[Federal Register Volume 74, Number 236 (Thursday, December 10, 2009)]
[Notices]
[Pages 65573-65576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-29420]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61110; File No. SR-MSRB-2009-17]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change Consisting of (i) 
Amendments to Rule G-8 (Books and Records To Be Made by Brokers, 
Dealers and Municipal Securities Dealers), Rule G-9 (Preservation of 
Records), and Rule G-11 (New Issue Syndicate Practices); (ii) a 
Proposed Interpretation of Rule G-17 (Conduct of Municipal Securities 
Activities); and (iii) the Deletion of a Previous Rule G-17 
Interpretive Notice

December 3, 2009.
    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 November 18, 2009, 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, II, and III below, which Items have been prepared 
by the MSRB. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB has filed with the Commission a proposed rule change 
consisting of (i) proposed amendments to Rule G-8 (books and records to 
be made by brokers, dealers and municipal securities dealers), Rule G-9 
(preservation of records), and Rule G-11, (new issue syndicate 
practices); (ii) a proposed interpretation (the ``proposed interpretive 
notice'') of Rule G-17 (conduct of municipal securities activities); 
and (iii) the deletion of a previous Rule G-17 interpretive notice on 
priority of orders dated December 22, 1987 (the ``1987 interpretive 
notice''). The MSRB requested that the proposed rule change become 
effective for new issues of municipal securities for which the Time of 
Formal Award (as defined in Rule G-34(a)(ii)(C)(1)(a)) occurs more than 
60 days after approval of the proposed rule change by the SEC.
    The text of the proposed rule change is available on the MSRB's Web 
site (http://www.msrb.org/msrb1/sec.asp), at the MSRB's principal 
office, and at the Commission's Public Reference Room.

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. 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 proposed amendments to Rule G-11 would: (1) Apply the rule to 
all primary offerings, not just those for which a syndicate is formed; 
(2) require that all dealers (not just syndicate members) disclose 
whether their orders are for their own account or a related account; 
and (3) require that priority be given to orders from customers over 
orders from syndicate members for their own accounts or orders from 
their respective related accounts, to the extent feasible and 
consistent with the orderly distribution of securities in the offering, 
unless the issuer otherwise agrees or it is in the best interests of 
the syndicate not to follow that order of priority.
    The proposed amendments to Rules G-8 and G-9 would require that 
records be retained for all primary offerings of: (1) All orders, 
whether or not filled; (2) whether there was a retail order period and, 
if so, the issuer's definition of ``retail;'' and (3) those instances 
when the syndicate manager allocated bonds other than in accordance 
with the priority provisions of Rule G-11 and the specific reasons why 
it was in the best interests of the syndicate to do so.
    The proposed interpretive notice would provide that violation of 
these priority provisions would be a violation of Rule G-17, subject to 
the same exceptions as provided in proposed amended Rule G-11. It also 
would provide that Rule G-17 does not require that customer orders be 
accorded greater priority than orders from dealers that are not 
syndicate members or their respective related accounts. The proposed 
interpretive notice also would provide that it would be a violation of 
Rule G-17 for a dealer to allocate securities in a manner that is 
inconsistent with an issuer's requirements for a retail order period 
without the issuer's consent. Issuance of the notice, in addition to 
the amendments to Rule G-11, is consistent with previous guidance 
issued by the Board that all activities of dealers must be viewed in 
light of the basic fair dealing principles of Rule G-17, regardless of 
whether other MSRB rules establish additional requirements on 
dealers.\3\
    The guidance set forth in the proposed interpretive notice arose 
out of the Board's ongoing review of its General Rules as well as 
concerns expressed by institutional investors that their orders were 
sometimes not filled in whole or in part during a primary offering, yet 
the bonds became available shortly thereafter in the secondary market. 
They attributed that problem to two causes: first, some retail dealers 
were allowed to place orders in retail order periods without going away 
orders and second, syndicate members, their affiliates, and their 
respective related accounts were allowed to buy bonds in the primary 
offering for their own account even though other orders remained 
unfilled. There was also concern that these two factors could 
contribute to restrictions on access to new issues by retail investors, 
in a manner inconsistent with the issuer's intent.
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    \3\ MSRB Notice 2009-42 (July 14, 2009)--Guidance on Disclosure 
and Other Sales Practice Obligations to Individual and Other Retail 
Investors in Municipal Securities.
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    The MSRB had last addressed the priority of orders in the 1987 
interpretive notice.\4\ That guidance interpreted Rule G-17 to require 
generally that customer orders be filled before orders from dealers and 
dealer-related accounts. Dealer-related accounts were defined to 
``include a municipal securities investment portfolio, arbitrage 
account, or secondary trading account of a syndicate member, a 
municipal securities investment trust sponsored by a syndicate member, 
or an accumulation account established in connection with such a 
municipal securities investment trust.'' The notice did not limit the 
ability of the syndicate manager to

[[Page 65574]]

allocate away from the priority provisions of the syndicate if to do so 
would be in the best interests of the syndicate. The Board determined 
to update the guidance provided in the 1987 interpretive notice due to 
changes in the marketplace and subsequent amendments to Rule G-11. The 
proposed interpretive notice will supersede the 1987 interpretive 
notice, which will be deleted as part of the proposed rule change.
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    \4\ The 1987 interpretive notice was filed with the SEC on 
December 22, 1987 for immediate effectiveness. See File No. SR-MSRB-
1987-14.
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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,\5\ which provides that the MSRB's rules shall:
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    \5\ 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 believes that the proposed rule changes and proposed 
interpretive notice are consistent with the Act because they will 
prevent fraudulent and manipulative acts and practices and protect 
investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe the proposed rule change will impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Act since it would apply equally to all dealers.

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

    On August 11, 2009, the MSRB published for comment the proposed 
amendments and proposed interpretive notice that comprise the proposed 
rule change.\6\ The MSRB received comments from five commentators.\7\
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    \6\ See MSRB Notice 2009-47 (August 11, 2009).
    \7\ Letters from: Carl Giles, Managing Director, First Southwest 
Company (``First Southwest''), to Peg Henry, MSRB, dated September 
10, 2009; Letter from Lynn Hampton, Vice President for Finance and 
Chief Financial Officer, Metropolitan Washington Airports Authority 
(``MWAA''), to Ronald A. Stack, MSRB Chair, dated August 18, 2009; 
Letter from Michael Decker and Mike Nicholas, Co-Chief Executive 
Officers, Regional Bond Dealers Association (``RBDA''), to Ms. 
Henry, dated September 11, 2009; Letter from Leon J. Bijou, Managing 
Director and Associate General Counsel, Securities Industry and 
Financial Markets Association (``SIFMA''), to Ms. Henry, dated 
September 11, 2009; and Letter from Napoleon Brandford, III, 
Chairman, Siebert Brandford Shank & Co., L.L.C. (``Siebert''), to 
Ms. Henry, dated September 8, 2009.
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First Southwest Letter

    First Southwest supported the proposed amendments to Rule G-11, in 
particular: (1) The change that would require all dealers to disclose 
whether their orders are for their own accounts or related accounts and 
(2) the changes that would require that underwriters give priority to 
customer orders. It characterized the practice of filling dealer orders 
or related account orders before customer orders as ``front running'' 
and supported the changes to Rule G-11 to strengthen the prohibition 
against front running.
    First Southwest assumed that one of the Board's goals in publishing 
Notice 2009-47 was to address flipping and said that the Board should 
go further by addressing flipping by non-syndicate members, hedge 
funds, investment advisors, mutual funds, bank portfolios, tender 
option bond (TOB) programs, and institutional investors. They suggested 
that the Board undertake a thorough study of flipping and, if 
appropriate, make recommendations for the regulation of this practice. 
They suggested that the following questions be addressed: (1) Do 
purchasers of bonds from a primary offering have the right to sell 
their bonds at any time? (2) Do purchasers of bonds from a primary 
offering have a right to take an immediate profit when possible? (3) Do 
flippers provide liquidity to the municipal marketplace? (4) Is 
flipping a case of demand being greater than supply thereby creating 
price discovery?

MWAA Letter

    MWAA was supportive of the proposals regarding retail order periods 
in the proposed interpretive notice. They said that they enforce their 
retail order periods and, in particular, check for flipping. They said 
that they prefer that retail firms participate in the selling group, 
rather than buying during the institutional sales order period and 
marking up the bonds for their retail clients. Their letter did not 
address the proposed rule amendments.

Siebert Letter

    Siebert commented on the proposed interpretive notice, stating that 
the retail order period process had broken down because few issuers 
were enforcing it. They said that some syndicate members submit large 
orders that they describe as bundled retail orders and that some 
institutional investors characterize their orders as retail, when in 
fact they probably are not. They said that some underwriting firms 
(primary book-runners) have formed arrangements with other firms to 
``funnel'' bonds at the full, or split, takedown out of the syndicate, 
characterizing these orders as retail, rather than more appropriately 
as selling group orders. They said they were in full support of the 
concerns expressed by institutional investors and of enforcement of the 
underwriting rules governing fair dealing.

RBDA Letter

    RBDA assumed that the proposed interpretive notice and proposed 
amendments to Rule G-11 were directed at flipping and said that much 
flipping is done by institutional investors, which the proposed 
interpretive notice would not address. They said that a dealer that 
submits retail orders during a retail order period without bona fide 
orders from retail customers already violates Rule G-17, which it said 
may be enforced through strict enforcement of existing rules and 
interpretations. They said that it is not always possible for a dealer 
to know whether an order is truly retail, for example if it comes from 
a bank trust department or a third party asset manager.
    RBDA said that the proposed definition of ``affiliate'' and 
``related account'' were too broad and would capture investor accounts 
that might be sufficiently independent to warrant treatment similar to 
unaffiliated customers. They suggested that the Board consider an 
alternative definition based on Rule G-14, such that if a trade would 
be required to be reported to RTRS without a special trade indicator, 
the investor would not be considered an affiliate or related account.
    They also said that the proposed amendments would establish new 
recordkeeping rules for secondary market trading accounts.

SIFMA Letter

    SIFMA opposed the proposed amendments to Rule G-11, arguing that 
they would disrupt the process of allocating securities. They objected 
to a rule that is focused only on underwriters, their affiliates, and 
related accounts, which they said would not eliminate front running and 
the ``placing of phantom [retail] orders.'' They said that the proposed 
amendments would add nothing that is not already prohibited under Rule 
G-17, which applies to all dealers, whether they are syndicate members 
or not. They said that dealers maintain records of orders, allotments, 
trade reporting data, and trade confirmations, which are used

[[Page 65575]]

by FINRA to audit violations of Rule G-17. They ``urge[d] FINRA to 
vigorously enforce existing laws and regulations to prevent front 
running, placing phantom orders and all other deceptive, dishonest or 
unfair practices.''
    SIFMA said that the proposed amendments to Rule G-11 would have 
detrimental effects on the process of allocating securities. They said 
that the amendments would reduce competition and result in higher 
borrowing costs. They said that the proposed amendments would interfere 
with the discretion afforded to syndicate managers by current Rule G-
11.
    SIFMA also said that the proposed amendments would not be 
consistent with FINRA's proposed rule on fixed price offerings, which 
they said would permit sales to affiliates as long as the sale was not 
at a discount.
    SIFMA supported the proposed interpretive notice, which they 
characterized as providing more flexibility than the proposed rule 
changes.

Response to Comment Letters

    Most of the commentators assumed that the purpose of the proposed 
rule change was the prevention of flipping.\8\ Some of the commentators 
\9\ then objected to the proposed amendments and, in RBDA's case, the 
proposed interpretive notice, on the grounds that they would not 
successfully eliminate flipping. Some of the commentators \10\ also 
stated that the filling of dealer orders in advance of customer orders 
constituted front-running and was already prohibited under SEC rules. 
The Board's objective in proposing the rule change is the broader 
distribution of municipal securities, rather than the elimination of 
flipping. Rule G-11 was designed to address the concerns expressed by 
Congress that the ``economic power accruing to banks by virtue of their 
role as major consumers as well as underwriters of new issue municipals 
has led to a loose set of syndicate rules which permit banks to be 
underwriter distributors of new issues of municipal bonds and in the 
same issue give their own investment portfolio the prerogatives and 
priorities of public institutional orders.'' \11\ Although Congress 
specifically focused on bank-related portfolios, the MSRB saw no reason 
to distinguish for purposes of Rule G-11 between such portfolios, on 
the one hand, and affiliated investment trusts or related portfolios of 
securities firms, on the other.\12\ The Board determined that it was 
appropriate to address potential abuses in the allocation of securities 
to customers at this time and that the Board would consider the other 
issues raised by the commentators as noted above in the context of its 
broader ongoing review of its fair practice and other rules.
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    \8\ See letters from First Southwest, MWAA, RBDA, and SIFMA.
    \9\ See letters from RBDA and SIFMA.
    \10\ See letters from First Southwest and SIFMA.
    \11\ S. Rep. No. 94-75, at 49 (1975).
    \12\ See Notice of Filing of Proposed Rule G-11 on Syndicate 
Practices--MSRB Rule G-11, [1977-1987 Transfer Binder] MSRB Manual 
(CCH) at 10,363.
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    Only two of the comment letters expressly addressed the proposed 
amendments to Rule G-8 and Rule G-9. SIFMA suggested that existing 
recordkeeping rules were adequate to permit enforcement of Rule G-17 if 
vigorously enforced by FINRA. However, existing Rule G-9 does not 
require retention of records of unfilled orders, which limits the 
ability of FINRA to effectively surveil for compliance with these 
requirements. The Board determined that the proposed amendments to G-8 
and G-9 are necessary to permit proper enforcement of the proposed rule 
change. Although RBDA commented that the proposed rule change would 
impose new recordkeeping requirements on secondary market trading 
accounts, the proposed rule change would merely move the existing 
recordkeeping requirements for such accounts to a new subsection of 
Rule G-8.
    The Board determined that the RBDA proposal to define ``affiliate'' 
based on Rule G-14 trade reporting concepts was not advisable, because 
it would result in a weakening of existing guidance in that a dealer's 
proprietary account would be considered ``related,'' while a dealer's 
TOB account would not.
    The Board did not agree with the SIFMA comment letter that the 
proposed interpretive notice is more flexible than the proposed 
amendments to Rule G-11, noting that the language in the proposed 
interpretive notice supposedly providing more flexibility--``to the 
extent feasible and consistent with the orderly distribution of 
securities in a primary offering''--is also contained in the proposed 
amendments to Rule G-11. The Board also did not agree that the proposed 
amendments to Rule G-11 would have detrimental effects on the process 
of allocating securities or that the amendments would reduce 
competition and result in higher borrowing costs. The Board also did 
not agree that the proposed amendments would interfere with the 
discretion afforded to syndicate managers by current Rule G-11, noting 
that neither the proposed amendments to Rule G-11 nor the proposed 
interpretive notice would preclude the allocation of securities to 
underwriters for their own accounts or their related accounts, because 
exceptions are provided if the issuer consents or the syndicate manager 
concludes that it is in the best interests of the syndicate to do so 
and properly documents that decision. Finally, with regard to SIFMA's 
comment on the proposed FINRA fixed price offering rule, there is no 
comparable fixed price offering rule for municipal securities.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission 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 Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The MSRB requested that the proposed rule change become effective 
for new issues of municipal securities for which the Time of Formal 
Award (as defined in Rule G-34(a)(ii)(C)(1)(a)) occurs more than 60 
days after approval of the proposed rule change by the SEC.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-2009-17 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MSRB-2009-17. This file 
number should be included on the

[[Page 65576]]

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, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal 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-2009-17 and should be submitted on or before 
December 31, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29420 Filed 12-9-09; 8:45 am]
BILLING CODE 8011-01-P