[Federal Register Volume 67, Number 57 (Monday, March 25, 2002)]
[Notices]
[Pages 13673-13674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7042]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45591; File No. SR-MSRB-2002-01]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change Relating to Rule 
G-17 on Disclosure of Material Facts

March 18, 2002.
    On January 25, 2002, pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ the Municipal Securities Rulemaking Board (``MSRB'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change relating to Rule G-17, on disclosure of material 
facts.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Commission published the proposed rule change for comment in 
the Federal Register on February 12, 2002.\3\ The Commission received 
no comment letters relating to the forgoing proposed rule change. This 
order approves the proposal.
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    \3\ See Release No. 34-45361 (January 30, 2002), 67 FR 6562.
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I. Description of the Proposed Rule Change

    The proposed rule change provides an interpretation of the duty to 
deal fairly set forth in Rule G-17. The MSRB's proposed this 
interpretation to set forth an expanded explanation of what Rule G-17's 
obligation to ``disclose all material facts'' means in today's 
innovative market. The MSRB believes that technological changes 
necessitate interpretive guidance for the application of certain rules. 
Alternative trading systems present the most graphic example of 
changing dealer/customer relationships and the consequent need for 
regulatory change, but these relationship obligations are not 
necessarily limited to electronic trading venues.
    As part of a dealer's obligation to deal fairly, the MSRB has 
consistently interpreted that Rule G-17 creates affirmative disclosure 
obligations for brokers, dealers and municipal securities dealers 
(collectively, ``dealers''). The MSRB has stated that a dealer's 
affirmative disclosure obligations require that a dealer 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.\4\ These obligations apply even when a dealer is acting 
as an order taker and effecting non-recommended secondary market 
transactions.
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    \4\ See e.g., Rule G-17 Interpretation--Educational Notice on 
Bonds Subject to ``Detachable'' Call Features, May 13, 1993, MSRB 
Rule Book (July 2001) at 129-130. The Commission described material 
facts as those ``facts which a prudent investor should know in order 
to evaluate the offering before reaching an investment decision.'' 
Municipal Securities Disclosure, Exchange Act Release No. 26100 
(Sept. 22, 1988) 53 FR 37778 at note 76, quoting In re Walston & Co. 
Inc., and Harrington, Exchange Act Release No. 8165 (Sept. 22, 1967) 
43 SEC 508, 1967 SEC LEXIS 553. Furthermore, the United States 
Supreme Court has stated that a fact is material if there is a 
substantial likelihood that its disclosure would have been 
considered significant by a reasonable investor. TSC Industries, 
Inc. v. Northway, Inc., 426 U.S. 438 (1976).
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    Rule G-17 requires that dealers disclose to a customer at the time 
of trade all material facts about a transaction known by the dealer. In 
addition, a dealer is required to disclose material facts about a 
security when such facts are reasonably accessible to the market. Thus, 
a dealer would be responsible for disclosing to a customer any material 
fact concerning a municipal securities transaction made publicly 
available through sources such as the NRMSIR system, the MSIL 
system, TRS, rating agency reports and other sources of information 
relating to the municipal securities transaction generally used by 
dealers that effect transactions in the type of municipal securities at 
issue (collectively, ``established industry sources'').\5\
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    \5\ Dealers operating electronic trading platforms have inquired 
whether providing electronic access to material information is 
consistent with the obligation to disclose information under Rule G-
17. The MSRB believes that the provision of electronic access to 
material information to customers who elect to transact in municipal 
securities on an electronic platform is generally consistent with a 
dealer's obligation to disclose such information, but that whether 
such access is effective disclosure ultimately depends upon the 
particular facts and circumstances present.
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    In addition to the basic disclosure obligations, the duty to ``deal 
fairly'' is intended to ``refer to the customs and practices of the 
municipal securities markets, which may, in many instances differ from 
the corporate securities markets.'' \6\ The customs and practices of 
the industry suggest that the sources of information generally used by 
a dealer that effects transactions in municipal securities may vary 
with the type of municipal security. For example, a dealer might have 
to draw on fewer industry sources to disclose all material facts about 
an insured ``triple-A'' rated general obligation bond than for a non-
rated conduit issue. In addition, to the extent that a security is more 
complex, for example, because of complex structure or where credit 
quality is changing rapidly, a dealer might need to take into account a 
broader range of information sources prior to executing a transaction.
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    \6\ See Exchange Act Release No. 13987 (Sept. 22, 1977).
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II. Discussion

    The MSRB believes that the proposed rule change is consistent with 
section 15B(b)(2)(C) of the Exchange Act.\7\ The

[[Page 13674]]

MSRB believes that this rule satisfies this standard because it is 
intended to clarify that a dealer's general obligation to provide 
disclosure is viewed within the context of reasonably available 
information about the municipal security and the dealer's actual 
knowledge of the municipal security. Additionally, the MSRB believes 
that the proposed rule change will not impose any burden on competition 
not necessary or appropriate in furtherance of the purposes of the 
Exchange Act, since it applies equally to all brokers, dealers and 
municipal securities dealers.
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    \7\ MSRB rules shall, ``be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade * * * 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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    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 
15B(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 consisting of an interpretation of Rule G-17, on disclosure 
of material facts, meets this standard. 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, 
the Commission finds that the proposed rule is consistent with the 
requirements of section 15B(b)(2)(C) of the Act, set forth above.

III. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Exchange Act, \10\ that the proposed rule change (File No. SR-MSRB-
2002-01) be and hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7042 Filed 3-22-02; 8:45 am]
BILLING CODE 8010-01-U