[Federal Register Volume 61, Number 78 (Monday, April 22, 1996)]
[Notices]
[Pages 17745-17747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9802]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37116; File No. SR-MSRB-95-17]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to Reports 
of Sales and Purchases

April 16, 1996.

I. Introduction

    On December 13, 1995 the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') a proposed rule change to 
require brokers, dealers and municipal securities dealers (``dealers'') 
to include time of trade execution when submitting information on 
inter-dealer transactions to the Board under rule G-14, in order to 
enhance the Board's transaction reporting pilot program (``the 
program'').
    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 36827 (February 9, 1996), 61 FR 6276 
(``Proposing Release''). The Commission received two comments on the 
proposal.\1\ For the reasons discussed below, this order approves the 
proposal to amend Board rule G-14, effective July 1, 1996, as requested 
by the Board in the Proposing Release.
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    \1\ See letter from Joseph W. Sack, Senior Vice President, 
Public Securities Association, to Secretary, Securities and Exchange 
Commission, dated March 8, 1996 (``PSA letter''), and from The 
Executive Committee of the Regional Municipal Operations Association 
to the MSRB, dated March 22, 1996 (``RMOA letter''). The Commission 
notes that the RMOA letter was not submitted to the Commission as a 
comment letter specifically on this filing, but because the letter 
provides RMOA's comments on the proposed rule to require time of 
trade reporting, the Commission is considering the pertinent 
comments in the present order.
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II. Description of the Proposal

a. Purpose

    As discussed in the Proposing Release, the proposed rule change is 
intended to improve the audit trail that is currently available for 
inter-dealer municipal securities transactions by requiring municipal 
dealers to include the time of trade execution when submitting 
information on their trades under Board rule G-14. This would make it 
possible to reconstruct the time sequence of interdealer transactions. 
The information would be made available, through the Board's automated 
transaction reporting system, to the Commission and to organizations 
charged with inspection for compliance with, and enforcement of, Board 
rules (``enforcement agencies'').

b. Background

    This initiative is one element of an ongoing, multi-phase pilot 
program to increase price transparency for public use and to create 
audit trails for market surveillance purposes in the municipal 
securities markets. In 1994,\2\ the Board described its plan to 
disseminate a daily public report that summarizes market activity for 
securities traded ``frequently'' \3\ on the previous day (``T+1''), and 
to construct a comprehensive ``surveillance database,'' that would 
include details of each trade (the identity of the parties, the price, 
par value, etc.). The 1994 plan proposed four phases: inclusion of 
inter-dealer transactions in Phase I, institutional customer 
transactions in Phase II,\4\ retail customer transactions in Phase III, 
and intra-day reporting in Phase IV.
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    \2\ See letter from Robert Drysdale, MSRB, to Arthur Levitt, 
SEC, dated November 3, 1994.
    \3\ Currently, the threshold for ``frequent'' trading is four or 
more trades in one day.
    \4\ ``Institutional'' transactions were defined for the purpose 
of Phase II as customer transactions settled on a delivery versus 
payment/receipt versus payment (DVP/RVP) basis. These are 
transactions in which the customer requires that settlement occur 
with an exchange of money and securities at the time of settlement. 
Generally, institutional customers require DVP/RVP settlement and 
retail customers do not.
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    The Commission originally approved the pilot program in concept on 
November 9, 1995.\5\ That order initiated the Board's transaction 
reporting program and operation of the supporting computer system, and 
was an important first step to increase transparency and market 
surveillance of the municipal securities market.
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    \5\ See Securities Exchange Act Release No. 34955 (November 9, 
1994), 59 FR 59810 (order approving Phase I of the MSRB's 
transaction reporting pilot program). The input stream for inter-
dealer transaction reporting under Phase I is transaction 
information reported by dealers, pursuant to Board rule G-14, to the 
Board through the automated comparison system. The Board has 
designated National Securities Clearing Corporation (``NSCC''), the 
central facilities provider of the automated comparison system, as 
its agent for receiving inter-dealer transaction information.
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    Accordingly, Phase I of the transaction reporting system has been 
operational since January 23, 1995. Each day, the system has produced a 
report of price and volume of inter-dealer transactions in ``frequently 
traded'' municipal securities executed on the previous business day. 
The system also generates a surveillance data base which includes, 
among other things, the price and volume of each compared trade, the 
trade date, identification of the security traded, and identification 
of all parties to each compared interdealer transaction.\6\
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    \6\ The Commission has recently approved the requirement to 
identify all dealers that are parties to a trade when submitting 
transaction information to the Board. See Securities Exchange Act 
Release No. 35988 (July 18, 1995), 60 FR 38069.
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    The information provided in the surveillance database is intended 
to enable the enforcement agencies to construct audit trails of inter-
dealer transactions. The Board has provided on-line access to the 
surveillance database to the National Association of Securities 
Dealers, Inc. (``NASD'') and is making information from the 
surveillance database available to all the agencies responsible for 
enforcing Board rules. The proposed amendment to rule G-14 is intended 
to enhance the surveillance information currently available, and to 
make it more useful to those responsible agencies.

c. Timing

    The Proposing Release notes that changes in the automated 
comparison system are underway to enable that system to collect time-
of-trade

[[Page 17746]]

information, and dealers and service providers must make corresponding 
changes in order to furnish to the MSRB the information that would be 
required under the proposal. To provide market participants with 
sufficient time to make the necessary internal system changes, the 
Board has requested that the Commission make the proposed rule change 
effective on July 1, 1996.
    The Proposing Release also describes the MSRB's revised plan to 
delay implementation for Phase II by merging that phase with Phase III 
of the program.\7\ According to the MSRB, notice was to be made 
available to the Commission and the industry by the end of 1995, 
outlining the new plan and requesting comment from industry 
participants. Corresponding proposed amendments to rule G-14 will be 
filed with the Commission in mid-1996. The Commission notes that the 
Proposing Release included a discussion of this new schedule, but did 
not formally propose a revised schedule or rule amendment for 
Commission review at this time.
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    \7\ In 1994, the MSRB had planned to obtain institutional trade 
data from the Institutional Delivery (``ID'') System, operated by 
Depository Trust Corporation (``DTC''). After further research into 
this matter, however, the MSRB has determined that it is appropriate 
to merge Phases II and III of the program. Under this modified 
approach, dealers would be required to report selected information 
about institutional and retail customer trades to the Board by 
uploading the data from their own systems to the central system 
operated by the Board. The Commission has not approved this modified 
schedule.
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d. Comments Received by the MSRB Prior to Filing With the Commission

    In its filing with the Commission, the Board stated that it 
received two comments on the proposal in response to a notice published 
by the MSRB which, among other things, had described the proposed rule 
change and requested comment from market participants.\8\
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    \8\ See ``Transaction Reporting Program for Municipal 
Securities: Phase II,'' MSRB Reports, Vol. 15, No. 1 (April 1995), 
at 11-15.
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    According to the Board, one commentor \9\ that responded to the 
MSRB publication stated that time-of-trade reporting would involve 
``major and possibly costly'' system changes to dealer systems. This 
commentor, according to the Board, believed that time-of-trade 
reporting should be delayed until retail customer transactions are 
added to the transaction reporting program, so that dealers and 
clearing agencies could make the needed changes in conjunction with 
more extensive changes foreseen for the later phases. The MSRB further 
explained that the second commentor that responded to the MSRB 
publication \10\ stated that many firms would incur development costs 
to modify their trading systems to accommodate time-of-trade 
information.
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    \9\ The Public Securities Association provided this comment.
    \10\ Goldman, Sachs & Co provided this comment.
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    The Board responded to the above concerns in the Proposing Release. 
The Board believes that the proposed rule change is essential to 
facilitating effective surveillance and enforcement activities 
regarding inter-dealer transactions and should not be delayed until 
later phases of the transaction reporting program. The Board does not 
believe that incorporating time-of-trade data into current trade 
reporting systems represents a major system change. The Board further 
believes that the proposed rule change would merely add one item of 
information to an existing reporting requirement. That information item 
already is required, for record-keeping purposes, to be recorded by the 
dealer. Finally, the Board has proposed more than six months' lead time 
from its publication date to the effective date to allow dealers 
sufficient time to schedule the necessary system changes. In many 
cases, it would be expected that this change could be made in 
connection with other minor system adjustments that must be implemented 
in the ordinary course of business.

III. Comments

    As noted above, the Commission received two comments on the 
proposal.\11\ Both commenters opposed approval of the proposed rule 
change.
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    \11\ See note 1, supra.
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    The commenters made essentially the same arguments that were made 
to the MSRB prior to filing discussed above. Specifically, one 
commenter, noting that it had already commented to the MSRB on the 
proposed rule change, continues to oppose the proposed rule change 
because of the costs that it would impose on dealers.\12\ The commenter 
asserts that, in light of other costs currently imposed on municipal 
dealers, along with the MSRB's plans to require new systems by January 
1998 for institutional and customer transaction reporting, 
implementation of the present proposal should be delayed until the 
requisite systems changes can be merged with those that will be 
required for the January 1998 transparency initiatives.
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    \12\ See PSA letter, supra note 1.
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    With respect to the present proposed rule change, the second 
commenter believes that time of trade information will be useful when 
the Board begins to take trade data beyond the dealer-to-dealer 
business.\13\ The commenter does not see the usefulness of the 
information now, however. This commenter recommends postponing the 
proposed rule change ``in favor of a more logical progression toward 
the desired goals.'' \14\
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    \13\ See RMOA letter, supra note 1.
    \14\ Id.
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IV. Discussion and Order Approving Proposed Rule Change

    The Commission believes the proposed rule change, effective as 
requested on July 1, 1996, is consistent with Section 15B(b)(2)(C) of 
the Securities Exchange Act of 1934, 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 
foster cooperation and coordination with persons engaged in 
regulating * * * 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 * * *.

    While the Commission is sympathetic to the commenters' concerns 
regarding implementation costs, the Commission agrees with the MSRB 
that time of trade will be useful to enforcement agencies in 
determining the sequence of trades. This, in turn, should improve 
market surveillance capabilities in identifying dealer trading patterns 
that warrant further investigation to determine whether potentially 
violative practices have occurred. These improvements in the audit 
trail for market surveillance of the municipal securities markets 
should assist in preventing fraudulent and manipulative acts and 
practices and, in general, protect investors and the public interest, 
in furtherance of the above stated statutory objectives.
    In this regard, the Commission previously has noted the need to 
make an ``integrated audit trail'' of transaction information available 
to the enforcement agencies. The Commission has expressed its belief 
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.'' \15\ Time of trade should 
prove useful as the MSRB moves toward coordinating its increasingly 
``integrated'' audit trail.
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    \15\ Securities Exchange Act Release No. 34955, supra note 4, at 
19.
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    The Commission also notes that, since its inception, the pilot 
program for trade reporting has been a multi-phase

[[Page 17747]]

program that, as proposed and approved in concept, would require market 
participants to make numerous systems changes. Thus, the requisite 
systems changes to report time of trade is one element of the on-going 
initiative, about which participants have been on notice for more than 
a year. Time of trade will not only be useful in market surveillance 
efforts for the present phase of the pilot program, but time of trade 
will continue to be needed when retail trade reports are required. 
Moreover, the MSRB has proposed, and the Commission is approving, a 
delayed effective date so that dealers may attempt to merge these 
systems enhancements with any others that may be required internally by 
dealers.
    Finally, while the Commission has not yet formally reviewed or 
approved the MSRB's proposal to delay institutional trade reporting 
until that phase can be merged with customer trade reporting, the 
Commission believes that market surveillance efforts and transparency 
are both essential elements of the overall pilot program and, 
therefore, one aspect of the program should not be delayed because 
technical difficulties have slowed progress in another aspect of the 
program. In this regard, the Commission looks forward to working with 
the MSRB and market participants toward continued swift improvements in 
both market surveillance and price transparency in the municipal 
securities markets.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-MSRB-95-17), effective July 
1, 1996, is approved.

    \16\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9802 Filed 4-19-96; 8:45 am]
BILLING CODE 8010-01-M