[Federal Register Volume 63, Number 70 (Monday, April 13, 1998)]
[Notices]
[Pages 18055-18057]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9593]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39833; File No. SR-MSRB-98-06]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Relating to Rule G-
15(d)(ii) Concerning Automated Confirmation/Acknowledgment of Customer 
Transactions

April 6, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 3, 1998, the 
Municipal Securities Rulemaking Board (``Board'' or ``MSRB'') 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 primarily by the Board. The Commission is 
publishing this notice to solicit comments from interested persons on 
the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Board is filing amendments to Board rule G-15(d)(ii), 
concerning automated confirmation/acknowledgment of customer 
transactions (hereafter referred to as ``the proposed rule change''). 
The text of the proposed rule change is as follows: \2\
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    \2\ Italicizing indicates new language; [brackets] indicate 
deletions.
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G-15  Confirmation, Clearance and Settlement of Transactions With 
Customers

    (a)-(c) No change.
    (d) Delivery/Receipt vs. Payment Transactions.
    (i) No change.
    (ii) Requirement for Confirmation/Acknowledgment.
    (A) Use of Registered Clearing Agency or Qualified Vendor. Except 
as provided in this paragraph (ii) of rule G-15(d), no broker, dealer 
or municipal securities dealer shall effect a customer transaction for 
settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP) 
basis unless the facilities of a C[c]learing A[a]gency [registered with 
the Securities and Exchange Commission (registered clearing agency)] or 
Qualified Vendor are used for automated confirmation and acknowledgment 
of the transaction. Each broker, dealer and municipal securities dealer 
executing a customer transaction on a DVP/RVP basis shall: (A) ensure 
that the customer has the capability, either directly or through its 
clearing agent, to acknowledge transactions in an automated 
confirmation/acknowledgment system operated by a [registered] 
C[c]learing A[a]gency or Qualified Vendor; (B) submit or cause to be 
submitted to a [registered] C[c]learing A[a]gency or Qualified Vendor 
all information and instructions required by the [registered] 
C[c]learing A[a]gency or Qualified Vendor for the production of a 
confirmation that can be acknowledged by the customer or the customer's 
clearing agent; and (C) submit such transaction information to the 
automated confirmation/acknowledgment system on the date of execution 
of such transaction; provided that a transaction that is not eligible 
for automated confirmation and acknowledgment through the facilities of 
a [registered] C[c]learing A[a]gency shall not be subject to this 
paragraph (ii).
    (B) Definitions for Rule G-15(d)(ii).
    (1) ``Clearing Agency'' shall mean a clearing agency as defined in 
Section 3(a)(23) of the Act that is registered with the Commission 
pursuant to Section 17A(b)(2) of the Act or has obtained from the 
Commission an exemption from registration granted specifically to allow 
the clearing agency to provide confirmation/acknowledgment services.
    (2) ``Qualified Vendor'' shall mean a vendor of electronic 
confirmation and acknowledgment services that:
    (A) for each transaction subject to this rule: (i) delivers a trade 
record to a Clearing Agency in the Clearing Agency's format; (ii) 
obtains a control number for the trade record from the Clearing Agency; 
(iii) cross-references the control number to the confirmation and 
subsequent acknowledgment of the trade; and (iv) electronically 
delivers any acknowledgment received on the trade to the Clearing 
Agency and includes the control number when delivering the 
acknowledgment of the trade to the Clearing Agency;
    (B) annually certifies: (i) with respect to its electronic trade 
confirmation/acknowledgment system, that it has a capacity requirements 
evaluation and monitoring process that allows the vendor to formulate 
current and anticipated estimated capacity requirements; (ii) that its 
electronic trade confirmation/acknowledgment

[[Page 18056]]

system has sufficient capacity to process the volume of data that it 
reasonably anticipates to be entered into its electronic trade 
confirmation/acknowledgment service during the upcoming year; (iii) 
that its electronic trade confirmation/acknowledgment system has formal 
contingency procedures, that the entity has followed a formal process 
for reviewing the likelihood of contingency occurrences, and that the 
contingency protocols are reviewed, tested, and updated on a regular 
basis; (iv) that its electronic confirmation/acknowledgment system has 
a process for preventing, detecting, and controlling any potential or 
actual systems or computer operations failures, including any failure 
to interface with a Clearing Agency as described in rule G-
15(d)(ii)(B)(2)(A), above, and that its procedures designed to protect 
against security breaches are followed; and (v) that its current assets 
exceed its current liabilities by at least five hundred thousand 
dollars;
    (C) when it begins providing such services, and annually 
thereafter, submits an Auditor's Report to the Commission staff and 
obtains from the Commission staff a statement that the Commission staff 
does not object to the Auditor's Report. (An Auditor's Report will be 
deemed unacceptable if it contains any findings of material weakness.); 
3
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    \3\ At this time, the Commission staff intends to indicate that 
a vendor's initial Auditor's Report is not unacceptable and that the 
vendor therefore is a qualified vendor for purposes of Rule G-15 by 
issuing a letter to the vendor stating that it will not recommend 
enforcement action against any of the Board's member organizations 
that elect to use the confirmation/affirmation services of the 
vendor.
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    (D) notifies the Commission staff immediately in writing of any 
material change to its confirmation/acknowledgment systems. (For 
purposes of this subparagraph (D) ``material change'' means any changes 
to the vendor's systems that significantly affect or have the potential 
to significantly affect its electronic trade confirmation/
acknowledgment systems, including changes that: (i) affect or 
potentially affect the capacity or security of its electronic trade 
confirmation/acknowledgment system; (ii) rely on new or substantially 
different technology; (iii) provide a new service as part of the 
Qualified Vendor's electronic trade confirmation/acknowledgment system; 
or (iv) affect or have the potential to adversely affect the vendor's 
confirmation/acknowledgment system's interface with a Clearing 
Agency.);
    (E) immediately notifies the Commission staff in writing if it 
intends to cease providing services;
    (F) provides the Board with copies of any submissions to the 
Commission staff made pursuant to subparagraphs (C), (D), and (E) of 
this rule G-15(d)(ii)(B)(2) within ten business days.
    (G) promptly supplies supplemental information regarding its 
confirmation/acknowledgment system when requested by the Commission 
staff or the Board.
    (3) ``Auditor's Report'' shall mean a written report which is 
prepared by competent, independent, external audit personnel in 
accordance with the standards of the American Institute of Certified 
Public Accountants and the Information Systems Audit and Control 
Association and which: (A) verifies the certifications described in 
subparagraph (d) (ii) (B) (2) (B) of this rule G-15; (B) contains a 
risk analysis of all aspects of the entity's information technology 
systems including, computer operations, telecommunications, data 
security, systems development, capacity planning and testing, and 
contingency planning and testing; and (C) contains the written response 
of the entity's management to the information provided pursuant to (A) 
and (B) of this subparagraph (d) (ii) (B) (3) of rule G-15.
    (C) Disqualification of Vendor. A broker, dealer or municipal 
securities dealer using a Qualified Vendor that ceases to be qualified 
under the definition in rule G-15(d)(ii)(B)(2) shall not be deemed in 
violation of this rule G-15(d)(ii) if it ceases using such vendor 
promptly upon receiving notice that the vendor is no longer qualified.
    (iii) No change.
    (e) No change.

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) The clearance of institutional customer transactions is 
accomplished today in large part through the use of automated 
confirmation/acknowledgment systems operated by clearing agencies 
registered with the Commission (``registered clearing agencies''). 
These systems have provided substantial efficiencies and cost savings 
by ensuring timely settlement and eliminating some of the time 
consuming and expensive manual processing associated with paper 
confirmations. The Board views these systems as a critical part of the 
national system of clearance and settlement mandated by Section 17A of 
the Act.\4\
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    \4\ 15 U.S.C. 78q-1.
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    Board rule G-15(d)(ii) requires that customer transactions in 
municipal securities which are effected on delivery versus payment or 
receipt versus payment (``DVP/RVP'') settlement basis must, if eligible 
for processing in an automated confirmation/acknowledgment system, be 
confirmed and acknowledged through such a system. The rule currently 
specifies that the confirmation/acknowledgment system must be one 
operated by a registered securities clearing agency. Other self-
regulatory organizations (``SROs'') in the securities market also have 
similar rules requiring confirmation/acknowledgment through registered 
clearing agencies. Based on a request from a private vendor, it appears 
some private vendors, who are not registered securities clearing 
agencies, nevertheless may wish to market confirmation/acknowledgment 
services to brokers, dealers and municipal securities dealers.
    The Board believes that competition among confirmation/
acknowledgment service providers is a desirable goal and ultimately 
will make the clearance and settlement process more efficient and 
responsive to the needs of the securities industry. At the same time, 
the Board believes that, if private vendors are to provide a clearance 
or settlement service that previously has been provided only by 
registered clearing agencies under supervision of the Commission, 
appropriate safeguards must be provided to assure that the systems 
offered by private vendors are reliable and are effectively integrated 
into the national system of clearance and settlement.
    The proposed rule change would allow brokers, dealers and municipal 
securities dealers to comply with rule G-15(d)(ii) through the use of 
confirmation/acknowledgment systems operated by non-registered 
``qualified vendors.'' to become a ``qualified vendor'' of 
confirmation/acknowledgment services, an entity would have to:
     For each transaction that it processes in its 
confirmation/acknowledgment system, deliver a trade

[[Page 18057]]

record to a registered clearing agency, obtain a control number, cross 
reference the control number to the confirmation/acknowledgment, 
electronically deliver any acknowledgment received from a customer or a 
customer's agent to the registered clearing agency and include such 
control number when delivering acknowledgments to the clearing agency.
     Certify to the integrity and capacity of the electronic 
confirmation/acknowledgment system and that it will maintain monitoring 
and contingency procedures.
     On an annual basis, submit an independent auditor's report 
to the Commission staff which the Commission staff does not object to.
     Notify the Commission staff in writing of any material 
changes in the systems by which it offers electronic confirmation/
acknowledgment services.
     Submit to the Board copies of any of the above filings 
with the Commission staff within ten business days.
     Supply supplemental information regarding its 
confirmation/acknowledgment services, as requested by the Board or the 
Commission staff.
    The Board believes that these requirements for a vendor to become 
and remain qualified are necessary to assure that the confirmation/
acknowledgment services used in the securities industry are reliable 
and are integrated into the national system of clearance and 
settlement. The proposed rule change is responsive to the Commission 
staff's request (contained in a letter, dated November 25, 1997 from 
Mr. Richard R. Lindsey, Director, Division of Market Regulation) that 
SROs consider adoption of uniform rule amendments which allow vendors 
to provide confirmation/acknowledgment services under circumstances 
similar to those specified in the proposed rule change.\5\
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    \5\ The Commission notes that the proposed rule change addresses 
the concerns raised by the Petition for Rulemaking filed by Thomson 
Financial Services (``Thomson'') with the Commission in December 
1996. Thus, the Commission will respond to Thomson's petition after 
the final disposition of the proposed rule change.
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    (b) As set forth in Section 15B(b)(2)(C) of the Act,\6\ the Board 
has the authority to adopt rules to ``foster cooperation and 
coordination with persons engaged in . . . clearing, settling, 
processing information with respect to, and facilitating transactions 
in municipal securities.''
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    \6\ 15 U.S.C. 78o-4(b)(2)(C).
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    The Board's role in this area is given additional direction by 
Section 17A of the Act,\7\ which mandates the creation of a national 
system of automated clearance and settlement of securities 
transactions. Section 17A expressly includes municipal securities 
within the stated objectives.
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    \7\ 15 U.S.C. 78q-1.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change will have 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act because it applies equally to 
all brokers, dealers and municipal securities dealers involved in DVP/
RVP customer transactions.

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

    No written comments were solicited or received.

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

    Within thirty-five days of the date of publication of this notice 
in the Federal Register or within such longer period (i) as the 
Commission may designate up to ninety 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 such proposed rule change or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of the Board. All 
submissions should refer to File No. SR-MSRB-98-06 and should be 
submitted by May 4, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-9593 Filed 4-10-98; 8:45 am]
BILLING CODE 8010-01-M