[Federal Register Volume 65, Number 57 (Thursday, March 23, 2000)]
[Notices]
[Pages 15675-15678]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7202]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42538; File No. SR-MSRB-00-01]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Supervision of Correspondence With the Public

March 16, 2000.

I. Introduction

    On January 7, 2000, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') submitted to the Securities and exchange 
Commission (``Commission''), 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 amending MSRB Rules G-8, G-9, and 
G-27. The proposed rule change was published for comment in the Federal 
Register on February 10, 2000.\3\ The Commission received no comments 
on the proposal. This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 42385 (Feb. 3, 2000), 65 
FR 6669.
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II. Description of the Proposal

    The Board has filed proposed amendments to MSRB Rules G-8, on books 
and records, G-9, on record retention, and G-27, on supervision. The 
proposed rule change will revise the Board's supervision and record 
retention rules to provide dealers with flexibility in developing 
reasonable procedures for the review of correspondence with the public. 
The amendments also accommodate the growing use of correspondence sent 
and received in electronic format while still providing for effective 
supervision. The Board has also filed with the Commission a draft 
notice that will provide guidance to dealers on how to implement these 
rule changes. The proposed rule change and accompanying notice are 
modeled after and designed to conform to the rules and guidance of the 
National Association of Securities Dealers (``NASD'').\4\
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    \4\ See Securities Exchange Act Release No. 39510 (Dec. 31, 
1997), 63 FR 1131 (Jan. 8, 1998); NASD Rule 3010; and NASD Notices 
to Members 98-11 and 99-03.
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    The Board has determined to adopt rules changes substantially 
similar to those of the NASD. The Board believes that conforming its 
rule language to the language in the NASD rules will help ensure a 
coordinated regulatory approach to the supervision of correspondence. 
In addition, in connection with Commission approval of the proposed 
rule change, the Board will issue a notice to provide guidance to 
dealers on implementing the proposed rule change. This guidance has 
been modeled after NASD Notices to Members 98-11 and 99-03 and is 
described below.

Supervision of Municipal Securities Representatives

    The proposed amendments to MSRB Rule G-27(d), provide, among other 
things, that a dealer must establish procedures for the review by a 
designated principal of each municipal securities representative's 
incoming and outgoing written (i.e., non-electronic) and electronic 
correspondence with the public relating to the municipal securities 
activities of such dealer. The procedures must be designed to provide 
reasonable supervision of each municipal securities representative and 
must be described in the dealer's written supervisory procedures. 
Implementation and execution of these procedures must be clearly 
evidenced, and the evidence must be maintained and be made available 
upon request to a registered securities association or the appropriate 
regulatory agency as defined in Section 3(a)(34) \5\ of the Act.
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    \5\ 15 U.S.C. 78c(a)(34).
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Procedures for Review of Correspondence

    Currently, MSRB Rule G-27(c)(vii)(C) requires each dealer to 
establish procedures for the review and written approval by a 
designated principal of all correspondence pertaining to the 
solicitation or execution of transactions in municipal securities. 
Under proposed Rule G-27(d)(ii), a review of each item of 
correspondence will no longer be required. Dealers will be given 
flexibility to develop procedures for the review of correspondence 
relating to the dealer's municipal securities activities--both incoming 
and outgoing, written or electronic--tailored to the nature and size of 
the dealer's business and customers.

[[Page 15676]]

    With respect to incoming written (i.e., non-electronic) 
correspondence directed to municipal securities representatives and 
related to the municipal securities activities of the dealer, the 
proposal would require review of the correspondence to properly 
identify and handle customer complaints and to ensure that customer 
funds and securities are handled in accordance with the dealer's 
procedures. The proposed rule change does not require review of all 
correspondence prior to use or distribution. However, any dealer that 
does not conduct electronic or manual pre-use review of each item of 
correspondence will be required to regularly educate and train its 
associated persons as to the dealer's procedures governing review of 
correspondence, document such education and training, and monitor to 
ensure compliance with such procedures.

Retention of Correspondence

    The proposed rule change includes amendments to MSRB Rules G-
8(a)(xx), G-9(b)(viii) and (xiv), and G-27(d)(i), (ii), and (iii) 
requiring each dealer to preserve correspondence of municipal 
securities representatives relating to municipal securities activities 
and maintain the records of written supervisory procedures, education 
and training required under Rule G-27(c) and (d) for three years. The 
proposed rule change also requires the names of the persons who 
prepared and reviewed correspondence to be ascertainable from the 
retained records and the records must be made available, upon request, 
to the appropriate enforcement agency (i.e., NASD or federal bank 
regulatory agency).

Draft Notice-Guidelines for Supervision and Review

    The notice to dealers (``Notice to Dealers'') will provide guidance 
on how to implement the proposed rule change. In particular, the Notice 
to Dealers states that in adopting review procedures pursuant to Rule 
G-27(d)(i), dealers must:
     Specify, in writing, the dealer's policies and procedures 
for reviewing different types of correspondence;
     Identify how supervisory reviews will be conducted and 
documented;
     Identify what types of correspondence will be pre- or 
post-reviewed;
     Identify the organizational position(s) responsible for 
conducting review of the different types of correspondence;
     Specify the minimum frequency of the reviews for each type 
of correspondence;
     Monitor the implementation of and compliance with the 
dealer's procedures for reviewing public correspondence; and
     Periodically re-evaluate the effectiveness of the dealer's 
procedures for reviewing public correspondence and consider any 
necessary revisions.
    The Notice to Dealers also states that in conducting reviews, 
dealers may use reasonable sampling techniques. As an example of 
appropriate evidence of review, e-mail related to the dealer's 
municipal securities activities may be reviewed electronically and the 
evidence of review may be recorded electronically.
    In developing supervisory procedures for the review of 
correspondence with the public pursuant to Rule G-27(d)(ii), the Notice 
to Dealers states that each dealer must consider its structure, the 
nature and size of its business, other pertinent characteristics, and 
the appropriateness of implementing uniform firm-wide procedures or 
tailored procedures (i.e., by specific function, office/location, 
individual, or group of persons).
    The Notice to Dealers also provides guidance on adopting review 
procedures pursuant to Rule G-27(d)(ii), and states that dealers must, 
at a minimum:
     Specify procedures for reviewing municipal securities 
representatives, recommendations to customers;
     Require supervisory review of some of each municipal 
securities representative's public correspondence, including 
recommendations to customers;
     Consider the complaint and overall disciplinary history, 
if any, of municipal securities representatives and other employees 
(with particular emphasis on complaints regarding written or oral 
communications with clients); and
     Consider the nature and extent of training provided 
municipal securities representatives and other employees, as well as 
their experience in using communications media (although a dealer's 
procedures may not eliminate or provide for minimal supervisory reviews 
based on an employee's training or level of experience in using 
communications media).
    In addition, the Notice to Dealers provides that supervisory policy 
and procedures must also:
     Provide that all customer complaints, whether received via 
e-mail or in written form from the customer, are kept and maintained;
     Describe any dealer standards for the content of different 
types of correspondence; and
     Prohibit municipal securities representatives' and other 
employees' use of electronic correspondence to the public unless such 
communications are subject to supervisory and review procedures 
developed by the dealer. For example, the Board would expect dealers to 
prohibit correspondence with customers from employees' home computers 
or through third party systems unless the dealer is capable of 
monitoring such communications.
    The Notice to Dealers also states that the method used for 
conducting reviews of incoming, written correspondence to identify 
customer complaints and funds may vary depending on the dealer's office 
structure. Where the office structure permits review of all 
correspondence, dealers should designate a municipal securities 
representative or other appropriate person to open and review 
correspondence prior to use or distribution to identify customer 
complaints and funds. The designated person must not be supervised or 
under the control of the municipal securities representative whose 
correspondence is opened and review. Unregistered persons who have 
received sufficient training to enable them to identify complaints and 
funds would be permitted to review correspondence.
    Where the office structure does not permit the review of 
correspondence \6\ prior to use or distribution, appropriate procedures 
that could be adopted include the following:
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    \6\ Amended language per telephone conversation between Carolyn 
Walsh, Assistant General Counsel, MSRB, and Ira L. Brandriss, Staff 
Attorney, Commission, on February 3, 2000.
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     Forwarding opened incoming, written correspondence related 
to the dealer's municipal securities activities to a designated office, 
or supervising branch office, for review on a weekly basis;
     Maintenance of a separate log for all checks received and 
securities products sold, which is forwarded to the supervising branch 
office on a weekly basis;
     Communication to clients that they can contact the dealer 
directly for any matter, including the filing of a complaint, and 
providing them with an address and telephone number of a central office 
of the dealer for this purpose; and
     Branch examination verification that the procedures are 
being followed.

[[Page 15677]]

III. Discussion

    The Commission believes that the proposed rule change is consistent 
with the requiremenets of the Act and the rules and regulations 
thereunder.\7\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15B(b)(2)(C) \8\ 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. 
The Commission believes that the proposed rule change will provide 
dealers with flexibility in adopting procedures for reviewing municipal 
securities representatives' public correspondence while establishing 
minimum requirements, guidelines, and standards governing the 
supervisory procedures dealers may adopt. The Commission also believes 
that the proposal is consistent with the Act in allowing dealers to use 
new technology, such as e-mail and the internet, while still providing 
for appropriate supervision and review. Moreover, the Commission 
believes that the proposal will protect existing and prospective 
customers by ensuring that customer complaints, funds, and securities 
are handled properly.
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    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78o-4(b)(2)(C).
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a. New Rule G-27(d)(i)

    New Rule G-27(d)(i) requires dealers to establish procedures for 
the review by a designated principal of the incoming and outgoing 
written and electronic correspondence of its municipal securities 
representatives with the public relating to the municipal securities 
activities of the dealer. The Commission believes that new Rule G-
27(d)(i) will protect investors and the public interest by requiring 
designated principals to review some of each municipal securities 
representative's correspondence, regardless of the method used for the 
review of correspondence pursuant to new Rule G-27(d)(ii). In this 
regard, the Commission notes the proposal requires dealers to adopt 
procedures designed to reasonably supervise each municipal securities 
representative. The Commission believes this requirement should ensure 
that appropriate persons within the firm will undertake to supervise 
the activities of the firm's municipal securities representatives.
    In addition, the Notice of Dealers provides guidance on adopting 
review procedures pursuant to Rule G-27(d)(i) and, at a minimum, 
requires dealers to: (i) specify, in writing, the dealer's policies and 
procedures for reviewing different types of correspondence; (ii) 
identify how supervisory reviews will be conducted and documented; 
(iii) identify what types of correspondence will be pre- or post-
reviewed; (iv) identify the organizational position(s) responsible for 
conducting review of the different types of correspondence; (v) specify 
the minimum frequency of the reviews for each type of correspondence; 
(vi) monitor the implementation of and compliance with the dealer's 
procedures for reviewing public correspondence; and (vii) periodically 
re-evaluate the effectiveness of the dealer's procedures for reviewing 
public correspondence and consider any necessary revisions.
    The Commission believes that these requirements will provide 
guidance to dealers in developing policies for supervising public 
correspondence and to municipal securities representatives in complying 
with the dealer's policies. The requirements should help to ensure that 
dealers carefully consider the supervisory procedures appropriate for 
different types of communications, closely monitor compliance with the 
dealer's policies, and periodically reevaluate their policies and 
procedures. The Commission expects dealers to monitor the effectiveness 
of their supervisory policies and procedures and to promptly make any 
necessary revisions.

b. New Rule G-27(d)(ii)

    New Rule G-27(d)(ii) will require dealers to develop written 
policies and procedures that are appropriate for the dealer's business, 
size, structure, and customers for the review of all municipal 
securities representatives' incoming and outgoing written and 
electronic correspondence with the public relating to its business. The 
proposal also requires dealers to adopt review procedures specifically 
designed to identify and handle customer complaints and to ensure that 
customer funds and securities are handled properly. The Commission 
believes the proposal will provide dealers with flexibility in adopting 
and implementing supervisory procedures while establishing minimum 
requirements, guidelines, and standards governing the supervisory 
procedures a dealer may adopt.
    The Commission believes that whenever practicable, prior review of 
incoming written correspondence to identify customer complaints, funds 
and securities should be mandated, to protect customer interests and 
possibly reduce dealers' potential liability. In some cases, however, 
prior review of incoming correspondence is not feasible. In such cases, 
the Commission believes that requiring dealers to employ alternative 
procedures reasonably designed to assure adequate handling of customer 
complaints, funds and securities is reasonable. The Commission believes 
that dealers that do not require prior review of all written 
correspondence should require, at a minimum, some combination of those 
alternatives provided by the MSRB as an example in the Notice to 
Dealers, or similar procedures, rather than relying on one alternative 
procedure. The Commission notes that under MSRB Rule G-27(d)(ii), a 
dealer that chooses not to require review of public correspondence 
prior to use or distribution must educate employees about the dealer's 
current correspondence procedures, document the employees' education 
and training, and ensure that the dealer's policies are implemented and 
followed.
    The Notice to Dealers provides guidance on adopting review 
procedures pursuant to Rule G-27(d)(ii) and, at a minimum, requires 
dealers to: (i) Specify procedures for reviewing municipal securities 
representatives' recommendations to customers; (ii) require supervisory 
review of some of each municipal securities representative's public 
correspondence, including recommendations to customers; (iii) consider 
the complaint and overall disciplinary history, if any, of municipal 
securities representatives and other employees (with particular 
emphasis on complaints regarding written or oral communications with 
clients; (iv) consider the nature and extent of training provided 
municipal securities representatives and other employees, as well as 
their experience in using communications media (although a dealer's 
procedures may not eliminate or provide for minimal supervisory reviews 
based on an employee's training or level of experience in using 
communications media); (v) provide that all customer complaints, 
whether received via e-mail or in written form from the customer, are 
kept and maintained; and (vi) describe any dealer standards for the 
content of different types of correspondence.
    As discussed above, the Notice to Dealers also provides alternative 
review

[[Page 15678]]

procedures to identify customer complaints and funds. These procedures 
include: (i) Forwarding opened incoming, written correspondence related 
to the dealer's municipal securities activities to a designated office, 
or supervising branch office, for review on a weekly basis; (ii) 
maintenance of a separate log for all checks received and securities 
products sold, which is forwarded to the supervising branch office on a 
weekly basis; (iii) communication to clients that they can contact the 
dealer directly for any matter, including the filing of a complaint, 
and providing them with an address and telephone number of a central 
office of the dealer for this purpose; and (iv) branch examination 
verification that the procedures are being followed.
    The Commission believes that the standards and guidelines set forth 
in new Rule G-27(d)(ii) and the Notice to Dealers will help to ensure 
that dealers continue to provide appropriate supervision of the public 
correspondence of their municipal securities representatives and that 
customer complaints, funds, and securities are properly handled. For 
example, considering the complaint and the municipal securities 
representative's overall disciplinary history will help to ensure that 
dealers implement supervisory procedures appropriate for each 
representative. In this regard, the Commission would expect a dealer to 
consider providing heightened supervision for a representative with a 
history or pattern of customer complaints, disciplinary action, or 
arbitrations. Moreover, the Commission notes that the requirements in 
MSRB Rule G-27 and the Notice to Dealers are minimum requirements. The 
Commission expects each dealer to implement any additional procedures 
the dealer believes are necessary to provide appropriate supervision of 
all its municipal securities representatives and employees.

c. Electronic Correspondence

    The Commission believes that the requirements specific to 
electronic communications both accommodate the growing use of 
correspondence sent and received in electronic format and help to 
ensure that dealers adopt appropriate supervisory procedures. In this 
regard, the Commission notes that the Notice to Dealers provides that a 
dealer's policies and procedures must prohibit municipal securities 
representatives' and other employees' use of electronic communications 
to the public unless those communications are subject to supervisory 
and review procedures developed by the dealer. The Notice to Dealers 
also states that the MSRB expects dealers to prohibit communications 
with the public from employees' home computers or through third party 
computer systems unless the dealer is capable of monitoring the 
communications.

d. Books and Records

    The Commission believes that it is reasonable for the MSRB to amend 
MSRB Rules G-8 and G-9 to require firms to maintain and preserve for 
three years (i) all written and electronic communications received and 
sent relating to the dealer's conduct with respect to municipal 
securities and (ii) records of compliance with MSRB Rule G-27(c) and 
(d). The Commission believes that requiring dealers to maintain and 
make available to the appropriate regulatory agency evidence that 
supervisory procedures have been implemented and carried out will help 
to ensure that dealers comply with the new requirements of Rule G-27. 
Moreover, the Commission believes that requiring the names of the 
persons who prepared and reviewed the correspondence to be 
ascertainable from the retained records will help to ensure that only 
appropriate persons prepare and supervise public correspondence.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) \9\ of the 
Act, that the proposed rule change (SR-MSRB-00-01) is approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-7202 Filed 3-22-00; 8:45 am]
BILLING CODE 8010-01-M