[Federal Register Volume 63, Number 81 (Tuesday, April 28, 1998)]
[Notices]
[Pages 23315-23317]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11209]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39900; File No. SR-MSRB-98-4]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to Rule G-
32, on Disclosures in Connection With New Issues

April 22, 1998.
    On March 25, 1998, 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-98-4) pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ The proposed 
rule change is described in Items, I, II, and III below, which Items 
have been prepared by the Board. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Board has filed with the Commission a proposed rule change 
consisting of amendments to Rule G-32, on disclosures in connection 
with new issues. The proposed rule change will provide an alternate 
method of compliance by brokers, dealers and municipal securities 
dealers with their obligation to deliver official statements in final 
form to customers by settlement for certain new issues of variable rate 
demand obligations. Below is the text of the proposed rule change. 
Additions are italicized; deletions are in brackets.

Rule G-32. Disclosures in Connection With New Issues

    (a) Disclosure Requirements. No broker, dealer or municipal 
securities dealer shall sell, whether as principal or agent, any new 
issue municipal securities to a customer unless such broker, dealer or 
municipal securities dealer delivers to the customer no later than the 
settlement of the transaction:
    (i) a copy of the official statement in final form prepared by or 
on behalf of the issuer or, if an [a final] official statement in final 
form is not being prepared by or on behalf of the issuer, a written 
notice to that effect together with a copy of an official statement in 
preliminary form, if any; provided, however, that if an official 
statement in final form is being prepared for new issue municipal 
securities issued in a primary offering that qualifies for the 
exemption set forth in paragraph (iii) of section (d)(1) of Securities 
Exchange Act Rule 15c2-12, a broker, dealer or municipal securities 
dealer may sell such new issue municipal securities to a customer if 
such broker, dealer or municipal securities dealer:
    (A) delivers to the customer no later than the settlement of the 
transaction a copy of an official statement in preliminary form, if 
any, and written notice that the official statement in final form will 
be sent to the customer within one business day following receipt 
thereof by the broker, dealer or municipal securities dealer, and
    (B) sends to the customer a copy of the official statement in final 
form, by first class mail or other equally prompt means, no later than 
the business day following receipt thereof by the broker, dealer or 
municipal securities dealer; and
    (ii) No change.
    [In the event an official statement in final form will not be 
prepared by or on behalf of the issuer, an official statement in 
preliminary form, if any, shall be sent to the customer with a notice 
that no final official statement is being prepared.]
    Every broker, dealer or municipal securities dealer shall promptly 
furnish the documents and information referred to in this section (a) 
to any broker, dealer or municipal securities dealer to which it sells 
new issue municipal securities, upon the request of such broker, dealer 
or municipal securities dealer.
    (b) No change.
    (c) Definitions [of New Issue Municipal Securities and Official 
Statement].
    For purposes of this rule, the following terms have the following 
meanings:
    (i)-(iii) No change.
    (iv) The term ``primary offering'' shall mean an offering defined 
in Securities Exchange Act Rule 15c2-12(f)(7).
* * * * *

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 
texts 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

1. Purpose
    The Board is proposing an amendment to Rule G-32, on disclosures in 
connection with new issues, that would permit brokers, dealers and 
municipal securities dealers (``dealers''), selling variable rate 
demand obligations to customers during the underwriting period, to 
deliver a preliminary official statement by no later than settlement 
and to send the official statement in final form within one business 
day of receipt from the issuer, provided these variable rate demand 
obligations qualify for the exemption provided under subparagraph 
(d)(1)(iii) of Rule 15c2-12 under the Act (``Rule 15c2-12'').
    Background. Rule G-32 provides that no dealer shall sell any new 
issue municipal securities to a customer unless that dealer delivers to 
the

[[Page 23316]]

customer, no later than the settlement of the transaction, a copy of 
the official statement in final form or, if an official statement in 
final form is not being prepared, a written notice to the effect 
together with an official statement in preliminary form, if any.\3\ The 
rule is designed to ensure that a customer who purchases a new issue 
municipal securities is provided with all available information 
relevant to his or her investment decision by settlement of the 
transaction.
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    \3\ The rule applies to all municipal securities (other than 
commercial paper) that are sold by a dealer during the issue's 
underwriting period, as such term is defined under Board rules.
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    The structure of Rule G-32, as currently in effect, is premised on 
the standard industry practice of issuers delivering the securities to 
the underwriters two or more weeks after the sale date for the 
securities (hereinafter referred to as the ``Bond Delivery 
Period'').\4\ The rule was originally adopted by the Board in 1977 \5\ 
and was amended substantially to its current form in 1985.\6\ In 1989, 
the Commission promulgated Rule 15c2-12,\7\ which requires underwriters 
in primary offerings subject to the rule, among other things, to 
contract with issuer to receive final official statements within seven 
business days after any final agreement to purchase, offer or sell 
municipal securities and to receive these statements in sufficient time 
to accompany any confirmation that request payment from any customer. 
At the time Rule 15c2-12 was drafted, the industry's standard Bond 
Delivery Period was two or more weeks.\8\ Presumably, Rule G-32's 
official statement delivery obligation was premised, at least in part, 
on this timing requirement.
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    \4\ The Bond Market Association states that ``[i]t usually takes 
about one month from the sale date for the bonds to be actually 
ready to be delivered to investors.'' Public Securities Association, 
Fundamentals of Municipal Bonds, Fourth Edition (1990).
    \5\ See Securities Exchange Act Release No. 15247 (October 19, 
1978), 43 FR 50526 (October 30, 1978) (File No. SR-MSRB-77-12). The 
Commission approved several Board rules in this release, including 
G-32.
    \6\ The Commission approved this amendment is Securities 
Exchange Act Release No. 22374 (August 30, 1985), 50 FR 36505 
(September 6, 1985) (File No. SR-MSRB-85-11). Subsequent amendments 
have been limited to providing a definition of ``underwriting 
period'' and clarifying the exemption for commercial paper. In 
addition, the Board has filed with the Commission a proposed 
amendment that relates primarily to dealer-to-dealer dissemination 
of official statements. See File No. SR-MSRB-97-14 (December 22, 
1997, amended March 12, 1998).
    \7\ Securities Exchange Act Release No. 26985 (June 28, 1989), 
54 FR 28799 (July 10, 1989).
    \8\ For example, the seven business day time frame of paragraph 
(b)(3) of Rule 15c2-12 presumably anticipated a typical Bond 
Delivery Period of at least one and one-half weeks since the final 
official statement is generally expected to be available at least by 
closing of the underwriting transaction.
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    The Board has previously sought to make Rule G-32 consistent with 
the provisions of Rule 15c2-12. In 1996, the Board published a notice 
requesting comments on a draft amendment to Rule G-32 that, among other 
things, would have expedited the time that customers are provided with 
a final official statement for primary offerings subject to Rule 15c2-
12 to the date of delivery of final money confirmations, as opposed to 
settlement, as is currently required.\9\ The draft amendment was based 
on the requirement under Rule 15c2-12 that underwriters contract with 
issuers to receive final official statements in sufficient time to 
accompany any confirmation that requests payment from any customer. 
However, the Board decided not to proceed with the draft amendment 
primarily due to commentators' complaints that frequent delays in 
obtaining the final official statement from the issuer would often make 
compliance with the accelerated timeframe impossible or unduly 
expensive and burdensome.\10\
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    \9\ See MSRB Reports, Vol. 16, No. 3 (Sept. 1996) at 19-23.
    \10\ See MSRB Reports, Vol. 17, No. 2 (June 1997) at 23-24.
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    In the interim, the Board had launched a review of the underwriting 
process which focused on, among other things, the manner and timeliness 
of delivery of official statements from issuers to underwriters under 
Rule 15c2-12 and from underwriters to the Board under Rule G-36.\11\ 
The Board found that, in some instances, issuers do not meet their 
contractual obligation entered into with underwriters pursuant to Rule 
15c2-12 to deliver official statements within seven business days after 
the date of final agreement to purchase, offer or sell the municipal 
securities. The Board noted that, if issuers are not meeting the 
current delivery requirement under Rule 15c2-12, it is possible that 
final official statements also are not being prepared in time to 
deliver to customers by settlement as required under Rule G-32. Thus, 
to assist the agencies charged with enforcing Rules G-32 and G-36 and 
to provide additional information to the Board in considering the 
effectiveness of such rules, the Board proposed certain revisions to 
Forms G-36(OS) and G-36(ARD) that would require that underwriters 
indicate, among other things, the date that final official statements 
are received from the issuer and the expected date of closing on the 
underwriting. The revised forms went into effect on January 1, 1998 and 
are currently being used by underwriting. The revised forms went into 
effect on January 1, 1998 and are currently being used by 
underwriters.\12\ The Board expects that information obtained through 
the revised forms, as well as, through dialogue with industry 
participants, will assist it in assessing the effectiveness of Rule G-
32 in the municipal marketplace as it has evolved since 1985 and 
particularly since promulgation of Rule 15c2-12.
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    \11\ See MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.
    \12\ See Securities Exchange Act Release No. 39545 (January 13, 
1998), 63 FR 3368 (January 22, 1998) (File No. SR-MSRB-97-10).
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    Proposed Amendment. In promulgating Rule 15c2-12 and in response to 
concerns raised by commentators that applying the provisions of the 
rule to variable rate demand obligations ``might unnecessarily hinder 
the operation of this market,'' \13\ the Commission provided an 
exemption to the rule for any such obligations that can be tendered by 
the holders thereof for purchase by the issuer or its agent at least as 
frequently as every nine months and that are in authorized denomination 
of $100,000 or more (``Exempt VRDOs''). The decision by the Commission 
to exclude Exempt VRDOs from the operation of Rule 15c2-12 was 
consistent with the fundamental structural differences between such 
securities and most of the traditional market for municipal securities. 
In most variable rate demand obligation issues, particularly those that 
fall within the Exempt VRDO category, the purchase contract is not 
executed until the issue closing date or the immediately preceding 
day.\14\ Thus, in the vast majority of such issues, the Bond Delivery 
Period--the period between the purchase date and the closing date--is 
at most only one business day. As issuers typically do not authorize 
the printing of the official statement in final form until the 
execution of the purchase contract, underwriters usually do not receive 
the official statement in final form until the closing date at the 
earliest and, in many instances, the printed version is not available 
until after the closing date, at which point the issuer has already 
delivered the Exempt VRDOs to the underwriters.
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    \13\ See Securities Exchange Act Release No. 26985 (June 28, 
1989), 54 FR 28799 (July 10, 1989).
    \14\ This compressed time frame arises as a result of the fact 
that, as securities bearing short-term yields sold at par, the 
market dictates that pricing--i.e., the setting of the interest rate 
borne by the securities during the initial rate period--and 
settlement occur on a same-day or next-day basis.

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[[Page 23317]]

    The Board has determined that, because the Bond Delivery Period for 
Exempt VRDOs is at most one business day, it is often not possible for 
dealers to settle with customers--who expect to receive delivery of 
their securities on the issue date--without causing a violation of the 
requirement that they deliver the official statement in final form to 
such customers by settlement. As a result, the Board is proposing an 
amendment to Rule G-32 that would permit a dealer, selling new issue 
Exempt VRDOs, to deliver the official statement in preliminary form to 
the customer by settlement, together with a written notice that the 
official statement in final form will be sent to the customer within 
one business day of receipt. Thereafter, once the dealer receives the 
official statement in final form, it must send a copy to the customer 
within one business day of receipt. If no official statement in 
preliminary form is being prepared, the dealer would only be obligated 
to deliver by settlement the written notice regarding the official 
statement in final form and to send the official statement in final 
form upon receipt.\15\ The proposed amendment offers an alternative 
method of compliance with Rule G-32 in the case of Exempt VRDOs. Thus, 
in those limited circumstances where dealers may in fact receive the 
official statement in final form in sufficient time to deliver it to 
customers by settlement (e.g., if an issuer approves completion of the 
official statement in final form prior to execution of the purchase 
contract), dealers would have the option of complying with the existing 
provision of the rule by delivering the official statement in final 
form to the customer by settlement.
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    \15\ As in the current rule, if no official statement in final 
form is being prepared, such dealer would deliver to the customer by 
settlement the official statement in preliminary form, if any, and 
written notice to the effect that an official statement in final 
form is not being prepared. If neither a final nor a preliminary 
official statement is being prepared, the dealer would only be 
obligated to deliver by settlement the written notice to the effect 
that no official statement in final form is being prepared.
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2. Statutory Basis
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act.\16\ The Board believes that the 
proposed rule change will ensure that the primary market in municipal 
securities continues to experience adequate levels of disclosure 
without disruption to the market for variable rate demand obligations.
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    \16\ Section 15B(b)(2)(C) states 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 transaction 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.
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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 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, because it would apply equally 
to all brokers, dealers and municipal securities dealers.

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

    Written comments were neither solicited nor received.

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 longer period (i) as the Commission may 
designated 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.

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, 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 in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the Board's principal offices. 
All submissions should refer to File No. SR-MSRB-98-4 and should be 
submitted by May 19, 1998.

    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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-11209 Filed 4-27-98; 8:45 am]
BILLING CODE 8010-01-M