[Federal Register Volume 67, Number 93 (Tuesday, May 14, 2002)]
[Notices]
[Pages 34508-34510]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-11952]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45882; File No. SR-MSRB-2002-03]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change Relating to 
Professional Qualifications of Municipal Fund Securities Limited 
Principals

May 6, 2002.
    On March 21, 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 professional qualifications of 
municipal fund securities limited principals.
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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 March 26, 2002.\3\ The Commission received two 
comment letters relating to the forgoing proposed rule change. This 
order approves the proposal.
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    \3\ See Release No. 34-45652 (April 3, 2002), 67 FR 15844.
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I. Description of the Proposed Rule Change

    The MSRB proposed rule change consists of an amendment to Rule G-3, 
on professional qualifications, to address a new category of principals 
that serve permanently as municipal fund securities limited principals. 
Under MSRB Rule G-3, which governs professional qualifications, a 
broker, dealer or municipal securities dealer (``dealer'') must have at 
least one municipal securities principal (and in some cases two 
municipal securities principals), even if the dealer's only municipal 
securities transactions are sales of municipal fund securities.\4\ In 
July 2001, MSRB amended Rule G-3 to provide a temporary alternative 
method for qualification of principals in connection with municipal 
fund securities.\5\ The amended rule provided relief to small dealers 
seeking to enter the market for municipal fund securities from Rule G-
3's requirement to immediately obtain a municipal securities principal. 
Under the temporary provision, until July 31, 2002, if a dealer's 
municipal securities activities are limited exclusively to municipal 
fund securities and the dealer has fewer than eleven associated persons 
engaged in such activities, the dealer may fulfill its obligation to 
have a municipal securities principal by designating a general 
securities or investment company/variable contracts limited principal 
to act as a limited

[[Page 34509]]

principal.\6\ During this period, any designated limited principal has 
all of the powers and responsibilities of a municipal securities 
principal under MSRB rules with respect to transactions in municipal 
fund securities. Under the current transition provision, on and after 
August 1, 2002, dealers effecting transactions in municipal fund 
securities are required to comply with the same municipal securities 
principal requirements applicable to all other dealers effecting 
transactions in municipal securities.
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    \4\ A municipal fund security is defined in MSRB's Rule D-12 as 
a municipal security issued by an issuer that, but for section 2(b) 
of the Investment Company Act of 1940 (the ``Investment Company 
Act''), would constitute an investment company within the meaning of 
the Investment Company Act. Section 2(b) exempts states and 
political subdivisions, and agencies, authorities, and 
instrumentalities thereof, from the Investment Company Act.
    \5\ See SR-MSRB 2001-05; Release No. 34-44584 (July 23, 2001), 
66 FR 39541 (July 31, 2001).
    \6\ Dealers that have 11 or more associated persons engaged in 
municipal fund securities activities may also designate a general 
securities or investment company/variable contracts limited 
principal to act as a limited principal. If a dealer is required to 
have two municipal securities principals under Rule G-3(b)(iii), 
then it may count one such limited principal toward this numerical 
requirement but must still have one municipal securities principal 
qualified other than by reason of being a general securities or 
investment company/variable contracts limited principal. If any 
dealer having 11 or more associated persons engaged in municipal 
fund securities activities is permitted to have only one municipal 
securities principal by virtue of Rule G-3(b)(iii)(A), the numerical 
requirement may not be satisfied by designation of a limited 
principal.
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    The MSRB acknowledges that many dealers that wish to participate in 
the market for municipal fund securities do not currently, and do not 
plan to, engage in any municipal securities activities other than with 
respect to municipal fund securities. Since these dealers will not 
participate in the market for municipal debt securities and the 
features of municipal fund securities differ significantly from those 
of debt securities, the MSRB believes that no investor protection 
purpose is served by requiring principals responsible for supervision 
of such firms' municipal fund securities activities to demonstrate 
their understanding of the application of MSRB rules other than with 
respect to municipal fund securities.
    To qualify as a municipal fund securities limited principal would 
be by means of an examination consisting of questions on the broad 
range of MSRB-specific topics that are relevant to municipal fund 
securities activities.\7\ The examination would require that the 
individual taking it have previously or concurrently taken and passed 
the general securities principal qualification examination (Series 24) 
or investment company and annuity principal qualification examination 
(Series 26) administered by the National Association of Securities 
Dealers, Inc. (``NASD''). The qualification examination for municipal 
fund securities limited principals is scheduled to become available on 
October 1, 2002. MSRB staff is currently in the process of developing 
the qualification examination and will file the study outline and 
specifications with the Commission under separate cover.
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    \7\ Since the qualification examination would be tailored 
specifically to the application of MSRB rules to municipal fund 
securities, rather than to all types of municipal securities, the 
MSRB expects that this examination would not be as lengthy as the 
existing qualification examination for municipal securities 
principals (Series 53).
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    An individual qualified as a municipal fund securities limited 
principal would be permitted to supervise only the municipal fund 
securities activities of the dealer and would have no authority to 
supervise the activities of the dealer with respect to any other type 
of municipal securities. However, an individual qualified as a 
municipal securities principal (Series 53) would continue to be 
qualified to supervise all municipal securities activities of the 
dealer, including activities relating to municipal fund securities.\8\ 
Thus, an individual wishing to supervise municipal fund securities 
activities could qualify to do so either by becoming: (i) a municipal 
securities principal through the municipal securities principal 
qualification examination (Series 53) or (ii) a municipal fund 
securities limited principal through this new qualification examination 
if the individual is already or concurrently becomes a general 
securities principal or investment company/variable contracts limited 
principal.
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    \8\ The question bank for the Series 53 examination includes 
questions relating to municipal fund securities. Individuals taking 
the Series 53 examination must therefore become familiar with the 
application of MSRB rules to municipal fund securities.
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    If a dealer's municipal securities activities are limited to 
municipal fund securities, the proposed rule change also would count 
all municipal fund securities limited principals toward the numerical 
requirement for principals regardless of the number of associated 
persons engaging in such activities. Thus, any dealer that does not 
engage in any municipal securities activities other than with respect 
to municipal fund securities could fully discharge its obligation with 
respect to municipal securities principals with individuals qualified 
as municipal fund securities limited principals.
    Further, existing rule language indirectly permits investment 
company/variable contracts limited representatives (Series 6) to take 
the Series 53 examination to become qualified as municipal securities 
principals.\9\ Although this was appropriate when there was no other 
provision under Rule G-3 for qualifying a principal to supervise 
municipal fund securities activities, the proposed rule change 
discontinues this method of qualification on October 1, 2002 when the 
new municipal fund securities limited principal qualification 
examination becomes available.\10\ An investment company/variable 
contracts limited representative would be able to qualify as a 
municipal fund securities limited principal by taking both the Series 
26 examination and the new municipal fund securities limited principal 
examination.
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    \9\ Rule G-3 permits an investment company/variable contracts 
representative to act as a municipal securities representative 
solely with respect to municipal fund securities.
    \10\ Qualification of an investment company/variable contracts 
limited representative as a full municipal securities principal 
allows that individual to supervise any municipal securities 
activities, including debt securities. The MSRB is concerned that an 
individual who is solely qualified as an investment company/variable 
contracts limited representative prior to becoming a municipal 
securities principal may not have an adequate understanding of 
municipal debt securities to provide effective supervision under all 
circumstances.
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    In addition, the proposed rule change extends the existing 
temporary provision permitting general securities principals and 
investment company/variable contracts limited principals to supervise 
municipal fund securities activities from July 31, 2002 to December 31, 
2002 in order to provide dealers with an adequate opportunity to 
prepare potential candidates for the new examination. During the 
extended transition period, the numerical requirement with respect to 
principals would be simplified so that all dealers, not just those with 
fewer than eleven associated persons engaged in municipal fund 
securities activities, could fully meet their principal requirements 
with principals acting in the temporary capacity permitted under the 
transition provisions. This rule change makes clear that, beginning on 
January 1, 2003, all municipal fund securities limited principals 
(including general securities principals and investment company/
variable contracts limited principals supervising municipal fund 
securities activities under the temporary transition period who wish to 
continue such supervisory activities after December 31, 2002) must be 
qualified by taking the new qualification examination.
    Finally, the MSRB rule change provides the NASD or any other 
appropriate regulatory agency the power to waive qualification 
requirements with respect to municipal fund

[[Page 34510]]

securities limited principals, as with all other qualification 
categories. Under Rule G-3(g)(i), such waivers are to be granted solely 
in extraordinary cases.

II. Summary of Comments

    The Commission received two comment letters on the proposal.\11\ Of 
the two comment letters, one expresses support and the other opposes 
the creation of a municipal fund securities limited principal.
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    \11\ See letter from John K. Forst, Law Offices of Dechert Price 
& Rhoads, to Jonathan G. Katz, Secretary, Commission, dated April 
30, 2002 (enclosing letter from James F. Getz, President, Federated 
Securities Corp. (``Federated''), to Mr. Jonathan G. Katz, 
Secretary, Commission); letter from Tamara K. Reed, Associate 
Counsel, Investment Company Institute (``ICI''), to Mr. Jonathan G. 
Katz, Secretary, Commission, dated April 25, 2002.
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    In favor of the MSRB proposal, the ICI letter states that the new 
classification of limited principals will provide ``needed relief'' to 
firms whose sole securities business consists of municipal fund 
securities.\12\ ICI referenced its recommendation submitted in prior 
letter, commenting on the MSRB's July 2001 notice, that the MSRB 
provide temporary and extended relief until the MSRB administers its 
new municipal fund securities limited principal examination.\13\ 
Because their concern is addressed in the proposed rule change, the ICI 
extends its support to the MSRB.
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    \12\ See ICI letter, note 11, supra.
    \13\ Id. (citing letter from Tamara K. Reed, Associate Counsel, 
ICI, to Ernesto A. Lanza, Esquire, MSRB, dated January 15, 2002.)
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    The comment letter sent by Federated opposes the MSRB's 
establishment of the new permanent category of municipal fund 
securities limited principals by stating that it creates ``unnecessary 
and inappropriate burdens''.\14\ Federated asserts that the existing 
requirements already assure the proper supervision for municipal fund 
securities, because there is ``virtually no substantive distinction 
between municipal fund securities and mutual funds''. The imposition of 
new MSRB regulation burdens member firms with unnecessary registration 
requirements, additional costs and administrative encumbrances without 
adding investor protections.\15\ As an alternative, the Federated 
letter supports supervision of the municipal fund securities under the 
current registration and continuing education scheme of the NASD. To 
the extent it is necessary, the letter requests that the MSRB work with 
the NASD to incorporate changes to the NASD's educational scheme that 
address municipal fund securities. Additionally, the Federated letter 
urges the MSRB to extend its current pilot to permit NASD mutual fund 
principals to supervise sales of municipals fund securities.\16\
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    \14\ See Federated letter, note 11, supra.
    \15\ Id.
    \16\ Id.
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    The MSRB believes that the proposed rule change would in fact 
decrease dealers' regulatory burden. Without the amendment, dealers 
would be required to use fully qualified municipal securities 
principals to meet their Rule G-3 principal requirement.\17\ As stated 
above, the creation of the municipal fund securities limited principal 
category provides dealers with an alternative means of meeting this 
requirement. For dealers that do not otherwise engage in municipal 
securities activities, allowing their general securities principals or 
investment company principals to take a shorter, more focused 
examination than the Series 53 exam in order to qualify as a municipal 
fund securities principal should be less burdensome. The further 
reduction in regulatory burden that these commentators most likely 
desire--i.e., no MSRB qualification requirements--is inappropriate 
since activities regulated by MSRB rules require ultimate supervision 
by someone who knows these rules.
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    \17\ Dealers selling mutual fund IRA accounts and muniicipal 
bond mutual funds are not required to comply with MSRB rules because 
these securities are not municipal securities and are instead 
subject to regulation under other regulatory schemes. In contrast, 
municipal fund securities are municipal securities and therefore are 
subject to MSRB rules and exempt from most other provisions of 
federal securities laws (such as the Securities Act of 1933 and the 
Investment Company Act).
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III. Discussion

    The MSRB believes that the proposed rule change is consistent with 
section 15B(b)(2)(A) of the Exchange Act, which provides that it is the 
MSRB's responsibility to propose and adopt rules which require that no 
municipal securities broker or municipal securities dealer shall effect 
any transaction in municipal securities unless, ``such municipal 
securities broker or municipal securities dealer and every natural 
person associated with such municipal securities broker or municipal 
securities dealer meets such standards of training, experience, 
competence, and such other qualifications as the Board finds necessary 
or appropriate in the public interest or for the protection of 
investors.'' \18\
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    \18\ 15 U.S.C. 78o-4(b)(2)(A).
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    Section 15B(b)(2)(A) of the Exchange Act also provides that the 
MSRB may appropriately classify municipal securities brokers and 
municipal securities dealers and their associated personnel and require 
persons in any such class to pass tests prescribed by the MSRB.
    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 rule and regulations thereunder, 
which govern the MSRB.\19\ 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 in 
municipal securities, and, in general, to protect investors and the 
public interest.\20\
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    \19\ 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).
    \20\ 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 amendment to Rule G-3, on professional 
qualifications, which relates to municipal fund securities limited 
principals, meets the statutory 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 addition, 
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,\21\ that the proposed rule change (File No. SR-MSRB-2002-
03) be and hereby is, approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-11952 Filed 5-13-02; 8:45 am]
BILLING CODE 8010-01-P