On May 9, 1996, the Securities and Exchange Commission (the “SEC”) issued an interpretative release expressing its views on the use of electronic media for delivery of information by, among others, brokers and dealers.[1] The SEC stated that brokers, dealers and others may satisfy their delivery obligations under federal securities laws by using electronic media as an alternative to paper-based media within the framework established in the SEC’s October 1995 interpretive release on the use of electronic media for delivery purposes.[2] The SEC also indicated that an electronic communication from a customer to a broker or dealer generally would satisfy the requirements for written consent or acknowledgment under the federal securities laws.

The Municipal Securities Rulemaking Board (the “Board”) is publishing this notice to address the use by brokers, dealers and municipal securities dealers (“dealers”) of electronic media to deliver and receive information under Board rules.[3] The Board will permit dealers to transmit documents electronically that they are required or permitted to furnish to customers under Board rules provided that they adhere to the standards set forth in the SEC Releases and summarized below.[4] Dealers also may receive consents and acknowledgments from customers electronically in satisfaction of required written consents and acknowledgments. Furthermore, the Board believes that the standards applied by the SEC to communications with customers should also apply to communications among dealers and between dealers and issuers. However, although it is the Board’s goal ultimately to permit dealers to make required submissions of materials to the Board electronically if possible, this notice does not affect existing requirements for the submission of materials to the Board, its designees and certain other entities to which information is required to be delivered under Board rules.[5]

Dealers are urged to review the SEC Releases in their entirety to ensure that they comply with all aspects of the SEC’s electronic delivery requirements. Although the examples provided in the SEC Releases are based on SEC rules, the examples nonetheless provide important guidance as to the intended application of the standards set out by the SEC with respect to electronic communications.

Electronic Communications from Dealers to Customers

General. According to the standards established by the SEC, dealers may use electronic media to satisfy their delivery obligations to customers under Board rules, provided that the electronic communication satisfies the following principles:[6]

1. Notice – The electronic communication should provide timely and adequate notice to customers that the information is available electronically.[7] Since certain forms of electronic delivery may not always provide a likelihood of notice that recipients have received information that they may wish to review, dealers should consider supplementing such forms of electronic communication with a separate communication, providing notice similar to that provided by delivery in paper through the postal mail, that information has been sent electronically that the recipients may wish to review.[8]

2. Access – Customers who are provided information through electronic delivery should have access to that information comparable to the access that would be provided if the information were delivered in paper form.[9] The use of a particular electronic medium should not be so burdensome that intended recipients cannot effectively access the information provided.[10] A recipient should have the opportunity to retain the information through the selected medium (e.g., by downloading or printing the information) or have ongoing access equivalent to personal retention.[11] Also, as a matter of policy, the SEC believes that a person who has a right to receive a document under the federal securities laws and chooses to receive it electronically should be provided with a paper version of the document upon specific request or if consent to receive documents electronically is revoked.[12]

3. Evidence to Show Delivery – Dealers must have reason to believe that electronically delivered information will result in the satisfaction of the delivery requirements under the federal securities laws. Dealers should consider the need to establish procedures to ensure that applicable delivery obligations are met, including recordkeeping procedures to evidence such satisfaction.[13] Such procedures should also be designed to ensure the integrity and security of information being delivered so as to ensure that it is the information that was intended to be delivered.[14] Dealers may be able to evidence satisfaction of delivery obligations, for example, by:

(1) obtaining the intended recipient’s informed consent [15] to delivery through a specified electronic medium and ensuring that the recipient has appropriate notice and access;

(2) obtaining evidence that the intended recipient actually received the information, such as by an electronic mail return-receipt [16] or by confirmation that the information was accessed, downloaded, or printed; or

(3) disseminating information through certain facsimile methods (e.g., faxing information to a customer who has requested the information and has provided the telephone number for the fax machine).

Personal Financial Information. The SEC has noted, and the Board agrees, that special precautions are appropriate when dealers are delivering information to customers that is specific to that particular customer’s personal financial information, including but not limited to information contained on confirmations and account statements.[17] In transmitting such personal financial information, dealers should consider the following factors:

1. Confidentiality and Security – Dealers sending personal financial information through electronic means or in paper form should take reasonable precautions to ensure the integrity, confidentiality, and security of that information. Dealers transmitting personal financial information electronically must tailor those precautions to the medium used in order to ensure that the information is reasonably secure from tampering or alteration.

2. Consent – Unless a dealer is responding to a request for information that is made through electronic media or the person making the request specifies delivery through a particular electronic medium, the dealer should obtain the intended recipient’s informed consent prior to delivering personal financial information electronically. The customer’s consent may be made either by a manual signature or by electronic means.

Electronic Communications from Customers to Dealers

Consistent with the position taken by the SEC, dealers may rely on consents and acknowledgments received from customers by electronic means for purposes of Board rules. In relying on such communications from customers, dealers must be cognizant of their responsibilities to prevent, and the potential liability associated with, unauthorized transactions. In this regard, the SEC states, and the Board agrees, that dealers should have reasonable assurance that the communication from a customer is authentic.

Electronic Transmission of Non-Required Communications

The 1996 SEC Release states that the above standards are intended to permit dealers to comply with their delivery obligations under federal securities laws when using electronic media. While compliance with the guidelines is not mandatory for the electronic delivery of non-required information that, in some cases, is being provided voluntarily to customers, the Board believes adherence to the guidelines should be considered, especially with respect to delivery of personal financial information.

Electronic Communications Among Dealers and Between Dealers and Issuers

The Board believes that the standards applied by the SEC to communications with customers should also apply to mandated communications among dealers and between dealers and issuers. Thus, a dealer that undertakes communications required under Board rules with other dealers and with issuers in a manner that conforms with the principles stated above relating to customer communications will have met its obligations with respect to such communications. In addition, a dealer may rely on consents and acknowledgments received from other dealers or issuers by electronic means for purposes of Board rules, provided that the dealer should have reasonable assurance that the communication from such other party is authentic. However, any Board rule that explicitly requires that a dealer enter into a written agreement with another party will continue to require that such agreement be in written form.[18] Financial information, as well as other privileged or confidential information, relating to another dealer or an issuer (or relating to another person or entity contained in a transmission between a dealer and another dealer or an issuer) should be transmitted using precautions similar to those used by a dealer in transmitting personal financial information to a customer.

Rules to Which this Notice Applies

Set forth below is a list of current Board rules to which dealers may apply the guidance provided in this notice. The Board believes that the list sets forth all of the rules that require or permit communications among dealers and between dealers and customers and issuers.[19] The summaries provided of the delivery obligations under the listed rules is intended for ease of reference only and are not intended to be complete statements of all the requirements under such rules.

• Rule G-8, on books and records to be made by dealers, prohibits dealers from obtaining or submitting for payment a check, draft or other form of negotiable paper drawn on a customer’s checking, savings, share or similar account without the customer’s express written authorization.

• Rule G-10, on delivery of investor brochure, requires dealers to deliver a copy of the investor brochure to a customer upon receipt of a complaint by the customer.

• Rule G-11, on sales of new issue municipal securities during the underwriting period, requires certain communications between senior syndicate managers and other members of the syndicate.[20]

• Rule G-12, on uniform practice, provides for confirmation of inter-dealer transactions and certain other inter-dealer communications.[21]

• Rule G-15, on confirmation, clearance and settlement of transactions with customers, provides for confirmation of transactions with customers and the provision of additional information to customers upon request.[22]

• Rule G-19, on suitability of recommendations and transactions and discretionary accounts, requires that dealers obtain certain information from their customers in connection with transactions and recommendations and also receive customer authorizations with respect to discretionary account transactions.

• Rule G-22, on control relationships, requires certain disclosures from a dealer effecting a transaction for a customer in municipal securities with respect to which such dealer has a control relationship and customer authorization of such transaction with respect to discretionary accounts.

• Rule G-23, on activities of financial advisors, requires that, under certain circumstances, dealers acting as financial advisors to issuers provide various disclosures to issuers and customers and receive certain consents and acknowledgments from issuers.[23]

• Rule G-24, on use of ownership information obtained in fiduciary or agency capacity, requires a dealer seeking to use for its own purposes information obtained while acting in a fiduciary or agency capacity for an issuer or other dealer to receive consents to the use of such information.

• Rule G-25, on improper use of assets, provides that put options and repurchase agreements will not be deemed to be guaranties against loss if their terms are provided in writing to customers with or on the transaction confirmation.

• Rule G-26, on customer account transfers, provides for written notice from customers requesting account transfers between dealers and the use of Form G-26 to effect such transfer.[24]

• Rule G-28, on transactions with employees and partners of other municipal securities professionals, requires that a dealer opening an account for a customer who is an employee or partner of another dealer must provide notice and copies of confirmations to such other dealer and permits such other dealers to provide instructions for handling of transactions with such customer.

• Rule G-29, on availability of Board rules, provides that dealers must make available to customers for examination promptly upon request a copy of the Board’s rules required to be kept in their offices.[25]

• Rule G-32, on disclosures in connection with new issues, requires dealers selling new issue municipal securities to customers to deliver official statements[26] and certain other information by settlement and requires selling dealers, managing underwriters and certain dealers acting as financial advisors to deliver such materials to dealers purchasing new issue municipal securities, upon request.[27]

• Rule G-34, on CUSIP numbers and new issue requirements, requires underwriters to communicate information regarding CUSIP numbers and initial trade date to syndicate and selling group members.[28]

• Rule G-38, on consultants, requires dealers to provide certain information to issuers regarding consulting arrangements.[29]

• Rule G-39, on telemarketing, prohibits certain telemarketing calls without the prior consent of the person being called.[30]

ENDNOTES

[1] See Securities Act Release No. 7288, Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15, 1996) (the “1996 SEC Release”).

[2] See Securities Act Release No. 7233, Exchange Act Release No. 36345 (October 6, 1995), 60 FR 53458 (October 13, 1995) (the “1995 SEC Release” and, together with the 1996 SEC Release, the “SEC Releases”).

[3] This notice has been filed with the SEC as File No. SR-MSRB-98-12.

[4] The Board also reminds dealers that the SEC indicated in the 1996 SEC Release that dealers may fulfill their obligation to deliver to customers, upon request, preliminary official statements and final official statements in connection with primary offerings of municipal securities subject to SEC Rule 15c2-12 by electronic means, subject to the guidelines set forth in the 1996 SEC Release. See 1996 SEC Release at note 47.

[5] For example, this notice does not apply to any requirements that dealers supply the Board with written information pursuant to Board rules A-12, A-14, A-15, G-36, G-37 and G-38. The Board has begun the planning process for electronic submission of information required under rule A-15 and of Form G-37/G-38 under rules G-37 and G-38. At such time as electronic submission becomes available, the Board will publish notice thereof and of the procedures to be used for such submission. Although submission of Forms G-36(OS) and G-36(ARD) under rule G-36 could also be made electronically by means similar to those which the Board may develop for Form G-37/G-38, such electronic submission is complicated by the requirement that Forms G-36(OS) and G-36(ARD) be accompanied by an official statement or advance refunding document, as appropriate. Given the current debate and lack of consensus among the various sectors of the municipal securities industry regarding electronic formatting of disclosure materials, and since the Board does not have the authority to dictate the format of issuer documents, the Board believes that any further action regarding electronic submissions under rule G-36 should await resolution of these issues. Finally, the Board does not at this time anticipate permitting electronic submission of information required under rules A-12 and A-14 since such information must be accompanied by payment of certain required fees.

Electronic submission of information under rule G-14 will continue to be governed by rule G-14 and associated Transaction Reporting Procedures. In addition, this notice does not alter the current submission standards applicable to the Board’s Continuing Disclosure Information (CDI) System of the Municipal Securities Information Library[®] (MSIL[®]) system. The Municipal Securities Information Library and MSIL are registered trademarks of the Board.

Furthermore, submission of information to the Board’s designees or certain other designated entities under Board rules must continue to be done in accordance with the procedures established by such designees or other entities. Board rules in which such requirements currently appear include rules G-7 (with respect to information required to be filed with the appropriate enforcement agencies), G-12 and G-15 (with respect to information to be submitted to registered clearing agencies and registered securities depositories), G-26 (with respect to customer account transfer instructions (other than Form G-26) required by registered clearing agencies), G-34 (with respect to information to be submitted to the Board’s designee for assignment of CUSIP numbers and to registered securities depositories) and G-37 (with respect to application to the appropriate enforcement agencies for exemptions from the ban on municipal securities business).

[6] Dealers that structure their deliveries in accordance with the principles set forth in this notice can be assured, except where otherwise noted, that they have satisfied their delivery obligations under Board rules. However, as the SEC stated in the 1995 SEC Release, the three enumerated principles are not the only factors relevant to determining whether the legal requirements pertaining to delivery of documents have been satisfied. Consistent with the SEC’s view, the Board believes that, if a dealer develops a method of electronic delivery that differs from the principles discussed herein, but provides assurance comparable to paper delivery that the required information will be delivered, that method may satisfy delivery obligations. See 1995 SEC Release, text following note 22. For example, a dealer can satisfy its obligation to send a confirmation to a customer under rule G-15 by electronic means in a manner that meets the principles set forth in this notice. In addition, dealers may continue to deliver confirmations electronically through the OASYS Global system established by Thomson Financial Services, Inc. on the conditions described in the Board’s Notice Concerning Use of the OASYS Global Trade Confirmation System to Satisfy Rule G-15(a), dated June 6, 1994, without specifically complying with the principles described in this notice. See MSRB Reports, Vol. 14, No. 3 (June 1994) at 37. See also 1996 SEC Release, note 38, and 1995 SEC Release, note 12. Also, rule G-29 provides that dealers must make available to customers for examination promptly upon request a copy of the Board’s rules required to be kept in their offices. Dealers may continue to comply with such requirement by giving customers access to the rules either in printed form or by viewing the rules on screen from the Board’s Internet web site (www.msrb.org) or from software products produced by other companies. See Interpretive Notice on Availability of Board Rules, dated May 20, 1998, in MSRB Reports, Vol. 18, No. 2 (August 1998) at 37.

[7] See 1996 SEC Release, text at note 20.

[8] See 1996 SEC Release, text at note 21, and 1995 SEC Release, text at note 23. The SEC notes, for example, that if information is provided by physically delivering material (such as a diskette or CD-ROM) or by electronic mail, such communication itself generally should be sufficient notice. However, if information is made available electronically through a passive delivery system, such as an Internet web site, separate notice would be necessary to satisfy the delivery requirements unless the dealer can otherwise evidence that delivery to the customer has been satisfied. 1996 SEC Release, note 21.

[9] The SEC states that, regardless of whether information is delivered in paper form or by electronic means, it should convey all material and required information. For example, if a paper document is required to present information in a certain order, then the information delivered electronically should be in substantially the same order. 1996 SEC Release, text at note 14.

[10] The SEC notes, for example, that if a customer must proceed through a confusing series of ever-changing menus to access a required document so that it is not reasonable to expect that access would generally occur, this procedure would likely be viewed as unduly burdensome. In that case, the SEC would deem delivery not to have occurred unless delivery otherwise could be shown. 1995 SEC Release, note 24.

[11] See 1996 SEC Release, note 22 and accompanying text, and 1995 SEC Release, notes 25-26 and accompanying text.

[12] See 1996 SEC Release, note 17 and accompanying text, and 1995 SEC Release, note 27 and accompanying text.

[13] See 1996 SEC Release, text following note 22, and 1995 SEC Release, note 22 and text at note 28. The Board is of the view that dealers that choose to deliver information to customers electronically should consider establishing systems and procedures for providing paper copies or using alternate electronic means in a timely manner should the primary electronic media fail for any reason.

[14] See 1996 SEC Release, text at note 25, and 1995 SEC Release, note 22. Dealers also should consider the need for systems and procedures to deter or detect misconduct by firm personnel in connection with the delivery of information, whether by electronic or paper means. 1996 SEC Release, text at note 16.

[15] In order for a consent to be an informed consent, the SEC has stated that the consent should specify the electronic medium or source through which the information will be delivered and the period during which the consent will be effective, describe the information that will be delivered using such means, and disclose the potential for the customer to incur costs in accessing the information. See 1996 SEC Release, note 23, and 1995 SEC Release, note 29.

[16] To the extent that material is distributed as an attachment to an electronic mail transmission, dealers must have a reasonable basis for believing that the attachment will in fact be transmitted along with the electronic mail transmission and that the attachment will be received by the recipient in an accessible format.

[17] In addition, the Board believes that other information that is privileged or confidential, regardless of whether such information is financial in nature, should be accorded the same precautions as is personal financial information.

[18] For example, the written agreements required under rules G-20(c), G-23(c) and G-38(b) must continue to be entered into in paper form.

[19] Unless otherwise provided in connection with the adoption by the Board of any new rules or amendments to existing rules that require or permit communications among dealers and between dealers and customers, issuers and others, the guidance provided in this notice would also apply to any such communications.

[20] Rule G-11 also requires that syndicate members furnish certain information to others, upon request. The Board believes that, solely for purposes of this requirement under rule G-11, such information may be provided to others by electronic means so long as the standards established in this notice with respect to electronic deliveries to customers are met.

[21] See, however, note 5 above with respect to information to be submitted to registered clearing agencies and registered securities depositories.

[22] See, however, note 5 above with respect to information to be submitted to registered clearing agencies and registered securities depositories. See also note 6 above regarding alternate electronic means previously reviewed by the Board.

[23] See, however, note 18 above and accompanying text regarding the written agreement to be entered into between a dealer acting as financial advisor and the issuer.

[24] See, however, note 5 above with respect to use of customer account transfer instructions (other than Form G-26).

[25] See note 6 above regarding alternate electronic means previously reviewed by the Board.

[26] The Board believes that dealers must be particularly cautious in delivering official statements by electronic means since they may present special challenges in ensuring that they are received by customers and other dealers without material omissions or distortions in formatting (for example, tables in which data is more than negligibly misaligned) that may cause such materials not to meet the standard for electronically transmitted information comparable to information delivered in paper form. See note 9 above and accompanying text.

[27] The Board believes that, to the extent that rule G-32(b)(i) [currently codified at rule G-32(c)(i)] obligates a managing or sole underwriter to provide, upon request, multiple copies of the official statement to a dealer with respect to new issue municipal securities sold by such dealer to customers, such obligation must continue to be met with paper copies of the official statement unless the purchasing dealer has consented to electronic delivery of the official statement in lieu of delivery of multiple paper copies. Compare 1995 SEC Release, example 11.

[28] See, however, note 5 above with respect to information to be submitted to the Board’s designee with respect to CUSIP number assignment and to registered securities depositories.

[29] See, however, note 18 above and accompanying text regarding the written agreement to be entered into between a dealer and its consultant and note 5 above with respect to submission of Form G-37/G-38 to the Board.

[30] Although the person receiving such telemarketing call may in many cases not be a customer, the Board believes that, solely for purposes of this provision of rule G-39, such consent may be accepted by the dealer by electronic means so long as the standards established in this notice with respect to electronic communications from customers to dealers are met.

Interpretation on the Application of Rules G-32 and G-36 to New Issue Offerings Through Auction Procedures

March 26, 2001

In July 1998, the Securities and Exchange Commission (“SEC”) approved two sets of amendments to rule G-32, on disclosures in connection with new issues. The first set of amendments permits brokers, dealers and municipal securities dealers (“dealers”) that sell new issue variable rate demand obligations qualifying for the exemption provided under subparagraph (d)(1)(iii) of Securities Exchange Act Rule 15c2-12 to deliver the preliminary official statement, rather than the final official statement, to customers by settlement.[1] The second set of amendments strengthens the rule’s existing requirements regarding dissemination of official statements to dealers purchasing new issue municipal securities and incorporates a longstanding Board interpretation regarding disclosure to customers of initial offering prices in negotiated underwritings.[2] In view of these recent amendments and the continuing concerns of the Board and the enforcement agencies that some dealers may have inadequate procedures in place to ensure compliance with rule G-32,[3] the Board is publishing this notice to review the requirements of the rule and to emphasize the importance of full and timely compliance.

Purpose and Structure of Rule G-32

Rule G-32 is designed to ensure that a customer who purchases new issue municipal securities is provided with all available information relevant to his or her investment decision by settlement of the transaction. The rule obligates all dealers selling new issue municipal securities to provide to their customers purchasing the securities certain disclosure materials by settlement. To effectuate this primary obligation, the rule further obligates all dealers that sell new issue municipal securities to other dealers, as well as the managing or sole underwriter for such securities, to provide to such purchasing dealers these disclosure materials so as to permit the purchasing dealers to comply with their primary delivery obligations to their own customers. Finally, the rule provides that a dealer that prepares an official statement in final form on behalf of an issuer while serving in the capacity of financial advisor to such issuer must make the official statement available to the underwriters promptly after the issuer approves its distribution. Compliance with each prong of the rule is crucial to ensure that the primary purpose of the rule is fulfilled.

New Issue Municipal Securities and the Underwriting Period

Rule G-32 applies to the sale of all new issue municipal securities. These are defined in section (c)(i)[*] as any municipal securities (other than commercial paper[4]) that are sold by any dealer during the issue’s underwriting period. Once the underwriting period has ended for an issue of municipal securities, the requirements of rule G-32 no longer apply to transactions in such municipal securities.

The underwriting period for an issue of municipal securities begins with the first submission to the underwriters of an order from a potential customer to purchase the securities or the purchase by the underwriters of the securities from the issuer (i.e., the execution of the purchase contract in a negotiated sale or the award of the securities in a competitive sale), whichever occurs first. The underwriting period ends upon delivery by the issuer of the securities to the underwriters (i.e., the bond closing) if the underwriters no longer retain an unsold balance at such time. If, however, the issue is not sold out by the bond closing, the underwriting period continues until the underwriters no longer retain an unsold balance; provided that, in the case of an issue underwritten by a sole underwriter, if the bond closing has occurred and the underwriter retains an unsold balance 21 calendar days after the first submission of an order, the underwriting period nonetheless ends after such 21st day.[5]

delivery obligationS to customers

A dealer selling new issue municipal securities to a customer is required to deliver (not merely send) certain information to such customer prior to settlement of the transaction. The Board has previously noted that the required information will be presumed to have been delivered to the customer if it was sent at least three business days prior to settlement.[6]

Official Statements. With only two exceptions, a dealer violates section (a) of rule G-32 if it sells, either as principal or agent, a new issue municipal security to a customer but fails to deliver an official statement in final form[7] to such customer by no later than settlement of that transaction. Dealers should note that this obligation differs from the obligation imposed by SEC Rule 15c2-12(b)(4) in that rule G-32 mandates that any dealer selling new issue municipal securities (not just participating underwriters of the offering) must deliver (not just send) the official statement to the customer by settlement, regardless of whether the customer has requested a copy of the official statement.[8]

The first exception under rule G-32 arises where the issuer is not preparing an official statement in final form. In that case, the dealer must deliver to the customer by no later than settlement a written notice that an official statement in final form is not being prepared, together with a copy of a preliminary official statement, if one has been prepared.[9] This exception is not available in cases where the official statement in final form is in the process of being prepared but is not yet available at the time that a dealer wishes to settle a transaction with a customer. Thus, in such a case, a dealer would violate rule G-32(a) by settling a customer transaction without delivery of the official statement in final form, even if a preliminary official statement is delivered by settlement and the official statement in final form is delivered to the customer as soon as it becomes available.

The second exception applies solely to municipal securities issued a primary offering that qualifies for the exemption set forth in SEC Rule 15c2-12(d)(1)(iii) (Exempt VRDOs),[10] but only if an official statement in final form is being prepared.[11] This exception permits a dealer to deliver a preliminary official statement to a customer by settlement in substitution for the official statement in final form so long as (1) the dealer provides written notice to the customer by settlement that the official statement in final form will be sent within one business day following its receipt by the dealer and (2) the dealer sends the official statement in final form to the customer within one business day of its receipt.[12] The Board believes, however, that if the official statement in final form is available in sufficient time to permit delivery to the customer by settlement, it would be in the dealer’s best interest to make such delivery by settlement, as it would be required to do for any other new issue municipal securities. This would permit the dealer to satisfy its delivery obligation with a single delivery of the official statement in final form, rather than two separate deliveries of the preliminary and final official statements, thereby reducing the dealer’s compliance burden.[13]

Additional Disclosures for Negotiated Underwritings . Where the underwriters have purchased an issue of municipal securities from the issuer in a negotiated sale, any dealer (not just syndicate or selling group members) selling such securities to a customer during the underwriting period is required to deliver to such customer prior to settlement, in addition to the official statement, information concerning (A) the underwriting spread;[14] (B) the amount of any fee received by such dealer as agent for the issuer in the distribution of the securities, if applicable;[15] and (C) the initial offering price for each maturity in the issue, including the initial offering price of maturities that are not reoffered.[16] The obligation to make these further disclosures may be satisfied by inclusion by the issuer of such information in the official statement in final form and the delivery of such official statement to the customer by settlement. However, should the issuer elect not to include any such information in the official statement or if an official statement that includes this information is not delivered to the customer by settlement, a dealer selling such securities during the underwriting period must nevertheless provide such information in writing to the customer by settlement (for example, in a confirmation or other writing delivered to the customer by settlement). For example, if a dealer delivers a preliminary official statement to a customer at settlement for a new issue Exempt VRDO and any of the required disclosure information is left blank or is noted as preliminary and subject to change (with the expectation of the information being completed or finalized in the official statement in final form to be delivered after settlement), then disclosure of such information would be required in a separate writing delivered at or prior to settlement.

DELIVERY OBLIGATIONS TO PURCHASING DEALERS

Dealers selling new issue municipal securities to other dealers, and dealers serving as managing or sole underwriters for such new issues, are also required to deliver the official statement and the additional disclosures for negotiated underwritings, if applicable, to dealers purchasing such securities during the underwriting period.

Obligations of Selling Dealers. If a dealer sells a new issue municipal security to another dealer, the selling dealer is obligated under rule G-32(a)[†] to send to the purchasing dealer, upon request, (i) the official statement in final form (or if no official statement in final form is being prepared, a written notice to that effect, together with a copy of a preliminary official statement, if one has been prepared) and (ii) if the underwriters originally purchased the securities from the issuer in a negotiated sale, the additional disclosures described above required in connection with a negotiated underwriting. The official statement and the additional disclosures related to negotiated underwritings, if applicable, must be sent by the selling dealer to the purchasing dealer within one business day of the purchasing dealer’s request, provided that, if the official statement in final form is being prepared but has not yet been received from the issuer or its agent, then the official statement in final form and the additional disclosures must be sent no later than the business day following such receipt.[17] These items must be sent by first class mail or other equally prompt means, unless the purchasing dealer arranges some other method of delivery and pays or agrees to pay for such alternate delivery method. This obligation applies with respect to all requests to a selling dealer made by a dealer purchasing new issue municipal securities from such selling dealer during the underwriting period, even where the selling dealer did not participate as a syndicate or selling group member for the underwriting of the new issue municipal securities.

Obligations of Managing and Sole Underwriters . If an official statement in final form is prepared in connection with an issue of municipal securities, the dealer serving as managing underwriter or sole underwriter for such issue is obligated under rule G-32(b)(i)[‡] to send to any dealer purchasing such securities during the underwriting period, upon request, (i) one copy of the official statement in final form plus one additional copy per $100,000 par value purchased by such purchasing dealer for resale to customers and (ii) if the underwriters originally purchased the securities from the issuer in a negotiated sale, the required additional disclosures. Managing and sole underwriters also are required to provide purchasing dealers, upon request, with instructions on how to order copies of the official statement in final form from the printer. The official statement and the additional disclosures related to negotiated underwritings, if applicable, must be sent by the managing or sole underwriter to the purchasing dealer within one business day of the purchasing dealer’s request, provided that, if the official statement in final form is being prepared but has not yet been received from the issuer or its agent,[18] then the official statement in final form and the additional disclosures must be sent no later than the business day following such receipt. These items must be sent by first class mail or other equally prompt means, unless the purchasing dealer arranges some other method of delivery and pays or agrees to pay for such alternate delivery method. This obligation applies with respect to all requests to the managing or sole underwriter made by purchasing dealers during the underwriting period, even where the managing or sole underwriter did not sell the new issue municipal securities to the purchasing dealer.

Obligations of Dealers Acting as Financial Advisors . Rule G-32(b)(ii)[#] provides that, if a dealer that acts as financial advisor to an issuer prepares an official statement in final form on behalf of such issuer, such dealer must make that official statement available to the managing or sole underwriter promptly after the issuer approves distribution of the official statement in final form. This provision is designed to ensure that, once the official statement is completed and approved by the issuer for distribution, dealers acting as financial advisors will be obligated to commence the dissemination process promptly.[19]

Implications for Inter-Dealer Dissemination . The provisions of rule G-32 relating to dissemination among dealers of official statements and the additional disclosures related to negotiated underwritings is designed to ensure that a dealer selling a new issue municipal security to a customer has a reliable and timely source for obtaining such items for delivery to the customer by settlement. In the case of a syndicate member that purchases a new issue municipal security in an underwriting, the rule, in conjunction with The Bond Market Association’s Standard Agreement Among Underwriters, will effectively obligate the managing underwriter to send the official statement in final form (in the required quantity) and the additional disclosures to the syndicate member within one business day of its receipt from the issuer.[20] If for any reason such syndicate member needs to obtain a copy of the official statement more rapidly than by means of first class mail, it may arrange with the managing underwriter for delivery of the official statement by an alternate means so long as the requesting syndicate member covers the cost of such delivery.

For a non-syndicate member that purchases a new issue municipal security from the syndicate or from any other dealer, both the dealer that sold the security to the non-syndicate member and the managing or sole underwriter is obligated, if requested by such non-syndicate member, to send the official statement in final form and the additional disclosures within one business day of such request. If for any reason such non-syndicate member needs to obtain a copy of the official statement more rapidly than by means of first class mail, it may arrange with the dealer that is fulfilling the request for delivery of the official statement by an alternate means so long as the requesting non-syndicate member covers the cost of such delivery. Dealers purchasing new issue municipal securities from another dealer are advised that the obligation of the selling dealer or of the managing or sole underwriter to send an official statement to such purchasing dealer only takes effect upon the request of the purchasing dealer. Therefore, unless the purchasing dealer already has a copy of the official statement or has an alternate source for receiving it and the additional disclosures, such dealer will need to take the affirmative step of requesting such items from the selling dealer or the managing or sole underwriter.

A dealer that sells a new issue municipal security to a customer is not relieved of its obligation to deliver by settlement the official statement in final form and the additional disclosures related to negotiated underwriters because either the dealer from which it acquired the security or the managing or sole underwriter for the issue fails to fulfill its obligation to send these items to such dealer upon request. Such dealer may need to obtain the official statement in final form from other available sources. Such other sources of official statements include, but are not limited to, the nationally recognized municipal securities information repositories, other information vendors, or the Board’s Municipal Securities Information Library® (MSIL®) system.[21] Similarly, a managing or sole underwriter or a dealer selling a new issue municipal security cannot fulfill its obligation to send the official statement in final form and the additional disclosures to a purchasing dealer upon request by referring such dealer to such other sources of official statements.

RECORDKEEPING

Rule G-8(a)(xiii) requires that each dealer make and keep a record of all deliveries of official statements and of the additional disclosures related to negotiated underwritings made to purchasers of new issue municipal securities.[22] Although the rule does not obligate a dealer to maintain such records in any given manner, such records must provide an adequate basis for the audit of such information. To this end, NASD Regulation, Inc. has noted:

Some firms establish a file containing a copy of the customer’s new issue municipal purchase confirmation and/or a mailing label to demonstrate compliance with Rule G-8. However, NASD Regulation does not view this approach as adequately demonstrating compliance with MSRB Rule G-8. Instead, an adequate record of the delivery of new issue municipal securities disclosure information should, at a minimum, contain the following:

• customer name;

• security description;

• settlement date(s);

• type of disclosure sent (preliminary or final Official Statement);

• date the required disclosure was sent;

• and name of person(s) sending the disclosures.

At times, a firm assigns the new issue municipal securities disclosure function to a third party vendor. As a result, the member [dealer] does not maintain “a record of delivery” of the new issue disclosure. Nevertheless, from a regulatory perspective, the firm remains fully responsible for disclosure. When firms have assigned the new issue disclosure function to a third party, NASD Regulation expects that the compliance review process will include, at a minimum, periodic test to assure that the new issue disclosures are being made at or before settlement.[23]

Dealers should consult with the applicable enforcement agency regarding the adequacy of their recordkeeping under rule G-8(a)(xiii).

[1] See MSRB Reports, Vol. 18, No. 2 (Aug. 1998) at 15-17.

[2] See MSRB Reports, Vol. 18, No. 2 (Aug. 1998) at 19-21.

[3 ] See MSRB Reports, Vol. 17, No. 2 (June 1997) at 23-24; see also NASD Regulation, Inc., “Municipal Securities Update – Disclosure to Purchasers of New Issue Securities,” Regulatory & Compliance Alert, Vol. 12, No. 3 (Sept. 1998) at 19-20.

[4] The exception for commercial paper applies solely to true commercial paper issues (i.e., not to variable rate demand obligations with a nominal long maturity and having a so-called “commercial paper” mode).

[5] See rules G-32(c)(ii) [currently codified at rule G-32(d)(ii)] and G-11(a)(ix).

[6] See MSRB Reports, Vol. 7, No. 2 (March 1987) at 12.

[7] Rule G-32 defines official statement as a document prepared by the issuer or its representatives setting forth, among other matters, information concerning the issuer and the proposed issue of securities. This definition is, of necessity, broader than the definition set forth in SEC Rule 15c2-12(f)(3) for the term “final official statement” since rule G-32 applies to all issues of municipal securities (other than commercial paper issues), not just those issues subject to SEC Rule 15c2-12. However, the Board believes that, in the case of new issue municipal securities subject to SEC Rule 15c2-12, the official statement in final form for purposes of rule G-32 would be the same as the final official statement for purposes of SEC Rule 15c2-12.

[8 ] SEC Rule 15c2-12(b)(4) provides that an underwriter participating in an offering subject to the Rule must send a copy of the final official statement to a potential customer within one business day of a request until the earlier of (i) 90 days from the end of the underwriting period or (ii) the time when the official statement is available from a nationally recognized municipal securities information repository, but in no case less than 25 days following the end of the underwriting period.

[9] Since SEC Rule 15c2-12(3) provides that an underwriter participating in an offering subject to the Rule must contract with the issuer to receive final official statements, the Board expects that a final official statement will be prepared for all such offerings and therefore delivery of preliminary official statements for such issues would never satisfy the delivery obligation under rule G-32(a).

[10] A primary offering qualifies for this exemption if the municipal securities are in authorized denominations of $100,000 or more and, at the option of the holder thereof, may be tendered to the issuer or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption or purchase by the issuer or its designated agent.

[11] If an official statement in final form is not being prepared, then the first exception described above would apply.

[12] See MSRB Reports, Vol. 18, No. 2 (Aug. 1998) at 15-17. If no preliminary official statement is prepared for such issue, then the dealer must still provide written notice by settlement that an official statement in final form will be sent within one business day of receipt.

[13] In addition, ensuring that the official statement in final form, rather than merely the preliminary official statement, is in the possession of the customer by settlement may help to avoid potential liabilities that could result if there are any material differences between the preliminary official statement and the official statement in final form. The fact that rule G-32 permits a dealer to deliver the preliminary official statement, rather than the official statement in final form, to a customer by settlement in this specific situation does not in any way limit or reduce the dealer’s disclosure obligations under the federal securities laws, including in particular the dealer’s obligation under rule G-17 to disclose, at or before execution of a transaction, all material facts concerning the transaction which could affect the customer’s investment decision and not omit any material facts which would render other statements misleading.

[14] This provision obligates a dealer to disclose the gross spread (i.e., the difference between the initial offering price and the amount paid to the issuer), expressed either in dollars or points per bond. The underwriting spread may be shown either as a total amount or as a listing of the components of the gross spread. If components of the gross spread are listed, that portion of the proceeds which represents compensation to the underwriters must be clearly identified as such. For example, the Board believes that use of the terms “underwriters’ discount” or “net to underwriters” would be acceptable but that the term “bond discount” is confusing and, therefore, inappropriate. See MSRB Reports, Vol. 7, No. 2 (March 1987) at 13.

[15] If no fee is received by the dealer for acting as an agent for the issuer in the distribution of the securities, the dealer need not affirmatively state that no such fee was received but may instead omit any statement regarding such fee.

[16] The initial offering price may be expressed either in terms of dollar price or yield.

[17] Thus, if a purchasing dealer requests a copy of the official statement in final form from a selling dealer before the issuer has delivered the official statement to the underwriters, then the obligation of the selling dealer to send the official statement is deferred until the business day after the underwriters receive the official statement from the issuer.

[18] The Board is of the view that an underwriter that prepares an official statement on behalf of an issuer would be deemed to have received the official statement from the issuer immediately upon such issuer approving the distribution of the completed official statement in final form (i.e., when the issuer releases the completed official statement for distribution).

[19] The Board urges issuers that utilize the services of non-dealer financial advisors to hold such financial advisors to the same standards for prompt delivery of official statements to the underwriters.

[20] The Bond Market Association’s Standard Agreement Among Underwriters provides that syndicate members must place orders for the official statement by the business day following the date of execution of the purchase contract and states that any syndicate member that fails to place such an order will be assumed to have requested the quantity required under rule G-32(b)(i) [currently codified at rule G-32(c)(i)]. See The Bond Market Association, Agreement Among Underwriters – Instructions, Terms and Acceptance (Oct. 1, 1997) at ¶ 3. Thus, except in the rare instances where an official statement in final form is completed and available for distribution on the date of sale, syndicate members will have made or have been deemed to have made their requests for official statements by the time the managing underwriter receives the official statement from the issuer, thereby obligating the managing underwriter to send the official statement to syndicate members within one business day of receipt.

[21] Municipal Securities Information Library and MSIL are registered trademarks of the Board.

[22] Rule G-9(b)(x) provides that these records must be preserved for a period of not less than 3 years.

[23] NASD Regulation, Inc., “Municipal Securities Update – Disclosure to Purchasers of New Issue Securities,” Regulatory & Compliance Alert, Vol. 12, No. 3 (Sept. 1998) at 19-20. The views of the bank regulatory agencies regarding adequacy of any particular recordkeeping practice for the purpose of demonstrating compliance with rule G-8 may differ.

[*]  [Currently codified at rule G-32(d)(i).]

[†]  [Currently codified at rule G-32(b).]

[‡] [Currently codified at rule G-32(c)(i).]

[#]  [Currently codified at rule G-32(c)(ii).]

Execution of infrequent unsolicited orders. This is in response to your letter in which you state that your firm is a discount broker that executes orders on an unsolicited basis and that occasionally a customer will approach your firm to sell a municipal security they own or to purchase a specific issue.  You ask that the Board give consideration to allowing a firm like yours to act as a broker/dealer for customers on an unsolicited basis without being required to have an associated person qualified as a municipal securities principal.

Rule G-2, on standards of professional qualification, states that no dealer shall effect any transaction in, or induce or attempt to induce the purchase or sale of, any municipal security unless such dealer and every natural person associated with such dealer is qualified in accordance with the rules of the Board.  Rule G-3, on professional qualifications, states that a dealer that conducts a general securities business shall have at least one associated person qualified as a municipal securities principal to supervise the dealer’s municipal securities activities.

The Board’s rules do not provide an exemption from the numerical requirements for municipal securities principals based on the type of transactions in municipal securities in which a dealer engages.  There also is no exemption from the Board’s rules based on a de minimus number of transactions in municipal securities.  MSRB interpretation of October 2, 1998.

Disclosure obligations. This is in response to your letters dated March 18, 1998 and March 31, 1998 in which you present an example where a dealer advertises a specific municipal security which it knows, or has reason to know, is subject to a material adverse circumstance such as a technical default. You ask whether a dealer is obligated to include disclosure information indicating that a bond is subject to additional risk in order to avoid publishing a false or misleading advertisement as prohibited by rule G-21(c).  The Board reviewed your letters and has authorized this response. 

Section (c) of rule G-21 provides, among other things, that no dealer shall publish any advertisement[1] concerning municipal securities which such dealer knows or has reason to know is materially false or misleading. The Board has previously interpreted the rule as not requiring that any specific statements or information be included in an advertisement but that any statement or information that is included must not be materially false or misleading.  Thus, if a dealer makes a statement in an advertisement that explicitly or implicitly refers to the soundness or safety of an investment in the municipal securities described in the advertisement, such dealer must include any information necessary to ensure that the advertisement is not materially false or misleading with respect to the soundness or safety of such investment. The rule establishes a general ethical standard that provides the enforcement agencies with the flexibility that is needed to evaluate advertisements in light of what information is printed and how the information physically is presented.  Thus, the enforcement agencies should continue to evaluate advertisements on a case-by-case basis to make a determination whether any such advertisements, in fact, are misleading. 

You also ask whether the relative specificity of any such disclosure obligation that may exist depends on the level of detail provided about the municipal security. As stated above, rule G-21 does not require that any specific statements or information be included in an advertisement but that any statement or information that is included must not be materially false or misleading. Thus, the nature and extent of any disclosures or other explanatory statements that must be included in an advertisement is dependent upon the substance and form of the information presented in the advertisement.

The Board wishes to emphasize that the enforcement agencies should remain cognizant of certain other rules of the Board that may be relevant in evaluating whether a dealer's advertisement and such dealer's interactions with customers or potential customers that arise as a result of such advertisement are in conformity with Board rules. Thus, depending upon the facts and circumstances, an advertisement for a particular municipal security that on its face conforms with the requirements of rule G-21 may nonetheless be violative of rule G-17, the Board's fair dealing rule,[2] if, for example, the advertisement is designed as a “bait-and-switch” mechanism that attracts potential customers interested in an advertised security that the dealer is not in a legitimate position to sell (because of its unavailability, unsuitability or otherwise) for the primary purpose of creating a captive audience for the offering of other securities. In addition, a dealer that in fact sells the municipal securities that are described in its advertisement must fulfill its obligations  under rule G-19, on suitability, and rule G-30, on pricing. MSRB interpretation of May 21, 1998.

[1] “Advertisement” is defined in rule G-21 as any material (other than listings of offerings) published or designed for use in the public, including electronic, media, or any promotional literature designed for dissemination to the public, including any notice, circular, report, market letter, form letter, telemarketing script or reprint or excerpt of the foregoing. The term does not apply to preliminary official statements or official statements, but does apply to abstracts or summaries of official statements, offering circulars and other such similar documents prepared by dealers. 

[2] Rule G-17 requires each dealer, in the conduct of its municipal securities business, to deal fairly with all persons and prohibits the dealer from engaging in any deceptive, dishonest or unfair practice.

Rule G-29, on availability of Board rules, requires dealers to keep a copy of all rules of the Board as from time to time in effect and to make such rules available for examination by customers promptly upon request. The Board's rules must be kept in each office in which any activities of a municipal securities representative are conducted (e.g., underwriting, trading or sales of municipal securities).

Dealers can meet the requirements of Rule G-29 by a number of different means, including by having Internet access in their offices to the Board's rules at its website (www.msrb.org). Dealers can also use printed versions of the rules or software products produced by other companies that contain the Board's rules. Regardless of the method used to ensure that a copy of the rules is available at each office, customers must be given access to such copies, whether in printed form or by viewing on screen.

In connection with Rule G-29, the Board reminds dealers that Rule G-27, on supervision, requires each dealer to supervise the conduct of its municipal securities business and the municipal securities activities of its associated persons to ensure compliance with Board rules. Dealers should review their supervisory procedures to ensure that they have procedures in place for making the Board's rules available and accessible to customers upon request in each office that engages in municipal securities activities. In addition, the supervisory procedures should address how the dealer will provide its offices with the most current version of the rules once they are in effect so that its securities professionals are alerted to new developments. A dealer may establish a procedure to obtain information about current rule amendments from notices posted on the Board's website.

NOTE: This notice was revised to reflect the discontinuation, effective January 1, 2014, of the MSRB's printed version of the MSRB Rule Book.

Multiple underwriters.  This is in response to your letter in which you ask us whether a dealer that serves in the capacity as settlement agent for an issuer, as described in your letter, is obligated to file Form G-36(OS) in connection with a primary offering of municipal securities sold and delivered in the manner described in your letter.

           Board rule G-36 obligates an underwriter in any primary offering of municipal securities that is subject to Rule 15c2-12 promulgated by the Securities and Exchange Commission to send to the Board, within one business day after receipt of the final official statement from the issuer, but no later than 10 business days after any final agreement to purchase, offer or sell the municipal securities, two copies of the final official statement and two copies of completed Form G-36 (OS).[1] In the event a syndicate or similar account has been formed for the underwriting of a primary offering, the managing underwriter is obligated to undertake, on behalf of the syndicate or account, the duty of sending the official statement and Form G-36(OS) to the Board.[2]

The obligation to comply with the requirements of rule G-36 and the related recordkeeping requirements of rule G-8(a)(xv) attaches to all underwriters in a primary offering that is subject to rule G-36. The only circumstance in which these rules permit an underwriter to depend upon another party to fulfill such obligation is when another underwriter has taken on the duties of a managing underwriter for a syndicate or similar account formed for the particular underwriting, in which case the rules place responsibility for compliance on such managing underwriter. Thus, in any primary offering in which more than one dealer is serving as underwriter (within the meaning of federal securities laws) for the same municipal securities without having formed an underwriting syndicate or similar account, each such underwriter (regardless of its stated capacity as settlement agent or otherwise) is individually obligated to comply with the requirements of rule G-36 and the related recordkeeping requirements of rule G-8(a)(xv).  MSRB interpretation of January 30, 1998.

__________

 ENDNOTES

[1]           Rule G-36 also obligates an underwriter in any primary offering of municipal securities that is not subject to SEC Rule 15c2-12 (other than a limited placement within the meaning of SEC Rule 15c2-12(d)(1)(i)) for which the issuer has prepared an official statement in final form to send to the Board, within one business day after delivery of the securities by the issuer to the underwriters, two copies of the official statement in final form and two copies of completed Form G-36(OS).

[2]           The managing underwriter is also required to undertake all recordkeeping duties imposed under rule G-8(a)(xv) in connection with rule G-36.

The Board has received questions concerning the appropriate allocation of supervisory responsibility between municipal securities principals and the new category of municipal securities sales principals. The Board recently amended its rule G-3 to permit a person associated with a securities firm whose activities with respect to municipal securities are limited to supervising sales to and purchases from customers to qualify as a "municipal securities sales principal" ("sales principal"). The Board also amended rules G-8 on recordkeeping, G-26 on the administration of customer accounts, and G-27 on supervision to permit securities firms to designate sales principals as responsible for certain supervisory functions insofar as they relate directly to transactions in municipal securities with customers.

In particular, rule G-27 concerning supervision requires municipal securities dealers to designate at least one municipal securities principal as responsible for supervising its municipal securities activities, including the municipal securities activities of branch offices or similar locations. In addition, rule G-27 permits the municipal securities dealer to designate a sales principal (e.g., a branch office manager) as responsible for the "direct supervision of sales to and purchases from customers." The rule also requires that a dealer adopt written supervisory procedures which, among other matters, reflect the delegation of supervisory authority to these personnel.

As a result of these amendments, in designating under rule G-27 one or more municipal securities principals as responsible for supervising the business and activities of the firm’s associated persons, a securities firm may choose to designate a qualified sales principal with limited responsibility for the direct supervision of sales to and purchases from customers. If so, the firm’s written supervisory procedures may allocate responsibility to a sales principal for reviewing and approving (to the extent that they relate to sales to and purchases from customers) the suitability of the opening of, and transactions in, customer accounts, the handling of customer complaints and other correspondence, and other matters permitted by Board rule to be reviewed or approved by a sales principal. A municipal securities principal, however, must be responsible for directly supervising the firm’s other municipal securities activities such as underwriting, trading, and pricing of inventories.

With respect to the relationship between a sales principal and the designated municipal securities principal, Board rule G-27 provides that a branch office manager who acts as the sales principal for his office will be responsible for the municipal securities sales activities under his direct supervision. Rule G-27 also provides that a designated municipal securities principal will be responsible for all municipal securities activities of the branch office including those that may be under the direct supervision of a sales principal. However, the branch office manager, under the particular organizational structure of a firm, may be responsible to some other designated supervisor for the discharge of his other duties.

Syndicate records: participations. This will acknowledge receipt of your letter of November 24, 1981 concerning certain of the requirements of Board rule G-8(a)(viii) regarding syndicate records to be maintained by managers of underwritings of new issues of municipal securities.

You note that this provision requires, in pertinent part, that,

[w]ith respect to each syndicate..., records shall be maintained ... showing ... the name and percentage of participation of each member of the syndicate or account...

You inquire whether this provision necessitates the designation of an actual percentage or decimal participation, or, alternatively,

whether a listing of the ... dollar participation [of each member] ... along with [the] aggregate par value of the syndicate meets the requirement ... of the Rule.

The rule should not be construed to require in all cases an indication of a numerical percentage for each member's participation, if other information from which a numerical percentage can easily be determined is set forth. The method you propose, showing the par value amount of the member's participation, is certainly acceptable for purposes of compliance with this provision of the rule. MSRB interpretation of December 8, 1981.

Records of original entry: unit system. This will acknowledge receipt of your letter of November 20, 1981 concerning compliance with certain of the provisions of Board rule G-8 through the use of a "unit system" method of recordkeeping. In your letter you indicate that the bank wishes to maintain the record of original entry required under rule G-8(a)(i) in the form of a collection of duplicate copies of confirmations filed in transaction settlement date order; in addition, you enclose a copy of the confirmation form used by the bank. You inquire whether maintaining the record in this manner would be satisfactory for purposes of the rule.

In a July 29, 1977 interpretive notice on rule G-8 the Board stated:

Under rule G-8, records may be maintained in a variety of ways, including a unit system of recordkeeping. In such a system, records are kept in the form of a group of documents or related groups of documents....

A unit system of recordkeeping is an acceptable system for purposes of rule G-8 if the information required to be shown is clearly and accurately reflected and there is an adequate basis for audit. This would require in most instances that each record in a unit system be arranged in appropriate sequence, whether chronological or numerical, and fully integrated into the over-all recordkeeping system for purposes of posting to general ledger accounts.

Therefore, the type of recordkeeping system you propose may be used for purposes of compliance with rule G-8 if (1) the records show, in a clear and accurate fashion, all of the information that is required to be shown, and (2) the records are maintained in a form that provides an adequate basis for audit by bank employees or examiners. It is my understanding that recordkeeping systems similar to that which you propose have been inspected by banking regulatory authorities during examinations of other bank municipal securities dealer departments, and have been found to meet these two criteria.

In your letter you indicate that the confirmation form used by your bank "contains all the information needed" to meet the recordkeeping requirement. Our review of your form indicates that this is not the case. The rule requires the record of original entry to contain

an itemized daily record of all purchases and sales of municipal securities, all receipts and deliveries of municipal securities (including bond or note numbers and, if the securities are in registered form, an indication to such effect), all receipts and disbursements of cash with respect to transactions in municipal securities, [and] all other debits and credits pertaining to transactions in municipal securities ... The records of original entry shall show the name or other designation of the account for which each such transaction was effected (whether effected for the account of such municipal securities broker or municipal securities dealer, the account of a customer, or otherwise), the description of the securities, the aggregate par value of the securities, the dollar price or yield and aggregate purchase or sale price of the securities, accrued interest, the trade date, and the name or other designation of the person from whom purchased or received or to whom sold or delivered.

The confirmation form you enclosed does not appear to provide a space for notation of "the name or other designation of the account for which [the] transaction was effected." This information is distinct from "the name or other designation of the person from whom purchased ... or to whom sold ..." (which would appear in the "name and address" portion of your form) and requires an indication of the account, whether it be the bank's trading inventory or portfolio, or the contra-principal on an agency transaction, in which the securities were held prior to a sale or will be held subsequent to a purchase. For example, if the bank sells $100,000 par value securities from its trading account to "Mr. Smith", the record of original entry would reflect that this transaction was effected for the account of the [bank's] trading account. A subsequent sale of these securities effected as agent for the customer would be reflected on the record of original entry as for the account of "Mr. Smith."

I note also that, in addition to a record of purchase and sale transactions (which could easily be maintained in the form of duplicate copies of confirmations), the record of original entry must contain information about transactions cleared on the date of the record as well as cash disbursements and receipts. Your letter does not indicate how your bank would comply with these latter requirements. As you may be aware, other banks using unit recordkeeping systems use additional copies of the confirmation as "clearance" records, with information on receipts and deliveries of securities and movements of cash noted on these copies. These "clearance" records are then aggregated with the purchase and sale records to form a complete record of original entry.

In summary, the method of maintaining a record of original entry which your bank proposes can be used to comply with the requirements of the rule. Certain aspects of the information required by the rule are not contained on the document you propose to use, however, and provision would have to be made for inclusion of these items in the records before the system you propose would be satisfactory for compliance with the rule's requirements. MSRB interpretation of November 24, 1981.

Syndicate records. I am writing in response to your letters of October 2 and October 19, 1981 concerning a particular recordkeeping arrangement used by an NASD-member firm in connection with its underwriting activities. In your letters you indicate that the firm conducts its underwriting activities from its main office and four regional branch office "commitment centers," with the committing branch offices authorized to commit to underwriting new issues on the firm's behalf. You inquire whether the firm is in compliance with the Board's recordkeeping and record retention rules if it maintains only part of the records on its underwritings in the main office. Correspondence from a field examiner attached to your letters indicates that the committing branch office originating a particular underwriting maintains all of the records with respect to such underwriting. The majority of these records are the original copies; the copies of confirmations, good faith checks, and syndicate settlement checks maintained at the committing branch office are duplicates of original records maintained at the firm's main office.

Rule G-9(d) requires that books and records shall be maintained and preserved in an easily accessible place for two years and shall be available for ready inspection by the proper regulatory authorities. The fact that the member firm does not maintain all records with respect to all of its underwriting activities in a single location does not contravene these provisions of Board rule G-9. Rule G-9 would permit the arrangement described in your letters, whereby a firm maintains copies of all of the records pertaining to a particular underwriting in the office responsible for that underwriting.

Thank you for your prompt assistance in providing the additional information we needed in order to respond to your inquiry. MSRB interpretation of October 21, 1981.

Settlement of syndicate accounts. This is in response to your letter of July 28, 1981, suggesting that requirements analogous to those placed on syndicate managers in rule G-12(j) be imposed on syndicate members who must remit their share of syndicate losses to their syndicate managers. You state that syndicate members frequently do not remit their losses to the manager in a timely fashion and that such a requirement would establish an "equitable balance between the interests of syndicate members and syndicate managers."

Rule G-12(j) provides:

Final settlement of a syndicate or similar account formed for the purchase of securities shall be made within 60 days following the date all securities have been delivered by the syndicate or account manager to the syndicate or account members.

The rule is not expressly limited to money payments by syndicate managers, but broadly requires that final settlement shall be made within 60 days following the date the manager delivers the securities to the syndicate members. Thus, the rule requires syndicate members to remit their share of syndicate losses to the syndicate manager within the 60-day period set forth in the rule. Since a syndicate member cannot remit his share of losses until he is apprised by the syndicate manager of the amount of his share, a member should remit his share of the losses to the manager within a reasonable period of time after receiving the syndicate accounting required by rule G-11(h). MSRB interpretation of September 28, 1981.

Certain amendments to Board rule G-15 on customer confirmations became effective on December 1, 1980. Among other matters, these amendments require that customer confirmations of transactions effected on the basis of dollar price, including confirmations of purchases from customers, set forth certain yield information concerning the transaction. Confirmations of dollar price transactions in non-callable securities, or in callable securities traded at prices below par, must set forth the yield to maturity resulting from the dollar price. Confirmations of dollar price transactions in securities which have been called or prerefunded must show the yield to the maturity date established by the call or prerefunding. Confirmations of transactions in callable securities traded at dollar prices in excess of par are exempt from yield disclosure requirements until October 1, 1981; after that date such confirmations must show the lowest of the yield to premium call, yield to par option, or yield to maturity resulting from such dollar price.[1]

Since the effective date of these amendments, the Board has received several inquiries as to whether all confirmations of purchases from customers, including purchases effected at a price derived from a yield price less a spread or concession, must show the yield resulting from the actual unit dollar price of the transaction.

The Board is of the view that all confirmations of purchasers from customers (except for purchases at par) must set forth the net or effective yield resulting from the actual unit dollar price of the transaction. The yield disclosure on confirmations of purchases from customers is intended to provide customers with a means of assessing the merits of alternative investment strategies (such as different possible reinvestment transactions) and the merits of the particular transaction being confirmed. The Board believes that the disclosure of the net or effective yield (i.e., that derived from the actual unit dollar price of the transaction) best serves these purposes.

[1] Confirmations of transactions effected at a dollar price of par ("100") continue to be exempt from any yield disclosure requirements.

The Municipal Securities Rulemaking Board has recently received inquiries concerning the provisions of rule G-12(h)(iii) regarding close-out procedures in the event of a firm's liquidation. The Board has been advised that a SIPC trustee has been appointed in connection with the liquidation of a general securities firm with which certain municipal securities brokers and dealers have uncompleted transactions in municipal securities, and that the New York Stock Exchange and the National Association of Securities Dealers, Inc., have notified their respective members that they may institute "immediate" close-out procedures on open transactions with the firm in liquidation. In accordance with a previous understanding between the Board and the NASD, the NASD has also advised municipal securities brokers and dealers that, pursuant to rule G-12(h)(iii), they may execute "immediate" close-outs on open transactions in municipal securities.

Rule G-12(h)(iii) provides:

Nothing herein contained shall be construed to prevent brokers, dealers or municipal securities dealers from closing out transactions as directed by a ruling of a national securities exchange, a registered securities by a ruling of a national securities exchange, a registered securities association or an appropriate regulatory agency issued in connection with the liquidation of a broker, dealer or municipal securities dealer.

Therefore, in the event that a national securities exchange or registered securities association makes a ruling that close-outs may be effected "immediately" on transactions with a firm in liquidation, municipal securities brokers and dealers may take such action. In these circumstances, a purchasing dealer seeking to execute such a close-out need not follow the procedures for initiation of a close-out procedure, nor is the dealer required to wait the prescribed time periods prior to executing the close-out notice. Similarly, a selling dealer need not attempt delivery prior to using the procedure for close-outs by sellers. In both cases dealers may proceed to execute the close-out immediately--that is, the purchasing dealer may immediately "buy in" the securities in question for the account and liability of the firm in liquidation (or utilize one of the other options available for execution of the close-out), and a selling dealer may immediately "sell out" the subject securities. Notification of the execution of the close-out should be provided in accordance with the normal procedure.

Dealers executing close-outs in these circumstances should advise the trustee of the firm in liquidation of their actions in closing out these transactions. If proceeds from the close-out execution are due to the firm in liquidation, they should be remitted to the trustee. Requests for payment of amounts due on close-out executions should also be sent to the trustee; the trustee will resolve these claims in the course of the liquidation.

The Board also notes that dealers having open transactions with a firm in liquidation may, but are not required to, execute "immediate" close-outs in these circumstances. If individual dealers wish to attempt some other means of completing these transactions, such as seeking to complete a transaction with the liquidated firm's other contra-side, they may do so.

Blanket consent. This is in response to your April 7, 1981, letter asking whether, consistent with rule G-23(d)(ii), a municipal securities dealer acting as a financial advisor to an issuer may obtain from the issuer prospective approval to participate in any and all new issues the issuer may sell on a competitive basis at some future date.

Rule G-23(d)(ii) provides that a municipal securities dealer which is acting as a financial advisor may not acquire or participate in the distribution of a new issue unless

if such issue is to be sold by the issuer at competitive bid the issuer has consented in writing to such acquisition or participation.

The rule is designed to minimize the "prima facie" conflict of interest that exists when a municipal securities professional acts as both financial advisor and underwriter with respect to the same issue. Rule G-23(d) speaks in terms of "a new issue" and the implication is that consent should be obtained on an issue-by-issue basis.

The Board believes that such a reading of the rule is consistent with the rule’s rationale—that an issuer should have an opportunity to consider whether, under the particular circumstances of an offering, the financial advisor’s potential conflict of interest is sufficient to warrant not consenting to its participation in the sale. The Board has concluded that an unrestricted consent would not afford an issuer such an opportunity and, accordingly, has determined that such a consent would not satisfy the requirements of rule G-23(d)(ii). MSRB interpretation of July 30, 1981.

Disclosure of pricing: accrued interest. This is in response to your request by telephone for an interpretation of Board rule G-15 which requires that a municipal securities dealer provide to his customer, at or prior to completion of a transaction, a written confirmation containing certain general information including the amount of accrued interest. Specifically, you have asked whether the rule permits a municipal securities dealer, in using one confirmation to confirm transactions in several different municipal securities of one issuer, to disclose the amount of accrued interest for the bonds as an aggregate figure. You have advised us that, typically, such a confirmation will show other items of information required by the rule such as yield and dollar price, separately for each issue.

Rule G-15 was adopted by the Board to assure that confirmations of municipal securities transactions provide investors with certain fundamental information concerning transactions. The Board believes that disclosure of accrued interest as an aggregate sum does not permit investors to determine easily from the confirmation the amount of accrued interest attributable to each security purchased, but rather necessitates the performance of several computations. It, thus, would be more difficult for an investor to determine whether the information concerning accrued interest is correct if the information is presented in aggregate form.

Such a result is inconsistent with the purposes of rule G-15. Accordingly, the Board has concluded that, under rule G-15, the amount of accrued interest must be shown for each issue of bonds to which the customer confirmation relates. MSRB interpretation of July 27, 1981.

Letters of credit. This is in response to your April 9, 1981, letter asking whether Board rule G-22, regarding control relationships, and G-23, regarding financial advisory agreements, would apply if a bank’s issuance of a letter of credit were contingent upon its being named underwriter or manager for the issue, or if a bank issuing a letter of credit retained authority to require an issuer, in effect, to call the securities.

Rule G-22 provides that

a control relationship with respect to a municipal security shall be deemed to exist if a broker, dealer, or municipal securities dealer (or a bank or other person of which the broker, dealer, or municipal securities dealer is a department or division) controls, is controlled by, or is under common control with the issuer of the security or a person other than the issuer who is obligated, directly or indirectly, with respect to debt service on the security.

The existence of a control relationship is a question of fact to be determined from the entire situation. Most recently, the Securities and Exchange Commission suggested that, for purposes of the Regulatory Flexibility Act, a registered broker-dealer would be deemed to be controlled by a person or entity who, among other things, has the ability to direct or cause the direction of management or the policies of the broker-dealer. Based upon the above, it is questionable whether a bank that conditions the issuance of a letter of credit upon being named an underwriter or upon a tie-in deposit arrangement should be deemed to control the issuer. Similarly, it does not appear that a bank that retains discretion under a letter of credit to cause the trustee to call the whole issue has a control relationship with the issuer.

You also ask whether under Board rule G-23 a financial advisory relationship is created if a bank conditions the issuance of a letter of credit upon being named an underwriter or upon obtaining a tie-in deposit arrangement. Under rule G-23, a financial advisory relationship is deemed to exist when a municipal securities professional provides, or enters into an agreement to provide, financial advisory services to, or on behalf of, an issuer with respect to a new issue of securities regarding such matters as the structure, timing or terms of the issue, in return for compensation or for the expectation of compensation. It does not appear that rule G-23 would apply in your example since the bank is not providing financial advisory or consulting services with respect to the structure, timing or other substantive terms of the issue. MSRB interpretation of July 27, 1981.

Yield disclosures. This letter is in response to your inquiry of April 14, 1981 concerning the application of the yield disclosure requirements of Board rule G-15 to a particular transaction effected by your firm. As I indicated to you in my letter of May 9, 1981, the Board was unable to consider your inquiry at its April meeting, and, accordingly, deferred the matter to its July meeting. At that meeting the Board took up your question and authorized my sending you this answer to your inquiry. While we realize that the matter is now moot with respect to the particular transaction about which you were writing, we assume that this question may arise again with respect to future transactions.

In your April 14 letter you inquired concerning a recent sale of new issue securities to a customer. You indicated that the firm had sold all twenty maturities of the new issue to a customer. This sale had been effected at the same premium dollar price for all maturities, and the customer had been advised of the average life of the issue and the yield to the average life. You inquired whether the final money confirmation of this sale should show "one dollar price ... and one yield to the average life," or the dollar price and each of the yields to the twenty different maturities of the issue.[1]

Rule G-15(a)(viii)(B)[*] requires that customer confirmations of transactions in noncallable securities effected on the basis of a dollar price set forth the dollar price and the resulting yield to maturity. In the situation you describe, it would be difficult to conclude that the rule would permit the confirmation to show only a "yield to the average life," omitting any yield to maturity information. Although the "yield to the average life" would provide the customer with some indication of the return on his or her investment, the customer could easily make the mistake of assuming that this would be the yield on all of the securities, and not realize that it is the result of differing yields, with lower yields on the short-term maturities and higher yields on the long-term ones. The Board believes that disclosure of each of the yields to the twenty maturities of the issue would provide the customer with much more accurate information concerning the return on his or her investments. Accordingly, the Board concludes that, in a transaction of this type, the final money confirmation(s) should set forth each of the yields. MSRB interpretation of July 27, 1981.

[1] Although you did not indicate this, we assume that all of these securities are noncallable.

[*] [Currently codified at rule G-15(a)(i)(A)(5)(b)]

Contents of advertisement: put options. Your letter dated June 15, 1981, has been referred to me for response. In your letter you mention our previous conversation regarding the appropriate definition of "put bonds", which definition your firm would like to use in advertisements offering such securities for sale. You request confirmation of the Board’s views concerning the aspects of the "put option" feature on these securities that would be appropriate to cover in such a definition.

The type of "put option" issue with which the Board is familiar, and which we discussed, has a provision in the indenture which permits the holder of the securities to tender or "put" the securities back to the issuer on specified dates at par. This feature typically commences six (or more) years after the date of issuance, is exercisable only once annually (on an interest payment date), and is exercisable only upon the provision of irrevocable prior notice to the issuer (typically three or more months before the exercise date).

If I remember our conversation correctly, you indicated that the firm wished to describe a security of this type in an advertisement as having a "put option" feature, available once annually, permitting redemption of the securities at par. I suggested that, while the items of information you detailed were appropriate, it might also be advisable to mention in the advertisement the "prior notice" requirement under the option exercise procedure. It would also be helpful to make clear the irrevocable nature of such notice.

If the content of your definition of the "put option" feature goes beyond the items we discussed (for example, by indicating that the "put option" is secured by a bank letter of credit, additional disclosures might also be appropriate. MSRB interpretation of July 13, 1981.

The Board continues to be concerned about industry compliance with certain of the requirements of Board rules G-11, "Sales of New Issue Municipal Securities During the Underwriting Period," and G-12, "Uniform Practice," with respect to the settlement of syndicate accounts. Board rule G-11(g)[*] requires, among other matters, that syndicate managers provide to members at the time of settlement of a syndicate account a detailed statement of the expenses incurred by the syndicate.[1] Rule G-12(j) requires that settlement of a syndicate account and distribution of any profit due to members be made within 60 days of delivery of the syndicate's securities. In addition, rule G-12(i) requires that good faith deposits be returned within two business days of settlement with an issuer, and rule G-12(k) requires that sales credits designated by a customer be distributed within 30 days following delivery of the securities [by the issuer to the syndicate]. 

The Board has from time to time received complaints from industry members concerning certain managers' non-compliance with these requirements. These persons allege that certain managers unduly delay the sending of syndicate settlement checks and other disbursements, and furnish settlement statements that provide little or no detail about the nature of the expenses incurred by the syndicate. These persons have also, on occasion, furnished to the Board copies of syndicate statements which illustrate clearly these managers' failure to provide the requisite information and to meet the time requirement for these disbursements. The Board has referred each of these complaints to the appropriate regulatory agency for investigation and appropriate action.

The Board wishes to emphasize strongly the need for compliance with these provisions. The Board continues to be of the view that the time periods and other requirements of the rules, which were arrived at after considerable deliberation, are fair and reasonable. The Board believes that failure to comply with these provisions is inexcusable. The Board does not accept the rationale offered by some, that the difficulties in obtaining bills for syndicate expenses justify these undue delays; the Board believes that it is incumbent upon managers to assure that such bills are received and processed in timely fashion, to permit compliance with the rule. The Board strongly urges syndicate managers who have failed to comply with these requirements to bring their practices into compliance with the requirements of the rules.

The Board also is communicating these views to the enforcement organizations and stressing its concern with respect to compliance with these provisions. It strongly urges all syndicate members to notify the appropriate enforcement organization of any violations by managers of these provisions.

[1] The rule contemplates that the statement will set forth a detailed breakdown of expenses into specified categories, such as advertising, printing, legal, computer services, packaging and handling, etc. The statement may include an item for miscellaneous expenses, provided that the amount shown under such an item is not disproportionately large in relation to other items of expense shown and includes only items of expense which cannot be easily categorized elsewhere in the statement.

[*] [Currently codified at rule G-11(h)]

NOTE: Revised to reflect subsequent amendments.

"Finder" of potential issuers. This responds to your letter of May 14, 1981 requesting our advice concerning the application of the qualification provisions of rule G-3 to a person employed by a municipal securities broker or dealer whose activities are limited solely to acting as a "finder" of potential issuers. Based upon the facts contained in your letter, and assuming that such person is not providing financial advisory or consultant services for issuers, it would appear that he or she is not performing functions, which are enumerated in rule G-3(a), the performance of which would require qualification as a municipal securities principal or a municipal securities representative. MSRB interpretation of June 24, 1981.

Registered municipal securities dealer. Your letter dated February 11, 1981 has been referred to me for response.

In your letter you state that [the firm] "has had no transactions in municipal securities since a trade on September 13, 1979." You note that according to rule A-14 of the Board relating to annual fees, a fee . . . is payable for each fiscal year in which the municipal securities broker or municipal securities dealer conducts business. You conclude that "[s]ince we did not conduct any business during the last fiscal year (10/1/79-9/30/80) it would appear that [the firm] should be entitled to a refund" for the fiscal year ending October, 1980, and should not be liable for payment of the annual fee for the fiscal year ending October, 1981.

The purpose of the annual fee imposed by rule A-14 is to defray the costs of the Board's communications with those firms which are qualified to do a municipal securities business. There is no threshold level of municipal securities business which triggers liability for payment of the annual fee. Rather, the fee is imposed on all brokers and dealers who are registered as municipal securities brokers with the S.E.C. Since [the firm] is registered as a municipal securities dealer, it is liable for payment of the annual fee imposed by rule A-14 for the fiscal year ending October 1981.

If your firm no longer intends to do a municipal securities business, rule A-15 of the Board provides a procedure for withdrawal from registration as a municipal securities dealer. Withdrawal from registration would, of course, enable your firm to avoid paying annual fees to the Board. However, at such time as your firm resumes any municipal securities business, it would be required to pay the initial and annual fees imposed by rules A-12 and A-14, respectively. MSRB interpretation of June 11, 1981

Board rule G-3 sets forth standards of qualifications for municipal securities brokers and municipal securities dealers and their associated persons, including examination requirements for municipal securities principals, municipal securities financial and operations principals, municipal securities sales principals, and municipal securities representatives.

In order to assure that its examinations constitute valid tests of the qualifications of persons who take them, the Board has instituted various procedures, in the question writing as well as the administration phases, which are designed to preserve the confidentiality of the examinations. In addition, on one occasion the Board found it necessary to take legal action, alleging copyright violations, against a securities training school which had used in its training material questions and answers that appeared to have been taken from questions contained in Board qualification examinations.

The Board wishes to point out that the practice of "debriefing" persons who have taken a municipal securities qualifications examination (i.e. requesting or encouraging such persons to reveal the contents of the examinations) may not only give rise to an infringement of the Board's copyright but would, if engaged in by members of the municipal securities industry, constitute a violation of the Board's rules. In this regard, rule G-3(g) [*] provides that no person associated with a municipal securities broker or municipal securities dealer shall (i) disclose to any person any question on any municipal securities qualification examination or the answers to any such questions, (ii) engage in any activity inconsistent with the confidential nature of any such qualification examination or its purpose as a test of the qualifications of persons taking such examination, or (iii) knowingly sign a false certification concerning any such qualification examination.

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

Confirmation disclosure: put option bonds. This will acknowledge receipt of your letter of March 17, 1981, with respect to "put option" or "tender option" features on certain new issues of municipal securities. In your letter you note that an increasing number of issues with "put option" features are being brought to market, and you inquire concerning the application of the Board’s rules to these securities.

The issues of this type with which we are familiar have a "put option" or "tender option" feature permitting the holder of securities of an issue to sell the securities back to the trustee of the issue at par. The "put" or "tender option" privilege normally becomes available a stated number of years (e.g., six years) after issuance, and is available on stated dates thereafter (e.g., once annually, on an interest payment date). The holder of the securities must usually give several months prior notice to the trustee of his intention to exercise the "put option."

Most Board rules will, of course, apply to "put option" issues as they would to any other municipal security. As you recognize in your letter, the only requirements raising interpretive questions appear to be the requirements of rules G-12 and G-15 concerning confirmations. These present two interpretive issues: (1) does the existence of the "put option" have to be disclosed and if so, how, and (2) should the "put option" be used in the computation of yield and dollar price.

Both rules require confirmations to set forth a

description of the securities, including ... if the securities are ... subject to redemption prior to maturity ..., an indication to such effect

Confirmations of transactions in "put option" securities would therefore have to indicate the existence of the "put option," much as confirmations concerning callable securities must indicate the existence of the call feature. The confirmation need not set forth the specific details of the "put option" feature.

The requirements of the rules differ with respect to disclosure of yields and dollar prices. Rule G-12, which governs inter-dealer confirmations, requires such confirmations to set forth the

yield at which transaction was effected and resulting dollar price, except in the case of securities which are traded on the basis of dollar price or securities sold at par, in which event only dollar price need be shown (in cases in which securities are priced to premium call or to par option, this must be stated and the call or option date and price used in the calculation must be shown, and where a transaction is effected on a yield basis, the dollar price shall be calculated to the lowest of price to premium call, price to par option, or price to maturity)

Rule G-15 requires customer confirmations to contain yield and dollar price as follows:

(A) for transactions effected on a yield basis, the yield at which transaction was effected and the resulting dollar price shall be shown. Such dollar price shall be calculated to the lowest of price to premium call, price to par option, or price to maturity. In cases in which the dollar price is calculated to premium call or par option, this must be stated, and the call or option date and price used in the calculation must be shown.

(B) for transactions effected on the basis of dollar price, the dollar price at which transaction was effected, and the lowest of the resulting yield to premium call, yield to par option, or yield to maturity shall be shown; provided, however, that yield information for transactions in callable securities effected at a dollar price in excess of par, other than transactions in securities which have been called or prerefunded, is not required to be shown until October 1, 1981.

(C) for transactions at par, the dollar price shall be shown[.]

Therefore, with respect to transactions in "put option" securities effected on the basis of dollar price, rule G-12 requires that confirmations simply set forth the dollar price. Rule G-15 requires that confirmations of such transactions set forth the dollar price and the yield to maturity resulting from such dollar price. With respect to transactions effected on the basis of yield, both rules require that the confirmations set forth the yield at which the transaction was effected and the resulting dollar price. Unless the parties otherwise agree, the yield should be computed to the maturity date when deriving the dollar price. If the parties explicitly agree that the transaction is effected at a yield to the "put option" date, then such yield may be shown on the confirmation, together with a statement that it is a "yield to the [date] put option," and an indication of the date the option first becomes available to the holder.

Since the exercise of the "put option" is at the discretion of the holder of the securities, and not, as in the case of a call feature, at the discretion of someone other than the holder, the Board concludes that the presentation of a yield to maturity on the confirmation, and the computation of yield prices to the maturity date, is appropriate, and accords with the goal of advising the purchaser of the minimum assured yield on the transaction. The Board further believes that the ability of the two parties to a transaction to agree to price the transaction to the "put option" date, should they so desire, provides sufficient additional flexibility in applying the rules to transactions in "put option" securities. MSRB interpretation of April 24, 1981.

Agency transaction: pricing. This will acknowledge receipt of your letter of March 17, 1981 concerning the appropriate method of disclosing remuneration on agency transactions. In your letter you indicate that the bank wishes to use one of the following two legends, as appropriate, in disclosing such remuneration:

1) "Commission: Agency Fee $ ... per $1,000 of par value included in/deducted from net price to customer;" or

2) "Commission: Concession received from broker/dealer $ ... per $1,000 of par value."

You inquire whether these legends, indicating the amount of remuneration on a "dollars per bond" basis, are satisfactory for purposes of rule G-15.

Rule G-15(b)[*] requires that

[i]f the broker, dealer or municipal securities dealer is effecting a transaction as agent for the customer or as agent for both the customer and another person, the confirmation shall set forth ... the source and amount of any commission or other remuneration received or to be received by the broker, dealer or municipal securities dealer in connection with the transaction.

As you are aware, the Board has previously interpreted this provision to require that an aggregate dollar amount be shown. The Board adopted this position due to its belief that many customers would find it difficult to interpret the meaning of a statement disclosing the remuneration as a percentage of par value or a unit profit per bond, or to relate this information to the "total dollar amount of [the] transaction" required to be shown under G-15(a)(xi)[†].

Accordingly, we are unable to conclude that disclosure of the remuneration in the manner in which you suggest would be satisfactory for purposes of the rule. The total dollar amount of the remuneration should be set forth on the confirmation. MSRB interpretation of April 23, 1981.

[*] [Currently codified at rule G-15(a)(i)(A)(1)(e)]

[†] [Currently codified at rule G-15(a)(i)(A)(6)(a)]

Indemnity agreement. This is in response to your letter dated March 18, 1981, regarding your client's (the "Bank") proposal to sell participations in industrial development bonds to one or more unit investment trusts or closed-end investment company (the "trust"), which bonds would be insured against default by the American Municipal Bond Assurance Corporation (AMBAC). Specifically you ask whether an agreement by the Bank to indemnify AMBAC to the extent of 25 percent of any losses suffered in the event of default would violate Board rule G-25(b) which generally prohibits a municipal securities dealer from guaranteeing a customer against loss in municipal securities transactions.

As you note in your letter, the Board has taken the position that a municipal securities bank dealer issuing a letter of credit which is publicly disclosed and for the benefit of all holders of the security would not violate the provisions of rule G-25(b). You state that the Bank’s agreement to indemnify AMBAC would be disclosed to and, at least indirectly would be for the benefit, of all investors.

Based upon the facts contained in your letter, it appears that the proposed agreement would not be prohibited by rule G-25(b). MSRB interpretation of March 26, 1981.