[Federal Register Volume 65, Number 149 (Wednesday, August 2, 2000)]
[Notices]
[Pages 47530-47550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19448]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43066; File No. SR-MSRB-00-06]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Municipal Fund Securities

July 21, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 5, 2000, the Municipal Securities Rulemaking Board (``MSRB'' 
or ``Board'') filed with the Securities and Exchange Commission 
(``Commission''

[[Page 47531]]

or ``SEC'') the proposed rule change described in Items I, II, and III 
below, which Items have been prepared by the Board. The Board submitted 
an amendments to the proposed rule change on July 17, 2000.\3\ 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.
    \3\ The Board submitted a new Form 19b-4, which supplements, the 
original filing. (``Amendment No. 1''). Specifically, Amendment No. 
1 amends Rule G-8(g)(i) to clarify that the Commission does not 
approve a firm's arrangement with a transfer agent regarding books 
and records. In addition, Amendment No. 1 makes certain technical 
corrections to the proposed rule change.
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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 (i) proposed new Rule D-12, defining municipal fund 
security; (ii) amendments to Rule A-13, on underwriting and transaction 
assessments for brokers, dealers and municipal securities dealers, Rule 
G-3, on classification of principals and representatives, numerical 
requirements, testing and continuing education requirements, Rule G-8, 
on books and records to be made by brokers, dealers and municipal 
securities dealers, Rule G-14, on reports of sales or purchases, Rule 
G-15, on confirmation, clearance and settlement of transactions with 
customers, Rule G-26, on customer account transfers, Rule G-32, on 
disclosures in connection with new issues, and Rule G-34, on CUSIP 
numbers and new issue requirements; and (iii) a Board interpretation on 
sales or municipal fund securities in the primary market. The text of 
the proposed rule change is set forth below. Additions were italicized; 
deletions are bracketed.

Rule D-12.``Municipal Fund Security''

    The term ``municipal fund security'' shall mean a municipal 
security issued by an issuer that, but for the application of Section 
2(b) of the Investment Act of 1940, would constitute an investment 
company within the meaning of Section 3 of the Investment Company Act 
of 1940.

Rule A-13. Underwriting and Transaction Assessments for Brokers, 
Dealers and Municipal Securities Dealers

    (a) Underwriting Assessments--Scope. Each broker, dealer and 
municipal securities dealer shall pay to the Board an underwriting fee 
as set forth in section (b) for all municipal securities purchased from 
an issuer by or through such broker, dealer or municipal securities 
dealer, whether acting as principal or agent, as part of a primary 
offering, provided that section (b) of this rule shall not apply to a 
primary offering of securities of all such securities in the primary 
offering:
    (i)-(ii) No change.
    (iii) at the option of the holder thereof, may be tendered to an 
issuer of such securities or its designated agent for redemption or 
purchase at par value or more at least as frequently as every nine 
months until maturity, earlier redemption, or purchase by an issuer or 
its designated agent; [or]
    (iv) have authorized denominations of $100,000 or more and are sold 
to more than thirty-five persons each of whom the broker, dealer or 
municipal securities dealer reasonably believes: (A) Has the knowledge 
and experience necessary to evaluate the merits and risks of the 
investment; and (B) is not purchasing for more than one account, with a 
view toward distributing the securities; or
    (v) constitute municipal fund securities.
    If a syndicate or similar account has been formed for the purchase 
of the securities, the underwriting fee shall be paid by the managing 
underwriter on behalf of each participants in the syndicate or similar 
account.
    (b)-(f) No change.

Rule G-3. Classification of Principals and Representatives; 
Numerical Requirements; Testing; Continuing Education Requirements

    No broker, dealer or municipal securities dealer or person who is a 
municipal securities representative, municipal securities principal, 
municipal securities sales principal or financial and operations 
principal (as hereafter defined) shall be qualified for purposes of 
rule G-2 unless such broker, dealer or municipal securities dealer or 
person meets the requirements of this rule.
    (a) Municipal Securities Representative.
    (i) No change.
    (ii) Qualification Requirements.
    (A)-(B) No change.
    (C) The requirements of subparagraph (a)(ii)(A) of this rule shall 
not apply to any person who is duly qualified as limited 
representative--investment company and variable contracts products by 
reason of having taken and passed the Limited Representative--
Investment Company and Variable Contracts Products Examination, but 
only if such person's activities with respect to municipal securities 
described in paragraph (a)(i) of this rule are limited solely to 
municipal fund securities.
    (D) Any person who ceases to be associated with a broker, dealer or 
municipal securities dealer (whether as a municipal securities 
representative or otherwise) for two or more years at any time after 
having qualified as a municipal securities representative in accordance 
with subparagraph[s] (a)(ii)(A), (B) or (C) [or (B)] shall again meet 
the requirements of subparagraph[s] (a)(ii)(A), (B) or (C) [or (B)] 
prior to being qualified as a municipal securities representative.
    (iii) Apprenticeship.
    (A) Any person who first become associated with a broker, dealer or 
municipal securities dealer in a representative capacity (whether as a 
municipal securities representative, [or] general securities 
representative or limited representative--investment company and 
variable contracts products) without having previously qualified as a 
municipal security representative, [or] general securities 
representative or limited representative--investment company and 
variable contracts products shall be permitted to function in a 
representative capacity without qualifying pursuant to subparagraph[s] 
(a)(ii)(A), (B) or (C) [or (B)] for a period of at least 90 days 
following the date such person becomes associated with a broker, dealer 
or municipal securities dealer, provided, however, that such person 
shall not transact business with any member of the public with respect 
to, or be compensated for transactions in, municipal securities during 
such 90 day period, regardless of such person's having qualified in 
accordance with the examination requirements of this rule. A person 
subject to the requirements of this paragraph (a)(iii) shall in no 
event continue to perform any of the functions of a municipal 
securities representative after 180 days following the commencement of 
such person's association with such broker, dealer or municipal 
securities dealer, unless such person qualifies as a municipal 
securities representative pursuant to subparagraph[s] (a)(ii)(A) (B) or 
(C) [or (B)].
    (B) Prior experience, of at least 90 days, as a general securities 
representative, limited representative--investment company and variable 
contracts products [mutual fund salesperson] or limited 
representative--government securities [representative], will meet the 
requirements of this paragraph (a)(iii).
    (b)-(h) No change.

[[Page 47532]]

Rule G-8. Books and Records to be Made by Brokers, Dealers and 
Municipal Securities Dealers

    (a) Description of Books and Records Required to be Made. Except as 
otherwise specifically indicated in this rule, every broker, dealer and 
municipal securities dealer shall make and keep current the following 
books and records, to the extent applicable to the business of such 
broker, dealer or municipal securities dealer.
    (i) Records of Original Entry. ``Blotters'' or other records of 
original entry containing an itemized daily record of all purchases and 
sales of municipal securities, all receipts and deliveries of municipal 
securities (including certificate numbers and, if the securities are in 
registered form, an indication to such effect), all receipts and 
disbursement of cash with respect to transactions in municipal 
securities, all other debits and credits pertaining to transactions in 
municipal securities, and in the case of brokers, dealers and municipal 
securities dealers other than bank dealers, all other cash receipts and 
disbursements if not contained in the records required by any other 
provision of this rule. The records of original entry shall show the 
name or other designation of the account for which each such 
transaction was effected (whether effected for the account of such 
broker, dealer or municipal securities dealer, the account of a 
customer, or otherwise), the description of the securities, the 
aggregate par value of the securities, the dollar price or yield and 
aggregate purchase or sale price of the securities, accrued interest, 
the trade date, and the name or other designation of the person from 
whom purchased or received or to whom sold or delivered. With respect 
to accrued interest and information relating to ``when issued'' 
transactions which may not be available at the time a transaction is 
effected, entries setting forth such information shall be made promptly 
as such information becomes available. Dollar price, yield and accrued 
interest relating to any transaction shall be required to be shown only 
to the extent required to be included in the confirmation delivered by 
the broker, dealer or municipal securities dealer in connection with 
such transaction under rule G-12 or rule G-15.
    (ii)-(viii) No change.
    (ix) Copies of Confirmations, Periodic Statements and Certain Other 
Notices to Customers. A copy of all confirmations of purchase or sale 
of municipal securities, of all periodic written statements disclosing 
purchases, sales or redemptions of municipal fund securities pursuant 
to rule G-15(a)(viii) and, in the case of a broker, dealer or municipal 
securities dealer other than a bank dealer, of all other notices sent 
to customers concerning debits and credits to customer accounts or, in 
the case of a bank dealer, notices of debits and credits for municipal 
securities, cash and other items with respect to transactions in 
municipal securities.
    (x) No change.
    (xi) Customer Account Information. A record for each customer, 
other than an institutional account, setting forth the following 
information to the extent applicable to such customer:
    (A)-(G) No change.
    (H) signature of municipal securities representative, [and] general 
securities representative or limited representative--investment company 
and variable contracts products introducing the account and signature 
of a municipal securities principal, municipal securities sales 
principal or general securities principal indicating acceptance of the 
account;
    (I)-(K) No change.
    For purposes of this subparagraph, the terms ``general securities 
representative,'' [and] ``general securities principal'' and ``limited 
representative--investment company and variable contracts products'' 
shall mean such persons as so defined by the rules of a national 
securities exchange or registered securities association. For purposes 
of this subparagraph, the term ``institutional account'' shall mean the 
account of (i) a bank, savings and loan association, insurance company, 
or registered investment company; (ii) an investment adviser registered 
either with the Commission under Section 203 of the Investment Advisers 
Act of 1940 or with a state securities commission (or any agency or 
office performing like functions); or (iii) any other entity (whether a 
natural person, corporation, partnership, trust, or otherwise) with 
total assets of at least $50 million. Anything on this subparagraph to 
the contrary notwithstanding, every broker, dealer and municipal 
securities dealer shall maintain a record of the information required 
by items (A), (C), (F), (H), (I) and (K) of this subparagraph with 
respect to each customer which is an institutional account.
    (xii)-(xix) No change.
    (b)-(f) No change.
    (g) Transactions in Municipal Fund Securities.
    (i) Books and Records Maintained by Transfer Agents. Books and 
records required to be maintained by a broker, dealer or municipal 
securities dealer under this rule solely with respect to transactions 
in municipal fund securities may be maintained by a transfer agent 
registered under Section 17A(c)(2) of the Act used by such broker, 
dealer or municipal securities dealer in connection with such 
transactions; provided that, in the case of a broker, dealer or 
municipal securities dealer other than a bank dealer, the arrangements 
with such transfer agent have been approved by the Commission or, in 
the case of a bank dealer, such arrangements have been approved by the 
appropriate regulatory agency for such bank dealer, and further 
provided that such broker, dealer or municipal securities dealer shall 
remain responsible for the accurate maintenance and preservation of 
such books and records.
    (ii) Price Substituted for Par Value of Municipal Fund Securities. 
For purposes of this rule, each reference to the term ``par value,'' 
when applied to a municipal fund security, shall be substituted with 
(A) in the case of a purchase of a municipal fund security by a 
customer, the purchase price paid by the customer, exclusive of any 
commission, and (B) in the case of a sale or tender for redemption of a 
municipal fund security by a customer, the sale price or redemption 
amount paid to the customer, exclusive of any commission or other 
charge imposed upon redemption or sale.

Rule G-14. Reports of Sales or Purchases

    (a) No change.
    (b) Transactions Reporting Requirements.
    (i) Each broker, dealer or municipal securities dealer shall report 
to the Board or its designee information about its transactions in 
municipal securities to the extent required by, and using the formats 
and within the timeframes specified in, Rule G-14 Transaction Reporting 
Procedures. Transaction information collected by the Board under this 
rule will be used to make public reports of market activity and prices 
and to assess transaction fees. The transaction information will be 
made available by the Board to the Commission, securities associations 
registered under Section 15A of the Act and other appropriate 
regulatory agencies defined in Section 3(a)(34)(A) of the Act to assist 
in the inspection for compliance with and the enforcement of Board 
rules.
    (ii)-(iii) No change.

 Rule G-14 Transaction Reporting Procedures

    (a) No change.
    (b) Customer Transactions.
    (i)-(ii) No change.

[[Page 47533]]

    (iii) The following transactions shall not be required to be 
reported under this section (b):
    (A) [A] a transaction in a municipal security that is ineligible 
for assignment of a CUSIP number by the Board or its designeee; and 
[shall not be required to be reported under this section (b).]
    (B) a transaction in a municipal fund security.
    (iv) No change.

Rule G-15. Confirmation, Clearance and Settlement of Transactions 
With Customers

    (a) Customer Confirmations.
    (i) At or before the completion of a transaction in municipal 
securities with or for the account of a customer, each broker, dealer 
or municipal securities dealer shall give or send to the customer a 
written confirmation that complies with the requirements of this 
paragraph (i):
    (A) Transaction information. The confirmation shall include 
information regarding the terms of the transaction as set forth in this 
subparagraph (A):
    (1)-(2) No change.
    (3) Par value. The par value of the securities shall be shown, with 
special requirements for the following securities:
    (a) No change.
    (b) Municipal fund securities. For municipal fund securities, in 
place of par value, the confirmation shall show (i) in the case of a 
purchase of a municipal fund security by a customer, the total purchase 
price paid by the customer, exclusive of any commission, and (ii) in 
the case of a sale or tender for redemption of a municipal fund 
security by a customer, the total sale price or redemption amount paid 
to the customer, exclusive of any commission or other charge imposed 
upon redemption or sale.
    (4) No change.
    (5) Yield and dollar price. Yields and dollar prices shall be 
computed and shown in the following manner, subject to the exceptions 
stated in subparagraph (A)(5)(d) of this paragraph:
    (a)-(c) No change.
    (d) Notwithstanding the requirements noted in subparagraphs 
(A)(5)(a) through (c) of this paragraph[,] above:
    (i)-(v) No change.
    (vi) Municipal fund securities. For municipal fund securities, 
neither yield nor dollar price shall be shown.
    (6) Final Monies. The following information relating to the 
calculation and display of final monies shall be shown:
    (a) No change.
    (b) amount of accured interest, with special requirements for the 
following securities:
    (i)-(ii) No change.
    (iii) Municipal fund securities. For municipal fund securities, no 
figure for accrued interest shall be shown;
    (c) if the securities pay interest on a current basis but are 
traded without interest, a notation of ``flat;''
    (d) extended principal amount, with special requirements for the 
following securities:
    (i) No change.
    (ii) Municipal fund securities. For municipal fund securities, no 
extended principal amount shall be shown;
    (e)-(h) No change.
    (7) Delivery of securities. The following information regarding the 
delivery of securities shall be shown:
    (a) Securities other than bonds or municipal fund securites. For 
securities other than bonds or municipal fund securities, denominations 
to be delivered;
    (b) No change.
    (c) Municipal fund securities. For municipal fund securites, the 
purchase price, exclusive of commission, of each share or unit and the 
number of shares or units to be delivered;
    (d) Delivery instructions. Instructions, if available, regarding 
receipt or delivery of securities[,] and form of payment, if other than 
as usual and customary between the parties.
    (8) No change.
    (B) Securities identification information. The confirmation shall 
include a securities identification which includes, at a minimum:
    (1) the name of the issuer, with special requirements for the 
following securities:
    (a) For stripped coupon securities, the trade name and series 
designation assigned to the stripped coupon municipal security by the 
broker, dealer or municipal securities dealer sponsoring the program 
must be shown:
    (b) Municipal fund securities. For municipal fund securities, the 
name used by the issuer to identify such securities and, to the extent 
necessary to differentiate the securities from other municipal fund 
securities of the issuer, any separate program series, portfolio or 
fund designation for such securities must be shown;
    (2) No change.
    (3) Maturity date, if any, with special requirements for the 
following securities:
    (a) No change.
    (b) Municipal fund securities. For municipal fund securities, no 
maturity date shall be shown;
    (4) Interest rate, if any, with special requirements for the 
following securities:
    (a)-(e) No change.
    (f) Municipal fund securities. For municipal fund securities, no 
interest rate shall be shown;
    (5) No change.
    (C) Securities descriptive information. The confirmation shall 
include description information about the securities which includes, at 
a minimum:
    (1)-(4) No change.
    (5) Municipal fund securities. For municipal fund securities, the 
information described in clauses (1) through (4) of this subparagraph 
(C) is not required to be shown; provided, however, that if the 
municipal fund securities are puttable or otherwise redeemable by the 
customer, the confirmation shall include a designation to that effect.
    (D) Disclosure statements:
    (1)-(2) No change.
    (3) The confirmation for securities for which a deferred commission 
or other charge is imposed upon redemption or as a condition for 
payment of principal or interest thereon shall include a statement that 
the customer may be required to make a payment of such deferred 
commission or other charge upon redemption of such securities or as a 
condition for payment of principal or interest thereon, as appropriate, 
and that information concerning such deferred commission or other 
charge will be furnished upon written request.
    (E) Confirmation format. All requirements must be clearly and 
specifically indicated on the front of the confirmation, except that 
the following statements may be on the reverse side of the 
confirmation:
    (1) The disclosure statements required in subparagraph (D)(1), 
(D)(2) or (D)(3) [and (2)] of this paragraph, provided that their 
specific applicability is noted on the front of the confirmation.
    (2)-(3) No change.
    (ii)-(iii) No change.
    (iv) Confirmation to customers who tender put option bonds or 
municipal fund securities. A broker, dealer, or municipal securities 
dealer that has an interest in put option bonds (including acting as 
remarketing agent) and accepts for tender put option bonds from a 
customer, or that has an interest in municipal fund securities 
(including acting as agent for the issuer thereof) and accepts for 
redemption municipal fund securities tendered by a customer, is 
engaging in a transaction in such municipal securities and shall send a 
confirmation under paragraph (i) of this section.
    (v) No change.
    (vi) Definitions. For purposes of this rule, the following terms 
shall have the following meanings:

[[Page 47534]]

    (A)-(F) No change.
    (G) The term ``periodic municipal fund security plan'' shall mean 
any written authorization or arrangement for a broker, dealer or 
municipal securities dealer, acting as agent, to purchase, sell or 
redeem for a customer or group of customers one or more specific 
municipal fund securities, in specific amounts (calculated in security 
units or dollars), at specific time intervals and setting forth the 
commissions or charges to be paid by the customer in connection 
therewith (or the manner of calculating them).
    (H) The term ``non-periodic municipal fund security program'' shall 
mean any written authorization or arrangement for a broker, dealer or 
municipal securities dealer, acting as agent, to purchase, sell or 
redeem for a customer or group of customers one or more specific 
municipal fund securities, setting forth the commissions or charges to 
be paid by the customer in connection therewith (or the manner of 
calculating them) and either (1) providing for the purchase, sale or 
redemption of such municipal fund securities at the direction of the 
customer or customers or (2) providing for the purchase, sale or 
redemption of such municipal fund securities at the direction of the 
customer or customers as well as authorizing purchase, sale or 
redemption of such municipal fund securities in specific amounts 
(calculated in security units or dollars) at specific time intervals.
    (vii) Price substituted for par value of municipal fund securities. 
For purposes of this rule, each reference to the term ``par value,'' 
when applied to a municipal fund security, shall be substituted with 
(i) in the case of a purchase of a municipal fund security by a 
customer, the purchase price paid by the customer, exclusive of any 
commission, and (ii) in the case of a sale or tender for redemption of 
a municipal fund security by a customer, the sale price or redemption 
amount paid to the customer, exclusive of any commission or other 
charge imposed upon redemption or sale.
    (viii) Alternative periodic reporting for certain transactions in 
municipal fund securities. Notwithstanding any other provision of this 
section (a), a broker, dealer or municipal securities dealer may effect 
transactions in municipal fund securities with customers without giving 
or sending to such customer the written confirmation required by 
paragraph (i) of this section (a) at or before completion of each such 
transaction if:
    (A) such transactions are effected pursuant to a periodic municipal 
fund security plan or a non-periodic municipal fund security program; 
and
    (B) such broker, dealer or municipal securities dealer gives or 
sends to such customer within five business days after the end of each 
quarterly period, in the case of a customer participating in a periodic 
municipal fund security plan, or each monthly period, in the case of a 
customer participating in a non-periodic municipal fund security 
program, a written statement disclosing, for each purchase, sale or 
redemption effected for or with, and each payment of investment 
earnings credited to or reinvested for, the account of such customer 
during the reporting period, the information required to be disclosed 
to customers pursuant to subparagraphs (A) through (D) if paragraph (i) 
of this section (a), with the information regarding each transaction 
clearly segregated; provided that it is permissible:
    (1) for the name and address of the broker, dealer or municipal 
securities dealer and the customer to appear once at the beginning of 
the periodic statement; and
    (2) for information required to be included pursuant to 
subparagraph (A)(1)(d), (A)(2)(a) (C)(5) or (D)(3) of paragraph (i) of 
this section (a) to:
    (a) appear once in the periodic statement if such information is 
identical for all transactions disclosed in such statement; or
    (b) be omitted from the periodic statement, but only if such 
information previously has been delivered to the customer in writing 
and the periodic statement includes a statement indicating that such 
information has been provided to the customer and identifying the 
document in which such information appears; and
    (C) in the case of a periodic municipal fund security plan that 
consists of an arrangement involving a group of two or more customers 
and contemplating periodic purchases of municipal fund securities by 
each customer through a person designated by the group, such broker, 
dealer or municipal securities dealer:
    (1) gives or sends to the designated person, at or before the 
completion of the transaction for the purchase of such municipal fund 
securities, a written notification of the receipt of the total amount 
paid by the group;
    (2) sends to anyone in the group who was a customer in the prior 
quarter and on whose behalf payment has not been received in the 
current quarter a quarterly written statement reflecting that a payment 
was not received on such customer's behalf; and
    (3) advises each customer in the group if a payment is not received 
from the designated person on behalf of the group within 10 days of a 
date certain specified in the arrangement for delivery of that payment 
by the designated person and either (a) thereafter sends to each 
customer the written confirmation described in paragraph (i) of this 
section (a) for the next three succeeding payments, or (b) includes in 
the quarterly statement referred to in subparagraph (B) of this 
paragraph (viii) each date certain specified in the arrangement for 
delivery of a payment by the designated person and each date on which a 
payment received from the designated person is applied to the purchase 
of municipal fund securities; and
    (D) such customer is provided with prior notification in writing 
disclosing the intention to send the written information referred to in 
subparagraph (B) of this paragraph (vii) on a periodic basis in lieu of 
an immediate confirmation for each transaction; and
    (E) such customer has consented in writing to receipt of the 
written information referred to in subparagraph (B) of this paragraph 
(viii) on a periodic basis in lieu of an immediate confirmation for 
each transaction; provided, however, that such customer consent shall 
not be required if:
    (1) the customer is not a natural person;
    (2) the customer is a natural person who participates in a periodic 
municipal fund security plan described in subparagraph (C) of this 
paragraph (viii); or
    (3) the customer is a natural person who participates in a periodic 
municipal fund security plan (other than a plan described in 
subparagraph (C) of this paragraph (viii) or a non-periodic municipal 
fund security program and the issuer has consented in writing to the 
use by the broker, dealer or municipal securities dealer of the 
periodic written information referred to in subparagraph (B) of this 
paragraph (viii) in lieu of an immediate confirmation for each 
transaction with each customer participating in such plan or program.
    (b)-(e) No change.

Rule G-26. Customer Account Transfers

    (a) Definitions. For purposes of this rule, the following terms 
have the following meanings:
    (i)-(ii) No change.
    (iii) The term ``nontransferable asset'' means an asset that is 
incapable of being transferred from the carrying party to the receiving 
party because (A) it is an

[[Page 47535]]

issue in default for which the carrying party does not possess the 
proper denominations to effect delivery and no transfer agent is 
available to re-register the securities, or (B) it is a municipal fund 
security which the issuer requires to be held in an account carried by 
one or more specified brokers, dealers or municipal securities dealers 
that does not include the receiving party.
    (b) No change.
    (c) Transfer Instructions.
    (i) No change.
    (ii) If an account includes any nontransferable assets, the 
carrying party must request, in writing and prior to or at the time of 
validation of the transfer instruction, further instructions from the 
customer with respect to the disposition of such assets. Such request 
shall provide the customer with the following alternative methods of 
disposition of nontransferable assets, if applicable.
    (A) No change.
    (B) retention by the carrying party for the customer's benefit; or
    (C) in the case of a nontransferable asset described in section 
(a)(iii)(B), transfer to another broker, dealer or municipal securities 
dealer, if any, which the issuer has specified as being permitted to 
carry such asset.
    (d)-(i) No change.

Rule G-32. Disclosures in Connection With New Issues

    (a) Customer 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 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:
    (A) if a customer who participates in a periodic municipal fund 
security plan or a non-periodic municipal fund security program has 
previously received a copy of the official statement in final form in 
connection with the purchase of municipal fund securities under such 
plan or program, a broker, dealer or municipal securities dealer may 
sell additional shares or units of the municipal fund securities under 
such plan or program to the customer if such broker, dealer or 
municipal securities dealer sends to the customer a copy of a new, 
supplemented, amended or ``stickered'' official statement in final 
form, by first class mail or other equally prompt means, promptly upon 
receipt thereof; provided that, if the broker, dealer or municipal 
securities dealer sends a supplement, amendment or sticker without 
including the remaining portions of the official statement in final 
form, such broker, dealer or municipal securities dealer includes a 
written statement describing which documents constitute the complete 
official statement in final form and stating that the complete official 
statement in final form is available upon request; or
    (B) 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.
    (A)-(B) Renumbered as (1)-(2).
    (ii) in connection with a negotiated sale of new issue municipal 
securities, the following information concerning the underwriting 
arrangements:
    (A) the underwriting spread, in any;
    (B) the amount of any fee received by the broker, dealer or 
municipal securities dealer as agent for the issuer in the distribution 
of the securities; provided, however, that if a broker, dealer or 
municipal securities dealer selling municipal fund securities provides 
periodic statements to the customer pursuant to rule G-15(a)(viii) in 
lieu of individual transaction confirmations, this paragraph (ii)(B) 
shall be deemed to be satisfied if the broker, dealer or municipal 
securities dealer provides this information to the customer at least 
annually and provides information regarding any change in such fee on 
or prior to the sending of the next succeeding periodic statement to 
the customer; and
    (C) except with respect to an issue of municipal fund securities, 
the initial offering price for each maturity in the issue that is 
offered or to be offered in while or in part by the underwriters, 
including maturities that are not reoffered.
    (b) Inter-Dealer Disclosure Requirements. Every broker, dealer or 
municipal securities dealer shall send, upon request, 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 no later than the business day following the request or, if 
an official statement in final form is being prepared but has not been 
received from the issuer or its agent, no later than the business day 
following such receipt. Such items shall be sent by first class mail or 
other equally prompt means, unless the purchasing broker, dealer or 
municipal securities dealer arranges some other method of delivery and 
pays or agrees to pay for such delivery.
    (b)-(c) Relettered as (c)-(d).

Rule G-34. CUSIP Numbers and New Issue Requirements

    (a)-(b) No change.
    (c) [CUSIP Number Eligibility] Exemptions. The provisions of this 
rule shall not apply to an issue of municipal securities (or for the 
purpose of section (b) any part of an outstanding maturity of an issue) 
which (i) does not meet the eligibility criteria for CUSIP number 
assignment or (ii) consists entirely of municipal fund securities.
* * * * *

Interpretation Relating to Sales of Municipal Fund Securities in the 
Primary Market

    The Municipal Securities Rulemaking Board (``Board'') has learned 
that sales of certain interests in trust funds held by state or local 
governmental entities may be effected by or through brokers, dealers or 
municipal securities dealers (``dealers''). In particular, the Board 
has reviewed two types of state or local governmental programs in which 
dealers may effect transactions in such interests: pooled investment 
funds under trusts established by state or local governmental entities 
(``local government pools'') \4\ and higher education savings plan 
trusts established by states (``higher education trusts'').\5\ In 
response to a request of the Board, staff of the Division of Market

[[Page 47536]]

Regulation of the Securities and Exchange Commission (``SEC'') has 
stated that ``at least some interests in local government pools and 
higher education trusts may be, depending on the facts and 
circumstances, `municipal securities' for purposes of the [Securities] 
Exchange Act of 1934].'' \6\ Any such interests that may, in fact, 
constitute municipal securities are referred to herein as ``municipal 
fund securities.'' To the extent that dealers effect transactions in 
municipal fund securities, such transactions are subject to the 
jurisdiction of the Board pursuant to Section 15B of the Securities 
Exchange Act of 1934 (``Exchange act'').
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    \4\ The Board understands that local government pools are 
established by state or local governmental entities as trusts that 
serve as vehicles for the pooled investment of public moneys of 
participating governmental entities. Participants purchase interests 
in the trust and trust assets are invested in a manner consistent 
with the trust's stated investment objectives. Investors generally 
do not have a right to control investment of trust assets. See 
generally National Association of State Treasures (``NAST''), 
Special Report: Local Government Investment Pools (July 1995) 
(``NAST Report'') Standard & Poor's Fund Services, Local Government 
Investment Pools (May 1999) (``S&P Report'').
    \5\ The Board understands that higher education trusts generally 
are established by states under section 529(b) of the Internal 
Revenue Code as ``qualified state tuition programs'' through which 
individuals make investments for the purpose of accumulating savings 
for qualifying higher education costs of beneficiaries. Individuals 
purchase interests in the trust and trust assets are invested in a 
manner consistent with the trust's stated investment objectives. 
Investors do not have a right to control investment of trust assets. 
See generally College Savings Plans Network, Special Report on State 
and College Savings Plans (1998) (``CSPN Report'').
    \6\ Letter dated February 26, 1999 from Catherine McGuire, Chief 
Counsel, Division of Market Regulation, SEC, to Diane G. Klinke, 
General Counsel of the Board, in response to letter dated June 2, 
1998 from Diane G. Klinke to Catherine McGuire, published as 
Municipal Securities Rulemaking Board, SEC No-Action Letter, Wash. 
Serv. Bur. (CCH) File No. 032299033 (Feb. 26, 1999) (``SEC 
Letter'').
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    With respect to the applicability to municipal fund securities of 
Exchange Act Rule 15c2-12, relating to municipal securities disclosure, 
staff of the staff of the SEC's Division of Market Regulation has 
stated:
    [W]e note that Rule 15c2-12(f)(7) under the Exchange act defines a 
``primary offering'' as including an offering of municipal securities 
directly or indirectly by or on behalf of an issuer of such securities. 
Based upon an analysis of programs that have been brought to our 
attention, it appears that interests in local government pools or 
higher education trusts generally are offered only by direct purchase 
from the issuer. Accordingly, we would view those interests as having 
been sold in a ``primary offering'' as that term is defined in Rule 
15c2-12. If a dealer is acting as an ``underwriter'' (as defined in 
Rule 15c2-12(f)(8)) in connection with that primary offering, the 
dealer may be subject to the requirements of Rule 15c2-12.\7\
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    \7\ Id.
---------------------------------------------------------------------------

    Rule 15c2-12(f)(8) defines an underwriter as ``any person who has 
purchased from an issuer of municipal securities with a view to, or 
offers or sells for an issuer of municipal securities in connection 
with, the offering of any municipal security, or participates or has a 
direct or indirect participation in any such undertaking, or 
participates or has a participation in the direct or indirect 
underwriting of any such undertaking.'' \8\
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    \8\ The definition of underwriter excludes any person whose 
interest is limited to a commission, concession, or allowance from 
an underwriter or dealer not in excess of the usual and customary 
distributors' or sellers' commission, concession, or allowance.
---------------------------------------------------------------------------

    Consistent with SEC staff's view regarding the sale in primary 
offerings of municipal fund securities, dealers acting as underwriters 
in primary offerings of municipal fund securities generally would be 
subject to the requirements of rule G-36, on delivery of official 
statements, advance refunding documents and Forms G-36(OS) and G-
36(ARD) to Board or its designee. Thus, unless such primary offering 
falls within one of the stated exemptions in Rule 15c2-12, the Board 
expects that the dealer would receive a final official statement from 
the issuer or its agent under its contractual agreement entered into 
pursuant to Rule 15c2-12(b)(3).\9\ Such final official statement should 
be received from the issuer in sufficient time for the dealer to send 
it, together with Form G-36(OS), to the Board within one business day 
of receipt but no later than 10 business days after any final agreement 
to purchase, offer, or sell the municipal fund securities, as required 
under rule G-36(b)(i).\10\ ``Final official statement,'' as used in 
rule G-36(b)(i), has the same meaning as in Rule 15c2-12(f)(3), which 
states, in relevant part:
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    \9\ Section (b)(3) of Rule 15c2-12 requires that a dealer 
serving as a Participating Underwriter in connection with a primary 
offering subject to the Rule contract with an issuer of municipal 
securities or its designated agent to receive copies of a final 
official statement at the time and in the quantities set forth in 
the Rule.
    \10\ If a primary offering of municipal fund securities is 
exempt from Rule 15c2-12 (other than as a result of being a limited 
offering as described in section (d)(1)(i) of the Rule) and an 
official statement in final form has been prepared by the issuer, 
then the dealer would be expected to send the official statement in 
final form, together with Form G-36(OS), to the Board under Rule G-
36(c)(i).
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    The term official statement means a document or set of documents 
prepared by an issuer of municipal securities or its representatives 
that is complete as of the date delivered to the Participating 
Underwriter(s) and that sets forth information concerning the terms of 
the proposed issue of securities; information, including financial 
information or operating data, concerning such issuers of municipal 
securities and those other entities, enterprises, funds, accounts, and 
other persons material to an evaluation of the Offering; and a 
description of the undertakings to be provided pursuant to paragraph 
(b)(5)(i), paragraph (d)(2)(ii), and paragraph (d)(2)(iii) of this 
section, if applicable, and of any instances in the previous five years 
in which each person specified pursuant to paragraph (b)(5)(ii) of this 
section failed to comply, in all material respects, with any previous 
undertakings in a written contract or agreement specified in paragraph 
(b)(5)(i) of this section.\11\
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    \11\ Dealers seeking guidance as to whether a particular 
document or set of documents constitutes a final official statement 
for purposes of Rule G-36(b)(i) may wish to consult with SEC staff 
to determine whether such document or set of documents constitutes a 
final official statement for purposes of Rule 15c2-12.
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    The Board understands that issuers of municipal fund securities 
typically issue and deliver the securities continuously as customers 
make purchases, rather than issuing and delivering a single issue on a 
specified date. As used in Board rules, the term ``underwriting 
period'' with respect to an offering involving a single dealer (i.e., 
not involving an underwriting syndicate) is defined as the period (A) 
commencing with the first submission to the dealer of an order for the 
purchase of the securities or the purchase of the securities from the 
issuer, whichever first occurs, and (B) ending at such time as the 
following two conditions both are met: (1) The issuer delivers the 
securities to the dealer, and (2) the dealer no longer retains an 
unsold balance of the securities purchased from the issuer or 21 
calendar days elapse after the date of the first submission of an order 
for the securities, whichever first occurs.\12\ Since an offering 
consisting of securities issued and delivered on a continuous basis 
would not, by its very nature, ever meet the first condition for the 
termination of the underwriting period, such offering would 
continuously remain in its underwriting period.\13\ Further, since rule 
G-36(d) requires a dealer that has previously provided an official 
statement to the Board to send any amendments to the official statement 
made by the issuer during the underwriting period, such dealer would 
remain obligated to send to the Board any amendments made to the 
official statement during such continuous underwriting period. However, 
in view of the increased possibility that an issuer may change the 
dealer that participates in the sale of its securities during such a 
continuous underwriting period, the Board has determine that rule G-
36(d) would require that the dealer that is at the time of an amendment 
then serving as underwriter for securities that are still in the 
underwriting period send the amendment to the Board, regardless of

[[Page 47537]]

whether that dealer or another dealer sent the original official 
statement to the Board.
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    \12\ See rule G-32(c)(ii)(B). If approved by the SEC, the 
proposed rule change will redesignate this section as Rule G-
32(d)(ii)(B).
    \13\ Similarly, an offering involving an underwriting syndicate 
and consisting of securities issued and delivered on a continuous 
basis also would remain in its underwriting period under the 
definition thereof set forth in Rule G-11(a)(ix).
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    In addition, municipal fund securities sold in a primary offering 
would constitute new issue municipal securities for purposes of rule G-
32, on disclosures in connection with new issues, so long as the 
securities remain in their underwriting period. Rule G-32 generally 
requires that a dealer selling a new issue municipal security to a 
customer must deliver the official statement in final form to the 
customer by settlement of such transaction. Thus, a dealer effecting 
transactions in municipal fund securities that are sold during a 
continuous underwriting period would be required to deliver to the 
customer the official statement by settlement of each such transaction. 
However, in the case of a customer purchasing such securities who is a 
repeat purchaser, no new delivery of the official statement would be 
required so long as the customer has previously received it in 
connection with a prior purchase and the official statement has not 
been changed from the one previously delivered to that customer.\14\
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    \14\ This is equally true for other forms of municipal 
securities for which a customer has already received an official 
statement in connection with an earlier purchase and who proceeds to 
make a second purchase of the same securities during the 
underwriting period. Furthermore, in the case of a repeat purchaser 
of municipal securities for which no official statement in final 
form is being prepared, no new delivery of the written notice to 
that effect or of any official statement in preliminary form would 
be required so long as the customer has received it in connection 
with a prior purchase. However, if an official statement in final 
form is subsequently prepared, the customer's next purchase would 
trigger the delivery requirement with respect of such official 
statement. Also, if an official statement which has previously been 
delivered is subsequently amended during the underwriting period, 
the customer's next purchase would trigger the delivery requirement 
with respect to such amendment.
---------------------------------------------------------------------------

    Certain other implications arise under Board rules as a result of 
the status, in the view of SEC staff, of sales of municipal fund 
securities as primary offerings. For example, dealers are reminded that 
the definition of ``municipal securities business'' under rule G-37, on 
political contributions and prohibitions on municipal securities 
business, and rule G-38, on consultants, includes the purchase of a 
primary offering from the issuer on other than a competitive bid basis 
or the offer or sale of a primary offering on behalf of any issuer. 
Thus, a dealer's transactions in municipal fund securities may affect 
such dealer's obligations under rules G-37 and G-38. In addition, rule 
G-23, on activities of financial advisors, applies to a dealer's 
financial advisory or consultant services to an issuer with respect to 
a new issue of municipal securities.

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
    Dealers that effect transactions in municipal securities are 
subject to the Board's jurisdiction pursuant to Section 15B of the 
Act.\15\ In particular, Section 15B(c)(1) \16\ prohibits dealers from 
effecting transactions in, or inducing or attempting to induce the 
purchase or sale of, a municipal security in contravention of any Board 
rule. Thus, since the enactment of Section 15B and the creation of the 
Board in the Securities Acts Amendments of 1975 (``Securities Acts 
Amendments''),\17\ a transaction effected by a dealer in a municipal 
security must be effected in conformity with Board rules.
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    \15\ 15 U.S.C. 78o-4.
    \16\ 15 U.S.C. 78o-4(c)(1).
    \17\ Pub. L. 94-29, 89 Stat. 97 (1975).
---------------------------------------------------------------------------

    The Board has learned that sales of certain interests in trust 
funds held by state or local governmental entities may be effected by 
or through dealers. In particular, the Board has reviewed two types of 
state or local governmental programs in which dealers may effect 
transactions in such interests: local government pools and higher 
education trusts.\18\ In response to a request of the Board, staff of 
the SEC's Division of Market Regulation has stated that ``at least some 
interests in local government pools and higher education trusts may be, 
depending on the facts and circumstances, `municipal securities' for 
purposes of the Act.'' \19\ Any such interests that may, in fact, 
constitute municipal securities are referred to herein as ``municipal 
fund securities.'' To the extent that dealers effect transactions in 
municipal fund securities, such transactions would be subject to the 
jurisdiction of the Board pursuant to Section 15B of the Act.\20\
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    \18\ See supra notes 4 and 5.
    \19\ SEC Letter, see supra note 5.
    \20\ 15 U.S.C. 78o-4.
---------------------------------------------------------------------------

    Board rules do not apply to any interest in a local government pool 
or a higher education trust that is not a municipal security. In 
addition, Board rules apply only to activities of dealers that effect 
municipal securities transactions. Thus, Board rules do not apply to an 
issuer of, or a non-dealer entity providing advice to issuers on, 
municipal securities, including municipal fund securities. However, to 
the extent that interests in a local government pool or a higher 
education trust are municipal securities and dealers are effecting 
transactions in them, Board rules automatically govern such dealer 
transactions, without the necessity of further Board rulemaking.\21\ On 
several previous occasions, the Board has alerted the industry to the 
applicability of Board rules to (and has adopted rule changes to 
accommodate) transactions in new forms of municipal securities or pre-
existing forms of securities that many in the industry had not 
previously recognized as municipal securities.\22\
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    \21\ Dealers also should consider the current applicability of 
Rule 15c2-12 under the Act. See supra note 7 and accompanying text. 
Questions regarding Rule 15c2-12 should be directed to SEC staff. In 
addition, dealers should distinguish sales of municipal fund 
securities from sales of securities to, and purchases of securities 
from, the trust fund underlying such municipal fund securities. The 
Board believes that the municipal securities industry has been well 
aware of the applicability of Board rules to dealer transactions 
that involve the sale or purchase of municipal securities to or from 
higher education trusts or local government pools.
    \22\ See ``Transactions in Municipal Collateralized Mortgage 
Obligations: Rule G-15,'' MSRB Reports, Vol. 12, No. 1 (April 1992) 
at 21; ``Stripped Coupon Municipal Securities,'' MSRB Reports, Vol. 
9, No. 1 (March 1989) at 3; ``Taxable Securities,'' MSRB Reports, 
Vol. 6, No. 5 (Oct. 1986) at 5; ``Tender Option Programs: SEC 
Response to Board Letter,'' MSRB Reports, Vol. 5, No. 2 (Feb. 1985) 
at 3; ``Tax-Exempt Notes: Notice Concerning Application of Board 
Rules to Such Notes and of Filing of Rule Change,'' MSRB Reports, 
Vol. 2, No. 7 (Oct./Nov. 1982) at 17; ``Application of Board's Rules 
to Municipal Commercial Paper,'' MSRB Reports, Vol. 2, No. 1 (Jan. 
1982) at 9 (``CP Notice''); ``Application of Board's Rules to 
Participation Interests in Municipal Tax-Exempt Financing 
Arrangements,'' MSRB Reports, Vol. 2, No. 1 (Jan. 1982) at 13; 
``Notice Concerning Application of Board's Rules to MAC Warrants,'' 
[1977-1987 Transfer Binder] MSRB Manual (CCH) para. 10,171 (Jan. 22, 
1981) (``MAC Warrant Notice'').
---------------------------------------------------------------------------

    A municipal fund security is defined in proposed Rule D-12 as a 
municipal security issued by an issuer that, but for Section 2(b) of 
the Investment Company Act of 1940 (``Investment Company Act''),\23\ 
would constitute an investment

[[Page 47538]]

company under the Investment Company Act. Thus, Board rules on 
municipal fund securities would apply to interests in state or local 
governmental trusts, such as local government pools and higher 
education trusts, only if the following three conditions are met:
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 80a-2(b). Section 2(b) provides that the 
Investment Company Act shall not apply to a state, or any political 
subdivision of a state, or any agency, authority, or instrumentality 
thereof.
---------------------------------------------------------------------------

    1. A dealer is engaging in transactions in such interests;
    2. Such interests, in fact, constitute municipal securities; and
    3. Such interests are issued by an issuer that, but for the 
exemption under Section 2(b) of the Investment Company Act, would be 
considered an investment company within the meaning of that Act.
    The Board understands the municipal fund securities may not have 
features typically associated with more traditional municipal 
securities. Instead, their features are similar to those of investment 
company securities.\24\ Although Board rules generally have been 
drafted to accommodate the characteristics of debt securities, the 
Board believes that most current rules can appropriately be applied to 
municipal fund securities. Nonetheless, the Board feels that certain 
rules should be amended to recognize the unique characteristics of 
municipal fund securities. The proposed rule change does not seek to 
extend the reach of Board rules, because the rules already apply to 
municipal fund securities, but seeks to tailor certain Board rules to 
accommodate the nature of municipal fund securities.
---------------------------------------------------------------------------

    \24\ Municipal fund securities generally provide investment 
return and are valued based on the investment performance of an 
underlying pool of assets having an aggregate value that may 
increase or decrease from day to day, rather than providing interest 
payments at a stated rate or discount, as is the case for more 
traditional municipal securities. In addition, unlike traditional 
municipal securities, these interests do not have stated par values 
or maturity dates and cannot be priced based on yield or dollar 
price. See generally NAST Report; S&P Report; and CSPN Report, supra 
notes 3 and 4.
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Description of Proposed Rule Change

    The proposed rule change defines a municipal fund security to 
include any interest in a local government pool or a higher education 
trust as they have been described to the Board, to the extent such 
interests are municipal securities. As a general matter, the proposed 
rule change has been drafted with the view that municipal fund 
securities should be treated differently from other municipal 
securities only under circumstances where current rules would not apply 
properly. In addition, the Board has not attempted to draft any 
proposed rule changes intended to address secondary market transactions 
in municipal fund securities because the Board understands that no such 
market now exists. The Board would undertake appropriate action should 
a secondary market develop in municipal fund securities.
    Proposed Rule D-12--Definition of Municipal Fund Security. Proposed 
Rule D-12 defines municipal fund security as a municipal security that 
would qualify as a security of an investment company under the 
Investment Company Act if it had not been issued by a state or local 
governmental entity.\25\ Before a security can be considered a 
municipal fund security, it must first be considered to be a municipal 
security. If an investment is deemed a municipal fund security, then 
dealer transactions are subject to all Board rules because of its 
status as a municipal security. Municipal securities, however, would 
receive special treatment in those instances where provisions are 
proposed to be added to relate specifically to municipal fund 
securities.\26\
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    \25\ This should be distinguished from shares in a mutual fund 
registered under the Investment Company Act with assets invested in 
municipal securities, which shares would not constitute municipal 
fund securities.
    \26\ The definition of municipal fund security is not strictly 
limited to interests in local government pools or higher education 
trusts that are municipal securities but would apply as well to any 
other municipal security issued under a program that would, but for 
the identity of the issuer as a state or local governmental entity, 
constitute an investment company under the Investment Company Act.
---------------------------------------------------------------------------

    Rule A-13--Assessments. Proposed Rule A-13 exempts the sale of 
municipal fund securities from the underwriting assessment imposed 
under section (b) thereof because the fee structure for dealers 
involved in the distribution of municipal fund securities is more like 
an administrative fee than an underwriting discount or commission given 
that these dealers do not undertake underwriting risks. As a result, 
fees generally are fixed and are low relative to traditional 
underwriting fees and the level of fees generated by the Board from 
underwriting assessments would be disproportionate to the resulting 
regulatory costs.
    Rule G-3--Professional Qualifications. Proposed Rule G-3 permits an 
associated person qualified as an investment company limited 
representative to effect transactions in municipal fund securities (but 
not in other municipal securities).\27\ However, a dealer must continue 
to have one or two municipal securities principals as required under 
existing section (b) of Rule G-3, even if the dealer's only municipal 
securities transactions are sales of municipal fund securities.
---------------------------------------------------------------------------

    \27\ Thus, an associated person who sells both municipal fund 
securities and other types of municipal securities must continue to 
qualify as either a municipal securities representative or a general 
securities representative.
---------------------------------------------------------------------------

    Rule G-8--Recordkeeping. Proposed Rule G-8 ensures consistency with 
proposed Rules G-3 and G-15. Thus, amended Rule G-8 would recognize 
that municipal fund securities do not have par values, dollar prices, 
yields and accrued interest and that investment company limited 
representatives may be permitted to effect transactions in municipal 
fund securities. In addition, proposed Rule G-8 requires dealers to 
retain copies of all periodic statements delivered to customers in lieu 
of individual confirmations with respect to transactions in municipal 
fund securities under proposed Rule G-15. Furthermore, proposed Rule G-
8 would permit a dealer effecting transactions in municipal fund 
securities to meet its books and records requirements by having a 
transfer agent maintain books and records for such municipal fund 
securities so long as the books and records of the transfer agent meet 
the requirements of proposed Rule G-8 as proposed to be amended and the 
dealer remains responsible for the accurate maintenance and 
preservation of the books and records.
    Rule G-14--Transaction Reporting. Proposed Rule G-14(b)(i) 
clarifies that certain types of municipal securities transactions may 
be excluded from transaction reporting as provided in the Rule G-14 
Transaction Reporting Procedures. The Board is proposing to amend the 
Transaction Reporting Procedures to expressly exempt any transaction in 
municipal fund securities from the customer transaction reporting 
system. A number of factors unique to municipal fund securities have 
contributed to the Board's determination to exempt such securities from 
proposed Rule G-14 at this time. In particular, municipal fund 
securities do not trade in the secondary market. Thus, for example, 
unlike the bulk of data currently received by the Board through the 
system, any data obtained regarding transactions in municipal fund 
securities would be limited to one-time sales to customers upon initial 
issuance and one-time purchases (or redemptions) from customers upon 
cashing out. Municipal fund securities are sold by dealers on an agency 
basis generally without payment of commissions by customers; therefore, 
dealers effecting transactions in municipal fund securities would have 
little opportunity to alter the pricing on such securities from that 
set the issuer.

[[Page 47539]]

Furthermore, certain critical data elements that the transaction 
reporting system currently collects (e.g., dollar price, yield, etc.) 
would not apply to transactions in municipal fund securities. 
Nonetheless, should the Board in the future receive information that 
practices have developed in the municipal fund security market that 
merit reporting of transaction information, the Board would consider 
whether to revisit the exemption from Rule G-14.
    Rule G-15--Customer Confirmations. Various amendments are being 
proposed to Rule G-15 relating to the concepts of par value, yield, 
dollar price, maturity date and interest, none of which apply to a 
municipal fund security. Thus, as proposed, a dealer is required to use 
the purchase of sale price of the securities, as appropriate, on a 
confirmation of a municipal fund securities transaction, rather than 
par value and would be able to omit yield, dollar price, accrued 
interest, extended principal, maturity date and interest rate. Dealers 
selling municipal fund securities are required to include the purchase 
price of each share or unit (rather than denomination) as well as the 
number of shares or units to be delivered. Confirmations of municipal 
fund securities transactions are required to include a disclosure that 
a deferred commission or other charge may be imposed upon redemption, 
if applicable.\28\ The proposal also makes clear that dealers must 
confirm redemptions of municipal fund securities. A confirmation of a 
municipal fund security transaction need not show the information 
required under paragraph (a)(i)(C) other than whether the security is 
puttable. In addition, the confirmation must include the name used by 
the issuer to identify the security and, to the extent necessary to 
differentiate the security from other municipal fund securities of the 
issuer, any separate program series, portfolio or fund designation.
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    \28\ Disclosure of deferred commissions or other charges covers, 
for example, any deferred sales load or, in the case of interests in 
certain higher education trusts, any penalty imposed on a redemption 
that is not for a qualifying higher education expense.
---------------------------------------------------------------------------

    In addition, the amendment would permit dealers to use periodie 
statements, rather than transaction-by-transaction confirmations, if 
customers are purchasing such securities pursuant to certain periodic 
plans or non-periodic programs, in a manner similar to the periodic 
reporting provision under Rule 10b-10 under the Act.\29\
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    \29\ 17 CFR 240.10b-10.
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    Rule G-26--Customer Account Transfers. The definition of 
``nontransferable asset'' and the transfer instructions for 
nontransferable assets in proposed Rule G-26 are proposed to be amended 
to reflect the fact that the issuer of municipal fund securities may 
limit the dealers that are authorized to carry accounts for customers 
in such securities.
    Rule G-32--Disclosures in Connection with New Issues. Proposed Rule 
G-32 permits a dealer to sell, pursuant to a periodic plan or a non-
periodic program as defined in Rule G-15, as proposed to be amended, a 
municipal fund security to a customer who has previously received the 
official statement for the security so long as its sends to the 
customers a copy of any new, supplemented, amended or stickered 
official statement promptly upon receipt from the issuer (i.e., actual 
delivery by settlement is not required). The dealer is permitted to 
satisfy this delivery requirement by delivering the amendment alone 
(including a notice that the complete official statement is available 
upon request) so long as the customer already had the official 
statement that is being amended and the dealer ensures that the 
amendment makes clear what constitutes the complete official statement. 
The proposed rule change also excepts municipal fund securities for 
which periodic statements in lieu of transaction confirmations are 
provided from the requirement that information on the underwriting fees 
paid to the dealer by the issuer be provided to customers by settlement 
so long as such information is disclosed at least annually and 
information on any fee changes paid by the issuer to the dealer is sent 
to customers simultaneously with or prior to the sending of the next 
periodic statement.
    Rule G-34--CUSIP Numbers and Depository Eligibility. The proposal 
would exempt municipal fund securities from the requirements of Rule G-
34 because no secondary market is expected to develop. \30\
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    \30\ Dealers may still elect to acquire CUSIP numbers for 
municipal fund securities and to make such securities depository 
eligible, subject to meeting all of the eligibility requirements of 
the CUSIP Service Bureau and of any securities depository, 
respectively.
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    Interpretation Relating to Sales of Municipal Fund Securities in 
the Primary Market. Interpretive guidance is provided in connection 
with the application of Rules G-23, G-32, G-36, G-37 and G-38 to dealer 
transactions in municipal fund securities.
2. Statutory Basis
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) \31\ of the Act, which requires the Board's rules 
to 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 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. The Board believes that the proposed rule change is 
consistent with the Act because it amends existing Board rules to 
better accommodate the unique characteristics of municipal fund 
securities, thereby removing impediments to a free and open market in 
these securities and promoting the protection of investors and the 
public interest.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78o-4(b)(2)(c).
---------------------------------------------------------------------------

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 that is not necessary or appropriate 
in furtherance of the purposes of the Act because it applies equally to 
all dealers effecting transactions in municipal fund securities.

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

    On March 17, 1999, the Board published a notice (``March Notice'') 
requesting comments on draft rule changes relating to transactions 
effected by or through dealers in municipal fund securities.\32\ The 
Board received twelve comment letters on the March Notice.\33\

[[Page 47540]]

After reviewing these comments, the Board re-circulated the draft rule 
changes, with certain modifications and additions, for further comment 
from industry participants in a notice published on August 27, 1999 
(``August Notice'').\34\ The Board received seven comment letters on 
the August Notice. \35\ After reviewing these additional comments, the 
Board approved the revised draft rule changes, with certain additional 
modifications and additions, for filing with the SEC. The comments 
received, and the Board's response, are summarized below.
---------------------------------------------------------------------------

    \32\ ``Municipal Fund Securities,'' MSRB Reports, Vol. 19, No. 2 
(April 1999) at 9.
    \33\ Letters from Laura Bramson, Senior Counsel, Teachers 
Personal Investors Services, Inc. (``TPIS''), to the Board, dated 
May 13, 1999 (``First TPIS Letter'') and June 30, 1999 (``Second 
TPIS Letter''); letter from Barbara L. Hasson, President, Board of 
Trustees, Pennsylvania Local Government Investment Trust 
(``PLGIT''), to Ernesto A. Lanza, Associate General Counsel, Board, 
dated May 13, 1999 (``PLGIT Letter''); letter from Marty Margolis, 
Managing Director, Public Financial Management (``PFM''), to Ernesto 
A. Lanza, dated May 14, 1999 (``PFM Letter''); letter from Sarah M. 
Starkweather, Vice President and Associate General Counsel, The Bond 
Market Association (``TBMA''), to Ernesto A. Lanza, dated June 1, 
1999 (``TBMA Letter''); letter from J. Todd Cook, Vice President and 
Senior Counsel, Merrill Lynch, Pierce, Fenner & Smith Incorporated 
(``Merrill''), to the Board, dated June 2, 1999 (``First Merrill 
Letter''); letter from Leonard M. Leiman, Partner, Fulbright & 
Jaworski LLP (``Fulbright''), as counsel to Fidelity Investment 
(``Fidelity''), to the Board, dated June 4, 1999 (``Fulbright 
Letter''); letter from Thomas R. Schmuhl, Duane, Morris & Heckscher 
LLP (``Duane''), as counsel to the Pennsylvania School District 
Liquid Asset Fund, to Ernesto A. Lanza, dated June 8, 1999 (``Duane 
Letter''); letter from Kenneth S. Gerstein, Schulte Roth & Zabel LLP 
(``Schulte''), as counsel to Cadre Financial Services, Inc., to the 
Board, dated June 18, 1999 (``Schulter Letter''); letter from 
Leonard I. Chubinsky, Assistant General Counsel, MBIA Municipal 
Investors Service Corporation (`MBIA-MISC''), to Ernesto A. Lanza, 
dated July 1, 1999 (``MBIA-MISC Letter''); letter from Thomas J. 
Wallace, Executive Director, Florida Prepaid College Board 
(``Florida''), to Ernesto A. Lanza, dated July 13, 1999 (``Florida 
Letter''); and letter from Betsy Dotson, Director, Federal Liaison 
Center, Government Finance Officers Association (``GFOA''), to 
Ernesto A. Lanza, dated July 16, 1999 (``First GFOA Letter'').
    \34\ ``Municipal Fund Securities--Revised Draft Rule Changes,'' 
MSRB Reports, Vol. 19, No. 3 (Sept. 1999) at 3.
    \35\ Letter from David Unkovic, Saul, Ewing, Remick & Saul LLP 
(``Saul''), as counsel to PLIT, to Ernesto A. Lanza, dated October 
27, 1999 (``Saul Letter''); letter from Joseph J. Connolly, Eckert 
Seamans Cherin & Mellott, LLC (``Eckert''), as counsel to PFM, to 
the Board, dated October 29, 1999 (``Eckert Letter''); letter from 
Betsy Dotson, Director, Federal Liaison Center, GFOA, to Ernesto A. 
Lanza, dated November 1, 1999 (``Second GFOA Letter''); letters from 
Eric D. Roiter, Senior Vice President and General Counsel, Fidelity 
Investments (``Fidelity''), to the Board, dated November 1, 1999 
(``First Fidelity Letter'') and to each Board member, dated January 
20, 2000 (``Second Fidelity Letter''); letter from J. Todd Cook, 
Vice President and Senior Counsel, Merrill, to the Board, dated 
November 5, 1999 (``Second Merrill Letter''); and letter from 
Marshall Bennett, Chairman, CSPN (NAST) and Mississippi State 
Treasurer, to Ernesto A. Lanza, dated January 11, 2000 (``NAST 
Letter'').
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A. Authority of Board To Adopt Rules Governing Dealer Transactions in 
Municipal Fund Securities

1. Comments Received
    Some commentators question the Board's authority to regulate 
municipal fund securities, particularly local government pool 
interests.\36\ Fidelity, Fubright, MBIA-MISC and Schulte state that 
such interests are not municipal securities under the Act. They argue 
that the term ``municipal securities'' as used in the Act is limited to 
debt obligations of municipal issuers and that interests in local 
government pools represent equity interests in trust assets, not debt 
obligations.\37\ Duane and Eckert question whether Congress intended 
that the Board regulate local government pools when it created the 
Board.
---------------------------------------------------------------------------

    \36\ See Duane, Fulbright, MBIA-MISC, Schulte, Eckert, First 
Fidelity and Second Fidelity Letters. Fulbright states that, 
although the Board has no authority to regulate either local 
government pool or higher education trust interests, it believes 
that interested parties would not resist ``appropriate regulation'' 
of higher education trust interests. It states that regulation of 
transactions in such interests is ``arguably both more important and 
less controversial'' than regulation of local government pool 
interests, noting that higher education trust interests ``clearly 
affect public investors and the public interest.'' Fidelity also 
believes that interests in higher education trusts are not municipal 
securities but states that such interests ``are distributed to the 
public investors and therefore may raise unique public policy 
issues.''
    \37\ These commentators observe that municipal securities are 
defined in Section 3(a)(29) of the Act as ``securities which are 
direct obligations of, or obligations guaranteed as to principal or 
interest by, a State or any political subdivision thereof,'' in 
contrast to the language used in Section 3(a)(2) of the Securities 
Act of 1933 regarding any ``security issue or guaranteed . . . by 
any State of the United States, or by any political subdivision of a 
State or Territory.'' They quote a Senate report statement on the 
Securities Acts Amendments that ```municipal securities' refers to 
debt obligations of state and local government issuers.'' Senate 
Comm. on Banking, Housing and Urban Affairs, Securities Acts 
Amendments of 1975, S.Rep. No. 75, 94th Cong., 1st Sess. 38 (1975) 
(``1975 Senate Report''); but cf. Securities Acts Amendments of 
1975, H.R. Conf. Rep. No. 229, 94th Cong., 1st Sess. 101 (1975) 
(``1975 Conference Report'') (amendments ``provide a comprehensive 
pattern for the registration and regulation of securities firms and 
banks which underwrite and trade securities issued by States and 
municipalities'') (emphasis added). They note references in SEC no-
action letters to obligations under the Internal Revenue Code to 
support their position that municipal securities are limited to debt 
obligations. See Itel Corp., SEC No-Action Letter, Wash. Serv. Bur. 
(CCH) File No. 100581018 (Oct. 1, 1981) (``Itel No-Action Letter''); 
Bedford-Watt Enterprises, SEC No-Action Letter, Wash. Serv. Bur. 
(CCH) File No. 062678091 (June 9, 1978) (``Bedford-Watt No-Action 
Letter''). In addition, CERS cites an SEC no-action letter to 
suggest that an equity security may not be a municipal security. See 
City Employees' Retirement System of the City of Los Angeles, SEC 
No-Action Letter, [1977-1978 Dec.] Fed. Sec. L. Rep. (CCH) para. 
81,194 (May 12, 1977) (``CERS No-Action Letter'').
---------------------------------------------------------------------------

2. Board Response
    A security must first be a municipal security in order to be a 
municipal fund security. The proposed rule change would not, and 
existing Board rules do not, apply to local government pool or higher 
education trust interests that are not municipal securities. Thus, the 
Board does not overstep its authority by regulating dealer transactions 
in municipal fund securities because, by definition, regulation is 
limited to interests that are municipal securities.
    A firm wishing to determine if Board rules apply to services it 
provides to an issuer of local government pool or higher education 
trust interests may seek advice of counsel as to whether (1) such 
services constitute broker-dealer activities, or (2) such interests are 
municipal securities. In addition, the firm may seek no-action relief 
from SEC staff. If a non-dealer firm's activities do not constitute 
broker-dealer activities, the firm need not be a registered broker or 
dealer subject to Board rules, even if the interests re municipal 
securities.\38\ If the interests are not municipal securities, the 
dealer need not comply with Board rules; however, the dealer's 
activities may be subject to provisions of the Act, the rules and 
regulations thereunder, and National Association of Securities Dealers 
(``NASD'') rules, unless the interests otherwise qualify for an 
exemption (e.g., as exempted securities other than municipal 
securities) under the Act.
---------------------------------------------------------------------------

    \38\ Thus, non-dealer firms may act as investment advisers to 
local government pool or higher education trust programs and not 
become subject to Board rules.
---------------------------------------------------------------------------

    Of course, the Board's rulemaking proposals meaningful only if 
municipal fund securities, in fact, exist. As noted above, the Board 
asked SEC staff whether local government pool and higher education 
trust interests are municipal securities. SEC staff replied that ``at 
least some interests in local government pools and higher education 
trusts may be, depending on the facts and circumstances, `municipal 
securities' for purposes of the Act.'' \39 \ Although the Board is not 
empowered to determine whether a security is a municipal security 
within the meaning of Section 3(a)(29) of the Act, the Board believes 
that, based on the SEC's response as well as a close review of existing 
no-action letters and legislative history of the Securities Acts 
Amendments, the Act, and the Securities Act of 1933 (``Securities 
Act''), as discussed below, at least some interests in local government 
pools and higher education trusts are municipal securities.
---------------------------------------------------------------------------

    \39\ See SEC Letter, supra note 5.
---------------------------------------------------------------------------

    For example, in agreeing not to recommend enforcement action in 
several no-action letters, SEC staff relied on opinions of counsel that 
interests in state or local governmental trusts were municipal 
securities under the Act.\40\ In

[[Page 47541]]

one instance, SEC staff agreed not to recommend enforcement action if a 
dealer, in offering and selling interests in a higher education trust, 
were to comply with Board rules as they have been proposed to be 
amended in the March Notice, in lieu of complying with such rules as 
currently in effect.\41\ In another no-action letter, SEC staff agree 
not to recommend enforcement action against dealers who (1) sold 
interests in a higher education trust through persons qualified to sell 
investment company products but who did not meet the Board's 
professional qualification requirements \42\ and (2) complied with Rule 
15c2-12(b)(5) \43\ through a continuing disclosure undertaking from a 
dealer affiliate, rather than from the issuer. In reaching this 
position, SEC staff noted that the higher education trust interests 
were ``atypical municipal securities.'' \44\
---------------------------------------------------------------------------

    \40\ See, e.g., Virginia Higher Education Tuition Trust Fund, 
SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 111599009 
(Nov. 16, 1999) (`` Virginia No-Action Letter''); Missouri Higher 
Education Savings Program, SEC No-Action Letter, Wash. Serv. Bur. 
(CCH) File No. 110199007 (Oct. 25, 1999) (``Missouri No-Action 
Letter''); Golden State Scholarshare Trust, SEC No-Action Letter, 
Wash. Serv. Bur. (CCH) File No. 092099002 (Sept. 15, 1999) 
(``California No-Action Letter'') Maine College Savings Program 
Fund, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 
080999001 (Aug. 2, 1999) (``Maine No-Action Letter''); Teachers 
Personal Investors Services, Inc., SEC No-Action Letter, Wash. Serv. 
Bur. (CCH) File No. 092898006 (Sept. 10, 1998) (``New York No-Action 
Letter''); New Hampshire Higher Education Savings Plan Trust, SEC 
No-Action Letter, Wash. Serv. Bur. (CCH) File No. 070698010 (June 
30, 1998) (``New Hampshire No-Action Letter''); Public Employees 
Retirement Board of the State of Oregon, SEC No-Action Letter, Wash. 
Serv. Bur (CCH) File No. 041398009 (March 3, 1998) (``Oregon State 
No-Action Letter''); North Carolina State Education Assistance 
Authority, SEC No-Action Letter, Wash. Serv. Bur. (CCH) File No. 
032497016 (March 24, 1997) (``North Carolina No-Action Letter''); 
Missouri Family Trust Fund, SEC No-Action Letter, Wash. Serv. Bur. 
(CCH) File No. 101392001 (Sept. 22, 1992) (``Missouri Family Trust 
No-Action Letter''); School District No. 1--Mutnomah County, Oregon, 
SEC No-Action Letter (Mar. 26, 1976) (``Oregon School District No-
Action Letter'').
    \41\ Maine No-Action Letter. SEC staff's position was 
conditioned on the dealer complying with all existing Board rules, 
other than those proposed to be amended in the March Notice, and 
complying with all Board rules upon completion of the current Board 
rulemaking process. Counsel had opined that the interests were 
direct obligations of an instrumentality of a state and therefore 
were municipal securities within the meaning of Section 3(a)(29) of 
the Act. See id. and accompanying letter of inquiry.
    \42\ New York No-Action Letter. SEC staff stated that this no-
action position expires six months after Rule G-3 is amended to 
establish qualification requirements for persons selling such 
interests.
    \43\ 17 CFR 240.15c2-12(b)(5).
    \44\ Id. Counsel had opined that the interests were direct 
obligations of an instrumentality of a state and, therefore, were 
municipal securities under the Act. See id. and accompanying letter 
of inquiry. See also New York State college Choice Tuition Savings 
Trust, SEC No-Action Letter, Wash. Serv. Bur. (CCH) file No. 
091498008 (Sept. 10, 1998) and accompanying letter of inquiry.
---------------------------------------------------------------------------

    In other instances, SEC staff agreed not to recommend enforcement 
action if state entities and their employees sold higher education 
trust interests without registering as brokers.\45\ The applicants 
opined in these cases that the interests were municipal securities 
under the Act, thereby exempting the issuers from registering as 
brokers by virtue of the exemption for issuers of municipal securities 
set forth in Section 3(d) \46\ of the Act.\47\ SEC staff also agreed 
not to recommend enforcement action if interests in a state trust were 
not registered under the Act, in reliance on an opinion that the 
exemption under Section 3(a)(12) of the Act \48\ for exempted 
securities was available.\49\
---------------------------------------------------------------------------

    \45\ See, e.g., Virginia No-Action Letter; Missouri No-Action 
Letter; California No-Action Letter; Main No-Action Letter; New 
Hampshire No-Action Letter; North Carolina No-Action Letter.
    \46\ 15 U.S.C 78c(d).
    \47\ See Virginia No-Action Letter, and accompanying letter of 
inquiry; Missouri No-Action Letter, and accompanying letter of 
inquiry; California No-Action Letter, and accompanying letter of 
inquiry; Maine No-Action Letter, and accompanying letter of inquiry; 
New Hampshire No-Action Letter, and accompanying letter of inquiry; 
North Carolina No-Action Letter, and accompanying letter of inquiry. 
See also Missouri Family Trust No-Action Letter, and accompanying 
letter of inquiry; Oregon School District No-Action Letter, and 
accompanying letter of inquiry;
    \48\ 15 U.S.C. 78c(a)(12).
    \49\ See Oregon State No-Action Letter. Counsel opined that the 
interests would be exempt from the registration requirements of the 
Act as securities issued by a state instrumentality. See also 
Pennsylvania Local Government Investment Trust, SEC No-Action 
Letter, Wash. Serv. Bur. (CCH) File No. 022283009 (Feb. 21, 1983) 
(``Pennsylvania No-Action Letter'') and accompanying letter of 
inquiry, in which counsel opined that interests in a local 
government pool were municipal securities under the Act that 
qualified for the exemption from the registration requirements of 
Section 12(g) of the Act. SEC staff did not expressly rely on this 
opinion in arriving at its no-action position.
---------------------------------------------------------------------------

    SEC staff also has taken the position that non-debt securities may 
be municipal securities under the Act.\50\ In one instance, SEC staff 
was unable to conclude that receipt/certificates evidencing developers' 
payments to a city of fees for the issuance of building permits were 
not municipal securities under the Act.\51\ SEC staff also has advised 
the Board that warrants sold by a municipal corporation entitling the 
holders to purchase other municipal securities of that corporation are 
themselves municipal securities under the Act.\52\ Finally, in those 
cases in which SEC staff concluded that an ``obligation'' within the 
meaning of the Internal Revenue Code would also constitute an 
``obligation'' for purposes of Section 3(a)(29) of the Act, SEC staff 
did not conclude that the failure of a security to be an obligation for 
purposes of the Internal Revenue Code would mean that such security was 
not a municipal security for purposes of the Act.\53\ In these cases, 
SEC staff was not presented with the issue of whether a non-debt 
security could be a municipal security. As noted above, on the last two 
occasions when SEC staff was confronted with this issue, it concluded 
that a non-debt security may be a municipal security for purposes of 
the Act.\54\
---------------------------------------------------------------------------

    \50\ See, e.g., City of El Paso de Robles, SEC No-Action Letter, 
Wash. Serv. Bur. (CCH) File No. 111285020 (June 18, 1985) (``El Paso 
de Robles No-Action Letter''); MAC Warrant Notice. The SEC's 
position with respect to these two types of non-debt securities 
stands in contrast to SEC staff's earlier position regarding call 
options in the CERS No-Action Letter.
    \51\ See El Paso de Robles No-Action Letter.
    \52\ See MAC Warrant Notice. The MAC Warrant Notice was cited 
with approval by SEC staff in a letter to the Office of the 
Comptroller of the Currency. See letter dated August 12, 1981 from 
Thomas G. Lovett, Attorney, SEC, to Owen Carney, Director, 
Investment Securities Division, Office of the Comptroller of the 
Currency (``CP Letter''), reprinted in CP Notice.
    \53\ See Itel No-Action Letter (stating that the term 
``obligation'' in the Act's definition of municipal security would 
generally include obligations under the Internal Revenue Code); 
Bedford-Watt No-Action Letter (stating that the Internal Revenue 
Code ``provides a useful analogy''). In the Bedford-Watt No-Action 
Letter, SEC staff recognized that ``obligation'' under Section 
3(a)(29) of the Act could include non-financial obligations to take 
actions needed for payment of the security. See also Pennsylvania 
No-Action Letter and accompanying letter of inquiry. In arriving at 
its opinion that local government pool interests described in the 
Pennsylvania No-Action Letter were municipal securities, counsel 
suggested, in reference to the definition of municipal securities in 
the Act, ``that the word `obligations' need not be read as `debt' in 
this context. The Trust is under obligation to redeem all Shares of 
Beneficial Interest presented for redemption.'' In addition, the 
Chairman of the College Savings Plans Network noted in Congressional 
testimony that ``state-sponsored college tuition programs are 
secured by the moral or political obligation of the states'' 
Marshall Bennett, Testimony Before the House Committee on Ways and 
Means, Hearing on Reducing the Tax Burden: II. Providing Tax Relief 
to Strengthen the Family and Sustain a Strong Economy, 106th Cong., 
1st Sess. (June 23, 1999), available at, http://www.house.gov/ways_means/fullcomm/106cong/6-23-99/6-23benn.htm> (visited April 5, 
2000) (emphasis added).
    \54\ See El Paso de Robles No-Action Letter; MAC Warrant Notice.
---------------------------------------------------------------------------

    A review of legislative history also suggests that the 
commentator's position that the term ``municipal securities'' in the 
Act excludes non-debt securities is not justified. The Senate report on 
the Securities Acts Amendments notes that the legislation created a 
definition of municipal securities in new Section 3(a)(29) of the 
Securities Act \55\ that, for all relevant purposes, used the same 
language as in the original version of the definition of exempted 
municipal securities in Section 3(a)(12) of the Act.\56\ It also states 
that no substantive changes in meaning would be effected by creating 
Section 3(a)(29).\57\ Thus, the import of the term ``municipal 
securities'' must be viewed, in the first instance, through the eyes of 
the original drafters of the Act in 1934

[[Page 47542]]

rather than the drafters of the Securities Acts Amendments in 1975.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 77c(a)(29).
    \56\ See 1975 Senate Report, at 90, 92.
    \57\ Id. at 92.
---------------------------------------------------------------------------

    The purpose of including municipal securities in the definition of 
exempted securities in the Act was to provide an exemption for 
municipal securities from most provisions of the Act and the Securities 
Act. Although commentators suggest that Board regulation of dealer 
transactions in non-debt securities of municipal issuers is 
inconsistent with the intent of drafters of the Securities Acts 
Amendments, the appropriate inquiry is whether the drafters of the 
original Act would have intended that only debt securities of municipal 
issuers be exempted from most provisions of the Act. That is, would the 
drafters of the original Act have intended that non-debt securities of 
state or local governmental entities--had such securities existed at 
the time--be subject to the entire range of regulation of the Act 
applicable to other equity securities, including in some instances a 
requirement for registration of such securities with the SEC? A review 
of Congressional debates, committee reports and hearing testimony 
relating to enactment of the Securities Act and the Act reveals that, 
in spite of differences in statutory language, both Acts were expected 
to exempt the same universe of municipal securities.
    For example, the 1993 House report on the Securities Act speaks of 
exempted state and local government securities almost exclusively in 
terms of ``obligations'' and ``bonds,'' not ``securities.'' \58\ The 
report explains the exemption set forth in Section 3(a) of the 
Securities Act as follows:
---------------------------------------------------------------------------

    \58\ See, e.g., House Comm. on Interstate and Foreign Commerce, 
Federal Supervision of Traffic in Investment Securities in 
Interstate Commerce, H.R.Rep. No.85, 73d Cong., 1st Sess. 6, 14 
(1933) (``1993 House Report'').

    Paragraph (2) exempts United States, Territorial and State 
obligations, or obligations of any political subdivision of these 
government units. The term ``political subdivision'' carries with it 
the exemption of such securities as county, town, or municipal 
obligations, as well as school district, drainage district, and 
levee district, and other similar bonds. The line drawn by the 
expression ``political subdivision'' corresponds generally with the 
line drawn by the courts as to what obligations of States, their 
units and instrumentalities created by them, are exempted from 
Federal taxation. By such delineation, any constitutional 
difficulties that might arise with reference to the inclusion of 
State and municipal obligations are avoided.\59\
---------------------------------------------------------------------------

    \59\ Id. at 14. This view was confirmed the following year 
during House committee hearings on the Act by the Commissioner of 
the Federal Trade Commission, which was charged with enforcing the 
Securities Act. See Stock Exchange Regulation: Hearing on H.R. 7852 
and H.R. 8720 Before the House Comm. on Interstate and Foreign 
Commerce, 73d Cong., 2d Sess. 899 (1934) (``1934 House Hearings'') 
(statement of James M. Landis, Commissioner, Federal Trade 
Commission). Commissioner Landis stated: ``We had that same problem 
up in the Securities Act, where the exemption that is given to what 
might be called municipal bonds, and bonds of States and their 
instrumentalities, and is drawn according to a line that parallels 
the line that is drawn which makes tax-exempt municipal bonds, State 
instrumentalities, and so. In other words, every instrumentality of 
a State which, like a municipality, or a political subdivision of a 
State, was exempted from taxation, would be exempted from 
registration upon an issue of securities. That is the line drawn in 
the Securities Act. If exempt from taxation they are also exempted 
from the necessity of registration under that Act.''

    Furthermore, during Congressional debate and hearings held in 1993 
on the Securities Act, members of Congress used the terms 
``securities,'' ``obligations'' and ``bonds'' interchangeable.\60\ 
Thus, although the statutory language in the Securities Act uses only 
the term ``securities'' and not the term ``obligations'' when 
describing municipal securities, there is no suggestion that Congress 
had anything in mind when enacting the Securities Act other than the 
tax-exempt bonds and other debt obligations of state and local 
governments that are customarily associated with municipal securities. 
Nonetheless, the commentators all have agreed that local government 
pool and higher education trust interests are exempt from the 
Securities from the Securities Act and none has suggested that this 
exemption is limited to tax-exempt debt obligations.
---------------------------------------------------------------------------

    \60\ See, e.g., Securities Act: Hearings on S. 875 Before the 
Senate Comm. on Banking and Currency on S. 875 Cong., 1st. Sess. 65 
(1993) (``1933 Senate Hearings'') (statement of Sen. Reynolds); id. 
at 228, 232 (statement of Sen. Kean); id. at 232 (statement of Sen. 
Costigan); id at 303 (statement of Sen. Norbeck); 77 Cong. Rec. 2925 
(1933) (statement of Rep. Studley).
---------------------------------------------------------------------------

    The initial draft of the Act introduced in Congress the following 
year exempted federal government securities but not municipal 
securities. Members of Congress expressed concern regarding the 
appropriateness of federal regulation of state and local governmental 
matters,\61\ the burden that provisions of the Act would place on state 
and local issuers \62\ and the relative detriment in the market to 
municipal securities if they were not exempted but federal government 
securities were exempted.\63\ Some discussion focused on whether a 
distinction should be drawn between defaulted and non-defaulted 
municipal securities. \64\ Ultimately, the language that was added to 
the Act to exempt municipal securities made no such distinction but 
instead was drafted in non-exclusive terms that paralleled the language 
used in the Act to describe federal government securities. This 
language also employed the same type of terminology that the drafters 
of the Securities Act had used in the legislative history to explain 
the statutory language on municipal securities in that Act.\65\ 
Legislative history does not reflect any intent or understanding that 
the municipal securities contemplated in the Act were any different 
than those that were already exempted under the Securities Act.\66\ It 
would be inconsistent with legislative intent to limit the exemption 
under the Act solely to debt securities of state and local governments 
without similarly limiting the reach of the exemption provided in the 
Securities Act.
---------------------------------------------------------------------------

    \61\ See 1934 House Hearings, at 822 (statement of Rep. 
Pettingill); id. at 898-9 (statements of James M. Landis, 
Commissioner, Federal Trade Commission; Rep. Pettingill). This 
concern also served as a primary basis for the exemption of 
municipal securities under the Securities Act. See 1933 House 
Report, at 14, and text accompanying note 59 above.
    \62\ See 1934 House Hearings, at 721, 911-3 (statement of Rep. 
Holmes); Stock Exchange Practices: Practices: Hearings on S. Res. 84 
and S. Res. 56 and S. Res. 97 Before the Senate Comm. on Banking and 
Currency, 73d Cong., 1st Sesses 7441-52 (1934) (``1934 Senate 
Hearings'') (statements of Archibald B. Roosevelt, Roosevelt & 
Weifold, Inc.; George B. Gibbons, George B. Gibbons & Co.; Sen. 
Gore; Sen. Goldsborough).
    \63\ See 1934 House Hearings, at 720 (statement of Rep. Holmes).
    \64\ See 1934 Senate Hearings, at 7413 (statements of H.H. 
Cotton, Investment Bank of Los Angeles; Ferdinand Pecora, Counsel to 
the Committee; Sen. Fletcher); id. at 7477 (statement of Tom K. 
Smith, Assistant to the Secretary of the Treasury; Sen. Adams; Sen. 
Walcott); 1934 House Hearings, at 7201 (statements for Tom K. Smith, 
Assistant to the Secretary of the Treasury; Rep. Holmes); id. at 
819-23 (statements of George B. Gibbons, George B. Gibbons & Co.; 
Rep. Merritt; Rep. Rayburn; Rep. Pettengill).
    \65\ See supra note 59 and accompanying text.
    \66\ The phrase ``security issued or guaranteed by'' used in 
Section 3(a)(2) of the Securities Act introduces bank securities 
(including bank equity securities) as well as government and 
municipal securities. In contrast, the phrase ``securities which are 
direct obligations of or obligations guaranteed as to principal or 
interest by'' used in Section 3(a)(12) of the Act introduced only 
municipal and government securities. Thus, even thoughth the 
drafters of both the Securities Act and the Act thought of municipal 
and government securities solely as debt securities, the term 
``obligation'' (to the extent such term is limited to debt 
securities) could only be used in the Act.
---------------------------------------------------------------------------

    Finally, in using the same term--``municipal securities''--that 
sets out the exemption from most provisions of the Act to also 
delineate the Board's rulemaking authority under Section 15B of the 
Act,\67\ Congress elected in the Securities Acts Amendments to grant 
the Board jurisdiction over dealer transactions in the identical 
universe of securities as were otherwise exempted from the Act as 
municipal securities.\68\

[[Page 47543]]

Thus, even if Congress did not have interests in local government pools 
or higher education trusts in mind when enacting the Securities Acts 
Amendments, it did have a specific intent that the Board would have 
authority over dealer transactions in any security that would 
constitute an exempted security by virtue of being a municipal 
security. In creating the Board, the Senate report on the Securities 
Act Amendments stated that it would not ``be desirable to restrict the 
Board's authority by a specific enumeration of subject matters. The 
ingenuity of the financial community and the impossibility of 
anticipating all future circumstances are obvious reasons for allowing 
the Board a measure of flexibility in laying down the rules for the 
municipal securities industry.'' \69\ The fact that certain types of 
instruments (such as non-debt securities of state or local governments) 
were essentially non-existent at the time of enactment of the 
Securities Acts Amendments did not, in the minds of the drafters, mean 
that regulations relating to newly created instruments would not be 
within the Board's power.\70\
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    \67\ 15 U.S.C. 78o-4.
    \68\ The conference report on the Securities Acts Amendments 
states: ``The Senate bill extended the basic coverage of the 
Securities Exchange Act of 1934 to provide a comprehensive pattern 
for the registration and regulation of securities firms and banks 
which underwrite and trade securities issued by States and 
municipalities. Municipal securities dealers were required to 
register with the Commission and comply with rules concerning just 
and equitable principles of trade and other matters prescribed by a 
new self-regulatory organization, the Municipal Securities 
Rulemaking Board, established by the bill and delegated 
responsibility for formulating rules relating to the activities of 
all municipal securities dealers. The exemption for issuers of 
municipal securities from the basic regulatory requirements of the 
Federal securities laws was continued.'' 1975 Conference Report, at 
101.
    \69\ 1975 Senate Report, at 47. See also CP Letter, at note 7.
    \70\ In testimony at a 1975 Senate committee hearing on the 
Securities Acts Amendments, a representative of the Municipal 
Finance Officers Association stated that the municipal securities 
market ``is completely a debt market.'' Securities Act Amendments of 
1975: Hearings on S. 249 Before the Senate Comm. on Banking, Housing 
and Urban Affairs, 94th Cong., 1st Sess. 479 (1975) (statement of 
Michael S. Zarin, Member, Comm. on Governmental Debt Administration, 
Municipal Finance Officers Association). Having been so informed, 
the Senate's description in the 1975 Senate Report of municipal 
securities as ``debt obligations of state and local government 
issuers,'' as noted by some commentators on the March Notice, in 
fact merely reflected an understanding of the nature of the 
municipal securities market at such time, not an understanding that 
the Act's definition of municipal securities was to be limited only 
to the debt segment of a broader municipal market that might also 
include equity securities. See 1975 Senate Report at 38.
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B. Appropriateness of Regulating Dealer Transactions in Municipal Fund 
Securities

1. Comments Received
    A number of commentators state that, even if the Board has 
authority to adopt the proposed rule change, the Board should refrain 
from doing so.\71\ Fulbright, MBIA-MISC and Schulte argue that no need 
has been demonstrated for regulation to protect investors or the public 
interest in connection with local government pool interests.\72\ They 
state that investors are local governments and not the typical public 
investor in municipal securities.\73\ Fulbright and Schulte argue that 
no abuses or other threats to public investors or the public interest 
have been identified by the Board that would warrant federal regulatory 
action. They state that offerings of interests in local government 
pools do not pose risks that are similar to those identified in the 
legislative history of the Securities Acts Amendments.\74\ MBIA-MISC 
argues that safeguards already exist to provide investor protections 
comparable to those in the proposed rule change.\75\ With respect to 
interests in higher education trusts, NAST states that the Board 
``should not attempt to regulate qualified state tuition program 
transactions, because there is no demonstrated need for regulation to 
protect state and local government investors or the public interest.'' 
\76\
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    \71\ See Duane, Florida, Fulbright, First GFOA, MBIA-MISC, 
Schulte, Eckert, Second Fidelity, and NAST Letters.
    \72\ GFOA makes a similar argument in the First GFOA Letter. 
GFOA also states in the First GFOA Letter that regulation of local 
government pools should be left to the states.
    \73\ Both Fidelity and Fulbright concede that interests in 
higher education trusts raise unique policy issues affecting public 
investors and the public interest. See supra note 36.
    \74\ For example, Fulbright and Schulte list Congressional 
concern about unconscionable markups, churning of accounts, 
misrepresentations, disregard of suitability standards, high-
pressure sales techniques, fraudulent trading practices resulting in 
substantial losses to public investors, and threats to the integrity 
of the local government capital-raising system. They argue that 
there is no opportunity for unconscionable markups and little 
incentive for churning of accounts or use of high-pressure sales 
techniques for these interests because they are purchased and 
redeemed at the current net asset value and purchasers do not pay 
commissions. They also argue that suitability concerns are not 
raised because local government pools are operated like money market 
funds and invest solely in the types of investments that their 
participants are permitted by state law to purchase.
    \75\ MBIA-MISC states that protections exist under the 
Investment Advisers Act of 1940, state regulations, voluntary 
adherence to the Investment Company Act and related federal 
regulations applicable to investment company securities, and 
Governmental Accounting Standards Board Statement No. 31 relating to 
accounting and financial reporting for certain investments and for 
external investment pools.
    \76\ NAST further states that the Board ``has not identified any 
abuses or other threats to public investors or the public interest 
that are sought to be avoided by applying existing rules to 
transactions in qualified state tuition programs. Rather, the Board 
appears to * * * intend to apply its rules to all transactions in 
state and local government securities, regardless of whether such 
regulation is needed.''
---------------------------------------------------------------------------

    Duane, Eckert, Florida, Fulbright, GFOA and Schulte state that 
Board rulemaking would adversely affect state and local governments. In 
particular, they believe that underwriting assessments would be passed 
on, directly or indirectly, to issuers and issuers would face 
additional administrative burdens as a result of the application of 
Board rules. They note that any increased costs to issuers likely would 
be passed on to investors in the form of lower returns on their 
investments.\77\
---------------------------------------------------------------------------

    \77\ As discussed below, the Board has decided to exempt sales 
of municipal fund securities by or through dealers from the 
underwriting assessment imposed under Rule A-13. See infra note 105 
and accompanying text.
---------------------------------------------------------------------------

    Duane, Fidelity and Fulbright also state that interests in local 
government pools involve transactions between the state or local 
government-sponsored pools and participating local governmental 
entities of that same state.\78\ Fulbright believes that Board 
rulemaking would be inconsistent with the Tenth Amendment because 
transactions in local government pool interest do not constitute 
interstate commerce. Furthermore, noting that the Act does not require 
registration of a broker or dealer whose business is exclusively 
intrastate, Fulbright suggests that the Board ``follow Congress's 
restraint in approaching intrastate transactions in securities.'' 
Finally, Fulbright states that regulation of transactions in these 
interests would ``improperly intrude on state sovereignty'' by 
indirectly regulating states by mandating actions by their agents.
---------------------------------------------------------------------------

    \78\ Fidelity argues in the Second Fidelity Letter: ``State and 
local governments use LGIPs to manage their internal cash positions. 
They are organized under state statute for the performance of a 
governmental function and are available exclusively to state and 
local governments within the sponsoring state or locality. No 
legitimate federal purpose is served by interposing the MSRB in 
these arrangements.''
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2. Board Response
    As the Board has previously observed, the current rulemaking 
proposal would not subject dealer transactions in municipal fund 
securities to Board rules but instead would make certain Board rules, 
to which such transactions are already subject, better accommodate the

[[Page 47544]]

nature of these securities. Making Board rules fit the characteristics 
of municipal fund securities is an appropriate Board undertaking. Also, 
Board rules do not govern the actions of issuers; instead, they impose 
standards on dealers effecting transactions in the securities of such 
issuers.\79\ In establishing the Board, Congress determined that dealer 
regulation was the appropriate manner of providing investor protection 
in the municipal securities market while maintaining the existing 
exemption for issuers.\80\
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    \79\ After reviewing the August Notice, GFOA states in the 
Second GFOA Letter that ``the revised draft is persuasive in 
explaining the limitations of the rule changes under consideration 
[and] * * * indicates a narrow regulatory design which should not 
affect those local government investment pools (LGIPs) that do not 
utilize brokers or dealers in their transactions (non-dealer 
entities) or which are not municipal securities.''
    \80\ See supra note 68.
---------------------------------------------------------------------------

    The definition of customer under Rule D-9 includes issuers, except 
in connection with sales of an issuer's new issue municipal securities, 
and therefore board rules contemplate that governmental entities acting 
as investors are entitled to the protections afforded by such rules to 
all customers.\81\ The Board understands that local government pools 
exist in nearly every state and that, in many states, more than one 
pool may be available to a local government.\82\ One market observer 
states that these pools ``can differ in their level of risk taking, 
internal oversight, shareholder services, and external reporting.'' 
\83\ Although a number of pools have been rated, the vast majority 
remain unrated. Most local government pools appear to be designed to 
maintain, as nearly as possible, a constant net asset value (similar to 
regulated money market mutual funds), but some operate as variable net 
asset value pools that do not seek to maintain a constant share value. 
Furthermore, a number of local government pools have experienced 
financial difficulties.\84\ These factors suggest that investor 
protection issues may be raised in connection with the sale by dealers 
of interests in local government pools.\85\ The Board believes that 
investor protection issues also may arise with respect to sales by 
dealers of interests in higher education trusts.\86\ For example, the 
Board believes that dealers have suitability obligations if they 
recommend a transaction in a local government pool or higher education 
trust interest to a local government or an individual, respectively, if 
such interest constitutes a municipal security.\87\
    Local government pools are described by certain commentators as 
being operated ``consistent with'' the federal securities laws 
applicable to investment companies and managed and administered in a 
manner ``similar'' to money market mutual funds, ``where practicable'' 
\88\ These comments imply that may programs in fact deviate to some 
degree from their voluntary compliance with existing federal 
regulations that would be applicable to these programs if they were not 
operated by state or local governmental entities. However, the Board 
notes that its rulemaking would not impose requirements on issuers and 
in fact has been drafted with the understanding that dealers may be 
effecting transactions in securities that are similar, but not 
identical, to investment company securities. In that respect, the Board 
believes that is rulemaking is more suitable for dealers effecting 
transactions in investment company securities because some SEC and NASD 
rules impose obligations on dealers based on the assumption that 
issuers, as registered investment companies, must comply with federal 
investment company laws are regulations. Thus, a dealer might have 
difficulty complying with the letter of existing regulations relating 
to securities of registered investment companies where the issuer of a 
local government pool or higher education trust interest has chosen not 
to voluntarily comply with the provisions that would be obligatory if 
it were a registered investment company. As is the case with all 
exiting Board rules, the proposed rule change recognizes that issuers, 
as largely unregulated entities, may act in widely divergent manners. 
Thus, obligations placed on dealers are sufficiently

[[Page 47545]]

flexible to permit dealers to act in a lawful manner in view of this 
wide divergence of circumstances while maintaining an adequate level of 
customer protection.
---------------------------------------------------------------------------

    \81\ As originally proposed, Rule D-9 would have excluded from 
the definition of customer ``the issuer of securities which are the 
subject of the transaction in question.'' See ``Notice of Filing of 
Fair Practice Rules,'' [1977-1987 Transfer Binder] MSRB Manual (CCH) 
para. 10,030 (Sept. 20, 1977). In amending the original proposed 
rule language to limit this exclusion solely to ``the issuer in 
connection with the sale of a new issue of its securities,'' the 
Board stated that it believed ``that the protections afforded 
customers by its rules should be extended to issuers when they act 
in secondary market transactions.'' See ``Notice of Filing of 
Amendments to Fair Practice Rules,'' [1977-1987 Transfer Binder] 
MSRB Manual (CCH) para. 10,058 (Feb. 28, 1978). Give that the Board 
has always felt that the issuers should be considered customers even 
in secondary market transactions involving their own securities, 
state and local governmental entities certainly should be considered 
customers in transactions involving securities of other such 
entities. Furthermore, in Congressional testimony on the bankruptcy 
filing of Orange County, California and its local government pool, 
SEC Chairman Arthur Levitt discussed customer protection rules of 
self-regulatory organizations as they may apply to state or local 
governmental entities acting as customers. See Derivative Financial 
Instruments Relating to Banks and Financial Institutions: Hearings 
Before the Senate Comm. on Banking, Housing and Urban Affairs, 104th 
Cong., 1st Sess. (1995) (``SEC Testimony'').
    \82\ S&P Report, at 3, 6-11. The Board takes no position as to 
which of these local government pools may issue interests that would 
constitute municipal fund securities.
    \83\ Id. at 3.
    \84\ PFM identifies several state-run and country-run pools 
(including the Orange County, California pool) as having had recent 
financial difficulties. See PFM Letter. See also NAST Report, at 2, 
5, 38; S&P Report, at 5.
    \85\ NAST has stated that it: ``recognizes that potential pool 
participants have numerous alternative investment vehicles from 
which to choose. The goal of the * * * [NAST Guidelines for Local 
Government Investment Pools] is to insure that local government 
investment officials, when choosing among their available investment 
options, are fully aware of significant investment and 
administrative policies, practices and restrictions of the pool and 
are thereby able to make informed investment decisions on behalf of 
the local governments * * * NAST further recommends that the broker/
dealer community govern itself to follow the same standards of 
conduct NAST has recommended for treasurers'' NAST Report, at 8. As 
the self-regulatory organization established by Congress to adopt 
rules for dealer transactions in municipal securities, the Board has 
created a body of rules that, together with this proposed rule 
change, constitute the self-governance and standards of conduct that 
NAST has recommended be established.
    \86\ The Board understands that investment strategies, pay-out 
restrictions, and fees and redemption charges or penalties of the 
existing higher education trust vary. At least some higher education 
trusts permit sales of interests to persons living in other states 
and permit redemption proceeds to be used to pay higher education 
expenses in any state. In other cases, redemption proceeds may be 
limited for use within a specific state. See generally CSPN Report. 
Thus, a single customer may have a choice of investments in various 
higher education trusts having widely differing strategies and 
terms. Furthermore, recent press reports regarding higher education 
trust programs have suggested that investor protection issues may 
exist in this section. See, e.g., ``Saving for College--Strategies 
for Putting Your Plan on Course,'' Consumer Reports (Feb. 2000) at 
56; Julie Vore, ``College Savings Plan: A Guide to How They Work,'' 
AAII Journal, Vol. 22, No. 2 (Feb. 2000) at 11; Thomas Easton and 
Michael Maiello, ``The College Saving Fund Scandal,'' Forbes (Mar. 
6, 2000) at 172; Mike McNamee, ``Piling Up Those bucks for 
College,'' Business Week (Mar. 13, 2000) at 155. The Board takes no 
position on which of these higher education trusts may issue 
interests that would constitute municipal fund securities.
    \87\ NAST Report, at 8 (stating the ``[t]he investment 
alternatives offered by broker/dealers to public finance officials 
should be suitable for the public entity's objectives.''). The fact 
that a local government pool's assets are invested in investments 
that are legally available as direct investments by local 
governments does not resolve suitability issues. See supra note 74. 
As with transactions in any other municipal security, Rule G-19 
would require a dealer recommending a transaction in a municipal 
fund security to have reasonable grounds for believing that the 
recommendation is suitable, based upon information available from 
the issuer or otherwise and the facts disclosed by or otherwise 
known about the customer. These suitability requirements do not 
differ in substance from those of the NASD, to which dealers 
effecting transactions in such interests might otherwise be subject 
if these interests are not municipal securities. See also SEC 
Testimony.
    \88\ See MBIA-MISC, PFM and PLGIT Letters.
---------------------------------------------------------------------------

    The Board believes that state regulation, federal rules applicable 
to investment advisors and Governmental Accounting Standards 
statements, although providing important protections in the areas 
governed by such rules and standards, do not serve as a substitute for 
regulation tailored specifically toward dealer activities in municipal 
fund securities. Furthermore, the Board believes that voluntary 
adherence to the substance of existing rules applicable to investment 
company securities and/or other equity securities provides inadequate 
protection to investors since dealers are free to deviate from these 
rules in any manner and at any time they choose without any apparent 
legal consequence. The existence of these collateral safeguards do not 
justify the Board refraining from making its rules more rational with 
respect to such securities.
    With respect to NAST's comments, the Board notes that its rules 
generally apply to all transactions effected by dealers in municipal 
securities, regardless of whether there has been a demonstration that 
each type of municipal security has been the subject of some kind of 
specific abuse or other specific threat to public investors. Board 
rules generally focus on dealers' fair dealing duties to customers, 
including in particular the obligation of dealers to disclose to 
customers all material information regarding a municipal security 
transaction. The Board believes that some of the very arguments made by 
NAST in support of its position that Board regulation of dealer 
transactions in higher education trust interests is inappropriate in 
fact lend greater support to the position that the Board is acting in 
accordance with its statutory mandate to protect investors and the 
public interest by adopting the proposed rule change. For example, NAST 
states:

substantial disincentives exist to discourage contributors from 
using the programs for any purpose other than the prepayment of 
tuition. Under the federal Internal Revenue Code, if the beneficiary 
does not use the contributions for qualified higher education 
purposes, except in cases of scholarship, death, or disability, the 
contributor is entitled to a limited refund and [in] most states the 
refund amount is reduced by a penalty and other charges. Generally, 
no earnings attributable to the account will be refunded. Moreover, 
tuition payments normally do not exceed the actual cost of a 
beneficiary's tuition. In addition, there is very limited 
opportunity to transfer program benefits.\89\
---------------------------------------------------------------------------

    \89\ See NAST Letter.

    The Board believes that its existing rules, as amended by the 
proposed rule change, would provide great benefit to potential 
purchasers of interests in higher education trusts by ensuring that the 
unique characteristics of such interests are disclosed by the selling 
dealers to their customers. In addition, as described above, NAST has 
previously noted that there are significant investor protection issues 
with respect to the investment by local governments in local government 
pools.\90\
---------------------------------------------------------------------------

    \90\ See supra notes 84-85. See also supra notes 81-85 and 
accompanying text.
---------------------------------------------------------------------------

    With regard to the argument that interests in local government 
pools are strictly intrastate in nature and therefore are not the 
appropriate subject of federal regulation, Board rules currently do not 
apply to any entity that, by virtue of the fact that its business is 
exclusively intrastate, is not registered as a broker or dealer under 
Section 15 of the Act.\91\ Beyond this, the federal securities laws 
provide that, once an entity engages in some interstate activities that 
require it to register under the Act, the broker-dealer rules 
applicable to such entity apply to both its interstate and intrastate 
transactions. The Board believes that Congress has made clear its 
policy determination that intrastate transactions of registered broker-
dealers should be subject to broker-dealer regulation.\92\
---------------------------------------------------------------------------

    \91\ 15 U.S.C. 78o.
    \92\ See, e.g., Sections 15 (b)(3) and 15B(a)(3) of the Act. 15 
U.S.C. 78o(b)(3); 15 U.S.C. 78o-4(a)(3).
---------------------------------------------------------------------------

C. Applicability of Existing Board Rules to Transactions in Municipal 
Fund Securities Effected Prior to Effectiveness of Proposed Rule Change

1. Comments Received
    Fulbright and Schulte argue that, to the extent that the Board may 
have authority to regulate dealer transactions in these interests, 
existing Board rules relating to municipal securities do not currently 
apply to transactions in local government pool interests.\93\ They 
state that existing Board rules were never intended to apply to 
securities other than debt obligations, as evidenced by the Board's 
statement in the March Notice that its rules ``generally have been 
drafted to accommodate the characteristics of debt obligations and not 
investment interests such as municipal fund securities.'' As a result, 
they believe that any interpretation by the Board that existing rules 
apply to municipal fund securities can only be effected through the 
rulemaking process.
---------------------------------------------------------------------------

    \93\ See Fulbright and Schulte Letters.
---------------------------------------------------------------------------

2. Board Response
    The Board believes that Section 15B(c)(1) of the Act \94\ 
automatically subjects any dealer transactions in municipal fund 
securities to Board rules. This is true regardless of whether dealers 
effecting such transactions are aware that municipal fund securities 
are, in fact, municipal securities. It is incumbent upon dealers to be 
aware of the nature of the securities in which they deal and it is not 
a defense against the applicability of Board rules that the dealer did 
not know that the securities were municipal securities. Thus, the 
Board's statement that any interest in a local government pool or a 
higher education trust that is a municipal security currently is 
subject to Board rules was a statement of fact rather than an 
interpretation.\95\
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78o-4(c)(1).
    \95\ Actual interpretations relating to how certain rules would 
be applied to transactions in municipal fund securities, such as the 
Board's Interpretation Relating to Sales of Municipal Fund 
Securities in the Primary Market included in the proposed rule 
change, would be filed with the SEC to the extent required under 
Section 19(b) of the Act and Rule 19b-4 under the Act.
---------------------------------------------------------------------------

    The Board recognizes, however, that, prior to publication of the 
March Notice, it may not have been readily apparent to the vast 
majority of dealers, as well as to most regulatory agencies, that 
interests that constitute municipal fund securities were municipal 
securities. Although the Board does not have authority to direct 
enforcement of its rules it is statutorily charged with determining the 
best means of protecting investors and the public interest in regard to 
dealer transaction in municipal securities. As such, the Board believes 
that, under the unique circumstances relating to municipal fund 
securities, enforcement of its rules with regard to transactions in 
such securities that occurred prior to the industry having been put on 
notice of their applicability would serve no substantial investor 
protection purpose, absent extraordinary circumstances or a showing of 
investor harm resulting from a material departure from standards of 
fairness generally applicable under the federal securities laws.

D. Structure of Proposed Rule Change

1. Comments Received
    Certain commentators express concern that the Board's rulemaking 
proposal contemplates amendments to existing rules rather than creation 
of a

[[Page 47546]]

separate body of regulations.\96\ TBMA states that the ``attempt to fit 
a totally new product or way of doing business into existing regulation 
that was created to address fundamentally different products and a 
different market structure is fraught with danger.'' \97\ TBMA also 
states that transactions in municipal fund securities should be 
regulated in a manner as similar as possible to the existing regulatory 
scheme for investment company securities.
---------------------------------------------------------------------------

    \96\ See PRM, Schulte and TBMA Letters.
    \97\ See TBMA Letter. Similarly, PFM comments that ``if the MSRB 
is intent on regulating activities relating to these funds, it 
should do so by developing a separate set of rules rather than by 
attempting to shoe horn the funds into the rules designed for 
underwritten fixed income securities.'' Schulte believes that 
``regulating the marketing of interests in * * * [local government 
pool investments] under existing MSRB rules, even if those rules are 
revised as the MSRB has proposed, would be like trying to put a 
square peg in a round hole.''
---------------------------------------------------------------------------

2. Board Response
    The Board reviewed its existing rules and compared them, where 
relevant, to rules that govern dealer transactions in securities of 
registered investment companies. In many resects, Board rules are 
functionally identical to these rules. In other cases, existing SEC or 
NASD rules provide a more appropriate method of regulating municipal 
fund securities and the Board sought to modify its rules in a manner 
that was consistent with those rules. In yet other cases, the 
regulation of registered investment companies has been effected by 
regulating issuers, an approach which the Board cannot, and does not 
seek to, duplicate. Finally, certain NASD and SEC rule provisions arise 
out of specific Congressional authorization in the Investment Company 
Act applicable to securities of registered investment companies but not 
applicable to unregistered municipal fund securities.
    Under the circumstances, the Board believes that its approach is 
appropriate. The Board sought industry comment on the proposed rule 
change on two separate occasions and, in those circumstances where 
commentators noted specific shortcomings, the Board considered the 
merits of the comments and made revisions where appropriate. As noted 
previously, the Board believes that its rules, as amended by the 
proposed rule change, are in many respects particularly well suited to 
dealers effecting transactions in municipal fund securities because 
they recognize that issuers, being unregulated entities, may act in 
widely divergent manners. Thus, Board rules provide a greater degree of 
flexibility than existing rules governing dealer transactions in 
registered investment company securities.\98\
---------------------------------------------------------------------------

    \98\ See supra note 88 and accompanying text.
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E. Specific Rule Provisions

1. Proposed Rule D-12, on Definition of ``Municipal Fund Security''
    Proposed Rule D-12 defines municipal fund security as a municipal 
security that would be an investment company security under the 
Investment Company Act but for the fact that the issuer is a state or 
local governmental entity or instrumentality. For a security to 
constitute a municipal fund security, the security must first 
constitute a municipal security. As discussed in detail above, existing 
Board rules do not, and the proposed rule change would not, apply to 
any local government pool or higher education trust interest that is 
not a municipal security.
    Fulbright and MBIA-MISC suggest that the Board explicitly exclude 
local government pool investment from the definition of ``municipal 
fund security.'' \99\ In addition, Eckert urges ``that the Board adopt 
a definition of `Broker' which excludes federally registered investment 
advisors that do not engage in the sale or distribution of securities 
except in connection with services as investment advisor and 
administrator to the issuers of Municipal Fund Securities.'' \100\ 
Eckert expresses concern that investment advisory firms that otherwise 
do not undertake broker or dealer activities will have difficulty in 
assessing standards applicable to dealers.
---------------------------------------------------------------------------

    \99\ See Fulbright and MBIA-MISC Letters.
    \100\ See Eckert Letter.
---------------------------------------------------------------------------

    The Board has not revised the proposed definition. The Board 
believes that there is no basis for excluding interests in local 
government pools from the definition of municipal fund securities, as 
discussed above. With respect to registered investment advisors, the 
Board has noted that its rules do not apply to activities of non-
dealers. A firm wishing to determine if Board rules apply to services 
it provides to an issuer of municipal fund securities may seek advice 
of counsel as to whether such services constitute broker-dealer 
activities and may seek comfort on counsel's opinion from SEC staff 
through the SEC's no-action procedure. If a non-dealer firm's 
activities do not constitute broker-dealer activities, the firm need 
not be a registered broker or dealer subject to Board rules. Thus, non-
dealer firms may act as investment advisers to local government pool or 
higher education trust programs and not become subject to Board rules. 
However, once a firm does in fact undertake broker-dealer activities 
with respect to municipal securities, the Board believes that such firm 
must be cognizant of and comply with all Board rules, regardless of how 
infrequently such dealer may transact business in municipal securities 
or how narrow a range of municipal securities activities in which such 
dealer is involved.
2. Rule A-13, on Underwriting Assessments
    The draft amendment to Rule A-13 included in the March Notice 
imposed an underwriting assessment on sales of municipal fund 
securities. Most commentators express concern regarding the assessment 
of underwriting fees on sales of municipal fund securities.\101\ 
Fulbright, GFOA, Merrill, PLGIT and TPIS suggest that these sales 
should be exempted from the underwriting assessment. TBMA states that 
the fee structure for dealers involved in the distribution of municipal 
fund securities is more like an administrative fee than an underwriting 
discount or commission because these dealers do not undertake 
underwriting risks. As a result, fees generally are fixed and are low 
relative to traditional underwriting fees. Because of these small 
margins, Duane, Florida, GFOA, PFM, PLGIT, Schulte and TPIS state that 
underwriting assessments would be passed on to issuers and therefore 
would represent a financial burden on the issuers' programs.\102\
---------------------------------------------------------------------------

    \101\ See Duane, Florida, Fulbright, First GFOA, Merrill, PLGIT, 
PFM, Schulte and Second TPIS Letters.
    \102\ Merrill and TBMA, on the other hand, suggest that the 
Board exempt municipal fund securities from the prohibition in Rule 
A-13(e) from passing through underwriting assessments to issuers.
---------------------------------------------------------------------------

    Merrill and TPIS state that given the volume of investments and 
redemptions in many local government pools,\103\ the level of fees 
generated by the Board from underwriting assessments would be 
disproportionate to the resulting regulatory costs. Merrill stats that, 
if assessments are imposed, they should be at a significantly lower 
level than the assessments charged in connection with

[[Page 47547]]

more traditional municipal securities offerings.\104\
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    \103\ PFM and PLGIT note that many local government pools have 
annual share turn-over rates of approximately 3 to 4 times their 
assets, due to the fact that many participants are investing short-
term funds that move in and out of the pools frequently during the 
course of the year. Schulte believes that this multiplier may reach 
as high as 10 times assets. PFM estimates that total issuances of 
interests in local government pools may be on the same order of 
magnitude as issuances of traditional municipal securities.
    \104\ In the alternative, Merrill, PFM, Schulte and TPIS suggest 
that underwriting assessments should be based on net issuances of 
municipal fund securities, taking into account all securities 
retired. TPIS also suggests that a flat annual or monthly fee set at 
a modest level might be more appropriate.
---------------------------------------------------------------------------

    Based on these comments, the Board revised the draft amendment to 
Rule A-13 to exempt sales of municipal fund securities from the 
underwriting assessment.\105\ The continuous nature of offerings in 
municipal fund securities, the predetermined and automatic nature of 
most customer investments and the heightened potential that 
underwriting assessments could create significant financial burdens on 
issuers to their customers' detriment justify exempting municipal fund 
securities from the underwriting assessment. The Board also wishes to 
make clear that it does not intend to seek payment of any previously 
accrued underwriting assessments that may technically be due and owing 
on prior sales of municipal fund securities.
---------------------------------------------------------------------------

    \105\ The Board published this revised version of the draft 
amendment to Rule A-13 in the August Notice. Commentators supported 
the Board's decision to exempt sales of municipal fund securities 
from the underwriting assessment. See Second GFOA and Saul Letters. 
Another commentator states, however, that ``there is no assurance 
that the assessment will not be imposed at a future time.'' See 
Eckert Letter. The Board believes that no further revisions to Rule 
A-13 are warranted.
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3. Rule G-3, on Professional Qualifications
    The proposed amendment to Rule G-3 permits an associated person 
qualified as an investment company limited representative to effect 
transactions in municipal fund securities (but no other municipal 
securities).\106\ A dealer must continue to have municipal securities 
principals as required under Rule G-3(b), even if the dealer's only 
municipal securities transactions are sales of municipal fund 
securities.
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    \106\ Thus, an associated person who sells both municipal fund 
securities and other types of municipal securities would be required 
to qualify as a municipal securities representative or general 
securities representative.
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    Schulte states that the amendment should be modified to exempt 
dealers in local government pool investments from the requirement that 
they have at least one municipal securities principal, provided that 
such dealers meet the requirements regarding principals established by 
the NASD.\107\ Similarly, Fidelity states that investment company 
principals should be permitted to supervise sales representatives that 
sell municipal fund securities and to approve advertisements.\108\
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    \107\ See Schulte Letter.
    \108\ See First Fidelity Letter. Rule G-21, on advertising, 
requires that each advertisement be approved by a municipal 
securities principal or general securities principal. Rule G-27, on 
supervision, requires either a municipal securities principal or 
municipal securities sales principal to supervise municipal 
securities sales activities. Fidelity incorrectly states that the 
draft amendment to Rule G-3 would require those who supervise sales 
representatives for local government pool investments to be 
qualified as a municipal securities sales principal. In fact, under 
Board rules, municipal securities principals may also supervise 
municipal sale activities.
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    The Board believes that requiring a dealer effecting transactions 
in municipal fund securities to have at least one municipal securities 
principal is appropriate because dealers must have at least one 
associated person who is familiar with Board rules. Consistent with 
this view, the Board believes that supervision of municipal securities 
activities is appropriately vested in individuals who have such 
familiarity with Board rules. The Board has not revised this proposed 
amendment.\109\
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    \109\ If at some future time the Investment Company and Variable 
Contracts Products Principal Examination (Series 26) were to include 
questions on relevant Board rules, including but not limited to 
those rules relating to municipal fund securities, the Board could 
reconsider the requirement that such supervisory activities be 
undertaken by a municipal securities principal.
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4. Rule G-8, on Recordkeeping
    As published in the March Notice, the draft amendment to Rule G-8 
would recognize that municipal fund securities do not have par values, 
dollar prices, yields and accrued interest and that some investment 
company limited representatives would be permitted to effect 
transactions in municipal fund securities.
    Fidelity suggest that Rule G-8 be amended to permit a dealer to 
rely on a transfer agent for municipal fund securities to meet 
applicable books and records requirements under the rule, noting that a 
transfer agency system is typically used for mutual fund-type 
products.\110\ Fidelity points to the existing provision in the rule 
that permits a non-clearing or introducing dealer to rely on records 
maintained by a clearing dealer.
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    \110\ See First Fidelity Letter.
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    The Board believes that it would be appropriate to permit a dealer 
effecting transactions in municipal fund securities to meet its books 
and records requirements by having its books and records maintained by 
a transfer agent so long as those books and records meet the 
requirements of Rule G-8 and the dealer remains responsible for the 
accurate maintenance and preservation of the books and records.\111\ 
Therefore, the Board has proposed to revise Rule G-8(g) as suggested.
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    \111\ This provision would parallel an existing provision in 
Rule G-8(c) permitting maintenance for a non-clearing dealer of 
records by clearing agencies that are not themselves dealers.
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    Fidelity also suggests that the definition of ``institutional 
account'' in Rule G-8(a)(xi) be amended to include states and their 
political subdivisions and instrumentalities, noting that the 
additional information required under this provision for non-
institutional accounts is ``simply inapposite'' with respect to such 
entities.\112\ The Board notes, however, that this definition is also 
used in Rule G-19, on suitability of recommendations and transactions, 
in connection with the requirement that dealers make reasonable efforts 
to obtain certain information about non-institutional accounts (but not 
institutional accounts as defined in Rule G-8(a)(xi)) prior to 
recommending a municipal security transaction.\113\ This information is 
then required to be used by the dealer when making a suitability 
determination under Rule G-19 in connection with a recommended 
transaction.
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    \112\ An institutional account is defined as (i) a bank, savings 
and loan association, insurance company, or registered investment 
company; (ii) a registered investment adviser; or (iii) any entity 
with total assets of at least $50 million. The additional 
information that dealers are required to record under Rule G-
8(a)(xi) for non-institutional accounts as compared to institutional 
accounts includes (i) the customer's age, (ii) the customer's 
occupation and employer and (iii) any beneficial owner of the 
account if other that the customer.
    \113\ The information that dealers are obligated to make 
reasonable efforts to obtain prior to recommending a municipal 
security transaction to a non-institutional account (but not to an 
institutional account) includes information concerning (i) the 
customer's financial status, (ii) the customer's tax status, (iii) 
the customer's investment objectives, and (iv) such other 
information used or considered to be reasonable and necessary by the 
dealer in making recommendations to the customer. The collection of 
this information can have an impact on the nature of a dealer's 
suitability obligation because suitability determinations are 
required to be based on information disclosed by or otherwise known 
about the customer. Depending upon the specific facts and 
circumstances, Rule G-19 may require that dealers make a greater 
effort to obtain information on which to base a suitability 
determination from a non-institutional account than from an 
institutional account.
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    The definition of institutional account under Rule G-8 is identical 
to the definition used under NASD rules and the Board believes that it 
should not diverge from this common definition without substantial 
cause. Further, because the definition of institutional account 
includes any entity with total assets of at least $50 million, a 
substantial proportion of state or local government customers would 
qualify as institutional accounts under the current

[[Page 47548]]

definition.\114\ Finally, excluding state and local governments from 
the definition of institutional account could serve to weaken the 
Board's suitability requirement with respect to recommended 
transactions with smaller state and local governments (i.e., those with 
assets of less than $50 million), which are the governmental entities 
arguably most likely in need of investor protection.\115\ Therefore, 
the Board did not amend the rule as suggested.
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    \114\ Because those state or local government customers do not 
qualify as an institutional account, the dealer would merely 
indicate in its records that such information (such as customer's 
age, occupation, etc.) is inapplicable, as with any other customer 
that does not qualify as an institutional account and is not a 
natural person.
    \115\ Because state and local governments with assets of less 
than $50 million are not considered institutional accounts under 
NASD rules, the suggested amendment would have the effect of making 
the Board's suitability requirements with respect to recommendations 
of municipal securities transactions to such entities weaker than 
NASD's suitability requirements with respect to recommendations of 
transactions in other types of securities to these same entities.
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    Furthermore, in conjunction with revisions to the proposed 
amendment to Rule G-15, relating to periodic statements in lieu of 
individual transaction confirmations, as described below, the Board 
revised the amendments to Rule G-8 to require that dealers retain as 
part of their books and records copies of all periodic statements 
delivered to customers in lieu of individual confirmations.
5. Rule G-15, on Customer Confirmations
    The draft amendments to Rule G-15, as published in the March 
Notice, change the concepts of par value, yield, dollar price, maturity 
date and interest, none of which would appropriately apply to a 
municipal fund security. Thus, on a confirmation of a municipal fund 
securities transaction, a dealer would use the purchase or sale price 
of the securities (as appropriate) rather than par value and would omit 
yield, dollar price, accrued interest, extended principal, maturity 
date and interest rate. Dealers selling municipal fund securities would 
be required to include the denomination or purchase price of each share 
or unit as well as the number of shares or units to be delivered. 
Confirmations of municipal fund securities transactions would require a 
disclosure to the effect that a deferred commission or other charge may 
be imposed upon redemption, if applicable.\116\ The amendment also 
would make clear that dealers must confirm redemptions of municipal 
fund securities. Finally, the amendment would permit dealers to use 
quarterly statements, rather than transaction-by-transaction 
confirmations, if customers are purchasing the securities in an agreed 
amount on a periodic basis (``periodic plan''), in a manner similar to 
the periodic reporting provision of Rule 10b-10 \117\ under the Act.
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    \116\ Disclosure of deferred commissions or other charges would 
cover, for example, any deferred sales load or, in the case of 
interests in certain higher education trusts, any penalty imposed on 
a redemption that is not for a qualifying higher education expense.
    \117\ 17 CFR 240.10b-10.
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    The Board received a number of technical comments on various 
provisions in the draft amendments to Rule G-15 published in the March 
Notice. In response, the Board published revised draft amendments to 
Rule G-15 in the August Notice. The revised amendments generated 
additional comments and, in certain cases, resulted in the Board making 
further revisions. The comments received and the Board's responses are 
set forth below:
    a. Periodic Statements--Rule G-15(a)(vi)(G) and (a)(viii). Several 
commentators state that the draft amendments, as published in the March 
Notice, would require individual confirmations for each transaction in 
local government pool interests.\118\ Schulte suggests that dealers 
effecting transactions in local government pool investments be 
permitted to use monthly statements. Merrill states that transactions 
in higher education trust interests that are not effected pursuant to a 
periodic plan should nonetheless qualify for periodic statements in 
lieu of individual transaction confirmations.\119\
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    \118\ See PLGIT, PFM and Schulte Letters. PFM and PLGIT state 
that individual confirmations for the frequent purchases and 
redemptions of local government pool interests would impose high 
administrative and cost burdens. PLGIT notes that its program 
processes over 500,000 check redemptions each year, with some 
program participants using checks for such purposes as paying 
payroll.
    \119\ See First Merrill and Second Merrill Letters. Merrill 
states that this would be ``analogous to and consistent with'' the 
provisions of Rule 10b-10 permitting periodic statements in lieu of 
confirmations for non-periodic transactions in tax-qualified 
individual retirement and individual pension plans.
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    As a result, the Board revised the draft amendment to Rule G-15 to 
provide that information regarding transactions in municipal fund 
securities effected in connection with a program that does not provide 
for periodic purchases or redemptions of municipal fund securities (a 
``non-periodic program'') may be disclosed to customers on a monthly 
statement in lieu of transaction confirmations.\120\ With respect to 
natural persons who participate in a non-periodic program, this monthly 
reporting would require the written consent of such individual or of 
the issuer. If the issuer directs that monthly statements be used in 
lieu of transaction confirmations, the revised amendment to Rule G-
15(a)(viii) would permit dealers effecting transactions in such 
municipal fund securities to use monthly statements without obtaining 
the consent of any customers. In addition, the amendment has been 
revised to eliminate the requirement that customers participating in a 
group periodic plan consent to the use of periodic statements in lieu 
of transaction confirmations.\121\
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    \120\ In addition, the Board made a minor language change to 
paragraph (a)(vi)(G) of Rule G-15 to clarify that quarterly 
statements in lieu of individual confirmations for periodic plans 
also would be available for arrangements involving a group of two or 
more customers.
    \121\ TPIS states that requiring customer consent to receive 
quarterly statements would impose administrative burdens on dealers 
that are not justified by any investor protection interest. It notes 
practical difficulties with sending confirmations to some members of 
a group plan and quarterly statements to others, stating that if the 
dealer fails to receive consent from any customer, it might be 
forced to send individual confirmations to all customers. TPIS 
states that, in adopting the investment company plan exception to 
the confirmation requirements in Rule 10b-10, the SEC recognized 
that securities sold through such plans do not require the same 
level of reporting as other securities transactions because their 
regularized nature raised fewer concerns about whether a particular 
transaction was executed consistent with the expectations of the 
customer. See First TPIS Letter.
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    In commenting on the revised amendments published in the August 
Notice, Merrill suggested that the revision inadvertently imposes a 
more onerous condition on dealers using periodic statements for 
customers participating in periodic plans that are not part of a group 
plan, as compared to customers participating in a non-periodic program, 
because the issuer would not be permitted under the language of the 
draft amendment to provide consent on behalf of customers as in the 
case of non-periodic programs.\122\ As a result, the Board has further 
revised the amendment to Rule G-15(a)(viii)(E) to allow issuers to 
provide consent for the use of periodic statements in these 
circumstances.\123\
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    \122\ See Second Merrill Letter.
    \123\ The Board believes that this further revision addresses 
any remaining concerns regarding the availability of periodic 
statements in lieu of confirmations alluded to by Fidelity in the 
First Fidelity Letter. The Board understands that these revisions to 
the confirmation provisions have adequately addressed PLGIT's 
concerns regarding the need for individual confirmations for each 
redemption. See Saul Letter.
    \124\ See First TPIS Letter.
    \125\ Subparagraph (a)(i)(A)(7) would require that the 
confirmation for a municipal fund security transaction indicate the 
purchase price (exclusive of commission) of each share or unit and 
the number of shares or units to be delivered, regardless of whether 
a physical or book-entry delivery of the securities will occur.
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    b. Rule G-15(a)(i)(A)(7). One commentator states that municipal 
fund securities will not be issued in certificated form and therefore 
the

[[Page 47549]]

delivery provisions under subparagraph (a)(i)(A)(7) would not be 
relevant.\124\ In order to avoid the potential for ambiguity, this 
subparagraph has been revised to eliminate reference to denomination 
and to refers solely to the share purchase price.\125\
    c. Rule G-15(a)(i)(C) and (A)(i)(B)(1). TPIS notes that the Board 
did not provide guidance regarding certain descriptive information 
regarding purchased securities required to be included in the 
confirmation under paragraph (a)(i)(C) and states that this paragraph 
should not be applicable to municipal fund securities. In the 
alternative, it suggests that confirmations should not be required to 
state that municipal fund securities are unrated.\126\ The Board has 
revised the amendment to (i) provide that a confirmation of a municipal 
fund security transactions need not show the information required under 
paragraph (a)(i)(C) other than whether the security is puttable and 
(ii) include a requirement in subparagraph (a)(i)(B)(1) that the 
confirmation include the name used by the issuer to identify the 
security and, to the extent necessary to differentiate the security 
from other municipal fund securities of the issuer, any separate 
program series, portfolio or fund designation. A statement to the 
effect that the security is unrated would not be required.
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    \126\ TPIS states that such securities are ineligible for 
ratings and such notation might be misleading. See First TPIS 
Letter. However, the Board notes that a relatively small number of 
local government pools have in fact been rated. See NAST Report, at 
36. See generally S&P Report.
---------------------------------------------------------------------------

    d. Rule G-15(a)(viii)(B). Merrill argues that certain information 
required to be disclosed on a periodic statement with respect to 
municipal fund security transactions would be unnecessarily repetitive 
and might best be disclosed in a separate disclosure document that is 
applicable to all transactions in these securities.\127\ This 
information includes disclosure of deferred commissions or other 
charges, whether the security is redeemable, the capacity of the 
dealer, and the time of execution. The Board believes that dealers 
using a periodic statement where the information is identical for all 
transactions shown on the statement should be permitted to provide the 
information only once on the statement rather than repeatedly for each 
transaction. In addition, the Board believes that if the information is 
included in disclosure materials previously delivered to the customer 
and the periodic statement clearly indicates that the information is 
included in the disclosure material, the information may be omitted 
from the periodic statement. Of course, a dealer would not be able to 
rely on this provision if the disclosure materials have not in fact 
been delivered to the customer or if the information included in the 
disclosure materials is not accurate with respect to any transaction 
disclosed on the periodic statement (e.g., if the information has 
subsequently been changed). As a result, the Board revised Rule G-
15(a)(viii)(B) to this effect.
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    \127\ See Second Merrill Letter. Fidelity believes that 
information regarding redemptions need not be disclosed at all. See 
First Fidelity Letter.
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6. Rule G-21, on Advertising
    The Board did not propose amending Rule G-21 in the March Notice. 
Schulte states that this rule should be revised to eliminate references 
to price and yield for purposes of municipal fund securities.\128\ 
Section (d)(i) provides that an advertisement for new issue municipal 
securities may show the initial reoffering price or yield, even if they 
have changed, so long as the date of sale is shown. In addition, it 
provides that if the price of yield shown in the advertisement is other 
than the initial price or yield, the price or yield shown must have 
been accurate at the time the advertisement was submitted for 
publication. The Board believes that these provisions do not 
unnecessarily restrict the manner in which municipal fund securities 
may be advertised nor do they mandate that an advertisement for a 
municipal fund security specify a price or yield.\129\ Therefore, no 
change has been proposed on Rule G-21.
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    \128\ See Schulte Letter.
    \129\ The Board understands that, in the context of local 
government pools, the terms ``yield'' may be used to refer to 
historical returns that may be used as a basis for comparing 
investment performance. See NAST Report, at 8. References in Rule G-
21 to yield, consistent with its use in other Board rules, refer to 
a future rate of return on securities and do not refer to historical 
yields. The Board notes that any use of historical yields would be 
subject to section (c) of Rule G-21, which provides that no dealer 
shall publish or cause to be published any advertisement concerning 
municipal securities that the dealer knows or has reason to know is 
materially false or misleading. Thus, a dealer advertisement of 
municipal fund securities that refer to yield typically would 
require a description of the nature and significance of the yield 
shown in the advertisement in order to assure that the advertisement 
is not false or misleading.
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7. Rule G-32, on New Issue Disclosures
    No amendments to Rule G-32 were proposed in the March Notice. 
However, the Board stated that municipal fund securities sold in a 
primary offering would constitute new issue municipal securities for 
purposes of Rule G-32 so long as the securities are in the underwriting 
period. Because the Board understands that issuers of municipal fund 
securities are continuously issuing and delivering the securities as 
customers make purchases, the Board believes that municipal fund 
securities would remain in their underwriting period so long as such 
issuance and delivery continues.\130\ Thus, a dealer effecting a 
transaction in a municipal fund security would be required to deliver 
to the customer the official statement, if one exists, by settlement of 
the transaction. However, in the case of any customer making repeat 
purchases of a municipal security (including but not limited to a 
municipal fund security), no new delivery of the official statement 
would be required so long as the customer has previously received it in 
connection with a prior purchase and the official statement has not 
been changed from the one previously delivered to that customer.\131\
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    \130\ Rule G-32 defines underwriting period for securities 
purchased by a dealer (not in a syndicate) as the period commencing 
with the first submission to the dealer of an order for the purchase 
of the securities or the purchase of the securities from the issuer, 
whichever first occurs, and ending at such time as the following two 
conditions both are met: (1) the issuer delivers the securities to 
the dealer, and (2) the dealer no longer retains an unsold balance 
of the securities purchased from the issuer or 21 calendar days 
elapse after the date of the first submission of an order for the 
securities, whichever first occurs. However, because the issuer 
continuously delivers municipal fund securities, the first condition 
for the termination of the underwriting period remains unmet.
    \131\ In addition, in the case of a repeat purchaser of 
municipal fund securities for which no official statement in final 
form is being prepared, no new delivery of the written notice to 
that effect or of any official statement in preliminary form would 
be required so long as the customer has previously received it in 
connection with a prior purchase. However, if an official statement 
in final form is subsequently prepared, the customer's next purchase 
would trigger the delivery requirement with respect to such official 
statement.
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    TBMA expresses concern regarding the timing requirement of Rule G-
32 in the limited circumstances where a revision has just been made to 
the official statement and a customer that participates in a periodic 
plan makes an automatic purchase of additional shares of municipal fund 
securities.\132\ In spite of the best efforts of the dealer and the 
issuer, it may be impossible for the revised official statement to be 
delivered to the customer by settlement. TBMA suggests that, under 
these circumstances, the timing requirement under Rule G-32 should be 
based on the

[[Page 47550]]

sending rather than the delivery of the official statement.
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    \132\ See TBMA Letter.
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    As a result, the Board published in the August Notice a draft 
amendment to Rule G-32 that provided that, in the situation where the 
official statement is being amended or otherwise changed, a dealer may 
sell, pursuant to a periodic plan, a municipal fund security to a 
customer who has previously received the official statement so long as 
it sends to the customer a copy of any new, supplemented, amended or 
stickered official statement by first class mail promptly upon receipt 
from the issuer (i.e., actual delivery by settlement would not be 
required). This draft amendment was designed to address the limited 
circumstances where an amendment to the official statement for a 
municipal fund security has just been produced but, because of standing 
arrangements with a customer under a periodic plan, a transaction in 
such security will automatically be effected and the securities 
delivered before the dealer is able to deliver the amended official 
statement to the customer, as would otherwise be required under the 
rule.
    Fidelity suggests that this draft amendment to Rule G-32 be made to 
apply equally to periodic plans and non-periodic programs.\133\ The 
Board believes that, although the problem that was intended to be 
addressed by the draft amendment would most likely arise under a 
periodic plan, such problems also may arise from time to time with 
respect to non-periodic programs. In addition, Merrill states that, in 
the case of an amendment to an official statement, dealers should be 
permitted to satisfy the delivery requirement under Rule G-32 with 
respect to the amended official statement by delivering the amendment 
alone (including a notice that the complete official statement is 
available upon request).\134\ The Board understands that this is a 
typical practice in connection with amendments to mutual fund 
prospectuses. Although the Board believes that Rule G-32 currently 
would permit delivery of the amendment alone so long as the customer 
already has the official statement that is being amended and the dealer 
ensures that the amendment makes clear what constitutes the complete 
official statement as amended, the Board has determined that clarifying 
language consistent with Merrill's comment should be added to Rule G-
32. as a result, the Board has made further revisions to Rule G-32 to 
effect both of these suggested changes.
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    \133\ See First Fidelity Letter.
    \134\ See Second Merrill Letter.
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    Finally, Eckert implies that requiring dealers selling municipal 
fund securities to comply with the official statement delivery 
requirements of Rules G-32 and G-36 may not conform Section 15B(d)(2) 
\135\ of the Act.\136\ Except for the technical changes to Rule G-32 
included in the proposed rule change, the provisions of Rules G-32 and 
G-36 apply to dealers effecting transactions in municipal fund 
securities in a manner identical to dealer transactions in other forms 
of municipal securities. The Board believes that its authority to 
require the delivery of official statements by dealers in the manner 
provided in these rules has long since been settled.
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    \135\ 15 U.S.C. 78o-4(d)(2).
    \136\ See Eckert Letter. Section 15B(d)(2) of the Act provides 
that the Board is not authorized to require any issuer, directly or 
indirectly, to furnish to the Board or a customer any document or 
information with respect to such issuer; provided that the Board may 
require dealers to furnish to the Board or customers such documents 
or information which is generally available from a source other than 
the issuer.
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8. Rule G-33, on Calculations
    The Board did not propose amendment Rule G-33 in the March Notice. 
Schulte states that this rule should be revised to eliminate references 
to par value, yield dollar price, maturity date and interest for 
purposes of municipal fund securities.\137\ By its terms, Rule G-33 
applies only to municipal securities that bear interest or are sold at 
a discount. Because municipal fund securities do not bear interest and 
are not sold at a discount, Rule G-33 would by its nature not apply. 
Therefore, no change has been made to Rule G-33.
---------------------------------------------------------------------------

    \137\ See Schulte Letter.
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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 
designate 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 Board 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 20549-0609. 
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 principal offices of the 
Board. All submissions should refer to the File No. SR-MSRB-00-06 and 
should be submitted by August 2, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\138\
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    \138\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-19448 Filed 8-1-00; 8:45 am]
BILLING CODE 8010-01-M