MSRB NOTICE 2002-20 (MAY 15, 2002)


The MSRB wishes to remind brokers, dealers and municipal securities dealers (collectively “dealers”) that certain elements of the rule changes concerning minimum denominations become effective for issues issued after June 1, 2002.  The rule changes consist of an amendment to Rule G-15, on confirmation, clearance, settlement and other uniform practice requirements with respect to transactions with customers, an interpretation of Rule G-17, on conduct of municipal securities activities, and a Rule G-8 recordkeeping requirement.

The amendment to Rule G-15 prohibits dealers from effecting transactions with customers in below-minimum denomination amounts for securities issued after June 1, 2002.  There are two limited exceptions to this rule.  First, dealers may purchase a below-minimum denomination position from a customer provided that the customer liquidates his or her entire position.  Second, dealers may sell such a liquidated position to another customer but would be required to provide written disclosure, either on the confirmation or separately, to the effect that the security position is below the minimum denomination and that liquidity may be adversely affected by this fact.  While it will be possible for a customer to liquidate a below-minimum denomination position, the liquidated position has to be kept whole and cannot be further subdivided as it is sold in the secondary market.  The amendment to Rule G-8 requires that, if written disclosure is provided on a separate document for sales to customers under the second exception of Rule G-15, dealers retain such disclosure for a period of at least three years. 

The interpretation of Rule G-17, which became effective upon SEC approval on January 30, 2002, applies regardless of the date of issuance of the securities involved.  The interpretation states that any time a dealer is selling to a customer a quantity of municipal securities below the minimum denomination for the issue, the dealer should consider this to be a material fact about the transaction.  The MSRB believes that a dealer’s failure to disclose such a material fact to the customer, and to explain how this could affect the liquidity of the customer’s position, generally would constitute a violation of the dealer’s duty under Rule G-17 to disclose all material facts about the transaction to the customer.

 May 15, 2002