Municipal finance professional: supervisor.  This is in response to your inquiry seeking guidance regarding the possible classification as a municipal finance professional under rule G-37 of a Taxable Department Head at your firm. You stated that the Taxable Department Head is the direct supervisor of a Branch Manager and this Branch Manager manages a sales representative who has solicited municipal securities business from an issuer. You state that it is clear that the Branch Manager and the sales representative are both municipal finance professionals. However, you further state that the Taxable Department Head has delegated all Public Finance/Municipal oversight responsibilities to the Public Finance Department Head for the Taxable Department Head's personnel. You ask whether, under these circumstances, the Taxable Department Head would be considered a municipal finance professional under rule G-37 as a result of his or her supervisory position.

The term "municipal finance professional" is defined in rule G-37(g)(iv). Clauses (C) and (D) of the definition set forth the basis for considering an associated person of a dealer to be a municipal finance professional as a result of his or her supervisory position. Clause (C) includes any associated person who is both (i) either a municipal securities principal or municipal securities sales principal and (ii) a supervisor of any associated person either primarily engaged in municipal securities representative activities or who solicits municipal securities business (referred to herein as a "primary municipal securities supervisor"). Clause (D) includes any associated person who is a supervisor of a primary municipal securities supervisor up through and including (in the case of a non-bank dealer) the Chief Executive Officer or similarly situation official (referred to herein as a "secondary municipal securities supervisor").

Unlike in the case of a primary municipal securities supervisor, a secondary municipal securities supervisor is not required to be a municipal securities principal or municipal securities sales principal. The status of a secondary municipal securities supervisor as a municipal finance professional is not conditioned on the areas in which such supervisor has responsibility over a primary municipal securities supervisor, so long as such secondary municipal securities supervisor retains some degree of supervisory responsibility (whether or not relating to municipal securities activities) over the primary municipal securities supervisor.  MSRB interpretation of November 23, 1999.

Financial advisory relationship: private placements. This is in response to your letter in which you seek clarification on certain matters related to rules G-23, on activities of financial advisors, and G-37, on political contributions and prohibitions on municipal securities business.

You ask when it is "necessary in the process of commencing preliminary work with a potential financial advisory client to enter into a formal written financial advisory contract." Rule G-23(c) states that "[e]ach financial advisory relationship shall be evidenced by a writing entered into prior to, upon or promptly after the inception of the financial advisory relationship (or promptly after the creation or selection of the issuer if the issuer does not exist or has not been determined at the time the relationship commences)." Rule G-23(b) states that "...a financial advisory relationship shall be deemed to exist when a broker, dealer or municipal securities dealer renders or enters into an agreement to render financial advisory or consultant services to or on behalf of an issuer with respect to a new issue or issues of municipal securities, including advice with respect to the structure, timing, terms and other similar matters concerning such issue or issues, for a fee or other compensation or in expectation of such compensation for the rendering of such services."

You ask whether you are to advise the Board by means of reporting on Form G-37/G-38 or by any other means when you commence work on subsequent financing transactions with an issuer with which your firm has an ongoing financial advisory contract. The Instructions for Completing and Filing Form G-37/G-38 provide a guideline to use in determining when to report financial advisory services on Form G-37/G-38.[1] Pursuant to these Instructions, dealers should indicate financial advisory services when an agreement is reached to provide the services. In addition, the Instructions note that dealers also should indicate financial advisory services during a reporting period when the settlement date for a new issue on which the dealer acted as financial advisor occurred during such period. There are no other requirements for reporting financial advisory services to the Board.

Finally, you ask whether rules G-23 or G-37 contain requirements concerning private placement activities. The term "municipal securities business" is defined in rule G-37 to include "the offer or sale of a primary offering of municipal securities on behalf of any issuer ( e.g. , private placement)..." The Instructions for Completing and Filing Form G-37/G-38 provide that private placements should be indicated at least by the settlement date if within the reporting period.

With respect to rule G-23, section (d) of the rule states that no dealer that has a financial advisory relationship with respect to a new issue of municipal securities shall acquire as principal either alone or as a participant in a syndicate or other similar account formed for the purpose of purchasing, directly or indirectly, from the issuer all or any portion of such issue, or act as agent for the issuer in arranging the placement of such issue, unless various actions are taken.[2] In addition, rule G-23(g) states that each dealer subject to the provisions of sections (d), (e) or (f) of rule G-23 shall maintain a copy of the written disclosures, acknowledgments and consents required by these sections in a separate file and in accordance with the provisions of rule G-9, on preservation of records. Finally, rule G-23(h) states that, if a dealer acquires new issue municipal securities or participates in a syndicate or other account that acquires new issue municipal securities in accordance with section (d) of rule G-23, such dealer shall disclose the existence of the financial advisory relationship in writing to each customer who purchases such securities from such dealer, at or before the completion of the transaction with the customer. MSRB interpretation of October 5, 1999.

[1] I have enclosed a copy of the Instructions for Completing and Filing Form G-37/G-38 as contained in the MSRB Rule Book. The instructions are also contained on the Board's web site (www.msrb.org) under the link for rule G-37.

[2] These actions are: (i) if such issue is to be sold by the issuer on a negotiated basis, (A) the financial advisory relationship with respect to such issue has been terminated in writing and at or after such termination the issuer has expressly consented in writing to such acquisition or participation, as principal or agent, in the purchase of the securities on a negotiated basis; (B) the dealer has expressly disclosed in writing to the issuer at or before such termination that there may be a conflict of interest in changing from the capacity of financial advisor to purchaser of or placement agent for the securities with respect to which the financial advisory relationship exists and the issuer has expressly acknowledged in writing to the dealer receipt of such disclosure; and (C) the dealer has expressly disclosed in writing to the issuer at or before such termination the source and anticipated amount of all remuneration to the dealer with respect to such issue in addition to the compensation referred to in section (c) of rule G-23, and the issuer has expressly acknowledged in writing to the dealer receipt of such disclosure; or (ii) if such issue is to be sold by the issuer at competitive bid, the issuer has expressly consented in writing prior to the bid to such acquisition or participation.

Solicitation of contributions.  This is in response to your letter in which you summarize your understanding of our telephone conversation relating to section (c) of rule G-37, on political contributions and prohibitions on municipal securities business. As I noted during our conversation, the Board’s rules, including rule G-37, apply solely to brokers, dealers and municipal securities dealers (“dealers”). The Board’s rulemaking authority, granted under Section 15B of the Securities Exchange Act of 1934, does not extend to issuers of municipal securities. Thus, rule G-37 does not impose any obligations upon issuers or officials of issuers. Although the Board appreciates your interest in not placing dealers and their associated persons in a position to violate their obligations under the rule, it is ultimately the responsibility of such dealers and associated persons, in consultation with appropriate compliance personnel, to ensure compliance with Board rules.

As you know, rule G-37(c) provides that no dealer or municipal finance professional shall solicit any person or political action committee to make any contribution, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business. The Board has previously stated that this provision would:

prohibit a dealer and any municipal finance professional from soliciting . . . any other person or entity, to make contributions to an official of an issuer with which the dealer engages or is seeking to engage in municipal securities business or to coordinate (i.e., bundle) contributions. . .[*] [M]unicipal finance professionals may volunteer their personal services in other ways to political campaigns.[1]

You had sought guidance regarding what activities would be covered by this provision of the rule. As you noted in your letter, I had indicated that the term “solicit” is not explicitly defined for purposes of section (c) of the rule. I had stated that whether a particular activity can be characterized as a solicitation of a contribution for purposes of section (c) is dependent upon the facts and circumstances surrounding such activity. I had noted, however, that the rule does not prohibit or restrict municipal finance professionals from engaging in personal volunteer work, unless such work constituted solicitation or bundling of contributions for an official of an issuer with which the municipal finance professional’s dealer is engaging or seeking to engage in municipal securities business[2] Municipal finance professionals are therefore free to, among other things, solicit votes or other assistance for such an issuer official so long as the solicitation does not constitute a solicitation or coordination of contributions for the official. [3]

Whether a municipal finance professional is permitted by section (c) of the rule to indicate to third parties that someone is a “great candidate” or to provide a list of third parties for the candidate to call would be dependent upon all the facts and circumstances surrounding such action. The facts and circumstances that may be relevant for this purpose may include, among any number of other factors, whether the municipal finance professional has made an explicit or implicit reference to campaign contributions in his or her conversations with third parties whom the candidate may contact and whether the candidate contacts such third parties seeking campaign contributions. However, the totality of the facts and circumstances surrounding any particular activity must be considered in determining whether such activity may constitute a solicitation of contributions for purposes of section (c) of the rule. Therefore, the Board cannot prescribe an exhaustive list of precautions that would assure that no violation of this section would occur as a result of such activity.  MSRB interpretation of May 21, 1999.
__________

[1] MSRB Reports, Vol. 14, No. 3 (June 1994) at 5. See Securities Exchange Act Release No. 33868 (April 7, 1994), 59 FR 17621 (April 13, 1994). See also Questions and Answers Concerning Political Contributions and Prohibitions on Municipal Securities Business: Rule G-37, May 24, 1994, reprinted in MSRB Rule Book; MSRB Interpretation of November 7, 1994, reprinted in MSRB Rule Book; MSRB Interpretation of May 31, 1995, reprinted in MSRB Rule Book. Furthermore, the Board stated in its filing of the rule with the Securities and Exchange Commission that the rule’s “anti-solicitation and anti-bundling proscriptions are intended to prohibit covered parties from: (i) soliciting others, including spouses and family members, to make contributions to issuer officials; and (ii) coordinating, or soliciting others to coordinate, contributions to issuer officials in order to influence the awarding of municipal securities business.” SEC File No. SR-MSRB-94-2.

[2] See Question and Answer No. 24, May 24, 1994, reprinted in MSRB Rule Book; Question and Answer No. 3, August 18, 1994, reprinted in MSRB Rule Book. In addition, if the municipal finance professional used dealer resources or incurred expenses that could be considered contributions in the course of undertaking such volunteer work, the ban on municipal securities business under section (b) of the rule could be triggered.

[3] In upholding the constitutionality of rule G-37, the United States Court of Appeals for the District of Columbia Circuit observed that “municipal finance professionals are not in any way restricted from engaging in the vast majority of political activities, including making direct expenditures for the expression of their views, giving speeches, soliciting votes, writing books, or appearing at fundraising events.” Blount v. SEC, 61 F.3d 938, 948 (D.C. Cir. 1995), cert. denied, 116 S. Ct. 1351 (1996). However, the Board has stated that hosting or paying to attend a fundraising event may constitute a contribution subject to section (b) of the rule. See Questions and Answers Nos. 24 and 29, May 24, 1994, reprinted in MSRB Rule Book.

[*][sentence deleted to reflect current rule provisions.]

In response to numerous calls on this subject, the Board wishes to reiterate its position on the application of rule G-37, on political contributions and prohibitions on municipal securities business, to Presidential campaigns of issuer officials. The Board directs persons interested in contributing to an issuer official's Presidential campaign to the MSRB Interpretation of May 31, 1995 (the “1995 Interpretive Letter”).[1]

Rule G-37, among other things, prohibits a broker, dealer or municipal securities dealer (“dealer”) from engaging in municipal securities business with an issuer within two years after any contribution to an official of an issuer made by the dealer; any municipal finance professional associated with the dealer; or any political action committee controlled by the dealer or any municipal finance professional. In the 1995 Interpretive Letter, the Board noted that rule G-37 is applicable to contributions given to officials of issuers who seek election to federal office, such as the Presidency. The Board also explained that the only exception to rule G-37's absolute prohibition on business is for certain contributions made to issuer officials by municipal finance professionals.[2] Specifically, contributions by such persons to officials of issuers would not invoke application of the prohibition if the municipal finance professional is entitled to vote for such official, and provided that any contributions by such municipal finance professional do not exceed, in total, $250 to each official, per election. In the example of an issuer official running for President, any municipal finance professional in the country can contribute the de minimis amount to the official's Presidential campaign without causing a ban on municipal securities business with that issuer.

The Board previously has stated that, if an issuer official is involved in a primary election prior to the general election, a municipal finance professional who is entitled to vote for such official may contribute up to $250 for the primary election and $250 for the general election to each such official.[3] In the context of a Presidential campaign, the Board notes that the $250 de minimis amount applies to the entire primary process, up through and including the national party convention. While rule G-37 allows a municipal finance professional to then contribute another $250 to the party candidate's general election campaign fund, the Board understands that a Presidential candidate who has accepted public funding for the general election is prohibited under federal law from accepting any contributions to further his or her general election campaign.

Finally, the Board also notes that rule G-37(c) provides that no dealer or municipal finance professional shall solicit any person or political action committee to make any contributions, or shall coordinate any contributions, to an official of an issuer with which the dealer is engaging or is seeking to engage in municipal securities business.

[1] The 1995 Interpretive Letter is reprinted in MSRB Rule Book (January 1, 1999) at 201-203. It also is available from the MSRB Rules/Interpretive Letters section of the Board's Web site at www.msrb.org.

[2] The term “municipal finance professional” is a defined term in rule G-37(g)(iv). The Board wishes to remind dealers that the term is broader than persons directly involved in municipal securities activities and may include certain supervisors, including in the case of a broker, dealer or municipal securities dealer other than a bank dealer, the Chief Executive Officer, and in the case of a bank dealer, the officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities. It also may include members of the dealer's executive or management committee or similarly situated officials. See Question and Answer number 2 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports , Vol. 14, No. 3 (June 1994) at 13; Question and Answer number 3 dated September 9, 1997, reprinted in MSRB Rule Book (January 1, 1999) at 199. The Questions and Answers also are available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.

[3] See Question and Answer number 10 dated May 24, 1994, reprinted in MSRB Rule Book (January 1, 1999) at 192; MSRB Reports , Vol. 14, No. 3 (June 1994) at 13. The Question and Answer also is available from the MSRB Rules/Interpretive Notice section of the Board's Web site at www.msrb.org.

Clerical or ministerial duties. This will acknowledge receipt of your letter in which you request advice concerning whether certain persons employed by [Name deleted] must qualify as municipal securities representatives under rule G-3.

In the case of one of the individuals, you state in your letter that he is responsible for calculating coupon rates for new issue securities, based on information provided to him by persons in [Name deleted] underwriting department. According to your letter, the individual has some discretion to "revise coupon rates to a more marketable figure," but all of his activities are subject to the approval of, and supervised by, municipal securities professionals in the department. We understand that he does not communicate with issuers, customers or other municipal securities dealers.

Based upon the facts set forth in your letter, we are of the view that the individual described performs only clerical or ministerial functions in calculating the coupon scale, and he is therefore not a municipal securities representative within the meaning of rule G-3.

In your letter, you also request advice regarding certain individuals whose only function is to receive telephonic orders for municipal securities from municipal securities dealers. We understand that these individuals do not solicit orders, negotiate prices or the terms of transactions, or transmit offers to prospective purchasers, nor do they communicate at any time with customers. Based upon the facts you have provided, we are of the opinion that these individuals perform only clerical or ministerial functions, and they are therefore also not municipal securities representatives within the meaning of rule G-3. MSRB interpretation of December 8, 1978.

Communication of information. I refer to your letter dated October 23, 1978 in which you request advice concerning the application of certain provisions of rule G-11. In your letter, you state that it is your understanding that the requirement in the rule for a syndicate manager to communicate information regarding the priority to be accorded to different orders could be satisfied if an agreement among underwriters provides for the managing underwriters, in their discretion, to establish the priorities to be accorded to different types of orders for the purchase of bonds from the syndicate so long as information as to the priorities so established is furnished to the members of the syndicate prior to the beginning of the order period.

Rule G-11 would permit the inclusion of a provision delegating to the managing underwriters the authority to establish the priority provisions under which the syndicate would operate. However, under section (f) of rule G-11, such information must be provided by the senior syndicate manager in writing to other members of a syndicate "prior to the first offer of any securities by a syndicate." Accordingly, if there is a presale period, the required disclosure must be made prior to the commencement of such period, and not prior to "the beginning of the order period." The procedures outlined in your letter would be permissible under the rule only if no securities are offered by a syndicate prior to the order period. MSRB interpretation of November 9, 1978.

Settlement of syndicate accounts. Your letter dated September 25, 1978, regarding rule G-12 has been referred to me for reply. In your letter, you inquire as to whether the requirement in section (j) of rule G-12 to settle syndicate accounts within 60 days following the date all securities are delivered to syndicate members, applies in all circumstances. Specifically, you ask whether the time for settlement may be extended under the rule in the event that the syndicate has not received all expense bills prior to the expiration of that period.

There is no provision in rule G-12 for extending the 60-day period in the circumstances which you described. In adopting this requirement, the Board sought to achieve an equitable balance between the interests of syndicate members and syndicate managers in settling syndicate accounts. The Board believes that the 60-day period provides sufficient time to enable syndicate managers to settle on syndicate accounts and represents a reasonable time within which such accounts should be settled. It is therefore incumbent upon a syndicate manager to encourage persons to submit bills to the syndicate on a timely basis. The syndicate manager will otherwise have to settle the account within the prescribed time period and make adjustments subsequently when late bills are finally received. MSRB interpretation of November 1, 1978.

Municipal securities representative. Your letter dated October 16, 1978, has been referred to me for response. In your letter, you request clarification of whether personnel in your firm will have to take and pass the Board's qualification examination for municipal securities representatives, since they only effect transactions with other municipal securities professionals.

Board rule G-3(a)(iii)[*] defines the term "municipal securities representative" to mean a natural person associated with a municipal securities broker or municipal securities dealer who performs certain specified functions, which include "trading or sales of municipal securities." A person is deemed to be a municipal securities representative under the rule whether he or she engages in such activities with customers or only other municipal securities professionals. Accordingly, personnel in your firm who only trade with, or sell securities to other municipal securities professionals will have to take and pass the examination for municipal securities representatives, unless they are exempted under the provisions of rule G-3(e)(ii)[†]. MSRB interpretation of October 27, 1978.

[*] [Currently codified at rule G-3(a)(i)]

[†] [Currently codified at rule G-3(a)(ii)(B)]

Records of original entry. Your letter dated October 13, 1978, has been referred to me for response. In your letter you inquire whether a certain method of keeping "records of original entry" is satisfactory for purposes of the requirement to maintain "current" books and records. In particular, you suggest that such records could be maintained by means of a "unit" or "ticket" system during the period from trade date to settlement date, and then recorded on a blotter as of the settlement date.

As indicated to you, such a method of preserving these records is acceptable, provided that all information required to be shown is clearly and accurately reflected in both forms of the record, and both forms provide adequate audit controls. MSRB interpretation of October 26, 1978.

Rule D-10 defines a discretionary account as an account for which a municipal securities professional has been authorized to determine what municipal securities will be purchased, sold or exchanged by or for the account. The definition covers accounts for which a municipal securities professional exercises discretionary authority from time to time, as well as accounts in which the customer sometimes, but not always, makes investment decisions. Under rule D-10, a discretionary account will not be deemed to  exist if the professional’s discretion is limited to the price at which, or the time at which, an order given by a customer for a definite amount of a specified security is executed. The definition relates to discretion concerning what municipal securities will be purchased, sold or exchanged, rather than when or at what price such transactions may occur.

Rule D-11 is designed to eliminate the need to make specific reference to personnel of securities firms and bank dealers in each Board rule that applies both to the organization and its personnel.

The term “associated person” in rule D-11 has the same meaning as set forth in section 3(a)(18) and 3(a)(32) of the Act, except that clerical and ministerial personnel are excluded from the definition for purposes of the Board’s rules, unless otherwise specified. Although the statutory definitions of associated persons include individuals and organizations in a control relationship with the securities professional, the context of the fair practice rules indicates that such rules will ordinarily not apply to persons who are associated with securities firms and bank deal- ers solely by reason of a control relationship.

Rule D-9 codifies, as a definitional rule of general application, the definition of the term “customer” presently set forth in various Board rules. Employees and other associated persons of brokers, dealers and municipal securities dealers would, under this definition, be “customers” with respect to transactions effected for their personal accounts. An issuer would be a “customer” within the meaning of the rule except in the case of a sale by it of a new issue of its securities.

Callable securities: pricing to call. Your letter dated May 1, 1978 concerning the pricing to call provisions of rules G-12 and G-15 has been referred to me for response. In your letter, you request clarification of the application of such provisions to a situation in which securities have been prerefunded and the escrow fund is to be held to the maturity date of the securities. We understand that the securities in question are part of a term issue, sold on a yield basis, and are subject to a mandatory sinking fund call beginning two years prior to maturity.

Under rules G-12 and G-15, the dollar price of a transaction effected on a yield basis must be calculated to the lowest of price to premium call price to par option or price to maturity. The calculation of dollar price to a premium call or par option date should be to that date at which the issuer may exercise an option to call the whole of a particular issue or, in the case of serial bonds, a particular maturity, and not to the date of a call in part.

Accordingly, the calculation of the dollar price of a transaction in the securities in your example should be made to the maturity date. The existence of the sinking fund call should, however, be disclosed on the confirmation by an indication that the securities are "callable." The fact that the securities are prerefunded should also be noted on the confirmation. MSRB interpretation of June 8, 1978.

Portfolio credit analyst. This will acknowledge with thanks receipt of your letter dated May 2, 1978 concerning the status of persons occupying the position of portfolio credit analyst at your bank. Your letter, as well as our telephone conversations prior and subsequent to the letter, raise two questions concerning the status of such persons under Board rules. First, are the functions of a portfolio credit analyst subject to the requirements of rule G-1, which defines a separately identifiable dealer department or division of a bank? Second, must a portfolio credit analyst qualify as a municipal securities representative or municipal securities principal under Board rule G-3?

Although we recognize that the primary purpose of the portfolio credit analyst, as set forth in the material you furnished to me, is to review your bank's investment portfolio, a function not subject to Board regulation, to the extent that the analyst provides research advice and analysis in connection with your bank's underwriting, trading or sales activities, the analyst must be included within the municipal securities dealer department for purposes of rule G-1, and is subject to the qualification requirements of rule G-3.

Under Board rule G-1, a separately identifiable department or division of a bank is that unit of the bank which conducts all of the municipal securities dealer activities of the bank. Section (b) of the rule defines municipal securities dealer activities to include research with respect to municipal securities to the extent such research relates to underwriting, trading, sales or financial advisory and consultant services performed by the bank. Thus, we think it clear that for purposes of rule G-1, persons functioning as portfolio credit analysts who render research in connection with underwriting, trading or sales activities at your bank must be included within the separately identifiable department or division of the bank for purposes of rule G-1. This is consistent with the underlying purpose of rule G-1 to assure that all of the functions performed at the bank relating to the business of the bank as a municipal securities dealer are appropriately identified for purposes of supervision, inspection and enforcement.

Under rule G-3(a)(iii)[*] a municipal securities representative is defined as a person associated with a municipal securities broker or municipal securities dealer who performs certain functions similar to those defined as municipal securities dealer activities in rule G-1. The position of portfolio credit analyst as described in your letter and accompanying material appears to fit the definition of municipal securities representative to the extent that persons occupying such position perform research in connection with the bank's underwriting, trading or sales activities. Under rule G-3(e)[†], municipal securities representatives are required to qualify in accordance with Board rules. A similar result would obtain with respect to qualification as a municipal securities principal, if the portfolio credit analyst functions in a supervisory capacity. MSRB interpretation of June 8, 1978.

[*] [Currently codified at rule G-3(a)(i)]

[†] [Currently codified at rule G-3(a)(ii)]

Extent and type of municipal securities activities. Your letter dated March 23, 1978 concerning compliance with the Municipal Securities Rulemaking Board's requirements has been referred to me for response.

The Municipal Securities Rulemaking Board was established by the Securities Acts Amendments of 1975 as the primary rulemaking authority with respect to the activities of municipal securities brokers and dealers and with respect to transactions in municipal securities. The Board's rules apply to each municipal securities broker and municipal securities dealer within the meaning of sections 3(a)(31) and 3(a)(30), respectively, of the Securities Exchange Act of 1934, as amended (the "Act"), and all municipal securities brokers and dealers regardless of the volume of their municipal securities business, are subject to the rules promulgated by the Board insofar as transactions in municipal securities are concerned, whether such transactions are solicited or unsolicited.

Under section 15B(b)(2)(J) of the Act, the Board is directed to prescribe fees and charges payable by each municipal securities dealer and municipal securities broker to defray the costs and expenses of operating the Board. Pursuant to this authority, the Board adopted rules A-12 and A-14 which impose an initial fee and an annual fee on each municipal securities broker and municipal securities dealer. A copy of these rules are enclosed.

In approving MSRB rules A-12 and A-14, the Securities and Exchange Commission determined that these assessments are consistent with the statutory requirement that the MSRB be self-funding. We therefore request that you comply with these rules and forward your checks to us promptly. MSRB interpretation of May 3, 1978.

Securities control. Your letter dated February 24, 1978, has been referred to me for response. In addition, I understand that you have had several subsequent telephone conversations about your question. In these conversations, you describe the procedures for securities control followed by your bank's dealer department.

Briefly, as we understand your procedures, the dealer department records all certificate numbers of municipal securities received or delivered by the department. This information is recorded in a manner which relates the physical receipt and delivery of specific certificates to specific transactions. Once in safekeeping, the certificates are kept in a vault, and filed by issue, rather than filed separately by account, chronologically, or by transaction. In your letter, you inquired whether this system of filing in the vault raises problems of compliance with Board rule G-8.

Since your bank records in records of original entry the certificate numbers upon receipt and delivery of municipal securities by your dealer department, it appears that your system satisfies the requirement under rule G-8(a)(i) that such information be recorded on the "record of original entry." The safekeeping procedures used by the bank are specifically excluded from the scope of the rule under the provisions of paragraph G-8(a)(iii), which requires

[r]ecords showing...all positions (including, in the case of a municipal securities broker or municipal securities dealer other than a bank dealer, securities in safekeeping)...

Therefore, based on the information you have provided, we believe that your system is in compliance with the applicable provisions of rule G-8. MSRB interpretation of April 10, 1978.

Securities record. In your letter, you question the application of Board rule G-8(a)(iii) and, in particular, the requirement that "such [securities] records shall consist of a single record system," to a situation in which a securities firm maintains such records organized by ownership of the securities. It is my understanding that the firm in question maintains records showing securities in the firm's trading account, and offsetting positions long and short, and separate records showing securities owned by customers and the offsetting location for those securities.

Rule G-8(a)(iii) requires, in part

[r]ecords showing separately for each municipal security all positions ... carried by such municipal securities broker or municipal securities dealer for its account or for the account of a customer...

Therefore, securities records should be maintained by security, although this can be accomplished by separate sheets showing positions in that security held for trading or investment purposes and positions owned by customers. A record organized by customer, showing several securities and offsetting positions held by that customer, is not acceptable for purposes of rule G-8(a)(iii).

With respect to your question regarding the multiple maturity provision of rule G-8(a)(iii), the relevant position of the rule states

multiple maturities of the same issue of municipal securities, as well as multiple coupons of the same maturity, may be shown on the same record, provided that adequate secondary records exist to identify separately such maturities and coupons.

Therefore, the securities to be shown on a single securities record must be identical as to issue date or maturity date. Securities which are identical as to issuer may be shown on a single securities record only if the securities have either the same issue date or the same maturity date, and if adequate secondary records exist to identify separately the securities grouped on the record. MSRB interpretation of April 8, 1978.

Fully disclosed broker. I refer to your letter of March 24, 1978 in which you request a determination concerning whether as a broker who passes all of his business through a dealer on a fully disclosed basis you are subject to the Municipal Securities Rulemaking Board's rules A-12 and A-14 which impose an initial and annual fee on municipal securities brokers and municipal securities dealer.

I note that the term "broker" as defined in section 3(a)(4) of the Securities Exchange Act of 1934 (the "Act") is not restricted to securities firms that directly effect transactions in securities for the account of others. I call your attention to various rules of the Securities and Exchange Commission governing the activities of "brokers" and "dealers" that recognize introducing brokers as "brokers" under the Act. See e.g., rules 15c-3-1 1(a)(2) and 15c3-3(k)(2). The definition of the term "municipal securities broker" set forth in section 3(a)(31) of the Act incorporates the statutory definition of "broker" and therefore appears similarly not limited to firms directly effecting transactions in municipal securities for the account of others.

Pursuant to rule D-1 of the Board, which incorporates the definition of terms used in the Act for purposes of the Board's rules, the term "municipal securities broker" as used in rules A-12 and A-14 has the same meaning as set forth in section 3(a)(31) of the Act.

Accordingly, we are unable to conclude that the fees imposed by the Board are inapplicable to your situation. MSRB interpretation of April 4, 1978.

Underwriting assessment: intrastate underwriting. This will acknowledge receipt of your letter dated March 3, 1978 requesting that [Company name deleted] be granted an exemption from rule A-13 of the Municipal Securities Rulemaking Board (the "Board"). Rule A-13 requires municipal securities brokers and municipal securities dealers to pay a fee to the Board based on their municipal securities underwriting activity. In your letter, you suggest that "the Company" should not be subject to the underwriting assessment imposed by the rule because it engages only in intrastate sales of municipal securities "to registered broker-dealers or institutional investors."

As a technical matter, although the Board has the authority to interpret its rules and to amend them through prescribed statutory procedures, the Board does not have the authority to grant exemptions from the rules. The authority to grant exemptions is vested in the Securities and Exchange Commission by section 15B(a)(4) of the Securities Exchange Act of 1934, as amended (the "Act").

In considering whether "the Company" should request an exemption from the Commission, the following information concerning rule A-13 may be helpful. The purpose of rule A-13 is to provide a reasonable and equitable means of defraying the costs and expenses of operating and administering the Board, as contemplated by section 15B(b)(2)(J) of the Act. The rule applies to all municipal securities dealers, with respect to their municipal securities underwriting activities, and covers situations in which new issue municipal securities are sold by or through a municipal securities professional to other securities professionals and institutional customers, as well as to individuals.

With respect to the intrastate character of "the Company's" underwriting activity, we note that certain provisions of the Securities Acts Amendments of 1975 (Pub. L. 94-29) had the effect of including within the scope of municipal securities dealer regulation the intrastate activities of municipal securities dealers. (See sections 3(a)(17), 15(a)(1) and 15B(a)(1) of the Act.) Rule A-13 makes no distinction between interstate and intrastate offerings. MSRB interpretation of March 27, 1978.

Delivery requirements: coupons and coupon checks. This letter is to confirm the substance of conversations you had with the Board’s staff concerning the application of certain provisions of rule G-12, the uniform practice rule, to deliveries of securities bearing past-due coupons. You inquire whether, in the case where a transaction is effected for a settlement date prior to the coupon payment date, a delivery of securities with this past-due coupon attached constitutes "good delivery" for purposes of the rule.

Rule G-12(e)(vii)(C) provides that a seller may, but is not required to, deliver a check in lieu of coupons if delivery is made within thirty calendar days prior to an interest payment date. Thus, in the circumstances you set forth, the seller would have the option to detach the coupons and provide a check, but is under no obligation to do so. A delivery with these coupons still attached would constitute "good delivery," and a rejection of the delivery for this reason would be an improper rejection. MSRB interpretation of March 9, 1978.

Delivery requirements: partials. I am writing to confirm the substance of our telephone conversation concerning the provision of rule G-12(e)(iv) on partial deliveries. In our discussion, you posed a specific example of a single purchase of securities in which half are of one maturity and half of another maturity and inquired whether or not delivery of only one of the maturities would constitute a "partial" under the terms of the rule.

As I stated to you, if the transaction is effected on an "all or none" basis, and your confirmation is marked "all or none" or "AON," this would suffice to indicate that the purchase of both maturities constitutes a single transaction, and that both maturities must be delivered to effect good delivery. MSRB interpretation of February 23, 1978.

This will acknowledge receipt of your letter dated February 2, 1978 in which you request a clarification of Board rule G-16 relating to periodic compliance examinations.

In your letter you express your understanding that rule G-16 does not apply to bank dealers. This understanding is incorrect. Rule G-16 applies to all municipal securities brokers and municipal securities dealers and requires that all such organizations be examined at least once each [two calendar years] to determine compliance with, among other things, rules of the Board. Under section 15B(c)(7) of the Securities Exchange Act of 1934, as amended (the “Act”), such examinations of bank dealers will be conducted by the appropriate federal bank regulatory agency. The Office of the Comptroller of the Currency is designated by the Act as the appropriate agency for national banks. MSRB interpretation of February 17, 1978.
NOTE: revised to reflect subsequent amendments.

Apprenticeship. This will acknowledge receipt of your letter dated January 30, 1978 and will confirm our recent telephone conversation.

In your letter you seek clarification of the applicability of the requirements of rule G-3(i)[*]relating to apprenticeship periods to a municipal securities representative who has previously qualified as a general securities representative. As I indicated in our conversation, an individual who was previously qualified as a general securities representative is not required to serve the 90-day apprenticeship period. MSRB interpretation of February 17, 1978.

[*] [Currently codified at rule G-3(a)(iii)]