MSRB NOTICE 2000-19 (MAY 2, 2000)

TECHNICAL AMENDMENTS FILED

The MSRB has filed with the SEC technical amendments to rules A-3, G-15, G-17 and G-18. The technical amendments become operative on June 1, 2000.

On May 2, 2000, the Municipal Securities Rulemaking Board (the “MSRB” or “Board”) filed with the Securities and Exchange Commission (the “SEC”) technical amendments to rules A-3, on membership on the Board, G-15, on confirmation, clearance and settlement of transactions with customers, G-17, on conduct of municipal securities business, and G-18, on execution of transactions.[1] The technical amendments become operative on June 1, 2000.

The MSRB has adopted technical amendments to rules A-3, G-15, G-17 and G-18 for the purpose of making the following non-substantive changes:

  • The amendments to subsections (a)(i), (c)(ii) and (c)(vi) of rule A-3 correct an unintended omission from the technical amendments with respect to the definition of public representatives on the Board and its Nominating Committee adopted by the MSRB in 1999 (the “1999 Technical Amendments”). These amendments make the rule language consistent with Section 15B(b)(1) of the Securities Exchange Act of 1934 (the “Exchange Act”).
  • The amendments to rule G-15(d)(ii) make subsection and paragraph references consistent with the MSRB’s general usage of such references throughout the rules.
  • The amendments to rule G-17 change certain terminology used in the rule from “municipal securities business” to “municipal securities activities” to avoid any ambiguity with the term “municipal securities business” as used in rules G-37 and G-38. The term “municipal securities business” as used in rules G-37 and G-38 has a specific limited definition, whereas rule G-17 uses that term in a manner intended to include all of the municipal securities activities of the dealer or its associated persons.[2] 
  • The amendment to rule G-18 would delete a definition of “broker’s broker” that pre-dated the Commission’s definition of that term under Exchange Act Rule 15c3-1(a)(8)(ii). Because the language used to define brokers’ broker differs in the two definitions, it is possible that some ambiguity may exist as to whether the term is intended to cover the same universe of dealers under the general federal securities laws and MSRB rules. The deletion of this definition from rule G-18 would eliminate this potential ambiguity.[3]

May 2, 2000

Text of Technical Amendments [4]

Rule A-3 – Membership on the Board

(a) Number and Representation. The Board shall consist of 15 members, at all times equally divided among the following groups:

(i) Public Representatives. Individuals who are not associated with any broker, dealer, or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling, any broker or dealer which is not a broker, dealer or municipal securities dealer that effects municipal securities transactions), at least one of whom shall be representative of investors in municipal securities, and at least one of whom shall be representative of issuers of municipal securities;

(ii) - (iii) No change.

(b) No change.

(c) Nomination and Election of Members.

(i) No change.

(ii) The Board will appoint a Nominating Committee composed of nine members. The membership of the Nominating Committee shall consist of six Board members and three persons who are not members of the Board. Of the six Board members, two shall be bank representatives, two shall be broker-dealer representatives, and two shall be public representatives. Of the three non-Board members, one shall be associated with and representative of bank dealers, one shall be associated with and representative of brokers, dealers, and municipal securities dealers other than bank dealers, and one shall not be associated with any broker, dealer, or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling any broker or dealer which is not a broker, dealer or municipal securities dealer that effects municipal securities transactions). In appointing persons to serve on the Nominating Committee, factors to be considered include the need to achieve broad geographic representation on such Committee, as well as diversity in the size and type of brokers, dealers and municipal securities dealers represented on such Committee.

(iii) - (v) No change.

(vi) The public representatives on the Board will, prior to their assumption of office, be subject to approval by the Commission to assure that no one of them is associated with any broker, dealer or municipal securities dealer (other than by reason of being under common control with, or indirectly controlling, any broker or dealer which is not a broker, dealer or municipal securities dealer that effects municipal securities transactions) and that at least one of the public representatives of the Board is representative of investors in municipal securities and at least one is representative of issuers of municipal securities.

(vii) No change.

(d) - (f) No change.

Rule G-15. Confirmation, Clearance and Settlement of Transactions with Customers

(a) - (c) No change.

(d) Delivery/Receipt vs. Payment Transactions.

(i) No change.

(ii) Requirement for Confirmation/Acknowledgment.

(A) Use of Registered Clearing Agency or Qualified Vendor. Except as provided in this paragraph (ii) of rule G-15(d), no broker, dealer or municipal securities dealer shall effect a customer transaction for settlement on a delivery vs. payment or receipt vs. payment (DVP/RVP) basis unless the facilities of a Clearing Agency or Qualified Vendor are used for automated confirmation and acknowledgment of the transaction. Each broker, dealer and municipal securities dealer executing a customer transaction on a DVP/RVP basis shall:

(1) (A) ensure that the customer has the capability, either directly or through its clearing agent, to acknowledge transactions in an automated confirmation/acknowledgment system operated by a Clearing Agency or Qualified Vendor;

(2) (B) submit or cause to be submitted to a Clearing Agency or Qualified Vendor all information and instructions required by the Clearing Agency or Qualified Vendor for the production of a confirmation that can be acknowledged by the customer or the customer’s clearing agent; and

(3) (C) submit such transaction information to the automated confirmation/acknowledgment system on the date of execution of such transaction; provided that a transaction that is not eligible for automated confirmation and acknowledgment through the facilities of a Clearing Agency shall not be subject to this paragraph (ii).

(B) Definitions for Rule G-15(d)(ii).

(1) No change.

(2) "Qualified Vendor" shall mean a vendor of electronic confirmation and acknowledgment services that:

(a) (A) for each transaction subject to this rule: (i) delivers a trade record to a Clearing Agency in the Clearing Agency’s format; (ii) obtains a control number for the trade record from the Clearing Agency; (iii) cross-references the control number to the confirmation and subsequent acknowledgment of the trade; and (iv) electronically delivers any acknowledgment received on the trade to the Clearing Agency and includes the control number when delivering the acknowledgment of the trade to the Clearing Agency;

(b) (B) certifies to its customers: (i) with respect to its electronic trade confirmation/acknowledgment system, that it has a capacity requirements evaluation and monitoring process that allows the vendor to formulate current and anticipated estimated capacity requirements; (ii) that its electronic trade confirmation/acknowledgment system has sufficient capacity to process the volume of data that it reasonably anticipates to be entered into its electronic trade confirmation/acknowledgment service during the upcoming year; (iii) that its electronic trade confirmation/acknowledgment system has formal contingency procedures, that the entity has followed a formal process for reviewing the likelihood of contingency occurrences, and that the contingency protocols are reviewed, tested, and updated on a regular basis; (iv) that its electronic confirmation/acknowledgment system has a process for preventing, detecting, and controlling any potential or actual systems or computer operations failures, including any failure to interface with a Clearing Agency as described in rule G-15(d)(ii)(B)(2)(a)(A), above, and that its procedures designed to protect against security breaches are followed; and (v) that its current assets exceed its current liabilities by at least five hundred thousand dollars;

(c) (C) when it begins providing such services, and annually thereafter, submits an Auditor’s Report to the Commission staff which is not deemed unacceptable by the Commission staff. (An Auditor’s Report will be deemed unacceptable if it contains any findings of material weakness.);

(d) (D) notifies the Commission staff immediately in writing of any material change to its confirmation/affirmation systems. (For purposes of this subparagraph (D) "material change" means any changes to the vendor’s systems that significantly affect or have the potential to significantly affect its electronic trade confirmation/acknowledgment systems, including: changes that: (i) affect or potentially affect the capacity or security of its electronic trade confirmation/acknowledgment system; (ii) rely on new or substantially different technology; (iii) provide a new service as part of the Qualified Vendor’s electronic trade confirmation/acknowledgment system; or (iv) affect or have the potential to adversely affect the vendor’s confirmation/acknowledgment system’s interface with a Clearing Agency.);

(e) (E) notifies the Commission staff in writing if it intends to cease providing services;

(f) (F) provides the Board with copies of any submissions to the Commission staff made pursuant to subparagraphs (c), (d) and (e) (C), (D), and (E) of this rule G-15(d)(ii)(B)(2) within ten business days; and .

(g) (G) promptly supplies supplemental information regarding its confirmation/acknowledgment system when requested by the Commission staff or the Board.

(3) "Auditor’s Report" shall mean a written report which is prepared by competent, independent, external audit personnel in accordance with the standards of the American Institute of Certified Public Accountants and the Information Systems Audit and Control Association and which:

(a) (A) verifies the certifications described in subparagraph (d)(ii)(B)(2)(b)(B) of this rule G-15;

(b) (B) contains a risk analysis of all aspects of the entity’s information technology systems including, computer operations, telecommunications, data security, systems development, capacity planning and testing, and contingency planning and testing; and

(c) (C) contains the written response of the entity’s management to the information provided pursuant to (a) and (b) (A) and (B) of this subparagraph (d)(ii)(B)(3) of rule G-15.

(C) No change.

(iii) No change.

(e) No change.

Rule G-17. Conduct of Municipal Securities Business Activities

In the conduct of its municipal securities business activities, each broker, dealer, and municipal securities dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest, or unfair practice.

Rule G-18. Execution of Transactions

Each broker, dealer and municipal securities dealer, when executing a transaction in municipal securities for or on behalf of a customer as agent, shall make a reasonable effort to obtain a price for the customer that is fair and reasonable in relation to prevailing market conditions. A broker, dealer or municipal securities dealer acting as a "broker’s broker" shall be under the same obligation with respect to the execution of a transaction in municipal securities for or on behalf of a broker, dealer, or municipal securities dealer. For purposes of this rule, a broker, dealer or municipal securities dealer acting as a "broker’s broker" shall mean a broker, dealer or municipal securities dealer who effects transactions for the account of other brokers, dealers and municipal securities dealers on a regular basis.


[1] File No. SR-MSRB-00-7. Comments submitted to the SEC should refer to this file number.

[2] The amendments to rule G-17 are consistent with similar amendments made to rules A-14, A-15, G-3 and G-27 in the 1999 Technical Amendments.

[3] Rule D-1 provides that, unless the context otherwise specifically requires, the terms used in Board rules shall have the respective meanings set forth in the Exchange Act and the rules and regulations of the Commission thereunder. Thus, the deletion of the definition of brokers’ broker from rule G-18 would automatically result in this term having the same meaning as set forth under Exchange Act Rule 15c3-1(a)(8)(ii).

[4] Underlining indicates additions; strikethrough indicates deletions.