[Federal Register Volume 67, Number 27 (Friday, February 8, 2002)]
[Notices]
[Pages 6067-6070]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3044]



[[Page 6067]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45363; File No. SR-MSRB-2001-08]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Relating to Official 
Communications, Pursuant to MSRB Rules G-15 and G-8

January 30, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') and Rule 19b-4 thereunder,\1\ notice is hereby given 
that on November 6, 2001, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change (File No. SR-MSRB-2001-08) (the 
``proposed rule change'') 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 a proposed rule change consisting of an 
amendment to its rule G-15 on confirmation, clearance and settlement of 
transactions with customers and an amendment to its rule G-8 on books 
and records. The proposed rule change would require brokers, dealers 
and municipal securities dealers (collectively ``dealers'') that 
safekeep municipal securities to retransmit official documents about 
municipal securities issues to their safekeeping clients under certain 
conditions.
    The text of the proposed rule change follows.\2\
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    \2\ Italics indicates additions; brackets denote deletions.
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Rule G-15. Confirmation, Clearance, [and] Settlement [of] and Other 
Uniform Practice Requirements with Respect to Transactions with 
Customers

    (a) through (e) No change.
    (f) *Reserved for future use*
    (g) Forwarding Official Communications
    (i) If a broker, dealer or municipal securities dealer receives an 
official communication to beneficial owners applicable to an issue of 
municipal securities that the broker, dealer or municipal securities 
dealer has in safekeeping along with a request to forward such official 
communication to the applicable beneficial owners, the broker, dealer 
or municipal securities dealer shall use reasonable efforts to promptly 
retransmit the official communication to the parties for whom it is 
safekeeping the issue.
    (ii) In determining whether reasonable efforts have been made to 
retransmit official communications, the following considerations are 
relevant: 
    (A) CUSIP Numbers. If CUSIP numbers are included on or with the 
official communication to beneficial owners, the broker, dealer or 
municipal securities dealer shall use such CUSIP numbers in determining 
the issue(s) to which the official communication applies. If CUSIP 
numbers are not included on or with the official communication, the 
broker, dealer or municipal securities dealer shall use reasonable 
efforts to determine the issue(s) to which the official communication 
applies; provided however, that it shall not be a violation of this 
rule if, after reasonable efforts are made, the issue(s) to which the 
official communication applies are not correctly identified by the 
broker, dealer or municipal securities dealer.
    (B) Compensation. A broker, dealer or municipal securities dealer 
shall not be required by this rule to retransmit official 
communications without an offer of adequate compensation. If 
compensation is explicitly offered in or with the official 
communication, the broker, dealer or municipal securities dealer shall 
effect the retransmission and seek compensation concurrently; provided, 
however, that if total compensation would be more than $500.00, the 
broker, dealer or municipal securities dealer may, in lieu of this 
procedure, promptly contact the party offering compensation, inform it 
of the amount of compensation required, obtain specific agreement on 
the amount of compensation and wait for receipt of such compensation 
prior to proceeding with the retransmission. In determining whether 
compensation is adequate, the broker, dealer or municipal securities 
dealer shall make reference to the suggested rates for similar document 
transmission services found in ``Suggested Rates of Reimbursement'' for 
expenses incurred in forwarding proxy material, annual reports, 
information statements and other material referenced in NASD Conduct 
Rule 2260(g), taking into account revisions or amendments to such 
suggested rates as may be made from time to time.
    (C) Sufficient Copies of Official Communications. A broker, dealer 
or municipal securities dealer is not required to provide duplication 
services for official communications but may elect to do so. If 
sufficient copies of official communications are not received, and the 
broker, dealer or municipal securities dealer elects not to offer 
duplication services, the broker, dealer or municipal securities dealer 
shall promptly request from the party requesting the forwarding of the 
official communication the correct number of copies of the official 
communication.
    (D) Non-Objecting Beneficial Owners. In lieu of retransmitting 
official communications to beneficial owners who have indicated in 
writing that they do not object to the disclosure of their names and 
security positions, a broker, dealer or municipal securities dealer may 
instead promptly provide a list of such non-objecting beneficial owners 
and their addresses.
    (E) Beneficial Owners Residing Outside of the United States. A 
broker, dealer or municipal securities dealer shall not be required to 
send official communications to persons outside of the United States of 
America, although brokers, dealers and municipal securities dealers may 
voluntarily do so.
    (F) Investment Advisors. A broker, dealer or municipal securities 
dealer shall send official communications to the investment advisor for 
a beneficial owner, rather than to the beneficial owner, when the 
broker, dealer or municipal securities dealer has on file a written 
authorization for such documents to be sent to the investment advisor 
in lieu of the beneficial owner.
    (iii) Definitions
    (A) The terms ``official communication to beneficial owners'' and 
``official communication,'' as used in this section (g), mean any 
document or collection of documents pertaining to a specific issue or 
issues of municipal securities that both:
    (1) Is addressed to beneficial owners and was prepared or 
authorized by: (a) An issuer of municipal securities; (b) a trustee for 
an issue of municipal securities in its capacity as trustee; (c) a 
state or federal tax authority; or (d) a custody agent for a stripped 
coupon municipal securities program in its capacity as custody agent; 
and
    (2) contains official information about such issue or issues 
including, but not limited to, notices concerning monetary or technical 
defaults, financial reports, material event notices, information 
statements, or status or review of status as to taxability.

[[Page 6068]]

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.
    (i) through (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) through (K) No change.
    (L) with respect to official communications, customer's written 
authorization, if any, that the customer does not object to the 
disclosure of its name, security position(s) and contact information to 
a party identified in G-15(g)(iii)(A)(1) for purposes of transmitting 
official communications under G-15(g).

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 
text 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

1. Purpose
    Certain parties, such as municipal issuers, may need to transmit an 
official document relating to an issue of municipal securities to the 
owners of the issue, the ``beneficial owners.'' In attempting to 
distribute such documents to beneficial owners, the party requesting 
official communications retransmission may send the documents to the 
holders registered with the transfer agent, or to a list of depository 
participants holding positions in the issue. Substantial numbers of 
municipal securities investors, however, do not hold positions via the 
records of the transfer agent or with a depository, but rather own the 
securities through a safekeeping agent such as a dealer. In this case, 
for the beneficial owners to receive the document, it is necessary for 
the party seeking to send such a document to ask the safekeeping agent 
to retransmit the document to its safekeeping clients who own the 
issue.
    The proposed rule change includes an amendment to rule G-15 on 
confirmation, clearance and settlement of transactions with customers 
that, as described below, would require dealers who serve as 
safekeeping agents to undertake ``reasonable efforts'' to retransmit 
``official communications'' to their safekeeping clients when requested 
to do so. That amendment also allows dealers in certain circumstances 
to send to the party requesting an official communication 
retransmission a list of beneficial owners who do not object to the 
disclosure of their name, contact information and security positions 
(``non-objecting beneficial owners'') in lieu of retransmitting 
documents. The proposed rule change also includes an amendment to rule 
G-8 on books and records to be made by brokers, dealers and municipal 
securities dealers that would require dealers to retain as an official 
record a customer's written authorization, if any, as to the customer's 
status as a non-objecting beneficial owner.
    The MSRB realizes that some dealers today retransmit documents to 
their customers voluntarily, or under specific terms of their 
safekeeping agreements, and in many cases do so without compensation 
from the party requesting retransmission. It is not the intent of the 
proposed rule change to discourage retransmissions of official 
communications in these cases. Rather, the purpose of the proposed rule 
change is to help ensure that parties needing to transmit official 
communications to beneficial owners would be able to depend on dealers 
undertaking reasonable efforts, under the explicit terms of the rule G-
15 amendment, to retransmit such official communications to the parties 
for whom those dealers safekeep municipal securities.
    (a) Official Communications
    The proposed rule change defines an ``official communication'' as a 
document or collection of documents addressed to beneficial owners that 
was prepared or authorized by an issuer of municipal securities, a 
trustee for an issue of municipal securities, a state or federal tax 
authority or a custody agent for a stripped coupon municipal securities 
program in its capacity as custody agent. These official communications 
may include notices of technical default or default as to payment of 
interest or principal, requests for votes by bondholders, update 
memoranda from the trustee of a defaulted issue, as well as other 
official communications to owners of municipal securities that are not 
in default.
    (b) Reasonable Efforts.
    The rule G-15 amendment addresses six topics to help clarify what 
would constitute ``reasonable efforts'' to be made by a dealer in 
retransmitting an official communication in specific situations. These 
provisions are discussed below.
    Compensation. The rule G-15 amendment would require dealers to 
retransmit official communications only if compensation is offered. 
This is the same principle used in the regulations governing 
retransmission of notices of proxy and other material in NASD Conduct 
Rule 2260 on Forwarding of Proxy and Other Materials. Since the types 
of communications a dealer may receive and the amount of work a dealer 
may have to perform to retransmit notices probably will vary greatly 
from case to case, there is no attempt in the rule G-15 amendment to 
specify exactly what adequate compensation would be in each possible 
case. However, to give some guidance on this issue, the rule G-15 
amendment references the rates of compensation for transmittal of 
documents detailed in NASD interpretation IM-2260, on Suggested Rates 
of Reimbursement, relating to forwarding of proxy and other 
materials.\3\ Dealers may reference this interpretation in determining 
reasonable clerical expenses and other expenses incurred in 
retransmitting an official communication.
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    \3\ NASD Manual (CCH) para. 4233.
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    The rule G-15 amendment also includes a ``compensation threshold.'' 
It states that, for retransmission where the total compensation sought 
will be less than $500, the dealer should begin retransmitting 
immediately and ask for the calculated compensation concurrently. For 
retransmission where compensation sought will be greater than $500, the 
dealer either follows the general rule, or may instead promptly contact 
the party offering compensation, inform it of the amount of 
compensation required, obtain specific agreement on the amount of 
compensation and wait for receipt of such compensation prior to 
proceeding with the retransmission.
    CUSIP numbers. An official communication may relate to many 
different issues of municipal securities and it may be unclear from the 
document exactly which issues are involved. If CUSIP numbers are 
included with the document, the dealer can use these issue identifiers 
to determine which of its safekeeping clients should receive the 
document. However, official communications may in some cases be 
disseminated without CUSIP numbers and, in these cases, it

[[Page 6069]]

may be difficult to determine exactly which CUSIP numbers are involved. 
The rule G-15 amendment states that, if CUSIP numbers are not included 
with the document, the dealer must use reasonable efforts to determine 
the CUSIP numbers, so that the appropriate safekeeping clients can be 
identified. However, if these efforts do not result in a correct 
identification of CUSIP numbers, the failure to retransmit to those 
safekeeping clients who were not identified would not be considered a 
violation of the rule.
    Sufficient copies of official communications. The rule G-15 
amendment would not require dealers to provide duplication services for 
official communications. If a dealer does not receive enough copies of 
official communications for the investors for whom it safekeeps 
securities, the dealer may elect to provide duplication services or 
else must request the sufficient number of copies from the party 
requesting the official communications retransmission.
    Non-objecting beneficial owners. A non-objecting beneficial owner 
is a beneficial owner of municipal securities that does not object to 
the disclosure of its name, contact information and security positions 
and that has provided this notice to the dealer in writing. For 
safekeeping clients who are non-objecting beneficial owners, a dealer 
would have the option of sending to the party requesting an official 
communication retransmission a list of non-objecting beneficial owners 
along with these owners' contact information in lieu of retransmitting 
documents. The rule G-15 amendment requires that dealers obtain an 
investor's non-objecting status in writing. The proposed rule change's 
amendment to rule G-8 would require that such record be kept for a 
period of at least six years following the closing of an account.
    Beneficial owners residing outside of the United States. The rule 
G-15 amendment would not require dealers to retransmit official 
communications to investors residing outside of the United States.
    Investment advisors. Some investors designate investment advisors 
to act on their behalf in submission of orders and other investment-
related decisions. In these cases, it would be important for the 
investment advisor to receive the official communication. Consequently, 
the rule G-15 amendment states that dealers shall send official 
communications to the investment advisor for a beneficial owner, rather 
than to the beneficial owner, when the dealer has on file a written 
authorization for such documents to be sent to the investment advisor 
in lieu of the beneficial owner.
2. Basis
    The MSRB believes the proposed rule change is consistent with 
section 15B(b)(2)(C) of the Exchange Act, which provides that the 
MSRB's rules:

    * * * be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principals of trade * * 
* and to protect investors and the public interest . * * *

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 purposes of the Exchange Act since it applies equally to all 
dealers in municipal securities.

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

    On March 28, 2001, the MSRB published a notice seeking comment on 
an exposure draft of the proposed rule change (``March 2001 draft 
amendment'')\4\, the terms of which substantially were the same as the 
proposed rule change, with the following exceptions:
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    \4\ ``Official Communications,'' MSRB Reports, Vol. 21, No. 1 
(May 2001) at 17.[4]: ``Official Communications,'' MSRB Reports, 
Vol. 21, No. 1 (May 2001) at 17.
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     The March 2001 draft amendment did not include within the 
definition of ``official communication': (i) A state or federal tax 
authority sending an official communication to beneficial owners; or 
(ii) a custody agent forwarding official communications to the owners 
of custodial receipts.
     The March 2001 draft amendment did not specify that 
dealers should send official communications to investment advisors when 
a dealer has on file a written authorization for such documents to be 
sent to the investment advisor in lieu of the beneficial owner.
     The March 2001 draft amendment stated that, if the total 
compensation would be greater than $500, then the dealer must contact 
the party offering compensation and seek agreement on the amount 
required prior to forwarding the official communication. The proposed 
rule change states that, in this case, the dealer may undertake this 
alternative course of action.
    The MSRB received comments on the March 2001 draft amendment from 
the following five commentators: American Bankers Association 
(``ABA''); Association for Investment Management and Research 
(``AIMR''); Bankers Trust; Regional Municipal Operations Association 
(``RMOA''); and The Bond Market Association (``TBMA'').
    A majority of the commentators offered general support for the 
March 2001 draft amendment. The TBMA ``fully supports the laudable goal 
of the Board in promoting timely communications and increased 
information to bondholders.'' The AIMR stated ``the types of 
information included within the definition of official communications 
are just the types of material information that investors need in order 
to manage their accounts in an informed and responsible manner.'' The 
RMOA stated that the municipal securities ``industry has the 
infrastructure in place to support this initiative.''
    One commentator, the ABA, expressed dissatisfaction with the 
language of March 2001 draft amendment in that it referred specifically 
to corporate trustees in the compensation section. The ABA, which 
represents corporate trustees, was particularly concerned that the 
language of the March 2001 draft amendment left an impression that the 
MSRB may take the position that trustees are legally responsible for 
sending documents and compensating dealers for retransmission of those 
documents. It was not the intent of the MSRB to opine on this issue; 
thus technical changes were made in the language of the proposed rule 
change to delete the specific reference to trustees.
    Timing of dissemination. In a typical case involving book-entry 
securities,\5\ an issuer or trustee attempting to reach beneficial 
owners must first send a formal request to the Depository Trust Company 
(``DTC'') for a list of participants holding positions in the issue. 
DTC then processes the request and sends back a list of its 
``participants'' that hold DTC positions in the issue.\6\ Once it knows 
the DTC participants involved, the issuer or trustee sends the relevant 
documents to those parties. In some cases, the DTC participant will be 
the beneficial owner. It is more likely that the DTC participant is 
merely holding a position on behalf of one or more safekeeping clients. 
In

[[Page 6070]]

this case, if the notice is to reach beneficial owners, the DTC 
participant must identify those clients and retransmit the documents to 
them. In some cases, there are multiple nominees between DTC and the 
ultimate beneficial owner. For example, a dealer that safekeeps 
securities for customers may do so through a DTC participant bank.
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    \5\ The great majority of municipal securities are held by book-
entry. The MSRB is not aware of any document retransmission problems 
when beneficial owners are directly registered with the issue's 
registrar.
    \6\ DTC ``participants'' are the largest banks and securities 
firms in the United States. There are only approximately 550 DTC 
participants. As noted below, many dealers are not direct 
participants, but rather use DTC indirectly through other banks or 
securities firms.
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    Even under the best of circumstances, an official communication may 
take a week or more to reach beneficial owners. Bankers Trust stated 
its concern over potential delays in the timing of dissemination of 
documents under the procedure outlined in the March 2001 draft 
amendment. The MSRB notes, however, that the proposed rule change is 
not intended to be a mechanism for dissemination of time-critical 
material information to market participants, but rather addresses the 
problem of how the specific owners of an issue can be identified and 
communicated with, for example, under the terms of a trust indenture 
when a vote of securities holders is being held. The MSRB believes it 
is important to acknowledge that retransmitting paper documents through 
a chain of nominees and other custodians cannot possibly provide 
information to beneficial owners as quickly as the information in those 
documents will reach the market from other sources such as information 
vendors, NRMSIRs, the issuer's web site, etc. The MSRB believes that if 
each nominee acts promptly when it is its turn to act, official 
communications normally should reach beneficial owners in a week or two 
and this normally will be sufficient time for a vote of bondholders or 
other purposes that require the issuer (or trustee if it chooses to do 
so) to communicate directly with bondholders.
    Compensation. As noted above, the March 2001 draft amendment 
included a compensation provision noting that, if total compensation 
would be more than $500.00, the dealer must contact the sender and 
inform it of the amount of compensation required and obtain specific 
agreement on the amount of compensation prior to retransmitting the 
official communication and may wait for receipt of such compensation 
prior to proceeding. Bankers Trust stated that the March 2001 draft 
amendment ``allows for delays in forwarding official communications to 
beneficial owners while the dealer seeks compensation from the issuer 
or trustee.'' The MSRB realizes that the requirement to seek 
compensation for retransmissions costing in excess of $500 prior to 
passing on documents could cause unnecessary delays in retransmitting 
official communications since some dealers may feel comfortable that an 
issuer will follow through on their offer of compensation, even prior 
to obtaining a specific agreement to pay such an amount. The RMOA, for 
example, stated ``in most cases compensation would take a back seat to 
[their] strong commitment to an informed customer.''
    The MSRB decided to change the compensation threshold so that it 
would be an optional course of action for the dealer rather than a 
requirement. The revised compensation provision would permit those 
dealers who would like to retransmit official communications as 
promptly as possible, even without assurance that compensation will be 
provided, to do so without having to wait for receipt of agreement or 
funds from the party offering compensation. However, for dealers that 
wish to be assured that compensation would be provided on 
retransmissions costing in excess of $500, the option is left for the 
dealer to seek specific agreement with the party offering compensation 
and to receive funds prior to retransmitting documents.

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

    Within 35 days of the date of 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 self-regulatory organization consents, the Commission will:
    (a) by order approve such 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 forgoing, including whether the rule proposal 
change is consistent with the Exchange 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-
2001-08 and should be submitted by March 1, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3044 Filed 2-7-02; 8:45 am]
BILLING CODE 8010-01-U