[Federal Register Volume 66, Number 19 (Monday, January 29, 2001)]
[Notices]
[Pages 8126-8131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-2474]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43858; File No. SR-MSRB-00-06]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval to Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval to Amendment No. 2 to 
the Proposed Rule Change Relating to Municipal Fund Securities

January 18, 2001.

I. Introduction

    On April 5, 2000, the Municipal Securities Rulemaking Board 
(``MSRB'' or ``Board'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to municipal fund 
securities. On July 17, 2000, the Board submitted Amendment No. 1 to 
the proposed rule change.\3\ The proposed rule change, as amended by 
Amendment No. 1, was published for comment in the Federal Register on 
August 2, 2000.\4\ The Commission received one comment letter on the 
proposed rule change.\5\ On October 12, 2000, the Board submitted 
Amendment No. 2 to the proposed rule change.\6\ This order approves the 
proposal, as amended. The Commission also seeks comment from interested 
persons on Amendment No. 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Board submitted an amended Form 19b-4, which 
supplemented the original filing (``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 43066 (July 21, 2000), 
65 FR 47530. On August 11, 2000, corrections to the notice were 
published in the Federal Register. See Securities Exchange Act 
Release No. 43066A (August 4, 2000), 65 FR 49279.
    \5\ See letter from Kevin R. Bertolini, Legal Counsel, Fidelity 
Investments, to Jonathan G. Katz, Secretary, SEC, dated August 22, 
2000.
    \6\ See letter from Ernesto A. Lanza, Associate General Counsel, 
MSRB, to Katherine England, Associate Director [sic], Division of 
Market Regulation (``Division''), SEC, dated October 11, 2000 
(``Amendment No. 2''). In Amendment No. 2, the MSRB responded to the 
issues raised in the comment letter. The MSRB, in response to the 
commenter's suggestion, amended proposed MSRB Rule G-15(a)(i)(C)(5) 
to delete the requirement to disclose whether a municipal fund 
security is puttable or otherwise redeemable by the customer on the 
confirmation. The Board also proposed to amend MSRB Rule G-
15(a)(viii)(B)(2) to delete the reference to MSRB Rule G-
15(a)(i)(C)(5).
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II. Description of the Proposal

    The proposed rule change consisted of the following: (1) A proposed 
definition of municipal fund security; (2) amendments to MSRB Rule A-13 
regarding underwriting and transaction assessments; (3) amendments to 
MSRB Rule G-3 regarding the classification of principals and 
representatives, and testing and continuing education requirements; (4) 
amendments to MSRB Rule G-8 regarding books and records; (5) amendments 
to MSRB Rule G-14 regarding reports of sales or purchases; (6) 
amendments to MSRB Rule G-15 regarding confirmations and clearance and 
settlement of transactions with customers; (7) amendments to MSRB Rule 
G-26 regarding customer account transfers; (8) amendments to MSRB Rule 
G-32 regarding disclosures in connection with new issues; and (9) 
amendments to MSRB Rule G-34 regarding CUSIP numbers and new issue 
requirements. In addition, the MSRB submitted a proposed interpretation 
regarding sales of municipal fund securities in the primary market.

1. Proposed MSRB Rule D-12--Definition of Municipal Fund Security

    The Board proposed to define a municipal fund security as a 
municipal security that would qualify as a security of an investment 
company under the Investment Company Act of 1940 if it had not been 
issued by a state or local governmental entity.\7\
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    \7\ The Board distinguished municipal fund securities from 
shares in a mutual fund that is registered under the Investment 
Company Act of 1940 with assets invested in municipal securities, 
which shares would not be considered municipal fund securities.
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    As a threshold matter, a municipal fund security must meet the 
definition of municipal security in section 3(a)(29) of the Act \8\ 
before a determination can be made as to whether it is a municipal fund 
security. As proposed by the Board, if a security meets the definition 
of municipal fund security then dealer transactions would be subject to 
all MSRB rules. The Board noted that its proposed definition would not 
be limited to interests in local government pools or higher education 
trusts that may be found to be municipal securities. The proposed 
definition would apply to any other municipal security issued under a 
program that, but for the identity of the issuer as a state or local 
governmental entity, would constitute an investment company under the 
Investment Company Act.
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    \8\ 15 U.S.C. 78c(a)(29).

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[[Page 8127]]

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

    The Board proposed to exempt the sale of municipal fund securities 
from the underwriting assessment imposed under section (b) of MSRB Rule 
A-13.

3. MSRB Rule G-3--Professional Qualifications

    The Board proposed to permit associated persons that are qualified 
as investment company limited representatives to effect transactions in 
municipal fund securities, but not in other municipal securities.\9\ 
However, a dealer must continue to have one or two municipal securities 
principals, as required under MSRB Rule G-3(b), even if the dealer's 
only municipal securities transactions are sales of municipal fund 
securities.
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    \9\ Therefore, the Board noted that 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 general securities representative.
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4. MSRB Rule G-8--Books and Records To Be Made by Brokers, Dealers and 
Municipal Securities Dealers

    The Board proposed to amend MSRB Rule G-8 to recognize that 
municipal fund securities do not have par values, dollar prices, 
yields, or accrued interest. In addition, the Board proposed to amend 
MSRB Rule G-8 to recognize that investment company limited 
representatives may be permitted to effect transactions in municipal 
fund securities. Under MSRB Rule G-8, dealers would be required to 
retain copies of all periodic statements delivered to customers in lieu 
of individual confirmations of municipal fund securities transactions 
pursuant to MSRB Rule G-15. Further, pursuant to MSRB Rule G-8, a 
dealer effecting transactions in municipal fund securities would be 
permitted to meet its books and records obligations by having a 
transfer agent maintain its books and records for municipal funds 
securities. A transfer agent that maintains a dealer's books and 
records would be required to satisfy the requirements of MSRB Rule G-8. 
Ultimately, however, the dealer remains responsible for the accurate 
maintenance and preservation of its books and records.

5. MSRB Rule G-14--Reports of Sales or Purchases

    In proposed MSRB Rule G-14(b)(i), the Board exempted transactions 
in municipal fund securities from the reporting requirements of the 
customer transaction reporting system.

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

    The Board proposed amendments to MSRB Rule G-15 to reflect that the 
concepts of par value, yield, dollar value, maturity date and interest 
do not apply to municipal fund securities. Specifically, the Board 
proposed to require a dealer to use the purchase or sale price of the 
security on a confirmation of a municipal fund security transaction, 
rather than par value, and would permit a dealer to omit yield, dollar 
price, accrued interest, extended principal, maturity date, and 
interest rate. Dealers that sell municipal fund securities would be 
required to include the purchase price of each share or unit as well as 
the number of shares or units to be delivered. Confirmations of 
transactions in municipal fund securities would have to include a 
disclosure that a deferred commission or other charge may be imposed 
upon redemption, if applicable.\10\ Further, the confirmation, as 
proposed, 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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    \10\ According to the Board, disclosure of deferred commissions 
or other charges includes, 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 trust.
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    The Board proposed to permit dealers to use periodic statements 
rather than transaction-by-transaction confirmations if customer 
purchases of municipal fund securities are affected pursuant to certain 
periodic plans \11\ or non-periodic programs,\12\ in a manner similar 
to the periodic reporting provision of Rule 10b-10 under the Act.\13\
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    \11\ In MSRB Rule G-15, the Board defined the term ``periodic 
municipal fund security plan'' as 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 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).
    \12\ In MSRB Rule G-15, the Board defined the term ``non-
periodic municipal fund security program'' as 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 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 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.
    \13\ 17 CFR 240.10b-10.
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7. MSRB Rule G-26--Customer Account Transfers

    The Board proposed to amend the definition of ``nontransferable 
asset'' and the transfer instructions for nontransferable assets in 
MSRB Rule G-26 to reflect that an issuer of municipal fund securities 
may limit the dealers that are authorized to carry accounts for 
customers in such securities.

8. MSRB Rule G-32--Disclosures in Connection With New Issues

    The Board proposed to amend MSRB Rule G-32 to permit a dealer to 
sell, pursuant to a periodic plan \14\ or non-periodic program,\15\ a 
municipal fund security to a customer who has previously received the 
official statement for the security so long as it sends to the customer 
a copy of any new, supplemented, amended, or stickered official 
statement promptly upon receipt from the issuer (i.e., actual delivery 
by settlement will not be required). As proposed, the dealer would be 
permitted to satisfy its 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 
has the official statement that is being amended and the dealer ensures 
that the amendment makes clear what constitutes the complete official 
statement. In addition, the proposal 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 regarding any changes in the fees paid by 
the issuer to the dealer is sent to customers simultaneously with or 
prior to the sending of the next periodic statement.
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    \14\ See note 11 supra.
    \15\ See note 12 supra.
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9. MSRB Rule G-34--CUSIP Numbers and New Issue Requirements

    The Board proposed to exempt municipal fund securities from the 
requirements of MSRB Rule G-34.

[[Page 8128]]

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

    The Board proposed to provide interpretative guidance with respect 
to the application of MSRB Rules G-23, G-32, G-36, G-37, and G-38 to 
dealer transactions in municipal fund securities.

III. Summary of Comments

    The Commission received one comment letter on the proposed rule 
change.\16\ In its letter, the commenter stated that interests in local 
government investment pools (``LIGPs'') and qualified state tuition 
programs (``QSTPs'') are not municipal securities for purposes of the 
Act. Notwithstanding this position, the commenter provided suggestions 
to the proposed revisions to MSRB Rule G-15 to assist in its compliance 
efforts should the proposed rule change be approved. The Board 
responded to the issues raised by the commenter in Amendment No. 2.\17\
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    \16\ See note 5 supra.
    \17\ See note 6 supra.
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    First, the commenter argued that the requirement that the time of 
execution or a statement that the time of execution will be furnished 
upon request be included on a confirmation is unnecessary for LGIPs and 
QSTPs. According to the commenter, these products are priced once a day 
and the pricing policies are disclosed in the offering documents. Thus, 
according to the commenter, requiring additional disclosure on the 
confirmation yields no additional benefits and does not serve to 
further protect the interests of investors.
    The Board disagreed; it believes that dealers executing 
transactions in municipal securities should be obligated to disclose 
the time of execution or state that the time of execution will be 
furnished upon written request. The Board argued that this information 
may be relevant, depending on the facts and circumstances, in 
determining whether a transaction was executed as the customer expected 
or as required under the Board's rules. The Board noted that disclosure 
of transactions effected under a periodic plan or a non-periodic 
program may be provided by a dealer in a separate document, such as the 
offering document. The Board further noted that this disclosure is 
required to appear on individual transaction confirmations by Rule 10b-
10(a)(1).\18\ In addition, the Board noted that pursuant to Rule 10b-
10(b)(2),\19\ any periodic statement used in lieu of individual 
transaction confirmations must include, among other things, a statement 
to the effect that any information required by Rule 10b-10(a) \20\ that 
is not set forth in the periodic statement will be furnished upon 
written request. Therefore, the Board believes that its disclosure 
requirement in MSRB Rule G-15 is consistent with Commission rules 
applicable to securities that are similar in many respects to municipal 
fund securities.
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    \18\ 17 CFR 240.10b-10(a)(1).
    \19\ 17 CFR 240.10b-10(b)(2).
    \20\ 17 CFR 240.10b-10(a).
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    Second, the commenter argued that proposed MSRB Rule G-15 is 
consistent with Commission rules applicable to securities that are 
similar in many respects to municipal fund securities.
    Second, the commenter argued that proposed MSRB Rule G-
15(a)(i)(C)(5)(f), which requires redeemability to be indicated on a 
confirmation, yields little benefit to purchasers of either LGIPs or 
QSTPs if such disclosure is included in the offering documents. 
Further, the commenter argued that requiring disclosure of 
redeemability on the transaction confirmation may serve to further 
confuse customers.
    After reviewing the reasons for including the puttability of 
municipal securities on transaction confirmations, the Board determined 
that deleting the requirement of disclosing puttability on 
confirmations of municipal fund securities transactions would not 
affect its customer protection goals. According to the Board, the 
redeemability of municipal fund securities by their owners is a 
standard feature of such securities \21\ and a dealer selling municipal 
fund securities would be required to disclose, at or prior to the time 
of the trade, all material facts relating to the securities, including 
material facts about redeemability. However, the puttability of a 
municipal fund security on a transaction confirmation would not serve 
any function in identifying or distinguishing the particular municipal 
fund security that is the subject of the transaction being confirmed. 
Therefore, the Board amended proposed MSRB Rule G-15(a)(i)(C)(5) to 
delete the requirement that puttability or redeemability be disclosed 
on the transaction confirmation. The Board also made conforming 
amendments to MSRB Rule G-15(a)(viii)(B)(2).
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    \21\ In contrast, the puttability of debt instruments is 
considered a non-standard feature whose absence or presence may have 
a significant effect on, among other things, the nature and value of 
the debt instrument. Thus, according to the Board, puttability is 
often a crucial term for distinguishing one security from another an 
for ensuring that the security that is delivered in fact matches 
with the security that was bargained for.
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    Finally, the commenter argued that proposed MSRB Rule G-15 could be 
read to prohibit certain LGIPs from utilizing the periodic transaction 
reporting provisions because under the proposal only those municipal 
fund securities that are sold either through a periodic plan \22\ or 
non-periodic municipal fund security program \23\ may utilize the 
periodic transaction reporting provisions. This, according to the 
commenter, would prohibit certain no-load LGIPs that are managed like 
money market funds and seek to maintain a stable net asset value from 
utilizing the periodic transaction reporting provisions.
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    \22\ See note 11 supra.
    \23\ See note 12 supra.
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    According to the commenter, the Board's proposed amendments to MSRB 
Rule G-15 were patterned, in part, after Rule 10b-10 under the Act.\24\ 
The commenter requested that the Board permit the use of periodic 
statements rather than individual transaction confirmations for stable, 
no-load LGIPs, regardless of the method of distribution. In the 
alternative, the commenter suggested that the MSRB amend MSRB Rule G-15 
to more closely track the provision of rule 10b-10 under the Act\25\ to 
permit the use of periodic statements in lieu of individual transaction 
confirmations for no-load LGIPs that are managed like money market 
funds and seek to maintain a stable net asset value regardless of 
whether the LGIPs are sold pursuant to periodic or non-periodic 
programs.
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    \24\ 17 CFR 240.10b-10.
    \25\ 17 CFR 240.10b-10.
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    In addition, the commenter suggested that the MSRB amend the 
definition of ``non-periodic municipal fund security program'' to 
specifically state that a dealer may be acting as agent for either the 
issuer or the customer because, according to the commenter, LGIPs are 
sometimes bought and sold absent any explicit designation of agency by 
the customer to the entity effecting transactions in the pool. The 
commenter believes that this modification would resolve any lingering 
uncertainty regarding the ability of LGIPs to utilize periodic 
transaction reports.
    In response, the Board stated that it believed the proposed 
definition of ``non-periodic municipal fund security program'' permits 
an authorization or arrangement relating to municipal fund securities 
to qualify as a non-periodic program regardless of whether the dealer 
is acting as agent for the issuer or for the customer.\26\ Therefore, 
the Board

[[Page 8129]]

stated that it believed that no modification of the proposed definition 
was necessary.
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    \26\ The Board noted that if the dealer is acting as principal, 
individual transaction confirmations would be required.
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to the Board.\27\ In particular, the 
Commission believes the proposed rule change is consistent with section 
15B(b)(2)(C) of the Act,\28\ which requires, among other things, that 
the rules of the Board be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation 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.
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    \27\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \28\ 15 U.S.C. 78o-4(b)(2)(C).
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    The Commission notes that the Board's proposal amends its current 
rules to accommodate the unique characteristics of municipal fund 
securities. According to the Board, it did not seek to extend the 
application of its rules to produces that were not already subject to 
its rules. Specifically, the Board's proposal only applies to those 
interests that satisfy the definition of municipal fund securities, 
which includes the requirement that such interests be municipal 
securities. The Board's proposal recognizes that municipal fund 
securities have unique terms and characteristics that, in some 
circumstances, should be accorded different treatment under the Board's 
rules.

1. Definition of Municipal Fund Security

    The Board proposed to define a municipal fund security as a 
municipal security that but for the identity of the issuer as a state 
or local governmental entity would qualify as a security of an 
investment company under the Investment Company Act of 1940. The 
threshold issue is whether an interest in a trust fund held by a state 
or local governmental entity is in fact a municipal security. In an 
interpretative letter, the staff of the Division stated that interests 
in local government pools and higher education trusts may be depending 
on the facts and circumstances, municipal securities for the purposes 
of the Act.\29\ If an interest in a trust fund held by a state or local 
governmental entity is not a municipal security, as defined by the Act, 
it would not be considered a municipal fund security subject to the 
rules of the Board.
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    \29\ See letter from Catherine McGuire, Chief Counsel, Division, 
SEC to Diane G. Klinke, General Counsel, MSRB, dated February 26, 
1999 (``Division Letter'').
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    The Commission believes that the proposed definition of municipal 
fund security is consistent with section 15B of the Act.\30\ The 
definition is appropriately limited to those interests that are 
municipal securities over which the Board has jurisdiction. 
Specifically, section 15B(b)(2) \31\ of the Act states that the board 
shall propose and adopt rules with respect to transactions in municipal 
securities effected by brokers, dealers, and municipal securities 
dealers. While the determination of whether an instrument is in fact a 
municipal security depends on the facts and circumstances of each 
individual instrument, if the instrument is a municipal security, it is 
subject to the rules of the Board. Further, the Commission notes that 
consistent with the requirements of section 15B(b)(2), the proposed 
rule change only governs those transactions in municipal fund 
securities that are effected by brokers, dealers, or municipal 
securities dealers.
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    \30\ 15 U.S.C. 78o-4.
    \31\ 15 U.S.C. 78o-4(b)(2).
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2. MSRB Rule G-8--Books and Records To Be Made by Brokers, Dealers and 
Municipal Securities Dealers

    The Board proposed several changes to its books and records 
requirements to accommodate municipal fund securities. First, to 
accommodate the terms of municipal fund securities that differ from 
more traditional municipal securities, the Board proposed to amend Rule 
G-8 to require that books and records to be kept for municipal fund 
securities include those terms that are required to be reflected on a 
customer's confirmation pursuant to MSRB Rule G-12 and MSRB Rule G-13. 
Specifically, municipal fund securities do not have par values, dollar 
prices, yields, or accrued interest. Thus, the amendment reflects the 
absence of these terms for municipal fund securities. The Commission 
believes that it is appropriate for the MSRB to tailor its rules to 
reflect the peculiar nature of these instruments.
    Second, the Board proposed to require that municipal securities 
dealers retain copies of all periodic written statements disclosing 
purchases, sales, or redemptions of municipal funds securities, as 
currently required for confirmation of municipal securities. The 
Commission believes that this distinction should remove any confusion 
as to the required books and records to be retained regarding municipal 
fund securities.
    Third, the Board proposed to permit dealers effecting transactions 
in municipal fund securities to meet their books and records 
requirements by having a transfer agent maintain their books and 
records. Pursuant to the proposed rule, the transfer agent must meet 
all of the requirements of MSRB Rule G-8; the dealer will remain 
ultimately responsible for the accurate maintenance and preservation of 
its books and records. The Commission believes that transfer agents 
should be able to adequately keep and maintain a dealer's books and 
records consistent with the rules of the MSRB as well as the 
requirements under the Act. However, dealers should actively monitor 
and ensure that their delegated transfer agents diligently and 
completely maintains their books and records because any failure of the 
transfer agent to adequately maintain and keep the dealer's books and 
records will also be considered a failure of the dealer.

3. MSRB Rule G-14--Reports of Sales or Purchases

    The Board proposed to exclude transactions in municipal funds 
securities from its customer transaction reporting system. The Board 
presented a number of arguments supporting its decision not to require 
transaction reporting for municipal fund securities. The major reason 
was the lack of a secondary market for these products. According to the 
Board, because municipal fund securities do not trade in the secondary 
market, transaction reporting would be limited to one-time sales 
transactions to customers upon initial issuance and one-time purchases 
(or redemptions) upon cashing out. Further, the Board argued that 
because municipal fund securities are sold by dealers on an agency 
basis generally without payment of commissions, dealers would have 
little opportunity to alter the pricing of municipal fund securities 
from that set by the issuer. Finally, the Board noted that certain data 
that must be reported (e.g. dollar price, yield, etc.) would not apply 
to municipal fund securities.
    The Commission believes that at this time the Board's proposed 
exemptions are consistent with the requirements of the Act. Based on 
the observations made by the Board, the Commission believes that 
requiring dealers to report

[[Page 8130]]

transactions of municipal fund securities would not provide benefits to 
investors. Specifically, a transaction report for municipal securities 
does not appear to be necessary to the price discovery process because 
of the lack of a secondary market and because of dealers' inability to 
change the prices set by issuers. However, the Commission believes that 
if the market for municipal fund securities changes in a manner such 
that investors could benefit from enhanced disclosure and transparency, 
the Board should consider requiring transaction reports.

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

    The Board proposed to amend the terms that must be set forth in a 
customer confirmation for a municipal fund security transaction. In 
addition, the Board proposed to permit periodic statements rather than 
transaction-by-transaction confirmation, if the customer purchases 
municipal fund securities pursuant to certain defined periodic plans or 
non-periodic programs. The Commission believes that these proposed 
changes should provide investors with pertinent information about their 
municipal fund securities transactions in a clear and appropriate 
manner. The Commission believes that removing irrelevant information 
should create a more useful and accurate confirmation statement for 
municipal fund securities investors.
    In regard to periodic statements, the Commission believes that the 
changes are consistent with the requirements of the Act. Investors will 
continue to be provided with confirmations about their municipal fund 
securities transactions either on a monthly basis, if the investor 
participates in a non-periodic municipal fund security program, or 
quarterly basis, if the investor participates in a periodic municipal 
fund security plan.

5. MSRB Rule G-32--Disclosures in Connection With New Issues

    The Commission believes that the Board's proposal regarding 
delivery of official statements to customers who participate in either 
periodic municipal fund security plans or non-periodic municipal fund 
security programs is consistent with the Act. Dealers will continue to 
be required to forward official statements to customers that 
participate in periodic plans and non-periodic programs and are 
required to ensure that their customers have the most recent new, 
supplemented, amended or stickered official statement in final form. 
Thus, investors will continue to receive pertinent, material 
information about the securities. The amendments should prevent 
duplicate information from being sent to investors each time a 
transaction is effected. The Commission believes that requiring 
official statements to be continuously sent would not serve any 
regulatory purpose. Dealers must ensure, however, that their customers 
have current, up-to-date official statements when transactions are 
effected.
    The Commission also believes that the Board's proposal to exempt 
municipal funds securities for which periodic statements are used from 
the requirement that information on underwriting fees paid to the 
dealer by the issuer be disclosed to customers by settlement is 
consistent with the Act. These dealers will be required to provide 
information regarding any changes to fees paid by the issuer to the 
dealer simultaneously with or prior to the sending of the next periodic 
statement. Therefore, investors will continue to be provided this 
information in a timely manner.y

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

    The Board's proposed interpretation describes the Board's view on 
sales of municipal fund securities in the primary market and the 
applicability of Rule 15c2-12,\32\ regarding Municipal Securities 
Disclosure, and MSRB Rules G-23 regarding Activities of Financial 
Advisors, G-32 regarding Disclosures in Connection with New Issues, G-
36 regarding Delivery of Official Statements, Advance Refunding 
Documents and Forms G-36(OS) and G-36(ARD) to the Board or its 
Designee, G-37 regarding Political Contributions and Prohibitions on 
Municipal Securities Business, and G-38 regarding Consultants.
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    \32\ 17 CFR 240.15c2-12.
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    Specifically, the Board clarified dealers' obligations regarding 
municipal securities disclosure. In the Division Letter, Division staff 
stated that if a dealer is acting as an underwriter \33\ in connection 
with a primary offering \34\ of interests in local government pools or 
higher education trusts, the dealer may be subject to the requirements 
of Rule 15c2-12.\35\
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    \33\ An underwriter is defined 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. 17 CFR 240.15c2-12 (f)(8).
    \34\ A primary offering is defined as including an offering of 
municipal securities directly or indirectly by or on behalf of an 
issuer of such securities. 17 CFR 240.15c2-12(f)(7). In the Division 
Letter, the staff stated that based on its analysis of programs 
brought to its attention interests in local government pools or 
higher education trusts generally are offered only by direct 
purchase from the issuer. Thus, the staff noted that it would view 
those interests as having been sold in a primary offering.
    \35\ 17 CFR 240.15c2-12.
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    Accordingly, the Board stated that if municipal fund securities are 
sold in a primary offering, dealers acting as underwriters generally 
would be subject to the requirements of MSRB Rule G-36 regarding 
delivery of official statements and advance refunding documents and 
Forms G-36(OS) and G-36(ARD). Pursuant to this rule, the Board expects 
that dealers would receive a final official statement from the issuer 
or its agent. In addition, the Board noted that municipal fund 
securities sold in a primary offering would constitute new issue 
municipal securities and, thus, would be subject to MSRB Rule G-32 
regarding disclosures in connection with new securities, so long as the 
securities are in the underwriting period.
    Finally, the Board alerted members to the implications that arise 
under the Board rules as a result of municipal fund securities being 
regarded as sold in a primary offering. Specifically, the Board noted 
that dealers would be subject to the political contribution limitations 
and prohibitions under MSRB Rule G-37. In addition, MSRB Rule G-38 
would govern a dealer's use of consultants. Finally, a dealer's 
financial advisory or consultant services to an issuer would be subject 
to MSRB Rule G-23.
    The Commission believes that the Board's interpretation should 
assist brokers, dealers and municipal securities dealers with complying 
with their obligations under the MSRB's rules regarding transactions in 
municipal fund securities. In the interpretation, the Board provided 
guidance on the current rules' application to municipal funds 
securities. The Commission believes that the interpretation should 
clarify the rules that govern a dealer's transactions in municipal fund 
securities.

7. Other Proposed Rules

    With respect to the changes proposed by the Board to Rules A-13, 
Assessments, G-13, Professional Qualifications, G-8, Books and Records 
to be Made by a Broker, Dealer and Municipal Securities Dealer, G-26 
Customer Account Transfers, and G-34, CUSIP and New Issue Requirements, 
the Commission believes the Board has appropriately tailored its rules 
to reflect the unique nature of these securities.

[[Page 8131]]

8. Amendment No. 2

    Finally, the Commission finds good cause to accelerate approval of 
Amendment No. 2 to the proposed rule change prior to the thirtieth day 
after the date of publication of notice thereof in the Federal 
Register. In Amendment No. 2, the Board amended MSRB Rule G-
15(a)(i)(C)(5) to delete the requirement that puttability or 
redeemability be disclosed on a transaction confirmation. In this 
regard, the Board also made conforming changes to MSRB Rule G-
15(a)(viii)(B)(2). According to the Board, redeemability is a standard 
feature of municipal fund securities and, thus, the term does not serve 
to identify or distinguish a particular municipal fund security. 
Further, as a standard feature, redeemability would need to be 
disclosed to customers at the time of trade pursuant to MSRB Rule G-17. 
The Commission believes that the amendment further tailors the MSRB's 
rules to accommodate the unique characteristics of municipal fund 
securities and notes that investors will be provided with disclosure of 
this term. According to the information provided by the Board, 
redeemability is not a necessary term that needs to be set forth on a 
confirmation. Therefore, the Commission believes that good cause 
exists, consistent with section 15B(b)(2)(C) \36\ and section 19(b) 
\37\ of the Act, to accelerate approval of Amendment No. 2 to the 
proposed rule change.
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    \36\ 15 U.S.C. 78o-4(b)(2)(C).
    \37\ 15 U.S.C. 78s(b).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether the amendment 
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 Board's principal offices. All 
submissions should refer to File No. SR-MSRB-00-06 and should be 
submitted by February 20, 2001.

VI. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\38\ that the proposed rule change (SR-MSRB-00-06), as amended, is 
approved.
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    \38\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-2474 Filed 1-26-01; 8:45 am]
BILLING CODE 8010-01-M