[Federal Register Volume 68, Number 16 (Friday, January 24, 2003)]
[Notices]
[Pages 3574-3577]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1581]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47202; File No. SR-MSRB-2002-14]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Relating to Market 
Emergencies

January 16, 2003.
    Pursuant to section 19(b)(1) of the Securities and Exchange Act of 
1934 (the ``Exchange Act'') and Rule 19b-4 thereunder,\1\ notice is 
hereby given that on December 11, 2002, the Municipal Securities 
Rulemaking Board (``MSRB'' or ``Board'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
(File No. SR-MSRB-2002-14) (the ``proposed rule change'') described in 
Items I, II, and III below, which Items have been prepared by the MSRB. 
The SEC is publishing this notice to solicit comments on the proposed 
rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1) and 17 CFR 240.19b-4 thereunder.

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[[Page 3575]]

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing a proposed rule change concerning market 
emergencies consisting of an Interpretation of its Rule G-17, on 
conduct of municipal securities activities and an amendment to its Rule 
A-4, on meetings of the Board.
    The text of the proposed rule change follows. Italics indicate 
proposed additions.

Rule G-17. Conduct of Municipal Securities Activities

Interpretation of Rule G-17--Effecting Transactions During Market 
Emergency

    It is inconsistent with the principles of fair dealing embodied in 
Rule G-17 for a broker, dealer or municipal securities dealer to effect 
transactions in municipal securities during a market emergency. For 
purposes of this interpretation, a market emergency is any situation 
causing a substantial failure in any of the systems necessary for 
clearance, settlement, confirmation, payment, or delivery of 
transactions in municipal securities or in other systems necessary for 
the prompt execution and consummation of municipal securities 
transactions or the fair and accurate pricing of municipal securities. 
In determining whether such a market emergency exists, a broker, dealer 
or municipal securities dealer shall rely upon the issuance of official 
announcements by the MSRB concerning market emergencies, which shall be 
issued after consultation with the Securities and Exchange Commission. 
Official announcements by the MSRB on market emergencies will be 
communicated to brokers, dealers and municipal securities dealers 
through news outlets commonly used in the municipal securities 
industry, by posting on the MSRB's World Wide Web site at www.msrb.org, 
and by transmittal of the announcement to the electronic mail addresses 
provided to the MSRB by brokers, dealers and municipal securities 
dealers under Rule G-40. Such official announcements will include 
information on the nature of the market emergency and affected systems, 
the nature and scope of transactions affected, and the status of the 
market emergency and its expected duration, if that is known.

Rule A-4. Meetings of the Board

    (a) through (d) No Change.
    (e) Special Meetings on Market Emergencies. Notwithstanding 
anything in these rules to the contrary, the following procedures 
govern special meetings to act on market emergencies: (i) notice of 
special telephone conference call meeting on a market emergency shall 
be sent to all Board members by the Executive Director, or in the 
absence of the Executive Director, by his or her designee: (A) as soon 
as possible after credible information is received suggesting the 
existence of a market emergency, and (B) during the existence of a 
declared market emergency, within 24 hours of a request by any Board 
member; (ii) notice of a special meeting on a market emergency, 
including a description of the proposed Board action and instructions 
for joining the conference call, shall be given by telephone and by e-
mail to all Board members; (iii) the Executive Director, or his or her 
designee, shall consult with the Commission on the emergency situation 
prior to a special meeting on a market emergency, if possible; (iv) the 
quorum requirement for a special meeting on a market emergency shall be 
five members and there shall be no requirement that at least one public 
representative, one broker-dealer representative and one bank 
representative be present; and (v) any action taken at such a meeting 
shall be by a majority vote of Board members attending the meeting and 
shall be limited to declaring a market emergency or ending a declared 
market emergency. For purposes of this paragraph (e), the meaning of 
the term ``market emergency'' shall be as defined in ``Notice of 
Interpretation of Rule G-17--Effecting Transactions During Market 
Emergency,'' dated----------.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the SEC, the MSRB included statements concerning 
the purpose of and basis for the proposed rule change and discussed any 
comments it received on the proposed rule change. The text of these 
statements may be examined at the places specified in Item IV below. 
The MSRB has prepared summaries, set forth in Section A, B, and C 
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    After the events of September 11, 2001, staff of the Commission and 
the MSRB met to discuss how the municipal securities market functioned 
in the aftermath of the attacks on the World Trade Center. On September 
11, and in the days following, MSRB monitored the municipal securities 
market through its contacts with dealers, clearing corporations and 
information providers.
    Although the effect on lower Manhattan was severe, because the 
municipal securities market is decentralized, the municipal securities 
market as a whole was not affected to the same degree as securities 
exchanges physically located near the disaster. On September 11, some 
trading in municipal securities occurred, albeit a very limited amount. 
Based on transactions reported to the MSRB's Transaction Reporting 
System, trade volume reached 8,244 trades by September 13 and 17,941 
trades by September 17. On September 19 and 20 transaction volume 
reached 23,996 and 26,155 trades respectively. Prior to September 11, 
in a typical day, 27,000 transactions were processed.
    Aside from dealer operations in Manhattan, in general, the 
infrastructure and systems necessary for processing transactions in the 
municipal securities market functioned in the days after September 11. 
Clearance and settlement systems for municipal securities transactions 
provided by Depository Trust and Clearing Corporation (DTCC) remained 
operational, although telecommunications problems in Manhattan did 
affect the ability of dealers in that area to exchange data with DTCC. 
The problems with clearing bank functions that disrupted the government 
securities market did not substantially affect the municipal securities 
market.
    Despite the resilience of municipal securities market systems and 
infrastructure on September 11, there remains a concern about what 
might have happened if the situation had been different. Had systems or 
infrastructure critical to the municipal securities market been 
disabled by the disaster, no legal or regulatory mechanism existed to 
temporarily halt trading. For example, any problems with central 
clearance and settlement systems are of an immediate concern, since the 
accumulation of unsettled trades, particularly in a volatile or chaotic 
market, presents risks to all segments of the market. Commission staff 
accordingly have asked MSRB to consider rulemaking to provide a 
procedure for a trading halt should a market emergency disable critical 
market systems or infrastructure in the future.
    The proposed rule change would provide such a procedure. Should a 
similar situation occur in the future, MSRB would review conditions in 
the

[[Page 3576]]

market through its contacts with dealers, clearing agencies and vendors 
of critical services to the market just as it did after September 11. 
The proposed rule change, however, includes changes to MSRB's 
administrative procedures in Rule A-4 allowing special MSRB telephone 
conference call Board meetings on market emergencies to occur without 
the normal notice requirement of seven days or the normal quorum 
requirement of two-thirds of the Board's members. The proposed rule 
change also includes a format interpretation of Rule G-17, on fair 
practice, that would prohibit dealers from trading for the duration of 
a market emergency declared by the MSRB. These proposed rule changes 
thus provide a procedure for instituting a trading halt should a market 
emergency necessitate one in the future.
    The proposed rule change specifically identifies the channels by 
which MSRB would make information known to municipal securities dealers 
in the event of a market emergency. It notes that this will be done 
through new outlets commonly used in the municipal securities industry, 
postings on the MSRB's Web site and by transmitting announcements to 
the electronic mail addresses provided to the MSRB by dealers under 
Rule G-40, on electronic mail contacts. Having an announced, written 
procedure for dealer notification would add a level of preparedness if 
a market emergency actually occurs. Just as important, it provides 
dealers with clear direction on where to look if the situation is 
uncertain and questions exist about whether an emergency has been 
declared. This also will help dealers determine if any other emergency 
rulemaking is in effect. After September 11 there was some confusion 
among municipal securities dealers about whether the regular-way 
settlement cycle for municipal securities had been changed to T+5 from 
the T+3 cycle mandated under MSRB Rules G-12(b)(ii) and G-15(b)(ii). 
This apparently was the result of announcements made concerning 
transactions in government bonds. In monitoring clearance and 
settlement data after September 11, the MSRB observed that some dealers 
were, as a practice, submitting all of their regular-way trades with a 
T+5 settlement date. Among other problems, this caused trade-matching 
failures in the central comparison system for inter-dealer 
transactions. The notification procedure for market emergency 
declaration will help direct the attention of dealers in municipal 
securities to the MSRB for announcements on possible rule changes in 
the wake of an emergency and thus should help to avoid similar 
confusion in the future.\2\
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    \2\ The proposed rule change addresses only the procedure for 
announcing trading halts. Should changes in existing MSRB rules be 
necessary during an emergency, these could be adopted by the MSRB 
and approved summarily by the SEC. Section 19(b)(3)(B) of the 
Exchange Act grants the SEC authority to approve proposed rule 
changes summarily when ``it appears to the Commission that such 
action is necessary for the protection of investors, the maintenance 
of fair and orderly markets, or the safeguarding of securities or 
funds.''
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    The proposed rule change's interpretation of Rule G-17 follows a 
principle of securities law that a dealer must not ``accept or execute 
any order for the purchase or sale of securities or induce or attempt 
to induce such purchase or sale if the dealer does not have the 
personnel and facilities to enable prompt execution and consummation of 
the transactions.''\3\ The MSRB believes that, where a substantial 
failure has occurred in the systems necessary for clearance, 
settlement, confirmation, payment or delivery of transactions in 
municipal securities, or in other systems necessary for the prompt 
execution and consummation of municipal securities transactions or the 
fair and accurate pricing of municipal securities, it may become 
necessary, for the overall protection of market participants, to halt 
trading by all dealers.\4\ Clearance and settlement systems are a 
particular concern because of counter-party risk that escalates when 
unsettled transactions grow during volatile or chaotic markets. Other 
situations possibly warranting a temporary halt in trading might 
include a massive failure of telecommunication systems, or the 
corruption of essential data used by the municipal securities industry 
(for example, through a computer virus).
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    \3\ See, e.g., Release No. 8363 (July 29, 1968), 33 FR 11150 
(August 7, 1968).
    \4\ The scope of the proposed rule change does not include the 
issuance of ``regulatory halts'' similar to those issued by 
exchanges and other SROs to stop trading in a specific security 
pending the announcement of news, or to allow news to be absorbed by 
the market before trading continues. Since this situation would not 
constitute an emergency effecting essential systems and market 
infrastructure, it is not included within the definition of a market 
emergency.
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Interpretation of Rule G-17

    The proposed Interpretation of Rule G-17 has the following 
elements:
    [sbull] It is a violation of Rule G-17 for a dealer to continue to 
effect transactions in municipal securities during an MSRB-declared 
``market emergency.''
    [sbull] A ``market emergency'' for this purpose is defined as ``a 
situation causing substantial failure in any of the systems necessary 
for clearance, settlement, confirmation, payment or delivery of 
transactions in municipal securities, or in other systems necessary for 
the prompt execution and consummation of municipal securities 
transactions or the fair and accurate pricing of municipal 
securities.''
    [sbull] Prior to acting on a market emergency, MSRB will consult 
with the SEC.
    [sbull] Official announcements by the MSRB on market emergencies 
will be communicated to dealers through news outlets commonly used in 
the municipal securities industry, by posting on the MSRB's World Wide 
Web site at http://www.msrb.org, and by transmittal of the announcement 
to the electronic mail addresses provided to the MSRB by dealers under 
Rule G-40.

Amendment to Rule A-4

    Prior to making any decision on a specific market emergency, the 
MSRB will hold a special Board meeting to share information and discuss 
the situation. The MSRB's current procedure for holding special Board 
meetings is contained in Rule A-4. Among other provisions, the rule 
states that the Secretary of the Board will call special meetings at 
the request of the Chairman or at the written request of three or more 
members. Seven days written notice, signed by the Secretary of the 
Board (or three days notice if given or sent by telephone, e-mail or 
personal delivery), is required for special meetings. The quorum for 
any Board meeting is two-thirds of the Board (normally ten members), 
with at least one securities firm representative, one bank dealer 
representative and one public member. Formal action requires an 
affirmative vote of the majority of the Board (normally eight members).
    During a time of crisis, market participants would want to know 
fairly quickly whether trading is to be halted. The existing seven-day 
and three-day notice requirements for special Board meetings thus seem 
impractical. Moreover, establishing communication with at least ten 
Board members and securing eight affirmative votes also might present a 
problem, particularly if the emergency in question affects the 
infrastructure of one or more major financial centers and members 
cannot be reached. The proposed rule change would streamline the 
process specifically for market emergency meetings. The proposed 
amendments to Rule A-4 provides the following procedure:
    [sbull] The Executive Director, or his or her designee, will 
schedule a special telephone conference call meeting on the possible 
declaration of a market

[[Page 3577]]

emergency as quickly as possible after receipt of credible evidence 
that a market emergency exists.
    [sbull] At least one hour's advance notice of a special meeting on 
a market emergency will be sent to each Board member by telephone and 
e-mail.
    [sbull] The Executive Director, or his or her designee, will 
consult with the SEC prior to each special meeting if this is possible. 
(Note that consultation with SEC would be required by the 
interpretation of Rule G-17 governing trading halts. Thus, consultation 
with the SEC would have to occur prior to any formal declaration of 
market emergency even if it does not occur prior to the meeting.)
    [sbull] The quorum of ten members generally necessary for a Board 
meeting is replaced for special meetings on market emergencies with a 
quorum of five members. The general requirement that a member be 
present from each of the three statutory categories (securities firm, 
bank dealer, public member) does not apply.
    [sbull] The requirement in the proposed rule change that all Board 
members be sent a notice of the special meeting by both telephone and 
e-mail is to ensure that as many Board members as possible, including 
those from all three statutory categories, can be included in the 
meeting. While the five-person quorum requirement does not contain any 
distributional requirements, Board staff shall endeavor, to the extent 
circumstances permit, to have at least one broker-dealer, one bank, and 
one issuer representative at the special meetings. To that end, Board 
staff shall obtain from each Board member contract information that 
will help ensure the ability of the staff to get notice of a special 
meeting to such persons in market emergency situations.
    [sbull] Board action at a meeting on a market emergency is limited 
to declaring a market emergency or ending a declared market emergency.
    [sbull] A majority vote of members attending the meeting (not 
necessarily a majority of the Board) is required to take action.
    [sbull] Once a market emergency has been declared, the Executive 
Director, or his or her designee, will schedule additional special 
conference call meetings on the market emergency within 24 hours after 
any request to do so by a Board member.
(2) Basis
    The MSRB believes the proposed rule change is consistent with 
section 15B(b)(2)(C) of the Exchange Act, which provides that the 
MSRB's rules:

    * * * be designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade * * 
* and to protect investors and the public interest. * * * \5\
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    \5\ 15 U.S.C. 78o-4(b)(2)(c).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change will impose 
any burden on competition in that it applies equally to all dealers in 
municipal securities.

C. Self-Regulatory Organization's Statement of Comments on the Proposed 
Rule Change Received From Member, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
SEC Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the SEC may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the self-regulatory organization consents, the SEC will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the forgoing, including whether the proposed rule 
is consistent with the Exchange Act. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the SEC, and all written communications relating to the proposed rule 
change between the SEC and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the SEC's Public 
Reference Room. Copies of the filing will also be available for 
inspection and copying at the MSRB's principal offices. All submissions 
should refer to File No. SR-MSRB-2002-14 and should be submitted by 
February 14, 2003.

    For the SEC by the Division of Market Regulation, pursuant to 
delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1581 Filed 1-23-03; 8:45 am]
BILLING CODE 8010-01-M