[Federal Register Volume 66, Number 147 (Tuesday, July 31, 2001)]
[Notices]
[Pages 39541-39543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19018]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44584; File No. SR-MSRB-2001-05]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Thereto by the 
Municipal Securities Rulemaking Board Relating to Municipal Fund 
Securities and Qualification of Municipal Securities Principals, 
Operative on August 6, 2001

July 23, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'') and Rule 19b-4 thereunder,\1\ notice is hereby 
given that on July 5, 2001, the Municipal Securities Rulemaking Board 
(the ``MSRB'') filed with the Securities and Exchange Commission (the 
``Commission'') a proposed rule change (File No. SR-MSRB-2001-05) (the 
``proposed rule change''). The MSRB subsequently filed an amendment to 
the proposed rule change with the Commission on July 11, 2001 (together 
with the proposed rule change, the ``Proposed Rule Change''). The 
Proposed Rule Change is described in Items I, II, and III below, which 
Items have been prepared by the MSRB. 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) and 17 CFR 240.19b-4 thereunder.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The MSRB has filed with the Commission a Proposed Rule Change 
consisting of an amendment to rule G-3, on professional qualifications. 
The Proposed Rule Change will become operative on August 6, 2001. The 
text of the Proposed Rule Change is set forth below. Additions are 
italicized.

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

    (a) No change.
    (b) Municipal Securities Principal.
    (i)-(iii) No change.
    (iv) Temporary Provisions for Municipal Fund Securities Limited 
Principal. Until July 31, 2002, the following provisions shall apply to 
any broker, dealer or municipal securities dealer whose municipal 
securities activities are limited exclusively to municipal fund 
securities:
    (A) notwithstanding the provisions of paragraph (b)(ii), the 
broker, dealer or municipal securities dealer may designate any person 
who has taken and passed the General Securities Principal Qualification 
Examination or Investment Company and Annuity Principal Qualification 
Examination as a municipal fund securities limited principal.
    (B) any municipal fund securities limited principal designated as 
provided in subparagraph (b)(iv)(A) may undertake all actions required 
or permitted under any Board rule to be taken by a municipal securities 
principal.
    (C) the broker, dealer or municipal securities dealer may count one 
municipal fund securities limited principal toward the numerical 
requirement for municipal securities principal set forth in paragraph 
(b)(iii); provided that, if such broker, dealer or municipal securities 
dealer is only required to have one municipal securities principal, 
such broker, dealer, or municipal securities dealer may count one 
municipal fund securities limited principal toward the numerical 
requirement only if the broker, dealer or municipal securities dealer 
is described in subparagraph (b)(iii)(B).
    (c)-(h) No change.

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 MSRB 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 MSRB 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

    (a) Since 1998, the MSRB has been reviewing the application of its 
rules to transactions in municipal fund securities by brokers, dealers 
and municipal securities dealers (``dealers''). A municipal fund 
security is defined in rule D-12 as a municipal security issued by an 
issuer that, but for the application of Section 2(b) of the Investment 
Company Act of 1940 (the ``Investment Company Act''), would constitute 
an investment company within the meaning of the Investment Company

[[Page 39542]]

Act.\2\ In view of the unique characteristics of municipal fund 
securities, the MSRB adopted a series of amendments to its existing 
rules and issued an interpretive notice regarding the sale of municipal 
fund securities in the primary market. These amendments and notice 
became effective on January 18, 2001.
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    \2\ Section 2(b) exempts states and political subdivisions, and 
agencies, authorities, and instrumentalities thereof, from 
application of the Investment Company Act.
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    In the course of its review of market practices in so-called 
Section 529 college savings plans,\3\ the MSRB has learned that, in 
some cases, a dealer that has been engaged by an issuer of municipal 
fund securities to serve as its primary distributor has in turn entered 
into relationships with one or more other dealers to provide further 
channels for distribution (``selling dealers''). A significant number 
of the selling dealers that have or are seeking to become involved in 
these multi-tiered distribution systems may be new to the municipal 
securities market, having previously limited their activities to sales 
of investment company and annuity products.\4\ Further, many of these 
dealers are quite small, having a limited number of associated persons 
who may be qualified solely as investment company/variable contracts 
limited representatives and investment company/variable contracts 
limited principals.\5\
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    \3\ Section 529 college savings plans are higher education 
savings plan trusts 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.
    \4\ Others may have been formed specifically for the purpose of 
effecting transactions in municipal fund securities, including 
effecting transactions through such non-traditional methods as 
applying rebates earned on consumer purchases of goods and services 
from participating vendors to the purchase of municipal fund 
securities.
    \5\ Some firms also use general securities principals to 
supervise their investment company and annuity product activities.
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    Rule G-3, on professional qualification, permits an investment 
company/variable contracts limited representatives to qualify as a 
municipal securities representatives, but only in connection with 
transactions in municipal fund securities.\6\ In addition, a dealer 
must have at least one municipal securities principal (and in some 
cases two municipal securities principals), even if the dealer's only 
municipal securities transactions are sales of municipal fund 
securities. The MSRB has received a number of inquiries from small 
dealers that wish to begin selling municipal fund securities but that 
have previously limited their practice to the sales of investment 
company securities or variable annuities. These small dealers generally 
do not have personnel who are qualified as municipal securities 
principals under rule G-3 and therefore face a significant barrier to 
entry in this sector precisely at a time when many municipal fund 
securities programs are structuring their distribution channels.
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    \6\ Thus, an associated person who sells both municipal fund 
securities and other types of municipal securities must qualify as a 
municipal securities representative by taking and passing either the 
Municipal Securities Representative Qualification Examination or the 
General Securities Registered Representative Examination.
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    A dealer that does not currently have a municipal securities 
principal associated with it may hire a municipal securities principal 
or may have one of its existing municipal securities representatives, 
general securities representative or general securities principals 
become qualified as a municipal securities principal by taking and 
passing the Municipal Securities Principal Qualification 
Examination.\7\ The MSRB is concerned that the burden to undertake 
either course of action may be higher for smaller firms than for larger 
firms. Of course, this differential also exits for firms seeking to 
enter the traditional debt sector or the municipal securities market. 
However, the repercussions of this higher burden on small firms may be 
considerably greater in the context of a market, such as the Section 
529 college savings plan market, that is still in its formative stages 
and where long-term market advantages may accrue to firms that are able 
to enter the market more quickly.
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    \7\ Under rule G-3(b)(ii)(D), any such associated person may act 
as a municipal securities principal for a period of up to 90 days 
prior to passing the Municipal Securities Principal Qualification 
Examination.
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    The Proposed Rule Change provides a temporary alternative method 
for qualification of municipal securities principals in connection with 
municipal fund securities. Under the rule change, until July 31, 2002, 
if a dealer's municipal securities activities are limited exclusively 
to municipal fund securities and the dealer has fewer than 11 
associated persons engaged in such municipal fund securities 
activities, it may fulfill its obligation to have a municipal 
securities principal by designating a general securities principal or 
investment company/variable contracts limited principal to act as a 
municipal fund securities limited principal.\8\ During this temporary 
period, any person designated as a municipal fund securities limited 
principal will have all of the powers and responsibilities of a 
municipal securities principal under MSRB rules with respect to 
transactions in municipal fund securities. If at any time during this 
temporary period the dealer effects any transactions in municipal 
securities other than municipal fund securities, the dealer will be 
required to have a fully qualified municipal securities principal 
(i.e., a municipal securities principal not qualified solely by reason 
of being a general securities principal or investment company/variable 
contracts limited principal). On and after August 1, 2002, dealers 
effecting transactions in municipal fund securities will be required to 
comply with the same municipal securities principal requirements 
applicable to all other dealers effecting transactions in municipal 
securities.
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    \8\ Dealers that have 11 or more associated persons engaged in 
municipal fund securities activities may also designate a general 
securities principal or investment company/variable contracts 
limited principal to act as a municipal fund securities limited 
principal. If any such dealer is required to have two municipal 
securities principals under rule G-3(b)(iii), then the dealer may 
count one municipal fund securities limited principal toward this 
numerical requirement but must still have one municipal securities 
principal qualified other than by reason of being a general 
securities principal or investment company/variable contracts 
limited principal. If any dealer having 11 or more associated 
persons engaged in municipal fund securities activities is permitted 
to have only one municipal securities principal by virtue of 
subparagraph (A) of rule G-3(b)(iii), the numerical requirement may 
not be satisfied by designation of a municipal fund securities 
limited principal.
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    The MSRB believes that the proposed Rule Change is consistent with 
Section 15B(b)(2)(C) of the Exchange Act, which requires that the 
MSRB's rules:

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 MSRB believes that the Proposed Rule Change is consistent with the 
Exchange Act in that it removes an impediment to smaller dealers 
seeking to effect transactions in municipal fund securities.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the Proposed Rule Change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the purpose of the Exchange Act since it

[[Page 39543]]

would relieve small dealers from a regulatory requirement that would 
inhibit their ability to effect transactions in municipal fund 
securities.

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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because of the foregoing Proposed Rule Change: (i) Does not 
significantly affect the protection of investors or the public 
interest; (ii) does impose any significant burden on competition; and 
(iii) the MSRB provided the Commission with written notice of its 
intent to file the proposed rule change and it amendment at least five 
business days prior to the filing date, the proposed rule change, as 
amended, is effective pursuant to Section 19(b)(3)(A) of the Exchange 
Act \9\ and Rule 19b-4(f)(6) thereunder.\10\ A proposed rule change 
filed under Rule 19b-4(f)(6) normally does not become operative prior 
to the 30 days after the date of filing.\11\ However, Rule 19b-
4(f)(6)(iii) permits the Commission to designate a shorter time if such 
action is consistent with the protection of investors and the public 
interest.\12\ The MSRB has requested that the Commission designate such 
shorter time period and accelerate the operative date of the proposal 
to August 6, 2001, less than 30 days from the date of filing of the 
amendment. The Commission, consistent with the protection of investors 
and the public interest,\13\ determined to grant the MSRB's request and 
make this rule change and its amendment operative on August 6, 2001.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6)(iii).
    \11\ See Id.
    \12\ Id.
    \13\ For the purpose only of accelerating the operative date of 
this proposal, the Commission has considered the proposals's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    For the reasons set forth above, the Commission finds that it is 
consistent with the protection of investors and the public interest for 
the rule proposal and its amendment to become operative on August 6, 
2001. At any time within 60 days of the filing of this proposed rule 
change, the Commission may summarily abrogate this rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors or otherwise in 
furtherance of the purposes of the Act. In particular, the MSRB 
believes the Proposed Rule Change qualifies as a ``non-controversial 
filing'' in that the Proposed Rule Change does not significantly affect 
the protection of investors or the public interest and does not impose 
any significant burden on competition.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including where the proposed rule 
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 submissions, 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 MSRB's principal offices. All submissions 
should refer to File No. SR-MSRB-2001-05 and should submitted by August 
21, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-19018 Filed 7-30-01; 8:45 am]
BILLING CODE 8010-01-M