[Federal Register Volume 89, Number 76 (Thursday, April 18, 2024)]
[Notices]
[Pages 27809-27816]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-08237]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-99949; File No. SR-MSRB-2024-03]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of a Proposed Rule Change To Amend MSRB Rule G-
47, on Time of Trade Disclosure, To Codify and Retire Certain Existing
Interpretive Guidance and Add New Time of Trade Disclosure Scenarios
April 12, 2024.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice
is hereby given that on April 9, 2024, the Municipal Securities
Rulemaking Board (``MSRB'' or ``Board'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') 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 filed with the Commission a proposed rule change
consisting of amendments to MSRB Rule G-47, on time of trade disclosure
(the ``proposed rule change''). The proposed rule change would codify
certain existing interpretive guidance and retire certain other
existing interpretive guidance, add new time of trade disclosure
scenarios, and make technical clarifications.
If the Commission approves the proposed rule change, the MSRB will
announce the effective date of the proposed rule change in a regulatory
notice to be published on the MSRB website no later than 30 days
following Commission approval. The effective date will be no later than
nine months following Commission approval.
The text of the proposed rule change is available on the MSRB's
website at https://msrb.org/2024-SEC-Filings, 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 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 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
MSRB Rule G-47 requires brokers, dealers, or municipal securities
dealers (``dealers'') to disclose to customers, at or prior to the time
of trade, all material information known or available publicly through
established industry sources. More specifically, MSRB Rule G-47
requires dealers selling a municipal security to a customer, or
purchasing a municipal security from a customer, to disclose to the
customer, orally or in writing, at or prior to the time of trade, all
material information known about the transaction, as well as
information about the municipal security that is reasonably accessible
to the market. This obligation exists for both unsolicited and
recommended transactions as well as primary and secondary market
transactions.\3\
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\3\ Dealers are also subject to Commission Rule 15l-1 under the
Exchange Act (``Regulation Best Interest'') that requires broker-
dealers to make certain prescribed disclosures to their retail
customer, before or at the time of the recommendation, about the
recommended transaction and the relationship between the retail
customer and the broker-dealer. See 17 CFR 240.15l-1(a)(2)(i).
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MSRB Rule G-47 Supplementary Material .03 contains examples of
information that may be material in specific scenarios and therefore
requires time of trade disclosures to a customer. The list of specific
scenarios is non-exhaustive and other information not listed in MSRB
Rule G-47 Supplementary Material .03 may be material to customers
depending upon the specific scenario. In addition to the specific
disclosure scenarios listed in MSRB Rule G-47 Supplementary Material
.03, various items of MSRB interpretive guidance list other scenarios
that could require a time of trade disclosure obligation to a dealer
transacting with a customer.
In summary, the proposed rule change would amend MSRB Rule G-47 to:
Clarify in section (a) of MSRB Rule G-47 that a dealer is
not obligated to disclose material information in violation of insider
trading rules or procedures;
Amend and simplify the definition of material information
in subsection (b)(ii) of MSRB Rule G-47 and make a conforming amendment
to Supplementary Material .01(a);
Codify into Supplementary Material .03 existing
interpretive guidance pertaining to market discount and to zero coupon
or stepped coupon securities;
Add a clarifying example of factor bonds as bonds that
prepay principal in Supplementary Material .03(i); and
Add three new disclosure scenarios to Supplementary
Material .03.
The proposed rule change would also retire interpretive guidance on
conversion costs and secondary market insurance and consolidate
existing inter-dealer time of trade disclosure guidance into a single
piece of interpretive guidance.
Disclosure of Material Information
The proposed rule change would redesignate the existing language of
MSRB Rule G-47(a) as subsection (i) and add a new subsection (ii) to
MSRB Rule G-47(a) clarifying that information that may be material to
the transaction would not be required to be disclosed to the customer
if, pursuant to the dealer's policies and procedures regarding insider
trading and related securities laws, such information is intentionally
withheld from the dealer's registered representatives who are engaged
in sales to and purchases from customers. It would be beneficial to the
market to clarify this point in the text of MSRB Rule G-47 given that
it is not the MSRB's intent for dealers to violate securities
regulations.
Definition of Material Information
MSRB Rule G-47(b)(ii) defines the term ``material information'' and
explains that information is considered
[[Page 27810]]
to be material if there is a substantial likelihood that the
information would be considered important or significant by a
reasonable investor in making an investment decision. The proposed rule
change would delete the language ``or significant'' in order to
streamline and simplify the definition. The MSRB does not believe that
this would materially alter the definition of material information or
impose any additional burdens on dealers. The proposed rule change
would make a conforming amendment in Supplementary Material .01(a) to
change the word ``significant'' to ``important.''
Codify Existing Interpretive Guidance on Market Discount and Zero
Coupon or Stepped Coupon Securities
The proposed rule change would codify and retire November 2016
interpretive guidance on market discount (the ``Market Discount
Guidance'').\4\ The Market Discount Guidance states that, absent
adequate disclosure that a security has market discount, an investor
might not be aware that all or a portion of such investor's investment
return represented by accretion of the market discount is taxable as
ordinary income. The Market Discount Guidance goes on to state that the
fact that a security has market discount is material information that
is required to be disclosed to a customer under MSRB Rule G-47 at or
prior to the time of trade. The proposed rule change would codify this
information into MSRB Rule G-47 Supplementary Material .03(p).
Furthermore, the proposed rule change would retire the Market Discount
Guidance upon codification as the MSRB believes that it would not
retain any standalone value. The MSRB believes that codifying this
information into the text of MSRB Rule G-47 would facilitate compliance
and consolidate the rulebook by removing redundant interpretive
guidance. The MSRB notes, however, that proposed MSRB Rule G-47
Supplementary Material .03(p) would not require dealers to provide
customers with more detailed or personalized information, or to provide
any information that could constitute tax advice, with respect to
market discount.
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\4\ See MSRB Interpretive Guidance, Time of Trade Disclosure--
Disclosure of Market Discount (November 22, 2016), available at
https://www.msrb.org/Time-Trade-Disclosure-Disclosure-Market-Discount.
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The proposed rule change would also codify and retain April 1982
interpretive guidance pertaining to municipal securities with zero
coupons or stepped coupons (the ``Zero or Stepped Coupon
Guidance'').\5\ The Zero or Stepped Coupon Guidance states in the
context of discussing zero coupon bonds and stepped coupon bonds that
the MSRB is of the view that persons selling such securities to the
public have an obligation to adequately disclose the special
characteristics of such securities in order to comply with the MSRB's
fair practice rules. The proposed rule change would incorporate this
guidance into MSRB Rule G-47 Supplementary Material .03(q) but retain
the Zero or Stepped Coupon Guidance as it contains additional
standalone value pertaining to MSRB Rule G-12 and MSRB Rule G-15.
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\5\ See MSRB Interpretive Guidance, Notice Concerning ``Zero
Coupon'' and ``Stepped Coupon'' Securities (April 27, 1982),
available at https://www.msrb.org/Notice-Concerning-Zero-Coupon-and-Stepped-Coupon-Securities.
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Retire Existing Interpretive Guidance on Conversion Costs and Secondary
Market Insurance
The proposed rule change would retire two pieces of interpretive
guidance that the MSRB believes have become outdated. The first
interpretive guidance to be retired is interpretive guidance from
August 1988 (the ``Conversion Cost Guidance'') stating that transfer
agents for some interchangeable securities charge fees for the
conversion of registered certificates to bearer form, which can be
substantial and, in some cases, prohibitively expensive.\6\ The
Conversion Cost Guidance goes on to state that dealers therefore should
ascertain the amount of the fee prior to agreeing to deliver bearer
certificates and that, if a dealer passes on the costs of converting
registered securities to bearer form to its customer, the dealer must
disclose the amount of the conversion fee to the customer at or prior
to the time of trade and the customer must agree to pay the conversion
fee. The MSRB believes that interchangeable securities are a rare
occurrence in the marketplace, and as such, the MSRB believes that
there is limited utility in retaining this guidance and proposes its
retirement.
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\6\ See MSRB Interpretive Guidance, Confirmation, Delivery and
Reclamation of Interchangeable Securities (August 10, 1988),
available at https://www.msrb.org/Confirmation-Delivery-and-Reclamation-Interchangeable-Securities.
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The second piece of interpretive guidance to be retired is guidance
from March 1984 on secondary market insurance (the ``Secondary Market
Insurance Guidance'').\7\ The Secondary Market Insurance Guidance, in
part, reminds the industry that if a security has been insured or if
arrangements for insurance have been initiated, the market price of the
security would be affected and this information is material and must be
disclosed to a customer at or before the execution of a transaction in
the security. MSRB Rule G-47 Supplementary Material .03(e) currently
includes a disclosure obligation scenario detailing when a security has
been insured or arrangements for insurance have been initiated, the
credit rating of the insurance company, and information about potential
rating actions with respect to the bond insurance company, effectively
making the comparable portion of the Secondary Market Insurance
Guidance superfluous. In addition, the MSRB explained in the Secondary
Market Insurance Guidance that it believes that a dealer should advise
a customer if evidence of insurance or other credit enhancement
features must be attached to the security for effective transference of
the insurance or device. However, the MSRB believes that it is no
longer common practice to require such evidence of insurance for
effective transference, and as a result, proposes to retire the
Secondary Market Insurance Guidance.
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\7\ See MSRB Interpretive Guidance, Application of Board Rules
to Transactions in Municipal Securities Subject to Secondary Market
Insurance or Other Credit Enhancement Features (March 6, 1984),
available at https://www.msrb.org/Application-Board-Rules-Transactions-Municipal-Securities-Subject-Secondary-Market-Insurance-or.
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Add an Example of a Bond That Prepays Principal
MSRB Rule G-47 Supplementary Material .03(i) lists bonds that
prepay principal as a specific scenario which may be material and
require disclosure at or prior to the time of trade. More specifically,
the scenario lists the fact that the security prepays principal and the
amount of unpaid principal that will be delivered on the transaction as
a scenario that may be material and require a time of trade disclosure.
The proposed rule change would add factor bonds to Rule G-47
Supplementary Material .03(i) as an example of a bond that prepays
principal. Factor bonds are bonds for which partial distributions are
processed by a proportional return of principal to each bondholder.
After the partial distribution, the factor must be applied to the face
value to determine interest payments as well as the principal amount
for each future transaction. Factor bonds, by their terms, are already
subject to this scenario and therefore this addition does not add or
remove any disclosure burdens but instead simply provides an example of
a potential disclosure
[[Page 27811]]
obligation currently contained in MSRB Rule G-47 that serves to remind
dealers of the applicability of this provision to factor bonds.
Add Three New Disclosure Scenarios
The proposed rule change would add three new disclosure scenarios
to MSRB Rule G-47 Supplementary Material .03's non-exhaustive list of
specific scenarios that could be material and require a time of trade
disclosure. Specifically, these three new scenarios are yield to worst,
the unavailability of the official statement, and the fact that
continuing disclosures are not available.
Yield to Worst. The proposed rule change would add yield to worst
as a disclosure scenario to MSRB Rule G-47 Supplementary Material .03
in new clause (r) thereof. MSRB Rule G-15(a)(i)(A)(5) requires the
yield at which a transaction is effected for transactions that are
computed on the basis of yield to maturity, yield to a call date, or
yield to a put date to be disclosed on a customer's confirmation.\8\
Furthermore, if the computed yield required by MSRB Rule G-15 is
different than the yield at which the transaction was effected, the
computed yield must also be disclosed on the confirmation.\9\ This
information is typically referred to as yield to worst. The MSRB
believes that this information may be material to a customer's
investment decision, as it could impact a decision to purchase a
municipal security at the current price or yield, and therefore may be
required to be disclosed at or prior to the time of trade in addition
to being disclosed on a customer's confirmation.
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\8\ Pursuant to MSRB Rule G-15(a)(i)(A)(5)(c)(v), yield is to be
calculated in accordance with MSRB Rule G-33, on calculations.
\9\ See MSRB Rule G-15(a)(i)(A)(5)(c)(vii).
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Unavailability of Official Statement for New Issue Customers. The
proposed rule change would add, in the case of sales to customers of
new issue municipal securities, the fact that an official statement is
unavailable or only available from the underwriter as a disclosure
scenario to MSRB Rule G-47 Supplementary Material .03 in new clause (s)
thereof. For purposes of this scenario, new issue municipal securities
consist of offered municipal securities within the meaning of MSRB Rule
G-32, which in general are municipal securities sold in a primary
offering until 25 days after the closing of the new issue.\10\ In
contrast, the potential for the lack of an official statement to be
material to a customer in a transaction outside of the primary offering
disclosure period is considerably lower and therefore normally would
not trigger an obligation under MSRB Rule G-47.
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\10\ MSRB Rule G-32(c)(vi) defines offered municipal securities
as municipal securities that are sold by a dealer during the
securities' primary offering disclosure period, including but not
limited to municipal securities reoffered in a remarketing that
constitutes a primary offering and municipal securities sold in a
primary offering but designated as not reoffered. Primary offering
disclosure period is defined in MSRB Rule G-32(c)(ix) as the period
commencing with the first submission to an underwriter of an order
for the purchase of offered municipal securities or the purchase of
such securities from the issuer, whichever first occurs, and ending
25 days after the final delivery by the issuer or its agent of all
securities of the issue to or through the underwriting syndicate or
sole underwriter. Pursuant to MSRB Rule G-32(c)(viii), primary
offering means an offering defined in Exchange Act Rule 15c2-
12(f)(7) (17 CFR 240.15c2-12(f)(7)), including but not limited to
any remarketing of municipal securities that constitutes a primary
offering as such subsection (f)(7) may be interpreted from time to
time by the Commission.
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Exchange Act Rule 15c2-12 \11\ requires underwriters to obtain and
review an official statement for most primary offerings of municipal
securities. MSRB Rule G-32(b)(i)(B) generally requires that the
underwriter submit such official statement (as well as any official
statement produced for a primary offering exempt from Exchange Act Rule
15c2-12 \12\) for posting on the Electronic Municipal Market Access
(``EMMA[supreg]'') \13\ website. If no official statement is posted by
an underwriter to EMMA for a primary offering by the closing date, the
underwriter is generally required under MSRB Rule G-32 to post to EMMA,
as applicable, either: (i) notification that no official statement
exists pursuant to MSRB Rule G-32(b)(i)(C) or (ii) in the case of a
primary offering not subject to Exchange Act Rule 15c2-12 \14\ by
virtue of paragraph (d)(1)(i) thereof (sometimes referred to as a
limited offering) and the underwriter has withheld posting the official
statement to EMMA pursuant to MSRB Rule G-32(b)(i)(E), contact
information for investors to request a copy of the official
statement.\15\
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\11\ 17 CFR 240.15c2-12.
\12\ Id.
\13\ EMMA[supreg] is a registered trademark of the MSRB.
\14\ 17 CFR 240.15c2-12.
\15\ MSRB Rule G-32(b)(i)(F) also provides an exemption for
certain commercial paper offerings or remarketings from the official
statement submission requirement assuming applicable conditions are
met.
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Under certain circumstances, dealers currently have obligations to
inform new issue customers by trade settlement regarding the
availability or unavailability of the official statement under MSRB
Rule G-32(a)(i) or (a)(iii)(A). The MSRB believes that the fact that an
official statement is not available could be material to a new issue
investor in making an investment decision and therefore should be
included in MSRB Rule G-47's list of scenarios that could trigger a
time of trade disclosure. As a result, new clause (s) of MSRB Rule G-47
Supplementary Material .03 would accelerate the timing for this
disclosure to a point in time where this information would be available
to the customer while making such investment decision, rather than
merely by settlement of the transaction and thus after such decision
has been made.
Dealers generally would be able to rely, for purposes of proposed
clause (s), on information posted on EMMA as of the time of trade of a
new issue municipal security with regard to whether an official
statement is unavailable or available only from the underwriter. In the
case of a customer trade by a dealer (other than the underwriter of the
municipal security) occurring prior to the posting on EMMA of the
official statement or any statement about the official statement's
availability,\16\ such dealer may presume that an official statement
will become available unless the dealer has knowledge that the official
statement will not in fact be posted or will only be made available
through the underwriter.\17\ Dealers that serve as underwriters for a
primary offering would, in contrast, be deemed to know whether or not
an official statement will be posted for such offering or will be made
available only from such underwriters.
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\16\ It is common for new issue municipal securities to be
traded beginning immediately after the time of first execution
within the meaning of MSRB Rule G-34(a)(ii)(C)(1)(b) but before the
underwriter timely posts the official statement to EMMA under MSRB
Rule G-32(b)(i)(B). This gap typically is a result of the time
needed to finalize and produce the official statement that
incorporates the final terms of a new issue offering.
\17\ This is somewhat analogous to the ability of dealers other
than the underwriter of a new issue to effectively presume that the
underwriter has made the required submissions to EMMA under MSRB
Rule G-32(a)(ii)(B).
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Unavailability of Continuing Disclosure. The proposed rule change
would add, as a disclosure scenario to MSRB Rule G-47 Supplementary
Material .03 in new clause (t) thereof, the fact that no issuer of, or
other obligated person with respect to, a customer's municipal security
has agreed to make continuing disclosures as contemplated under
Exchange Act Rule 15c2-12 \18\ available on EMMA. Exchange Act Rule
15c2-12(b)(5) \19\ prohibits an underwriter from purchasing or selling
municipal securities in most new issue offerings
[[Page 27812]]
unless the underwriter has reasonably determined that an issuer or
obligated person has undertaken in a written agreement or contract to
provide specified continuing disclosures to the MSRB. Exchange Act Rule
15c2-12(d)(2)(ii),\20\ while providing an exemption from Exchange Act
Rule 15c2-12(b)(5),\21\ requires a modified version of such continuing
disclosure agreement or contract. In addition, Exchange Act Rule 15c2-
12(d)(3) \22\ provides a partial exemption from Exchange Act Rule 15c2-
12(b)(5) \23\ but still requires a modified version of such continuing
disclosure agreement or contract limited to specified event notices.
This new disclosure scenario in proposed clause (t) would apply to any
municipal securities of the foregoing offerings. However, certain new
issue offerings are wholly exempt from or otherwise not subject to
Exchange Act Rule 15c2-12(b)(5) \24\ by virtue of paragraph (a) or
subparagraph (d)(1) of Exchange Act Rule 15c2-12,\25\ and therefore
this new disclosure scenario would not apply to any municipal
securities of these specific types of exempt offerings.
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\18\ 17 CFR 240.15c2-12.
\19\ 17 CFR 240.15c2-12(b)(5).
\20\ 17 CFR 240.15c2-12(d)(2)(ii).
\21\ 17 CFR 240.15c2-12(b)(5).
\22\ 17 CFR 240.15c2-12(d)(3).
\23\ 17 CFR 240.15c2-12(b)(5).
\24\ Id.
\25\ 17 CFR 240.15c2-12(a) and (d)(1). In addition, Exchange Act
Rule 15c2-12(d)(5) provides an exemption from Exchange Act Rule
15c2-12(b)(5) for certain municipal securities outstanding on
November 30, 2010 so long as they have continuously met the
conditions specified therein. 17 CFR 240.15c2-12(d)(5).
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Continuing disclosure documents and related information submitted
by issuers and obligated persons to EMMA's continuing disclosure
service are made available on the EMMA website.\26\ Such continuing
disclosures currently are accessible by users of the EMMA website
through a variety of means, including on the Disclosure Documents tab
of the EMMA Security Details page for each specific municipal security.
The disclosures provided on such page are generally accompanied by
certain information, as applicable, provided to EMMA by the underwriter
of the applicable municipal security at the time of its initial
issuance regarding any agreement by the issuer or other obligated
persons to undertake to provide continuing disclosures.\27\
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\26\ See MSRB Information Facility IF-3, on Electronic Municipal
Market Access System--EMMA, available at https://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Informational/IF-3.
\27\ See MSRB Rule G-32(b)(i)(A) and (b)(vi)(C)(1)(a).
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Dealers generally would be able to rely on such information posted
on EMMA by the underwriter regarding an issuer's or other obligated
person's continuing disclosure undertaking for purposes of MSRB Rule G-
47 Supplementary Material .03(t) unless the dealer has knowledge to the
contrary.\28\ In addition, particularly for municipal securities for
which no such underwriter-provided information concerning any
continuing disclosure agreement may be displayed on EMMA, a review of
the official statement or other information available on EMMA typically
would indicate whether the issuer or obligated person has undertaken to
provide continuing disclosures on the municipal securities.
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\28\ The ability of a dealer to rely on this posted information
for purposes of MSRB Rule G-47 Supplementary Material .03(t) would
not conclusively foreclose any other potential disclosure or other
obligation of a dealer, under MSRB Rule G-47(a), Exchange Act Rule
15c2-12 (17 CFR 240.15c2-12) or otherwise, that might arise relating
to the existence of or the performance or non-performance under any
continuing disclosure agreement by an issuer or obligated person, or
with regard to the content of such continuing disclosure, depending
on the specific facts and circumstances.
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The MSRB believes that the fact that continuing disclosures are not
required to be made available to a customer on EMMA, which is where a
customer would typically go to review such information prior to trading
a municipal security, will generally be material and therefore should
be included in time of trade disclosures provided to a customer. On
occasion, an issuer or obligated person may undertake to provide
continuing disclosures not contemplated by Exchange Act Rule 15c2-12
\29\ (sometimes referred to as voluntary continuing disclosures). This
proposed scenario is not intended to require disclosures with regard to
the existence of an agreement solely in respect of such voluntary
continuing disclosures.
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\29\ 17 CFR 240.15c2-12.
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Consolidate Existing Inter-Dealer Time of Trade Disclosure Guidance
The proposed rule change would consolidate three pieces of existing
interpretive guidance relating to inter-dealer time of trade disclosure
into one standalone interpretive guidance in order to better streamline
time of trade disclosure guidance.\30\ While MSRB Rule G-47 applies to
customer transactions and not transactions between dealers,\31\ the
MSRB has previously discussed a dealer's fair dealing disclosure
obligations in connection with inter-dealer transactions in these three
pieces of inter-dealer guidance. The MSRB believes that consolidating
this existing guidance into a single interpretive guidance would be
beneficial to the market and result in a more organized rulebook. The
MSRB does not believe that the three existing pieces of inter-dealer
guidance would otherwise retain any standalone value upon consolidation
into the new guidance and, therefore, these three pieces of guidance
would be retired.
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\30\ See MSRB Interpretive Guidance, Notice Concerning
Securities that Prepay Principal (March 19, 1991), available at
https://www.msrb.org/Notice-Concerning-Securities-Prepay-Principal;
MSRB Interpretive Guidance, Disclosure of Pricing: Calculating the
Dollar Price of Partially Prerefunded Bonds (May 15, 1986),
available at https://www.msrb.org/Disclosure-Pricing-Calculating-Dollar-Price-Partially-Prerefunded-Bonds; and MSRB Interpretive
Guidance, Description Provided at or Prior to the Time of Trade
(April 30, 1986), available at https://www.msrb.org/Description-Provided-or-Prior-Time-Trade. Any portions of such interpretive
pieces relating to customer disclosure standards are already
incorporated into MSRB Rule G-47.
\31\ See MSRB Rule G-47(a).
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2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2) of the Exchange Act,\32\ which provides that the MSRB
shall propose and adopt rules to effect the purposes of the Exchange
Act with respect to, among other matters, transactions in municipal
securities effected by dealers. Section 15B(b)(2)(C) of the Exchange
Act \33\ provides that the MSRB's rules shall 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 and municipal financial products, to remove impediments to
and perfect the mechanism of a free and open market in municipal
securities and municipal financial products, and, in general, to
protect investors, municipal entities, obligated persons, and the
public interest.
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\32\ 15.U.S.C. 78o-4(b)(2).
\33\ 15 U.S.C. 78o-4(b)(2)(C).
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The MSRB believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Exchange Act \34\ because the proposed rule
change would protect investors and the public interest by ensuring that
retail and other customers receive material information at or prior to
the time of trade that would allow them to make an informed investment
decision. Adding new requirements for dealers to disclose when an
official statement is unavailable, when continuing disclosures are not
available, and the
[[Page 27813]]
yield to worst of a transaction would provide investors with material
information when deciding to transact in municipal securities.
Consolidating existing interpretive guidance into the text of MSRB Rule
G-47 and clarifying existing rule language would promote compliance by
dealers with existing requirements under MSRB Rule G-47 and thereby
promote the protection of investors and the public interest. The MSRB
believes that providing this material information to investors,
particularly retail customers who may or may not know how or where to
access this information, will assist investors by providing them with
material information that could influence their investment decision.
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\34\ Id.
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Furthermore, the MSRB believes that consolidating its rulebook by
removing interpretive guidance that is outdated or has already been
incorporated into the rulebook will facilitate transactions in
municipal securities, as well as facilitate compliance with MSRB rules,
by reducing the need for industry participants to cross reference
multiple sources.
B. Self-Regulatory Organization's Statement on Burden on Competition
Section 15B(b)(2)(C) of the Exchange Act \35\ requires that MSRB
rules not be designed to impose any burden on competition that is not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. The proposed rule change would improve the municipal securities
market's operational efficiency and promote regulatory certainty by
streamlining requirements and providing dealers with a clearer
understanding of regulatory obligations incorporated into rule text
from the current interpretive guidance. In addition, the proposed rule
change would apply equally to all dealers. Therefore, the MSRB believes
the proposed rule change would not impose any burden on competition
and, consequently, does not impose a burden that is not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
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\35\ Id.
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In reaching this conclusion, the MSRB was guided by the MSRB's
Policy on the Use of Economic Analysis in MSRB Rulemaking.\36\ In
accordance with this policy, the MSRB evaluated the potential impacts
on competition of the proposed rule change. For the purposes of this
filing, the MSRB used the current iteration of MSRB Rule G-47 as the
baseline to evaluate the costs and benefits for the proposed rule
change, as well as other reasonable regulatory alternatives.
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\36\ The Policy on the Use of Economic Analysis in MSRB
Rulemaking is available at http://msrb.org/Rules-and-Interpretations/Economic-Analysis-Policy.aspx. In evaluating whether
there was a burden on competition, the MSRB was guided by its
principles that required the MSRB to consider costs and benefits of
a rule change, its impact on capital formation and the main
reasonable alternative regulatory approaches.
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Benefits, Costs and Effect on Competition
The proposed rule change is intended to benefit investors by
requiring disclosure of additional information that is easily and
readily accessible to dealers. The proposed rule change is also
intended to benefit dealers by reducing their burden through
clarification of the existing rule requirements and eliminating
unnecessary compliance time and paperwork.
Benefits
The proposed rule change would provide several benefits for dealers
and investors. First, the MSRB believes that the proposed rule change
would streamline the process for dealers and clarify the existing rule
so that dealers would better understand what disclosures must be
disclosed to an investor at the time of trade, and thus would eliminate
unnecessary compliance time and paperwork and reduce the burden on
regulated entities. These include a clarification that the time of
trade disclosure obligation in MSRB Rule G-47 does not require dealers
to disclose material information to their customers that is
intentionally withheld, based on a dealer's policies and procedures
regarding insider trading. Furthermore, consolidating certain
interpretive guidance and retiring six pieces of interpretive guidance
would streamline the rulebook by consolidating existing guidance into
the text of the rulebook and facilitate compliance by reducing the
number of sources a dealer must review when complying with MSRB Rule G-
47. Finally, the MSRB believes the proposed disclosure codification
with three newly specified supplementary material paragraphs
(continuing disclosures by an issuer, unavailability of an official
statement in a new issue and the yield to worst) would benefit
investors by helping to ensure that such information, which is easily
and readily accessible to dealers, is disclosed to investors.
Costs
The MSRB believes that dealers would incur some costs because of
the proposed rule change. These costs include the one-time upfront
costs related to revising related policies and procedures as well as
ongoing costs such as compliance costs associated with maintaining and
updating relevant disclosures. This would be especially true for the
three new time of trade disclosure obligations to be codified in MSRB
Rule G-47 where dealers have a new responsibility to disclose readily
accessible information to customers.\37\ However, as current MSRB Rule
G-47 already requires dealers to disclose material information to
investors without specifying certain information and circumstances that
could be material, it is possible that dealers may already have these
specific disclosures built into their existing time-of-trade disclosure
process. Regardless, the MSRB believes that this information is
potentially material and therefore should be included in the time of
trade disclosure obligation scenarios in MSRB Rule G-47.
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\37\ In a comment letter responding to the MSRB's request for
comment described below, one commenter expressed concern about the
costs of implementing the three proposed new specified time of trade
disclosure obligations. Specifically, smaller dealers ``tend to bear
a great burden because fixed compliance costs are spread over a
smaller base of revenue.'' See Letter from Michael Decker, Senior
Vice President, Bond Dealers of America, dated April 17, 2023, at 2.
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The MSRB believes that dealers would not incur any, or only
negligible, costs from proposed changes such as codifying existing
interpretive guidance into MSRB Rule G-47, since dealers are presumably
already in compliance with the existing interpretive guidance and
relevant MSRB rules. The MSRB believes that dealers may also have
additional costs associated with recordkeeping in relation to the
disclosure requirements. Overall, the MSRB believes the aggregate
upfront and ongoing costs relative to the baseline would be minor, and
the expected aggregate benefits to investors and dealers accumulated
over time should exceed the total costs.
Effect on Competition, Efficiency and Capital Formation
The MSRB believes that the proposed rule change would neither
impose a burden on competition nor hinder capital formation, as the
proposed rule change would be applicable to all dealers and is not
expected to erode protection for investors and issuers. The proposed
rule change would improve the municipal securities market's operational
efficiency and promote regulatory certainty by providing dealers with a
clearer understanding of regulatory obligations that are incorporated
into the rule text. Although the benefits to investors
[[Page 27814]]
discussed above would require dealers to incur some additional costs,
at present, the MSRB is unable to quantitatively evaluate the magnitude
of the efficiency gains or losses, but believes the overall benefits
accumulated over time for all market participants would outweigh the
upfront costs of revising policies and procedures as well as the
ongoing compliance costs borne by dealers. The MSRB does not expect
that the proposed rule change would impose a burden on competition for
dealers, as the upfront costs are expected to be relatively minor for
all dealers while the ongoing costs are expected to be proportionate to
the size and trading activities of each dealer. In addition, the
proposed rule change would apply equally across all dealers.
Reasonable Regulatory Alternatives
The MSRB considered and assessed two reasonable regulatory
alternatives but determined the proposed rule change is superior to
these alternatives. One alternative the MSRB considered was for MSRB
Rule G-47 to pivot to an entirely principles-based approach when
determining what information is considered material and therefore must
be disclosed to investors at or before the time of trade. An entirely
principles-based approach would provide an overarching objective for
dealers to consider when determining whether specific information
should be provided at the time of trade but would not provide specific
examples of situations where, depending on the facts and circumstances,
information could be material. By comparison, dealers currently are
provided with a list of fifteen specific scenarios contained in MSRB
Rule G-47 Supplementary Material .03 that could be material, depending
on the facts and circumstances, to assist them in their compliance
efforts, and the proposed rule change would add three additional
disclosure scenarios. The MSRB determined the alternative to adopt an
entirely principles-based approach to be inferior to the proposed rule
change, which would provide dealers with the latitude to make a
judgement on what is material while also offering specific examples.
This alternative would also defeat the original purpose of creating
MSRB Rule G-47 in 2013 to consolidate the previously issued guidance
into rule language without substantively changing the existing
obligations.
Another alternative the MSRB considered was to restructure MSRB
Rule G-47 to provide a detailed and prescriptive listing of required
time of trade disclosures without the primary principles-based
requirement set forth in MSRB Rule G-47(a). This alternative would
eliminate any gray area that may currently exist because compliance
personnel currently must weigh the general principle set forth in MSRB
Rule G-47(a) with the Supplementary Material and any applicable
interpretative guidance.\38\ While the proposed rule change would
maintain the existing obligation of dealers to make a judgement on what
is material, the alternative would increase the risk of information
material to investors not being disclosed if such information does not
fall within the listed items of disclosure, thereby reducing investor
protection. As a result, the MSRB deemed these alternatives as inferior
to the proposed rule change.
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\38\ In response to the original request for comment in 2013 to
create MSRB Rule G-47, which included both a principles-based
requirement for material disclosures as well as a list of potential
scenarios, one commenter stated that the structure of the proposed
rule text was ``unnecessarily ambiguous,'' See Letter from Michael
Nicholas, Chief Executive Officer, Bond Dealers of America, dated
March 12, 2013, at 2, available at https://www.msrb.org/sites/default/files/RFC/2013-04/BDA.pdf.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
The MSRB sought comment on draft amendments to MSRB Rule G-47 in a
request for comment that was published on February 16, 2023 (the
``Request for Comment'').\39\ The MSRB received seven comment letters
in response to the Request for Comment.\40\
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\39\ See MSRB Notice 2023-02, Request for Comment Regarding a
Retrospective Review of the MSRB's Time of Trade Disclosure Rule and
Draft Amendments to MSRB Rule D-15, On Sophisticated Municipal
Market Professionals (February 16, 2023) available at https://www.msrb.org/sites/default/files/2023-02/2023-02.pdf.
\40\ Comment letters were received from: AKF Consulting: Letter
from Andrea Feirstein, Managing Director, and Mark Chapleau, Senior
Consultant, dated April 20, 2023; Bond Dealers of America (``BDA''):
Letter from Michael Decker, Senior Vice President, dated April 17,
2023 (the ``BDA Letter''); College Savings Plan Network: Letter from
Rachel Biar, Nebraska Assistant State Treasurer, NEST 529 College
Savings Program Director, Chairman, College Savings Plans Network,
dated April 17, 2023; Government Finance Officers Association:
Letter from Emily Brock, Director, Federal Liaison Center, dated
July 21, 2023; Curtis McLane, dated April 19, 2023; my529: Letter
from Richard K. Ellis, Executive Director, dated April 17, 2023; and
Securities Industry and Financial Markets Association (``SIFMA''):
Letter from Leslie M. Norwood, Managing Director and Associate
General Counsel, Head of Municipal Securities, dated April 17, 2023
(the ``SIFMA Letter''). Comment letters are available at https://www.msrb.org/sites/default/files/2023-04/All-Comments-to-Notice-2023-02.pdf.
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In addition to items related to MSRB Rule G-47 on time of trade
disclosure, the Request for Comment solicited comment on time of trade
disclosure obligations with respect to 529 savings plans as well as on
draft amendments to MSRB Rule D-15, defining the term sophisticated
municipal market professional. Comments received in response to time of
trade disclosure obligations with respect to 529 savings plans as well
as those received in response to the draft amendments to MSRB Rule D-15
will be addressed through separate initiatives. The BDA Letter and
SIFMA Letter were directly responsive to the proposed rule change and
the two letters are summarized below by topic, with MSRB responses
provided.
Material Information
The Request for Comment solicited comments on draft rule text that
would clarify that MSRB Rule G-47(a) does not require dealers to
disclose to their customers material information that, pursuant to the
dealer's policies and procedures regarding insider trading and related
securities laws, is intentionally withheld from the dealer's registered
representatives who are engaged in sales to and purchases from a
customer.
SIFMA specifically states that it appreciates the MSRB clarifying
that it is not the MSRB's intent to require dealers to violate dealer
processes that have been established to facilitate compliance with
another obligation in order to comply with MSRB Rule G-47.\41\ SIFMA
also states that the technical clarification described in the proposed
rule change is largely helpful and alleviates potential sources of
confusion.\42\
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\41\ See SIFMA Letter at 4.
\42\ See SIFMA Letter at 7.
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The MSRB agrees with SIFMA that the intent of MSRB Rule G-47 is not
to require dealers to violate their policies and procedures designed to
address insider trading and related securities laws in order to comply
with MSRB Rule G-47, and the proposed rule change will make this clear
on its face.
Codify Existing Interpretive Guidance on Market Discount, Zero Coupon
and Stepped Coupon Securities
The Request for Comment solicited comments on draft rule text that
would codify existing interpretive guidance on market discount, zero
coupon, and stepped coupon securities into MSRB Rule G-47 Supplementary
Material .03 as features of a security that may be material in specific
scenarios and therefore trigger a time of trade disclosure.
[[Page 27815]]
The BDA Letter states that BDA is generally not opposed to the
proposed rule change as it relates to MSRB Rule G-47 as many of the
proposed changes reflect codification or reorganization of existing
guidance or practices and would not impose significant new burdens.\43\
SIFMA, however, states that it is concerned about the increase in scope
of time of trade disclosure and requiring disclosure about zero coupon
and stepped coupon bonds could obfuscate material information.\44\
SIFMA also expresses concern that the provision of more detailed
information about market discount beyond notification of the existence
of a discount could constitute the provision of tax advice.\45\
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\43\ See BDA Letter at 1.
\44\ See SIFMA Letter at 3-4.
\45\ Id.
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The time of trade disclosures relating to market discount, zero
coupon or stepped coupon securities are currently contained within
interpretive guidance. Therefore, dealers should be on notice as to the
potential materiality of these security features. The MSRB believes
that consolidating material time of trade disclosure scenarios into
MSRB Rule G-47 would be a benefit to the market. Furthermore, while
information on market discount, zero coupon or stepped coupon
securities may be obvious to market professionals, it is less likely to
be obvious to retail investors toward which MSRB Rule G-47 is primarily
oriented. However, in connection with disclosure related to market
discount, dealers would not be required pursuant to the provisions of
the proposed rule change to provide customers with more detailed or
personalized information, or to provide any information that could
constitute tax advice.
Retire Existing Interpretive Guidance on Conversion Costs and Secondary
Market Insurance
The Request for Comment solicited comments on retiring existing
interpretive guidance relating to conversion costs and secondary market
insurance. The Request for Comment noted that the substance of the
Conversion Cost Guidance relating to interchangeable securities is not
a common occurrence in the marketplace anymore and therefore should be
retired. The Request for Comment noted that this guidance is currently
reflected in MSRB Rule G-47 Supplementary Material .03(e). The Request
for Comment also noted that the Secondary Market Insurance Guidance
states that the fact that a security has been insured or arrangements
for insurance have been initiated will affect the market price of the
security and is material and must be disclosed to a customer at or
before execution of a transaction in the security. Additionally, the
Secondary Market Insurance Guidance explained that a dealer should
advise a customer if evidence of insurance or other credit enhancement
features must be attached to the security for effective transference of
the insurance or device. The Request for Comment noted that the MSRB
believes that it is not common practice to require such evidence of
insurance for effective transference.
SIFMA states that it agrees that evidence of insurance generally is
not required to be attached to a security for effective transfer and
that there are no aspects of the guidance that the MSRB proposes to
retire that should be retained in any way.\46\ BDA states that it is
generally not opposed to the proposed rule change as it relates to MSRB
Rule G-47 as many of the proposed changes reflect codification or
reorganization of existing guidance or practices and would not impose
significant new burdens.\47\
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\46\ See SIFMA Letter at 7.
\47\ See BDA Letter at 1.
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The MSRB agrees with SIFMA and BDA that the guidance to be retired
in the proposed rule change would not impose significant burdens and
that the guidance no longer retains utility due to its current
codification within MSRB Rule G-47 or the fact that it has become
outdated.
Add Factor Bonds as an Example of a Bond that Prepays Principal
The Request for Comment solicited comments on a technical amendment
to add factor bonds as an example of a type of bond that prepays
principal under MSRB Rule G-47 Supplementary Material .03(i). The
Request for Comment noted that MSRB Rule G-47 Supplementary Material
.03(i) already covers bonds that prepay principal as a feature that
could trigger the time of trade disclosure obligation.
The SIFMA Letter states that SIFMA is concerned about the proposed
increase in scope of time of trade disclosures and that requiring time
of trade disclosure about items such as factor bonds would add
compliance risks and burdens.\48\ BDA states that it is generally not
opposed to the proposed rule change as it relates to MSRB Rule G-47.
Many of the proposed changes reflect codification or reorganization of
existing guidance or practices and would not impose significant new
burdens.\49\
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\48\ See SIFMA Letter at 3-4.
\49\ See BDA Letter at 1.
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MSRB Rule G-47 Supplementary Material .03(i) already lists bonds
that prepay principal as a disclosure scenario. Adding factors bonds as
an example of a bond that prepays principal does not add any new burden
or disclosure scenario, as factor bonds are bonds that prepay principal
and therefore are already within the scope of this provision.
Furthermore, while this information may be obvious to market
professionals, it is less likely to be obvious to retail investors
toward which MSRB Rule G-47 is primarily oriented.
Three New Disclosure Scenarios
The Request for Comment solicited comments on the addition of three
new disclosure scenarios to MSRB Rule G-47 Supplementary Material .03.
Specifically, the three new disclosure scenarios discussed in the
Request for Comment were the unavailability of the official statement,
whether the issuer is required to make continuing disclosures, and
yield to worst.
SIFMA states that it is concerned that the proposed increase in
scope of time of trade disclosures and requiring time of trade
disclosure about the availability of an official statement and yield to
worst calculations would add compliance risks and burdens, and that
time of trade disclosure of obvious information, on the contrary,
obfuscates material information.\50\ Furthermore, SIFMA states that the
list of time of trade disclosures has become overbroad and
unnecessarily increases risks to dealers without providing material
benefit to issuers and investors and urged the MSRB to reconsider the
changes that add these additional time of trade disclosures.'' \51\ BDA
states that the addition of three new disclosure scenarios would impose
costs on dealers to update written supervisory procedures and obtain
additional sources for this information.\52\ BDA goes on to state that
while the marginal compliance costs associated with the proposed rule
change may be relatively small, it would come at a time when the
industry is digesting major regulatory initiatives, including the
transition to T+1 clearing and settlement as well as pending proposals
related to shortening the Real-time Trade Reporting System trade report
deadline to one minute and a third best execution rule which
[[Page 27816]]
cumulatively would impose significant costs to dealers.\53\
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\50\ See SIFMA Letter at 3-4.
\51\ See SIFMA Letter at 4.
\52\ See BDA Letter at 1-2.
\53\ See BDA Letter at 2.
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The MSRB appreciates the concerns raised by SIFMA and BDA. However,
the MSRB believes that unavailability of the official statement, the
fact that continuing disclosures are not available and yield to worst
are all material information that would impact an investor's decision
to transact in specific municipal securities, and therefore should be
included in the time of trade disclosures. Furthermore, while there
could be additional costs for dealers to comply with the new disclosure
scenarios, the MSRB believes that the costs would be minimal and not
outweigh the need to disclose material information to investors.
In response to the concerns raised by SIFMA and BDA, the MSRB
narrowed the scope of the disclosure scenario relating to the
unavailability of the official statement as it was described in the
Request for Comment. The proposed rule change would limit this
disclosure scenario to sales to customers of new issue municipal
securities which would be consistent with current requirements under
MSRB Rule G-32.
Obtaining Information About a Security From a Customer
The Request for Comment solicited comments on draft rule text that
would have required a dealer purchasing a municipal security from a
customer to obtain sufficient information about the securities that is
not otherwise readily available to the market so that it can accurately
describe the securities when the dealer reintroduces them into the
market.
In response, SIFMA states that it believes this guidance to be
outdated and that the information environment in the municipal
securities market is fundamentally different today than when the
original guidance was published, thanks in large measure to the work of
the MSRB and its EMMA website.\54\ The MSRB acknowledges that the
information environment is dramatically different today as compared to
when the original guidance was published, including in particular the
broad availability to the public of information through the EMMA
website. Therefore, the MSRB did not include this language in the
proposed rule change.
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\54\ See SIFMA Letter at 3.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period of up to 90 days (i) as
the Commission may designate 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 or disapprove 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 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 email to [email protected]. Please
include File Number SR-MSRB-2024-03 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549.
All submissions should refer to File Number SR-MSRB-2024-03. This file
number should be included on the subject line if email 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 website (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 website viewing and printing 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 the filing also will be available for inspection and
copying at the principal office of the MSRB. Do not include personal
identifiable information in submissions; you should submit only
information that you wish to make available publicly. We may redact in
part or withhold entirely from publication submitted material that is
obscene or subject to copyright protection. All submissions should
refer to File Number SR-MSRB-2024-03 and should be submitted on or
before May 9, 2024.
For the Commission, pursuant to delegated authority.\55\
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\55\ 17 CFR 200.30-3(a)(12).
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Vanessa A. Countryman,
Secretary.
[FR Doc. 2024-08237 Filed 4-17-24; 8:45 am]
BILLING CODE 8011-01-P