MSRB NOTICE 2002-23 (JUNE 21, 2002)

NOTICE OF PROPOSED AMENDMENT TO RULE G-32 ON SENDING DISCLOSURE DOCUMENTS TO CUSTOMERS SHARING THE SAME ADDRESS

On June 21, 2002, the Municipal Securities Rulemaking Board (“MSRB”) filed with the Securities and Exchange Commission (“SEC”) an amendment to Rule G-32, on disclosures in connection with new issues, that would permit a dealer to satisfy its official statement delivery obligations by complying with SEC Rule 154 when sending disclosure documents to two or more customers sharing the same address by sending a single official statement to that address, subject to certain conditions.  The filing also amends Rule G-8, on books and records, and Rule G-9, on preservation of records.[1]

SUMMARY OF PROPOSED AMENDMENT

SEC Rule 154, on delivery of prospectuses to investors at the same address, permits a broker-dealer or issuer to satisfy its prospectus delivery requirements under the Securities Act of 1933 with respect to two or more investors sharing the same address by sending a single prospectus to that address, subject to certain conditions.[2]  The SEC refers to this process as “householding.”  The purpose of Rule 154 is to reduce the number of duplicate disclosure documents delivered to such investors, thereby resulting in greater convenience for investors and cost savings for broker-dealers and issuers.[3]

Under SEC Rule 154, the investors do not have to be related.  The document may be addressed to the investors as a group (e.g., “Jane Doe and Household” or “The Smith Family”) or to each of the investors individually (e.g., “Jane Doe and John Smith”).  The address may be a residential, commercial, or electronic address (i.e., it may be a street address, post office box, fax number, or e-mail address).[4]

The broker-dealer must obtain the investors’ written consent to the delivery of a single document on behalf of all such investors, or the broker-dealer may rely on “implied consent” if the following conditions are met:  (1) the investor has the same last name as the other investors, or the broker-dealer reasonably believes that they are members of the same family; (2) the dealer sends each investor written notice at least 60 days before relying on this provision, and provides each investor with an opportunity to opt out of this method of delivery; [5] (3) the investor does not opt out during the 60-day notice period; and (4) the dealer delivers the documents to a residential street address or a post office box. [6] 

For open-end management investment companies (i.e., mutual funds) and dealers that are required to deliver the disclosure documents of such companies, SEC Rule 154(c) requires, at least annually, that the dealer explain to investors who have provided written or implied consent how such consent can be revoked.  This information may be provided through any means reasonably designed to reach the investor, such as a prospectus, shareholder report or newsletter. 

MSRB Rule G-32, on disclosures in connection with new issues, generally requires that any dealer selling municipal securities to a customer during the issue’s underwriting period must deliver the official statement in final form, if any, to the customer by settlement of the transaction.  The MSRB believes that, with respect to this delivery requirement, if two or more customers share the same address, Rule G-32 should allow for the same “householding” process as that contained in SEC Rule 154.  In addition, Rule G-32(a)(i)(A) provides that, if a customer participates in a periodic municipal fund security plan or a non-periodic municipal fund security program and has previously received an official statement in final form in connection with such a plan or program, the dealer may sell additional shares or units to that customer if the dealer sends a copy of any new, supplemented, amended or “stickered” official statement in final form, by first class mail or other equally prompt means.  Allowing for householding in the context of municipal fund securities would be particularly beneficial, especially where one family has accounts for multiple children (or each parent has separate accounts for the same child) and the dealer may be required to deliver disclosure documents on an ongoing basis (e.g., the customer participates in a periodic plan or non-periodic program). 

Thus, the MSRB has determined to amend Rule G-32(a) to reference SEC Rule 154 and state that a dealer may satisfy its official statement delivery obligations by complying with that Rule’s requirements when sending disclosure documents to two or more customers sharing the same address.  The amendment further provides that dealers that are required to send ongoing disclosure documents to customers who participate in a periodic municipal fund security plan or a non-periodic municipal fund security program are specifically required to comply with SEC Rule 154(c) by providing those customers with information, at least annually, on how to revoke their consent to the householding process and thereby receive individual copies of disclosure documents, if they so desire. 

The proposed rule change also amends Rule G-8, on books and records, and Rule G-9, on preservation of records, to account for the changes to Rule G-32. 

June 21, 2002

TEXT OF PROPOSED RULE CHANGE [7]

Rule G-32.  Disclosures in Connection with New Issues

(a) Customer Disclosure Requirements.  No broker, dealer or municipal securities dealer shall sell, whether as principal or agent, any new issue municipal securities to a customer unless such broker, dealer or municipal securities dealer delivers to the customer no later than the settlement of the transaction:

    (i) a copy of the official statement in final form prepared by or on behalf of the issuer or, if an official statement in final form is not being prepared by or on behalf of the issuer, a written notice to that effect together with a copy of an official statement in preliminary form, if any; provided, however, that:

        (A) No change

        (B) (1) No change

            (2) sends to the customer a copy of the official statement in final form, by first class mail or other equally prompt means, no later than the business day following receipt thereof by the broker, dealer or municipal securities dealer; and

        (C) if two or more customers share the same address, a broker, dealer or municipal securities dealer may satisfy the delivery obligations set forth in this section (a)(i) by complying with the requirements set forth in Rule 154 of the Securities Act of 1933, on delivery of prospectuses to investors at the same address.  In addition, any such broker, dealer or municipal securities dealer shall comply with paragraph (c) of Rule 154, on revocation of consent, if subject to the delivery requirements in section (a)(i)(A) of this rule, concerning a customer who participates in a periodic municipal fund security plan or a non-periodic municipal fund security program; and

    (ii) No change. 

(b) through (d) No change.

Rule G-8.  Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a) Description of Books and Records to be Made.  Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

    (i) – (xii) No change.

    (xiii) Records Concerning Deliveries of Official Statements.  A record of all deliveries to purchasers of new issue municipal securities, of official statements or other disclosures concerning the underwriting arrangements required under rule G-32.and, if applicable, a record evidencing compliance with section (a)(i)(C) of rule G-32.

    (xiv) – (xxi)  No change.

(b) – (g)  No change.

Rule G-9.  Preservation of Records

(a) No change.

(b) Records to be Preserved for Three Years.  Every broker, dealer and municipal securities dealer shall preserve the following records for a period of not less that three years:

    (i)–(ix)  No change.

    (x) all records of deliveries of rule G-32 disclosures and, if applicable, a record evidencing compliance with section (a)(i)(C) of rule G-32 required to be retained as described in rule G-8(a)(xiii);

    (xi)-(xv)  No change

(c) - (g)  No change.


[1] SR-MSRB-2002-06.  Comments on the proposed rule change should be submitted to the SEC and should reference this file number.

[2] The SEC has similar requirements under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 with respect to shareholder reports.

[3] SEC Release No. 33-7766 (November 4, 1999).

[4] An e-mail address may be used if the dealer obtains the investors’ written consent for electronic delivery and it is a shared e-mail address.

[5] The dealer must provide either a toll-free number or a pre-addressed, postage paid form.

[6] Rule 154 provides that a dealer can assume that an address is a residential address unless it has information that indicates it is a business address.  If the dealer has reason to believe that the address is a multi-unit dwelling, the address must include the investor’s unit number.  See Rule 154(b)(4) and (d).

[7] Underlining indicates new language; strikethrough indicates deletions.