[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