities of one issuer from a dealer, 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. 
Moreover, the MSRB's rules require members to use an automated 
clearance and settlement system for transactions which makes it 
necessary to have separate confirmations to enter transactions into the 
automated system.
    The Commission believes that a dealer, when acting as an agent for 
the customer, has a fiduciary duty to disclose on the confirmation the 
amount of the dealer's ``discount'' or concession received in the 
transaction. In an agency transaction, 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 should be considered remuneration 
received from the customer and should be disclosed.
    The Commission believes that requiring the dealer to disclose the 
initial public offering price for the original issue discount security 
information is particularly important to customers since it may be 
needed for tax reasons and also may be important in determining the 
investor's gain if the security is subject to an early call. Moreover, 
most commercial information vendors will have the OID price available.
    The Commission believes that the rule change is consistent with and 
promotes better compliance with the provisions of Section 15B(b)(2)(C) 
of the Act.\5\ The reorganization of the rule 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.

    \5\ 15 U.S.C. 78o-3. Section 15B(b)(2)(C) 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; and not be 
designed to permit unfair discrimination between customers, issuers, 
municipal securities brokers, or municipal securities dealers, to 
fix minimum profits, to impose any schedule or fix rates of 
commissions, allowances, discounts, or other fees to be charged by 
municipal securities brokers or municipal securities dealers, to 
regulate by virtue of any authority conferred by this title matters 
not related to the purposes of this title or the administration of 
the Board, or to impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    The Commission believes the rule change will strengthen the 
disclosure requirements for municipal securities and customer 
protection objectives of the rule. The change to rule G-15(a)(i)(E) 
will require that all disclosures, with certain exceptions, be clearly 
and specifically indicated on the front of the confirmation. The rule 
change will allow certain requirements to be met by statements on the 
back of the confirmation to avoid crowding of information on the front 
side of the confirmation.
    The Commission believes that the current disclosure of call 
features in the pre-printed legend on the back of the confirmation has 
not always been effective in alerting customers to the existence of all 
features. The rule change will put customers clearly on notice as to 
the presence of call features on the front of the confirmation, 
including the requirement that a specific date and price for the next 
pricing call (one of the most important elements of call information) 
always be disclosed.\6\ If any call features exist in addition to the 
next pricing call, the proposed rule change will require the following 
notation on the front of the confirmation--``Additional call features 
exist that may affect yield; complete 

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information will be provided upon request.''

    \6\ Rule G-15(a)(vi)(F) as amended 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 change to rule G-15(a)(i)(C)(3)(f) will require that if a 
security is unrated by a nationally recognized statistical rating 
organization, a disclosure to that effect be made. The Commission 
believes that this disclosure will alert customers that they may wish 
to obtain further information or clarification from their dealer.
    The change to rule G-15(a)(i)(C)(1)(a) will require dealers to put 
the primary revenue source for revenue bonds on the confirmation (e.g., 
project name) and delete the language requiring disclosure of the 
primary revenue source ``if necessary for a materially complete 
description of the securities.'' The Commission believes that requiring 
disclosure of the primary revenue source of revenue bonds on the 
confirmation will help ensure that customers receive important 
information about the purpose and source of payment of revenue bonds.
    The change to rule G-15(a)(i)(C)(1)(b) will require dealers always 
to identify the additional obligor on the confirmation or indicate 
``multiple obligors'' if there is more than one additional obligor. The 
Commission believes this will simplify and clarify the intent of the 
rule. Also, the rule change will clarify that, if a letter of credit is 
used, the identity of the bank issuing the letter of credit must be 
noted.
    The rule change will delete both the ``limited tax'' and the ``ex-
legal'' designations of certificates. The ``limited tax'' designation 
is no longer necessary because the meaning of this ``limited tax'' 
designation has become ambiguous as various states have implemented a 
variety of tax limitation measures. The ``ex-legal'' delivery 
designation is no longer necessary because of the high percentage of 
book-entry-only securities in the market and the movement away from 
physical delivery of certificates which included a copy of the legal 
opinion.
    The rule change will retain the 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.''
    In addition, the 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.\7\ The Commission 
believes it is important for customers to know that zero coupon 
securities may be affected by an early call and that a premium over the 
accreted value is being paid in the purchase price.

    \7\ 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 generally 
at the accreted value.
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    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, so as not to 
be 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. It would, for 
example, not be required for transactions in the issue occurring after 
the first interest payment date.\8\

    \8\ The change to rule G-15(a)(i)(C)(2)(e), consistent with 
current rule G-15(a)(ii)(I), requires that if securities pay 
interest on other than semi-annual basis, a statement of the basis 
on which interest is paid shall be included.
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    The change to rule G-15 (a)(i)(A)(5)(d) will include specific 
exemptions 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 current rule includes no exemption 
for these transactions. The Commission believes that a statement of 
yield on these transactions may mislead investors.
    Rule G-15(a)(i)(D)(2) will include a provision regarding municipal 
CMOs that the dealer must include a statement on the confirmation 
indicating that the actual yield of municipal 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 Commission believes that this provision should apply to 
municipal securities as it is similar to the Commission's requirements 
in Rule 10b-10, the rule for non-municipal securities.
    Finally, the Commission believes the proposed rule change does not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of this title because the rule will apply 
to all MSRB members. Thus, individual brokers and dealers will not be 
disparately affected by the rule change.
    At the MSRB's request, the Commission is delaying effectiveness of 
the proposed rule change until 120 days after the approval order by the 
Commission is published in the Federal Register to ensure that firms' 
confirmation practices are in compliance.
    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-MSRB-95-4 be, and hereby is, approved 
and effective November 15, 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. 95-17518 Filed 7-17-95; 8:45 am]
BILLING CODE 8010-01-M