[Federal Register Volume 67, Number 88 (Tuesday, May 7, 2002)]
[Notices]
[Pages 30743-30747]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-11231]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45849; File No. SR-MSRB-2002-02]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change Relating to 
Transactions With Sophisticated Municipal Market Professionals

April 30, 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 transactions with sophisticated 
municipal market professionals.
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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 
four comment letters relating to the forgoing proposed rule change. 
This order approves the proposal.
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    \3\ See Release No. 34-45364 (January 30, 2002), 67 FR 6294.
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I. Description of the Proposed Rule Change

    The MSRB's proposed rule change provides an interpretation of the 
duties under Rules G-13, G-17, G-18, and G-19 \4\ with regard to 
transactions involving sophisticated municipal market professionals. 
The MSRB proposed this rule change because it believes that dealers may 
consider the nature of the institutional customer in determining what 
specific actions are necessary to meet the fair practice standards for 
a particular transaction. The MSRB's proposal concerns only the manner 
in which a dealer determines that it has met certain of its fair 
practice obligations to certain institutional customers; it does not 
alter the basic duty to deal fairly, which applies to all transactions 
and all customers.\5\
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    \4\ The general rules are as follows: Rule G-13, Quotations 
Relating to Municipal Securities; Rule G-17, Conduct of Municipal 
Securities Activities; Rule G-18, Execution of Transactions; and 
Rule G-19, Suitability of Recommendations and Transactions; 
Discretionary Accounts.
    \5\ The proposed rule change describes institutional customer as 
``an entity, other than a natural person (corporation, partnership, 
trust, or otherwise), with total assets of at least $100 million 
invested in municipal securities in the aggregate in its portfolio 
and/or under management.'' See Release No. 34-45364 (January 30, 
2002), 67 FR 6294.

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[[Page 30744]]

    In the proposed rule change notice, the MSRB clarified the 
definition of sophisticated municipal market professional (``SMMP''). 
Not all institutional customers are sophisticated regarding investments 
in municipal securities. There are three important considerations with 
respect to the nature of an institutional customer in determining the 
scope of a dealer's fair practice obligations. When a dealer has 
reasonable grounds for concluding that an institutional customer (i) 
has timely access to the publicly available material facts concerning a 
municipal securities transaction; \6\ (ii) is capable of independently 
evaluating the investment risk and market value of the municipal 
securities at issue; \7\ and (iii) is making independent decisions 
about its investments in municipal securities, and other known facts do 
not contradict such a conclusion,\8\ the institutional customer can be 
considered an SMMP.\9\ While the scope of a dealer's fair practice 
obligations depends on the particular transaction, by making a 
reasonable determination that an institutional customer is an SMMP, 
certain of the dealer's fair practice obligations remain applicable but 
are deemed fulfilled. In addition, as discussed below, the fact that a 
quotation is made by an SMMP would have an impact on how such quotation 
is treated under rule G-13.
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    \6\ A determination of ``timely access to the publicly available 
material facts'' will depend on the customer's resources and the 
customer's ready access to established industry sources for 
disseminated material information. Considerations include, but are 
not limited to, the following: resources available to the 
institutional customer to investigate the transaction; the 
institutional customer's independent access to the NRMSIR system and 
the MSRB's MSIL system; and the institutional customer's access to 
other sources of information concerning material finance 
developments. See id.
    \7\ To determine if an institutional customer is ``capable of 
independently evaluating the investment risk and market value'' 
depend on examination of that customer's ability to make its own 
investment decisions. Relevant considerations include, but are not 
limited to, the following: the use of one or more consultants, 
investment advisers, research analysts or bank trust departments; 
the general level of municipal securities market expertise of the 
institutional customer and expertise in the municipal securities 
under consideration; the institutional customer's ability to 
understand economic features of municipal securities; the 
institutional customer's ability to independently evaluate how 
market developments affect the municipal security under 
consideration; and the complexity of the municipal securities 
involved. See id.
    \8\ ``Independent investment decisions'' depend on the 
institutional customer's own thorough independent assessment of 
opportunities and risks presented by the potential investment, 
market forces, etc. Relevant considerations include, but are not 
limited to, the following: Any written or oral understanding that 
exists between the dealer and the institutional customer regarding 
the nature of the relationship and services between the dealer and 
the customer; the presence or absence of a pattern of acceptance of 
the dealer's recommendations; the use by the institutional customer 
of ideas, suggestions, market views and information obtained from 
sources other than the dealer; the extent to which whether the 
dealer has received from the institutional customer current 
comprehensive portfolio information in connection with municipal 
securities transactions. See id.
    \9\ Dealers are advised that they have the option of having 
investors attest to SMMP status as a means of streamlining the 
dealers' process for determining that the customer is an SMMP. 
However, a dealer would not be able to rely upon a customer's SMMP 
attestation if the dealer knows or has reason to know that an 
investor lacks sophistication concerning a municipal securities 
transaction.
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Application of SMMP Concept to Rule G-17's Affirmative Disclosure 
Obligations

    As it applies to rule G-17, the SMMP concept recognizes that the 
actions of a dealer, in compliance with affirmative disclosure 
obligations under rule G-17, when effecting non-recommended secondary 
market transactions may depend on the nature of the customer. When a 
dealer has reasonable grounds for concluding that the institutional 
customer is an SMMP, the institutional customer, by definition, is 
already aware, or capable of making itself aware of, material facts and 
is able to independently understand the significance of the material 
facts available from established industry sources.\10\ When the dealer 
has reasonable grounds for concluding that the customer is an SMMP then 
the dealer's obligation when effecting non-recommended secondary market 
transactions to ensure disclosure of material information available 
from established industry sources is fulfilled. There may be times when 
an SMMP is not satisfied that the information available from 
established industry sources is sufficient to allow it to make an 
informed investment decision. In those circumstances, the MSRB believes 
that an SMMP can recognize that risk and take appropriate action, be it 
declining to transact, undertaking additional investigation or asking 
the dealer to undertake additional investigation.
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    \10\ The MSRB filed a related notice regarding the disclosure of 
material facts under rule G-17 concurrently with this filing. See 
File No. SR-MSRB-2002-01. The MSRB's rule G-17 notice provides that 
a dealer would be responsible for disclosing to a customer any 
material fact concerning a municipal security transaction 
(regardless of whether such transaction had been recommended by the 
dealer) 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 
municipal securities (collectively, ``established industry 
sources'').
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    This interpretation does nothing to alter a dealer's duty not to 
engage in deceptive, dishonest, or unfair practices under rule G-17 or 
under the federal securities laws. In essence, a dealer's disclosure 
obligations to SMMPs when effecting non-recommended secondary market 
transactions would be on par with inter-dealer disclosure obligations. 
This interpretation will be particularly relevant to dealers operating 
electronic trading platforms, although it will also apply to dealers 
who act as order takers over the phone or in-person.\11\ This 
interpretation recognizes that there is no need for a dealer in a non-
recommended secondary market transaction to disclose material facts 
available from established industry sources to an SMMP customer that 
already has access to the established industry sources.\12\
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    \11\ For example, if an SMMP reviewed an offering of municipal 
securities on an electronic platform that limited transaction 
capabilities to broker-dealers and then called up a dealer and asked 
the dealer to place a bid on such offering at a particular price, 
the interpretation would apply because the dealer would be acting 
merely as an order taker effecting a non-recommended secondary 
market transaction for the SMMP.
    \12\ In order to meet the definition of an SMMP an institutional 
customer must, at least, have access to established industry 
sources.
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    As in the case of an inter-dealer transaction, in a transaction 
with an SMMP, a dealer's intentional withholding of a material fact 
about a security, where the information is not accessible through 
established industry sources, may constitute an unfair practice 
violative of rule G-17. In addition, a dealer may not knowingly 
misdescribe securities to the customer. A dealer's duty not to mislead 
its customers is absolute and is not dependent upon the nature of the 
customer.

Application of SMMP Concept to Rule G-18 Interpretation--Duty to Ensure 
That Agency Transactions Are Effected at Fair and Reasonable Prices

    Rule G-18 requires that each dealer, when executing a transaction 
in municipal securities for or on behalf of a customer as agent, make a 
reasonable effort to obtain a price for the customer that is fair and 
reasonable in relation to prevailing market conditions.\13\ The

[[Page 30745]]

actions that a dealer must take to make reasonable efforts to ensure 
that its non-recommended secondary market agency transactions with 
customers are effected at fair and reasonable prices may be influenced 
by the nature of the customer as well as by the services explicitly 
offered by the dealer.
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    \13\ This guidance only applies to the actions necessary for a 
dealer to ensure that its agency transactions are effected at fair 
and reasonable prices. If a dealer engages in principal transactions 
with an SMMP, rule G-30(a) applies and the dealer is responsible for 
a transaction-by-transaction review to ensure that it is charging a 
fair and reasonable price. In addition, rule G-30(b) applies to the 
commission or service charges that a dealer operating an electronic 
trading system may charge to effect the agency transactions that 
take place on its system.
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    If a dealer effects non-recommended secondary market agency 
transactions for SMMPs and its services have been explicitly limited to 
providing anonymity, communication, order matching and/or clearance 
functions and the dealer does not exercise discretion as to how or when 
a transaction is executed, then the MSRB believes the dealer is not 
required to take further actions on individual transactions to ensure 
that its agency transactions are effected at fair and reasonable 
prices.\14\ By making the determination that the customer is an SMMP, 
the dealer necessarily concludes that the customer has met the 
requisite high thresholds regarding timely access to information, 
capability of evaluating risks and market values, and undertaking of 
independent investment decisions that would help ensure the 
institutional customer's ability to evaluate whether a transaction's 
price is fair and reasonable.
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    \14\ Similarly, the MSRB believes the same limited agency 
functions can be undertaken by a broker's broker toward other 
dealers. For example, if a broker's broker effects agency 
transactions for other dealers and its services have been explicitly 
limited to providing anonymity, communication, order matching and/or 
clearance functions and the dealer does not exercise discretion as 
to how or when a transaction is executed, then the MSRB believes the 
broker's broker is not required to take further actions on 
individual transactions to ensure that its agency transactions with 
other dealers are effected at fair and reasonable prices.
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    This interpretation will be particularly relevant to dealers 
operating alternative trading systems in which participation is limited 
to dealers and SMMPs. It clarifies that in such systems rule G-18 does 
not impose an obligation upon the dealer operating such a system to 
investigate each individual transaction price to determine its 
relationship to the market. The MSRB recognizes that dealers operating 
such systems may be merely aggregating the buy and sell interest of 
other dealers or SMMPs. This function may provide efficiencies to the 
market. Requiring the system operator to evaluate each transaction 
effected on its system may reduce or eliminate the desired 
efficiencies. Even though this interpretation eliminates a duty to 
evaluate each transaction, a dealer operating such system, under the 
general duty set forth in rule G-18, must act to investigate any 
alleged pricing irregularities on its system brought to its attention. 
Accordingly, a dealer may be subject to rule G-18 violations if it 
fails to take actions to address system or participant pricing abuses.
    If a dealer effects agency transactions for customers who are not 
SMMPs, or has held itself out to do more than provide anonymity, 
communication, matching and/or clearance services, or performs such 
services with discretion as to how and when the transaction is 
executed, it will be required to establish that it exercised reasonable 
efforts to ensure that its agency transactions with customers are 
effected at fair and reasonable prices.

Application of SMMP Concept to Rule G-19 Interpretation--Suitability of 
Recommendations and Transactions

    The MSRB's suitability rule is fundamental to fair dealing and is 
intended to promote ethical sales practices and high standards of 
professional conduct. Dealers' responsibilities include having a 
reasonable basis for recommending a particular security or strategy, as 
well as having reasonable grounds for believing the recommendation is 
suitable for the customer to whom it is made. Dealers are expected to 
meet the same high standards of competence, professionalism, and good 
faith regardless of the financial circumstances of the customer. Rule 
G-19, on suitability of recommendations and transactions, requires 
that, in recommending to a customer any municipal security transaction, 
a dealer shall have reasonable grounds for believing that the 
recommendation is suitable for the customer based upon information 
available from the issuer of the security or otherwise and based upon 
the facts disclosed by the customer or otherwise known about the 
customer.
    This guidance concerns only the manner in which a dealer determines 
that a recommendation is suitable for a particular institutional 
customer. The manner in which a dealer fulfills this suitability 
obligation will vary depending on the nature of the customer and the 
specific transaction. Accordingly, this interpretation deals only with 
guidance regarding how a dealer will fulfill such ``customer-specific 
suitability obligations'' under rule G-19. This interpretation does not 
address the obligation related to suitability that requires that a 
dealer have a ``reasonable basis'' to believe that the recommendation 
could be suitable for at least some customers. In the case of a 
recommended transaction, a dealer may, depending upon the facts and 
circumstances, be obligated to undertake a more comprehensive review or 
investigation in order to meet its obligation under rule G-19 to have a 
``reasonable basis'' to believe that the recommendation could be 
suitable for at least some customers.\15\
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    \15\ See e.g., Rule G-19 Interpretation--Notice Concerning the 
Application of Suitability Requirements to Investment Seminars and 
Customer Inquiries Made in Response to a Dealer's Advertisement, May 
7, 1985, MSRB Rule Book (July 1, 2001) at 135; In re F.J. Kaufman 
and Company of Virginia, 50 S.E.C. 164, 168, 1989 SEC LEXIS 2376, 
*10 (1989). In a 1988 Release, the Commission's discussion of 
municipal underwriters' responsibilities noted that ``a broker-
dealer recommending securities to investors implies by its 
recommendation that it has an adequate basis for the 
recommendation.'' Municipal Securities Disclosure, Release No. 34-
26100 (September 22, 1988) (the ``1988 SEC Release'') at text 
accompanying note 72.
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    The manner in which a dealer fulfills its ``customer-specific 
suitability obligations'' will vary depending on the nature of the 
customer and the specific transaction. While it is difficult to define 
in advance the scope of a dealer's suitability obligation with respect 
to a specific institutional customer transaction recommended by a 
dealer, the MSRB has identified the factors that define an SMMP as 
factors that may be relevant when considering compliance with rule G-
19. Where the dealer has reasonable grounds for concluding that an 
institutional customer is an SMMP, then a dealer's obligation to 
determine that a recommendation is suitable for that particular 
customer is fulfilled.
    This interpretation does not address the facts and circumstances 
that go into determining whether an electronic communication does or 
does not constitute a customer-specific ``recommendation.''

Application of SMMP Concept to Rule G-13, on Quotations

    New electronic trading systems provide a variety of avenues for 
disseminating quotations among both dealers and customers. In general, 
except as described below, any quotation disseminated by a dealer is 
presumed to be a quotation made by such dealer. In addition, any 
``quotation'' of a non-dealer (e.g., an investor) relating to municipal 
securities that is disseminated by a dealer is presumed, except as 
described below, to be a quotation made by such dealer.\16\ The dealer 
is affirmatively responsible in either case for ensuring compliance 
with the bona fide and fair market value

[[Page 30746]]

requirements with respect to such quotation.
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    \16\ A customer's bid for, offer of, or request for bid or offer 
is included within the meaning of a ``quotation' if it is 
disseminated by a dealer.
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    However, if a dealer disseminates a quotation that is actually made 
by another dealer and the quotation is labeled as such, then the 
quotation is presumed to be a quotation made by such other dealer and 
not by the disseminating dealer. Furthermore, if an SMMP makes a 
``quotation'' and it is labeled as such, then it is presumed not to be 
a quotation made by the disseminating dealer; rather, the dealer is 
held to the same standard as if it were disseminating a quotation made 
by another dealer.\17\ In either case, the disseminating dealer's 
responsibility with respect to such quotation is reduced. Under these 
circumstances, the disseminating dealer must have no reason to believe 
that either: (i) The quotation does not represent a bona fide bid for, 
or offer of, municipal securities by the maker of the quotation or (ii) 
the price stated in the quotation is not based on the best judgment of 
the maker of the quotation of the fair market value of the securities.
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    \17\ The disseminating dealer need not identify by name the 
maker of the quotation, but only that such quotation was made by 
another dealer or an SMMP, as appropriate.
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    While rule G-13 does not impose an affirmative duty on the dealer 
disseminating quotations made by other dealers or SMMPs to investigate 
or determine the market value or bona fide nature of each such 
quotation, it does require that the disseminating dealer take into 
account any information it receives regarding the nature of the 
quotations it disseminates. Based on this information, such a dealer 
must have no reason to believe that these quotations fail to meet 
either the bona fide or the fair market value requirement and it must 
take action to address such problems brought to its attention. Reasons 
for believing there are problems could include, among other things, (i) 
complaints received from dealers and investors seeking to execute 
against such quotations, (ii) a pattern of a dealer or SMMP failing to 
update, confirm or withdraw its outstanding quotations so as to raise 
an inference that such quotations may be stale or invalid, or (iii) a 
pattern of a dealer or SMMP effecting transactions at prices that 
depart materially from the price listed in the quotations in a manner 
that consistently is favorable to the party making the quotation.\18\
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    \18\ The MSRB believes that, consistent with its view previously 
expressed with respect to ``bait-and-switch'' advertisements, a 
dealer that includes a price in its quotation that is designed as a 
mechanism to attract potential customers interested in the quoted 
security for the primary purpose of drawing such potential customers 
into a negotiation on that or another security, where the quoting 
dealer has no intention at the time it makes the quotation of 
executing a transaction in such security at that price, could be a 
violation of rule G-17. See Rule G-21 Interpretive Letter--
Disclosure Obligations, MSRB Interpretation of May 21, 1998, MSRB 
Rule Book (July 1, 2001) at p. 139.
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    In a prior MSRB interpretation stating that stale or invalid 
quotations published in a daily or other listing must be withdrawn or 
updated in the next publication, the MSRB did not consider the 
situation where quotations are disseminated electronically on a 
continuous basis.\19\ In such case, the MSRB believes that the bona 
fide requirement obligates a dealer to withdraw or update a stale or 
invalid quotation promptly enough to prevent a quotation from becoming 
misleading as to the dealer's willingness to buy or sell at the stated 
price. In addition, although not required under the rule, the MSRB 
believes that posting the time and date of the most recent update of a 
quotation can be a positive factor in determining whether the dealer 
has taken steps to ensure that a quotation it disseminates is not stale 
or misleading.
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    \19\ See Rule G-13 Interpretation, Notice of Interpretation of 
Rule G-13 on Published Quotations, April 21, 1988, MSRB Rule Book 
(July 1, 2001) at 91.
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II. Summary of Comments

    The Commission received five letters for comment on the 
proposal.\20\ Of the five letters received, one expressed support\21\ 
for the proposed rule change and the other four expressed concerns with 
the current form of the proposal.\22\
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    \20\ See letter from Lynnette Kelly Hotchkiss, Senior Vice 
President and Associate General Counsel, The Bond Market Association 
(``TBMA''), to Mr. Jonathan Katz, Secretary, Commission, dated March 
1, 2002; letter from James C. White, Senior Vice President, Schwab 
Capital Markets, Charles Schwab (``Schwab''), to Jonathan G. Katz, 
Secretary, Commission, dated March 4, 2002; letter from Amy B.R. 
Lancellotta, Senior Counsel, Investment Company Institute (``ICI''), 
to Mr. Jonathan G. Katz, Secretary, Commission, dated March 4, 2002; 
letter from Stanley N. Griffith, Vice President/Associate General 
Counsel, Fidelity Management & Research Co., Fidelity Investments 
(``Fidelity''), to Jonathan G. Katz, Secretary, Commission, dated 
March 13, 2002; letter from Ian MacKinnon, Managing Director, The 
Vanguard Group (``Vanguard''), to Jonathan G. Katz, Commission, 
dated March 25, 2002.
    \21\ See letter from TMBA, note 20, supra.
    \22\ See letters from Schwab, ICI, and Fidelity, note 20, supra.
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    The comment letter received from TBMA stated that it ``strongly 
supported'' the MSRB's embrace of the sophisticated municipal market 
professional concept.\23\ In their comment letter, the TBMA asserted 
that the MSRB's proposed rule change would advance the benefits 
resulting from on-line municipal security trading platforms. TBMA 
foresees that this proposal will allow trading platforms to ``simplify 
their regulatory obligations, cut costs, and improve their ability to 
compete''.\24\ In addition, TBMA expressed its expectation the 
sophisticated municipal market professional concept will benefit all 
investors ``by improved liquidity and transparency throughout the 
municipal market.''\25\
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    \23\ See letter from TBMA, note 20, supra.
    \24\ [24]Id.
    \25\ [25]Id.
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    The four letters opposing the MSRB's proposed rule change stated 
various customer protection concerns. Opponents foresee a reduction in 
a dealer's fair dealing standard resulting from this proposal. 
Collectively, these comment letters expressed trepidation with 
unintended consequences from the proposal in its current form.
    The letter from ICI initially favors the concept of reducing 
certain obligations with transactions involving sophisticated municipal 
market professionals; however, the ICI does not favor the proposal's 
current draft form. The ICI states that it is ``disappointed that the 
MSRB did not accept our recommendations and revise its interpretive 
notice accordingly.''\26\ Specifically, ICI requested that the MSRB 
make the following revisions: (1) Limit to the proposal's applicability 
to electronic trading platforms; and (2) exclude from the sophisticated 
municipal market professional safe harbor certain securities that are 
exempt from continuing disclosure requirements of the Exchange Act's 
Rule 15c2-12.\27\ Without the inclusion of their request, ICI urges the 
MSRB to closely monitor the proposal's impact, if any, on the 
dissemination of secondary market disclosure.\28\
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    \26\ See letter from ICI, note 20, supra.
    \27\ Id.
    \28\ Id.
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    The letter from Fidelity presented a concern of an ensuing 
compromise of customer protections within the institutional market.\29\ 
In reference to its agreement with ICI's position, Fidelity requested 
that the MSRB revise its proposal to: (1) limit the proposal's 
applicability to electronic trading platforms; and (2) exclude from the 
sophisticated municipal market professional safe harbor certain 
securities that are exempt from continuing disclosure requirements of 
the Exchange Act's Rule 15c2-12.\30\ Additionally, Fidelity added 
emphasis to a commitment of protecting mutual fund and money market 
fund investors.

[[Page 30747]]

Fidelity asserted that reducing a dealer's role in disseminating 
secondary market disclosure ``runs completely counter to the policy 
underpinnings of the investor protection provisions of the Investment 
Company Act of 1940 * * * including preserving liquidity * * * and 
providing adequate information''.\31\
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    \29\ See letter from Fidelity, note 20, supra.
    \30\ Id.
    \31\ Id.
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    Similar to Fidelity's letters asserting concerns with the 
proposal's negative impact on municipal mutual funds and money market 
funds, Vanguard cites the interpretation's appearance of eliminating a 
dealer's obligation to make suitability determinations.\32\ To avoid 
dilution of disclosure information, Vanguard recommends that the MSRB 
insert a carve-out for Rule G-19. According to the letter, Vanguard's 
opinion is that the MSRB has not demonstrated a commensurate benefit to 
be gained by reducing obligations for SMMPs and thus, should not affect 
a change that may ``exacerbate the problems caused by the limited 
disclosure regime for municipal securities''.\33\ Vanguard stated that 
it recognizes that mutual funds and money market fund have their own 
regulatory compliance responsibilities, nevertheless, Vanguard sees 
cooperation of dealers as critical investor protection.
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    \32\ See letter from Vanguard, note 20, supra.
    \33\ Id.
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    The comment letter from Schwab focused on interests of its retail 
customers. The letter expressed Schwab's agreement in the tremendous 
benefits the growth of on-line trading brings to the fixed-income 
marketplace. However, Schwab questioned the encouragement of growth in 
a ``professionals-only'' platform.\34\ In its letter, Schwab stated 
that its ``principal objection'' to the proposal is the proposal's 
failure ``to adequately acknowledge and protect the retail investor's 
right to fully participate in the growing electronic marketplace''.\35\ 
Schwab expressed fear that the proposed rule change will create a two-
tiered market in fixed income securities and deny retail investors 
access to the best market prices.\36\
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    \34\ See letter from Schwab, note 20, supra.
    \35\ Id.
    \36\ Id.
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III. Discussion

    The Commission must approve a proposed MSRB rule change if the 
Commission finds that the proposal is consistent with the requirements 
set forth under the Exchange Act, the rules and regulations thereunder, 
which govern the MSRB.\37\ 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 principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, settling, processing information 
with respect to, and facilitiating 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.\38\
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    \37\ 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).
    \38\ 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 transactions with 
sophisticated municipal market professionals 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 
Exchange Act, set forth above.

IV. Conclusion

    It is therefore Ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\39\ that the proposed rule change (File No. SR-MSRB-2002-
02) be and hereby is, approved.
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    \39\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-11231 Filed 5-6-02; 8:45 am]
BILLING CODE 8010-01-u