[Federal Register Volume 70, Number 12 (Wednesday, January 19, 2005)]
[Notices]
[Pages 3079-3081]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-174]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51020; File No. SR-MSRB-2005-01]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Interpretive Reminder Notice Regarding Rule G-17, on 
Disclosure of Material Facts--Disclosure of Original Issue Discount 
Bonds

January 11, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 5, 2005, the Municipal Securities Rulemaking Board (``MSRB'' 
or ``Board'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the MSRB. The 
MSRB has designated this proposal

[[Page 3080]]

as constituting a stated policy, practice, or interpretation with 
respect to the meaning, administration, or enforcement of an existing 
rule of the MSRB under Section 19(b)(3)(A)(i) of the Act \3\ and Rule 
19b-4(f)(1) thereunder,\4\ which renders the proposal effective upon 
filing with the Commission. The Commission 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).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the Commission an interpretive reminder 
notice regarding Rule G-17, on disclosure of material facts--disclosure 
of original issue discount bonds. The text of the notice follows, with 
italics indicating new language:
* * * * *

Reminder Notice Regarding Rule G-17, on Disclosure of Material Facts--
Disclosure of Original Issue Discount Bonds

    The MSRB is publishing this notice to remind dealers of their 
affirmative disclosure obligations when effecting transactions with 
customers in original issue discount bonds. An original issue discount 
bond, or O.I.D. bond, is a bond that was sold at the time of issue at a 
price that included an original issue discount. The original issue 
discount is the amount by which the par value of the bond exceeded its 
public offering price at the time of its original issuance. The 
original issue discount is amortized over the life of the security and, 
on a municipal security, is generally treated as tax-exempt interest. 
When the investor sells the security before maturity, any profit 
realized on such sale is calculated (for tax purposes) on the adjusted 
book value, which is calculated for each year the security is 
outstanding by adding the accretion value to the original offering 
price. The amount of the accretion value (and the existence and total 
amount of original issue discount) is determined in accordance with the 
provisions of the Internal Revenue Code and the rules and regulations 
of the Internal Revenue Service.\1\
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    \1\ See Glossary of Municipal Securities Terms, Second Edition 
(January 2004).
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    Rule G-17, the MSRB's fair dealing rule, encompasses two general 
principles. First, the rule imposes a duty on dealers not to engage in 
deceptive, dishonest, or unfair practices. This first prong of Rule G-
17 is essentially an antifraud prohibition. In addition to the basic 
antifraud provisions in the rule, the rule imposes a duty to deal 
fairly with all persons. As part of a dealer's obligation to deal 
fairly, the MSRB has interpreted the rule to create affirmative 
disclosure obligations for dealers. The MSRB has stated that the 
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.\2\ These obligations apply even when a 
dealer is effecting non-recommended secondary market transactions. 
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    \2\ See e.g., Rule G-17 Interpretation--Educational Notice on 
Bonds Subject to ``Detachable'' Call Features, May 13, 1993, MSRB 
Rule Book (July 2004) at 135.
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    In the context of the sale to customers of an original issue 
discount security, the MSRB's customer confirmation rule, Rule G-15(a), 
provides that information regarding the status of bonds as original 
issue discount securities must be included on customer confirmations. 
Specifically, Rule G-15(a)(i)(C)(4)(c) provides that, ``If the 
securities pay periodic interest and are sold by the underwriter as 
original issue discount securities, a designation that they are 
``original issue discount'' securities and a statement of the initial 
public offering price of the securities, expressed as a dollar price'' 
must be included on the customer's confirmation.
    The MSRB previously has alerted dealers of their obligation to make 
original issue discount disclosures to customers and has stated that, 
``The Board believes that the fact that a security bears an original 
issue discount is material information (since it may affect the tax 
treatment of the security); therefore, this fact should be disclosed to 
a customer prior to or at the time of trade.'' \3\ The MSRB is 
publishing this notice to remind dealers of their disclosure 
obligations under Rule G-17 because it remains concerned that, absent 
adequate disclosure of a security's original issue discount status, an 
investor might not be aware that all or a portion of the component of 
his or her investment return represented by accretion of the discount 
is tax-exempt, and therefore might sell the securities at an 
inappropriately low price (i.e., at a price not reflecting the tax-
exempt portion of the discount) or pay capital gains tax on the 
accreted discount amount. Without appropriate disclosure, an investor 
also might not be aware of how his or her transaction price compares to 
the initial public offering price of the security. Appropriate 
disclosure of a security's original issue discount feature should 
assist customers in computing the market discount or premium on their 
transaction.
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    \3\ Rules G-12 and G-15, Comments Requested on Draft Amendments 
on Original Issue Discount Securities, MSRB Reports, Vol. 4, No. 6 
(May 1994) at 7.
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* * * * *

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

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposal. The text of these 
statements may be examined at the places specified in Item IV below. 
The MSRB has prepared summaries, set forth in Sections 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
    The MSRB is publishing the proposed rule change to remind dealers 
of their affirmative disclosure obligations when effecting transactions 
with customers in original issue discount bonds.
    The MSRB previously has alerted dealers of their obligation to make 
original issue discount disclosures to customers and has stated that, 
``The Board believes that the fact that a security bears an original 
issue discount is material information (since it may affect the tax 
treatment of the security); therefore, this fact should be disclosed to 
a customer prior to or at the time of trade.'' \5\ The MSRB is 
publishing this notice to remind dealers of their disclosure 
obligations under Rule G-17 because it remains concerned that, absent 
adequate disclosure of a security's original issue discount status, an 
investor might not be aware that all or a portion of the component of 
his or her investment return represented by accretion of the discount 
is tax-exempt, and therefore might sell the securities at an 
inappropriately low price (i.e., at a price not reflecting the tax-
exempt portion of the discount) or pay capital gains tax on the 
accreted discount amount. Without appropriate disclosure, an investor 
also might not be

[[Page 3081]]

aware of how his or her transaction price compares to the initial 
public offering price of the security. Appropriate disclosure of a 
security's original issue discount feature should assist customers in 
computing the market discount or premium on their transaction.
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    \5\ Rules G-12 and G-15, Comments Requested on Draft Amendments 
on Original Issue Discount Securities, MSRB Reports, Vol. 4, No. 6 
(May 1994) at 7.
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2. Statutory Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(C) of the Act,\6\ which authorizes the MSRB to adopt rules 
that shall:
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    \6\ 15 U.S.C. 78o-4(b)(2)(C).

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, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal 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 
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the public interest.

    The MSRB has always interpreted its Rule G-17, on fair dealing, to 
encompass two general principles. First, the rule imposes a duty on 
dealers not to engage in deceptive, dishonest, or unfair practices. In 
addition to the basic antifraud provisions in the rule, the rule 
imposes a duty to deal fairly with all persons. As part of a dealer's 
obligation to deal fairly, the MSRB has interpreted the rule to create 
affirmative disclosure obligations for dealers. The proposed rule 
change will further the purposes of Section 15B(b)(2)(C) by reminding 
dealers of their obligations to deal fairly with customers and 
affirmatively disclose, at or before the sale of municipal securities 
to a customer, all material facts concerning the transaction including 
a security's original issue discount feature.

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 among dealers not necessary or appropriate in 
furtherance of the purposes of the Act because it applies equally to 
all dealers in municipal securities.

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

    Written comments were neither solicited nor received.

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

    The MSRB has designated this proposed rule change as constituting a 
stated policy, practice or interpretation with respect to the meaning, 
administration or enforcement of an existing MSRB rule under Section 
19(b)(3)(A)(i) of the Act,\7\ and Rule 19b-4(f)(1) thereunder,\8\ which 
renders the proposed rule change effective upon filing with the 
Commission.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4.
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    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal if it appears to the Commission that 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\9\
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    \9\ See 15 U.S.C. 78s(b)(3)(C).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-MSRB-2005-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-MSRB-2005-01. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission 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 Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the office 
of the MSRB. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
MSRB-2005-01 and should be submitted on or before February 9, 2005.

    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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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-174 Filed 1-18-05; 8:45 am]
BILLING CODE 8010-01-P