[Federal Register Volume 64, Number 62 (Thursday, April 1, 1999)]
[Notices]
[Pages 15855-15856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8065]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41217; File No. SR-MSRB-97-16]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to
Activities of Financial Advisors
March 26, 1999.
I. Introduction
On December 23, 1997, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB''), submitted to the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change relating to activities of
financial advisors. The Board filed Amendments No. 1 \3\ and No. 2 \4\
to the proposed rule change on April 16, 1998 and January 14, 1999,
respectively. The proposed rule change, as amended, was published for
comment in the Federal Register on February 23, 1999.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Amendment No. 1 made certain technical changes are revised
statements concerning comments received on the draft amendment
published by the Board for comment from its members.
\4\ After discussion with Commission staff, the MSRB filed
Amendment No. 2 to revise the language of Rule G-23 to address
certain disclosure and consent issues raised by the proposed rule
change.
\5\ See Exchange Act Release No. 41053 (Feb. 12, 1999, 64 FR
8894.
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The Commission received one comment letter on the proposal.\6\ the
commenter objected to the proposed rule change because it does not
require the financial advisor to inform the issuer of its intent to act
as remarketing agent on an issue of securities prior to beginning work
on that issue. In response, the MSRB stated that financial advisors may
not know at the beginning stage of work on an issue whether the issue
will be long or short term and whether it will be available to act as a
remarketing agent for the issue when it is remarketed.\7\ The
Commission believes the proposal provides the issuer with sufficient
information and time to select a suitable remarketing agent. For these
reasons and those set forth below, this order approves the proposed
rule change, as amended.
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\6\ Letter from Robert E. Donovan, Executive Director, Rhode
Island Health and Educational Building Corporation, to Secretary,
SEC, dated March 15, 1999.
\7\ Letter from Ronald W. Smith, Senior Legal Associate, MSRB,
to Sonia Patton, Attorney, SEC, dated March 22, 1999.
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II. Description of the Proposal
Rule G-23,\8\ on activities of financial advisors, establishes
disclosure and other requirements for dealers that act as financial
advisors to issuers of municipal securities. The rule is designed
principally to minimize the prima facie conflict of interest that
exists when a dealer acts as both financial advisor and underwriter
with respect to the same issue of municipal securities. Specifically,
Rule G-23 requires a financial advisor to alert the issuer to the
potential conflict of interest that might lead the dealer to act in its
own best interest as underwriter rather than the issuer's best
interest.\9\
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\8\ MSRB Manual, General Rules, Rule G-23 (CCH) para.3611.
\9\ See supra note 8.
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In certain instances, some financial advisors also have acted as
remarketing agents for issues on which they advised the issuer. To
address this situation and its potential conflict of interest, a
proposed rule change was filed to require a financial advisor, prior to
entering into a remarketing agreement for an issue on which it advised
the issuer, to disclose in writing to the issuer the terms of the
remuneration the financial advisor could earn as remarketing agent on
such issue and that there may be a conflict of interest in changing
from the capacity of financial advisor to remarketing agent. The
proposed rule change also required that the financial advisor receive
the issuer's acknowledgment in writing of receipt of such disclosures.
Under the proposal, when these requirements are met, a dealer acting as
financial advisor for an issue also could serve as remarketing agent
for that issue.
Commission staff requested that the proposed rule change be revised
to include a provision requiring issuer consent to the dealer's dual
role, along with certain other technical language changes.\10\
amendment No. 2 revises this proposal to require that a dealer that has
a financial advisory relationship with an issuer with respect to a new
issue of municipal securities, prior to acting as a remarketing agent
for that issue, disclose in writing to the issuer that there may be a
conflict of interest in acting as both financial advisor and
remarketing agent for the securities with respect to which the
financial advisory relationship exists and disclose the source and
basis of the remuneration the dealer could earn as remarketing agent on
such issue. This written disclosure to the issuer can be in a separate
writing provided to the issuer prior to the execution of the
remarketing agreement or the disclosure can be in the remarketing
agreement. The issuer must expressly acknowledge in writing to the
broker, dealer, or municipal securities dealer receipt of such
disclosure and consent to the financial advisor acting in both
capacities and to the source and basis of the remuneration. If the
disclosure is made prior to the execution of the remarketing agreement,
the amount of the specific fee paid by the issuer to the remarketing
agent still may be negotiated in the remarketing agreement. If the
disclosure is made in the remarketing agreement, the dealer will have
negotiated the amount of its fee with the issuer.
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\10\ See supra note 4.
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III. Discussion
The Commission believes that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder.\11\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15B(b)(2)(C) \12\ of the Act.
Section 15B(b)(2)(C) of the Act requires, among other things, that the
rules of the Board 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, and, in general, to protect investors and the public interest.
Specifically, the Commission believes the proposed rule change will
prevent fraudulent and manipulative acts and practices and promote just
and equitable principles of trade by requiring a dealer that has a
financial advisory
[[Page 15856]]
relationship with an issuer of securities, prior to acting as
remarketing agent for the issuer's securities, to disclose in writing
to the issuer that there may be conflict of interest and the source and
basis of the remuneration the dealer expects to earn as remarketing
agent. This will enable the issuer to assess the conflict of interest,
and decide if it wishes to proceed or take other action. The Commission
believes the proposed rule change further prevents fraudulent and
manipulative acts and practices by requiring the issuer's consent to
the dealer acting as remarketing agent and to the source and basis of
remuneration. The Commission believes this requirement will enhance the
likelihood that a financial advisor who wishes to act as remarketing
agent for an issue on which it advised the issuer acts in the issuer's
best interest and not its own best interest as remarketing agent.
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\11\ In reviewing this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. The proposed rule change should improve efficiency and
competition because it prevents all municipal securities dealers
from acting as both financial advisor and remarketing agent with
respect to a new issue of securities without first obtaining the
issuer's consent. 15 U.S.C. 78f(b)(7).
\12\ 15 U.S.C. 78o-4(b)(2)(C).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) \13\ of the
Act, that the proposed rule change, as amended, (SR-MSRB-97-16) is
approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-8065 Filed 3-31-99; 8:45 am]
BILLING CODE 8010-01-M