[Federal Register Volume 67, Number 31 (Thursday, February 14, 2002)]
[Notices]
[Pages 6960-6961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2588]



[[Page 6960]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45338; File No. SR-MSRB-2001-07]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change Relating to 
Minimum Denominations

January 25, 2002.
    On October 16, 2001, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') and Rule 19b-4 thereunder,\1\ a 
proposed rule change (File No. SR-MSRB-2001-07) concerning minimum 
denominations consisting of an amendment to its rule G-15 on 
confirmation, clearance and settlement of transactions with customers, 
an amendment to its rule G-8 on books and records to be made by 
brokers, dealers and municipal securities dealers, and an 
interpretation of its rule G-17 on conduct of municipal securities 
activities.
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    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4 thereunder.
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    The proposed rule change was published for comment in the Federal 
Register on December 28, 2001.\2\ The Commission received fifteen 
comment letters on the MSRB's proposed rule change. This order approves 
the proposal.
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    \2\ See Release No. 34-45174 (December 19, 2001), 66 FR 67342.
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I. Description of the Proposed Rule Change

    The MSRB proposed this rule change as a measure to ensure that 
dealers observe the minimum denominations stated in the official 
documents of municipal securities issues. Official documents for 
municipal securities issues may state a ``minimum denomination'' larger 
than the normal $5,000 par value. For example, an issuer may state a 
high minimum denomination (typically $100,000) to qualify for one of 
several exemptions from Rule 15c2-12's \3\ requirement to file certain 
disclosure documents. Additionally, an issuer may set high minimum 
denominations because of a concern that the securities may not be 
appropriate for those retail investors who would be likely to purchase 
securities in relatively small amounts.
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    \3\ 17 CFR 240.15c2-12.
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    Several issuers have expressed concern to the MSRB upon discovering 
that their issues with high minimum denominations were trading in the 
secondary market in transaction amounts much lower than the stated 
minimum denomination. Based on information obtained from the MSRB 
Transaction Reporting Program, it appears that there are significant 
numbers of these types of transactions. In the past, brokers, dealers 
and municipal securities dealers (collectively ``dealers'') effecting 
such transactions likely would have noticed the problem when attempting 
to make delivery of a certificate to the customer. Generally, the 
transfer agent would not have been able to honor a request for a 
certificate with a par value below the minimum denomination. However, 
the increased use of book-entry deliveries and safekeeping arrangements 
for retail customers largely preclude the need for individual 
certificates for customers and there is no other systemic screening to 
identify transactions that are in below-minimum denomination amounts. 
Today, municipal securities predominantly stay in a book-entry 
environment, with ownership recorded on the books and records of 
depositories and other nominees, a restriction on the par value of 
certificates does not effectively restrict the size of transactions.
    The MSRB believes that it is appropriate for the rule to be 
prospective in this manner so that issuers, dealers and other market 
participants will be aware of the secondary market implications of high 
minimum denominations at the time the decision is made to incorporate 
them into an issue's terms. Accordingly, the proposed rule change 
includes an amendment to MSRB rule G-15 that would prohibit 
transactions in below-minimum denomination amounts for securities 
issued after June 1, 2002, with two limited exceptions.
    The general prohibition of the rule G-15 amendment is designed to 
prevent dealers from effecting transactions that break up securities 
positions into amounts below the issue's denomination. The two 
exceptions in the amendment to rule G-15 are designed to help preserve 
liquidity of customers' below-minimum denomination positions that may 
occur through actions other than a dealer effecting transactions in 
below-minimum denomination amounts.\4\ First, a dealer may purchase a 
below-minimum denomination position from a customer provided that the 
customer liquidates his/her entire position. Second, a dealer may sell 
such a liquidated position to another customer but would be required to 
provide written disclosure, either on the confirmation or separately, 
to the effect that the security position is below the minimum 
denomination and that liquidity may be adversely affected by this fact.
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    \4\ A below-minimum denomination position may be created, for 
example, by call provisions that allow calls in amounts less than 
the minimum denomination, investment advisors who may split 
positions they purchase among several clients or the division of an 
estate as a result of a death or divorce. Such below-minimum 
denomination positions also may be created as a result of a gift.
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    Under MSRB rule G-8, on books and records, customer confirmations 
must be kept for three years in a dealer's books and records. To ensure 
consistency in the recordkeeping requirements for separate written 
disclosures given to a customer under the rule G-15 amendment and the 
recordkeeping requirements for customer confirmations, the proposed 
rule change includes an amendment to rule G-8 that would require 
dealers to keep a record of these separate written disclosures for a 
minimum of three years.
    Although certain written disclosures would be required, after the 
trade, for those transactions done under the second exemption to the 
rule G-15 amendment, the MSRB also seeks to address a more general need 
for time-of-trade disclosure in the proposed rule change. Rule G-17 
states: ``In the conduct of its municipal securities activities, each 
broker, dealer, and municipal securities dealer shall deal fairly with 
all persons and shall not engage in any deceptive, dishonest, or unfair 
practice.'' The MSRB has interpreted this rule to mean, among other 
things, that dealers are required to disclose, at or before the sale of 
municipal securities to a customer, all material facts concerning the 
transaction, including a complete description of the security. The 
proposed rule change includes an interpretation of rule G-17 stating 
that any time a dealer is selling to a customer a quantity of municipal 
securities below the minimum denomination for the issue, the dealer 
should consider this to be a material fact about the transaction. The 
MSRB believes that a dealer's failure to disclose such a material fact 
to the customer, and to explain how this could affect the liquidity of 
the customer's position, generally would constitute a violation of the 
dealer's duty under rule G-17 to disclose all material facts about the 
transaction to the customer.

[[Page 6961]]

    While the rule G-15 amendment applies only to municipal securities 
issued after June 1, 2002, the interpretation of rule G-17 applies to 
all transactions in municipal securities regardless of the date of 
issuance of the security traded. This helps ensure that all future 
investors are made aware at or prior to the time of trade that the 
securities position they are about to purchase is below the minimum 
denomination and that the liquidity of that position may be adversely 
affected by this fact.

II. Summary of Comments

    The Commission received fifteen comments letters on the 
proposal.\5\ All of the letters received favored the proposal. 
Collectively, the comment letters asserted that the proposal balanced 
the enforcement of bondholder protections without impairing liquidity 
of bonds currently held in unauthorized denominations by unsuspecting 
investors.\6\ All but three of the commenters preferred a retroactive 
application; nevertheless, they supported the proposal's prospective 
enforcement of bondholders' protections.\7\
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    \5\ See letter from Rebecca Floyd, Executive Vice President and 
General Counsel, Kansas Development Finance Authority to Office of 
the Secretary, Commission, dated January 14, 2002; letter from Neil 
P. Moss, Executive Director, Idaho Health Facilities Authority to 
Office of the Secretary, Commission, dated January 14, 2002; letter 
from Corinne M. Johnson, Executive Director, Colorado Health 
Facilities Authority to Office of the Secretary, Commission, dated 
January 14, 2002; letter from Edith F. Behr, President, National 
Council of Health Facilities Finance Authorities to Office of the 
Secretary, Commission, dated January 14, 2002; letter from Edith F. 
Behr, Executive Director, New Jersey Health Care Facilities 
Financing Authority to Office of the Secretary, Commission, dated 
January 14, 2002; letter from Larry Nines, Executive Director, 
Wisconsin Health and Educational Facilities Authority to Office of 
the Secretary, Commission, dated January 15, 2002; letter form 
Christopher B. Taylor, Auditor and Advisor, Department of Health and 
Human Services, The North Carolina Medical Care Commission to Office 
of the Secretary, Commission, dated January 15, 2002; letter from 
Don A. Templeton, Executive Director, South Dakota Health and 
Educational Facilities Authority to Office of the Secretary, 
Commission, dated January 15, 2002; letter from Robert E. Donovan, 
Executive Director, Rhode Island Health and Educational Building 
Corporation to Office of the Secretary, Commission, dated January 
15, 2002; letter from David C. Bliss, Executive Director, New 
Hampshire Health and Education Facilities Authority to Office of the 
Secretary, Commission, dated January 15, 2002; letter from Malcolm 
S. Rode, Executive Director, Vermont Educational and Health 
Buildings Financing Agency, dated January 15, 2002; letter from Jill 
H. Tanner, Executive Director, Indiana Health Facilities Financing 
Authority to Office of the Secretary, Commission, dated January 16, 
2002; letter from Kim Herman, Executive Director, Washington Higher 
Education Facilities Authority to Office of the Secretary, 
Commission, dated January 16, 2002; letter from Mary R. Jeka, Acting 
Executive Director, Massachusetts Health and Educational Facilities 
Authority to Office of the Secretary, Commission, dated January 16, 
2002; and letter from Michael J. Stanard, Executive Director, 
Missouri Health and Educational Facilities Authority to Office of 
the Secretary, Commission, dated January 16, 2002.
    \6\ See note 4, supra.
    \7\ See note 4, supra (not including the letter from Missouri 
Health and Educational Facilities Authority; the letter from 
National Council of Health Facilities Finance Authority, and the 
letter from Washington Higher Education Facilities Authority).
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III. Discussion

    The Commission must approve a proposed MSRB rule change if the 
Commission finds that the MSRB's proposal is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder that govern the MSRB.\8\ The language of section 15(b)(2)(C) 
of the Exchange Act requires that the MSRB's rules must be designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principals of trade, to foster cooperation and 
coordination with persons engaged in regulating, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national system, and, in general, to protect 
investors and the public interest.\9\
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    \8\ Additionally, in approving this rule, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78o-4(b)(2)(c).
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    After careful review, the Commission finds that the MSRB's proposed 
rule change concerning minimum denominations meets this standard. The 
minimum denominations proposal consists of an amendment to MSRB Rule G-
15 on confirmation, clearance and settlement of transactions with 
customers, an amendment to MSRB Rule G-8 on books and records to be 
made by brokers, dealers and municipal securities dealers, and an 
interpretation of MSRB Rule G-17 on conduct of municipal securities 
activities. The Commission believes that this proposed rule change is 
consistent with the requirements of the Exchange Act, and the rules and 
regulations thereunder, in particular, section 15B(b)(2)(C).

IV. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act that the proposed rule change (SR-MSRB-2001-07) be, and 
hereby is, approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-2588 Filed 2-13-02; 8:45 am]
BILLING CODE 8010-01-P