[Federal Register Volume 60, Number 142 (Tuesday, July 25, 1995)]
[Notices]
[Pages 38069-38071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18175]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35988; File No. SR-MSRB-95-12]


Self-Regulatory Organization; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Municipal Securities 
Rulemaking Board Relating to Report of Sales and Purchases and 
Associated Transaction Reporting Procedures

July 18, 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 June 22, 
1995, the Municipal Securities Rulemaking Board, Inc (``MSRB'' or 
``Board'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing a proposed rule change to rule G-14, on reports 
of sales and purchases and associated transaction reporting procedures, 
to enhance the Board's transaction reporting pilot program to provide 
improved support of market surveillance and enforcement of Board rules. 
The proposed rule change would require brokers, dealers, and municipal 
securities dealers (``dealers'') that clear transactions for other 
dealers to identify the dealers that executed the transaction, when 
submitting transaction information to the Board under rule G-14. This 
would make available reliable information concerning each broker or 
dealer that is party to a transaction, including introducing brokers 
who are currently not identified on some transactions submitted to the 
Board. Such information would be made available through the Board's 
pilot automated transaction reporting system to the Commission and to 
organizations charged with inspection for compliance with, and 
enforcement of, Board rules (``enforcement agencies''). The Board 
requests that the proposed rule change be effective July 24, 1995.

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 self-regulatory organization 
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 self-regulatory organization 
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 Purpose Rule Change

1. Purpose
    On November 9, 1994, the Commission approved an amendment to Board 
rule G-14, on reports of sales or purchase of municipal securities, and 
associated transaction reporting procedures.\1\ Approval of the 
amendment represented a first step in achieving transparency in the 
municipal securities market, as it requires dealers to report to the 
Board or its designee \2\ information on each inter-dealer transaction 
in municipal securities, for public dissemination and for surveillance 
and enforcement uses. The amendment enabled implementation of the 
Board's transaction reporting pilot program and operation of an 
automated information system for transaction reporting (``system'').\3\

    \1\ See Securities Exchange Act Release No. 34955 (November 9, 
1994), 59 FR 59810.
    \2\ The Board has designated National Securities Clearing 
Corporation (``NSCC'') as its agent for receiving interdealer 
transaction information. Before this designation, NSCC already was 
receiving transaction information in its role as the central 
facilities provider of the automated comparison system.
    \3\ Other required information was also submitted by the Board 
to the Commission before the pilot system became operational. See 
Securities Exchange Act Release No. 35181 (December 30, 1994), 60 FR 
2412, and see letters from Larry M. Lawrence, MSRB, to Keith Riley, 
SEC, dated December 31, 1994, and January 23, 1995.

[[Page 38070]]

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    The system produces daily, public reports of frequently traded 
issues \4\ and summary volume and price information about the inter-
dealer market on the previous business day (``daily report''), and is 
building a surveillance database of detailed records about every inter-
dealer transaction that has been successfully compared \5\ by the 
automated comparison system. Dealers report transaction information to 
the Board, pursuant to rule G-14, through the automated comparison 
system. The transaction reporting system has been operational and has 
been collecting and publicly reporting inter-dealer transaction 
information since January 23, 1995. The Board had begun working with 
the National Association of Securities Dealers (``NASD'') and the bank 
regulatory agencies to establish detailed operational arrangements by 
which comprehensive information will be made available.\6\ This 
information includes, among other things identification of parties to 
each compared trade and the prices of all securities traded, and is not 
limited to transactions in issues that are traded four or more times a 
day.

    \4\ Currently, only issues that are traded four or more times 
during a day are included in the next day's daily report.
    \5\ In general, a ``compared'' transaction is one for which 
salient information items, provided by both parties to a trade, are 
matched and found to agree by the automated comparison system.
    \6\ Cooperation between the Board and the enforcement agencies 
was noted by the Commission as important in the enforcement of the 
customer protection rules, and the Commission's order approving the 
system described the NASD as the primary entity responsible for 
conducting market surveillance. The NASD already has requested and 
received transaction information from the surveillance database, as 
part of its enforcement activities. The Board is making arrangements 
to further automate the process of making surveillance information 
available to the NASD and to expand such support to all enforcement 
agencies.
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    The Commission has often noted the need to make an ``integrated 
audit trail'' of transaction information available to the agencies 
charged with enforcement of Board rules. The Commission believes that 
an audit trail will ``provide valuable information for market 
surveillance and inspection purposes to the MSRB, the Commission, the 
NASD, and the relevant banking agencies.''\7\

    \7\ See note 1, supra.
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    The surveillance databases of transactions being built as part of 
the transaction reporting system will provide an effective audit trail 
for the enforcement agencies. The proposed rule change will help to 
ensure that the audit trail contains the identify of all dealers 
involved in each compared inter-dealer municipal securities 
transaction.
    Currently, transaction information reported to the Board under rule 
G-14 through the automated comparison system always includes a 
numerical identifier for the dealer that ``clears'' the transaction 
through NSCC. In many cases, this dealer, called the ``clearing 
broker,'' is also the dealer that executed the transaction. In other 
cases, the ``clearing broker'' submits the trade on behalf of another 
dealer that executed the transaction. In a clearing-introducing broker 
arrangement, the clearing broker may submit transaction information on 
behalf of the introducing broker. In this case, the introducing broker 
generally is identified as the ``executing broker'' in the comparison 
system.
    During the first months of transaction reporting operations, the 
Board has noted that a substantial number of transactions submitted 
under G-14 do not include any indication whether the trade is actually 
done by the ``clearing broker'' or on behalf of another ``executing 
broker.'' \8\ Under these circumstances, the surveillance database does 
not reflect the identity of all dealers involved in the transaction. 
The identity of the actual executing brokers on each transaction is 
critical to the surveillance database and to monitoring individual 
dealers' compliance with the requirement for trade comparison on the 
night of trade date.\9\

    \8\ Clearing brokers have the option of including the identity 
of the introducing brokers when reporting a transaction, in which 
case the introducing broker identifiers are entered into the Board's 
surveillance database. The database lacks the introducing broker 
identifier of transactions for which the clearing broker chooses not 
to identify the introducing broker.
    \9\ Clearing and introducing brokers are jointly responsible for 
submitting transaction information for automated comparison under 
rule G-12(f). See ``Enforcement Initiative,'' MSRB Reports, Vol. 14, 
No. 3 (June 1994), at 35. Therefore, the clearing broker bears 
responsibility for obtaining accurate and timely information from 
its executing brokers and submitting it for comparison in time to 
achieve comparison on the night of trade data. However, charting the 
performance of individual executing brokers would be helpful both to 
the clearing brokers and to the enforcement agencies, since it would 
indicate which executing brokers are presenting problems.
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    The proposed rule change would require dealers who clear 
transactions for other dealers to identify the executing dealers 
involved in the trade. This would involve relatively minor changes in 
current practice. Clearing brokers would have to ensure the presence of 
the executing broker identification for both the ``buy side'' and the 
``sell side'' for every transaction submitted to the automated 
comparison system.\10\ In addition, each executing broker of municipal 
securities transactions that has not yet been assigned an executing 
broker symbol would have to request an assignment.\11\

    \10\ A clearing broker that uses an ``omnibus'' account to 
handle introducing brokers' trades might have to change its 
practices to identify the introducing broker in each case, rather 
than using its own clearing broker symbol.
    \11\ The NASD assigns executing broker symbols to brokers, 
dealers, and municipal securities dealers. A self-clearing broker 
may use an NASD-assigned symbol to identify itself in its role as 
executing broker, or it may use its NSCC-assigned broker number for 
this purpose.
2. Statutory Basis
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C), which requires, in pertinent part, that the 
Board's rules:

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, * * * 
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. * * *

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

    The Board does not believe that the proposed rule change will 
impose any burden on competition in that it applies equally to all 
dealers in municipal securities.

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

    The Board has neither solicited nor received comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
(3) was provided to the Commission for its review at least five days 
prior to the filing date; and (4) does not become operative for thirty 
days from the date of its filing on June 22, 1995, the proposed rule 
change has become effective pursuant to Section 19(b)(3)(A) of the Act 
and Rule 19b-4(e)(6) thereunder. In particular, the Commission believes 
the proposed rule change would qualify as a ``non-controversial 
filing'' in that the proposed standards do not significantly affect the 
protection of investors or the public interest and do not impose any 

[[Page 38071]]
significant burden on competition. At any time within sixty days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.

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, N.W., Washington, D.C. 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. Sec. 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-95-12 and should 
be submitted by August 15, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18175 Filed 7-24-95; 8:45 am]
BILLING CODE 8610-01-M