Rule G-38, on solicitation of municipal securities business, prohibits any broker, dealer or municipal securities dealer ("dealer") from making a direct or indirect payment to any person who is not an affiliated person[1] of the dealer for a solicitation of municipal securities business.[2] The current version of Rule G-38 replaced a prior version of the rule, relating to the use of consultants, effective August 29, 2005.[3]  Thus, with one narrowly defined exception discussed below, since August 29, 2005, dealers have been prohibited from making any payments to persons not affiliated with the dealer (including but not limited to any former consultant under the prior version of Rule G-38) for solicitations of municipal securities business.

A dealer is permitted to make a payment to a former consultant who is not an affiliated person of the dealer for a solicitation of municipal securities business if the payment is made solely for solicitation activities undertaken by such former consultant on or prior to August 29, 2005. A transitional payment is permitted only if (A) the former consultant has not solicited municipal securities business from any issuer on behalf of the dealer after August 29, 2005 and (B) the dealer submits Form G-38t to the MSRB for each calendar quarter during which such payment to the consultant is made or remains pending. The dealer must disclose on its initial and all subsequent Form G-38t submissions each item of municipal securities business for which a transitional payment remains pending and the amount of such pending payment, together with other required information, until such quarter in which the payment is finally made.[4]

Dealers are required to submit Form G-38t to the MSRB for a calendar quarter only if a transitional payment to a former consultant is paid during such quarter or remains pending (i.e., payable at a future date) as of such quarter. If no such payments are made or remain pending in any calendar quarter, Form G-38t is not required to be submitted and dealers should not make such submissions. Dealers should note that pending payments must continuously be disclosed on Form G-38t for every calendar quarter, beginning with the quarter ended on September 30, 2005 and each quarter thereafter, until paid. If a pending payment has not been disclosed on Form G-38t for any one or more prior calendar quarters, such payment may no longer be made under the transitional payment provision of Rule G-38 and the dealer would violate Rule G-38 if it subsequently makes such a payment.

The MSRB wishes to remind dealers that Rule G-38 strictly prohibits all payments by a dealer to a non-affiliated person for solicitation activities undertaken after August 29, 2005, even if such solicitation activities are undertaken pursuant to a contract entered into by the dealer with the non-affiliated person on or prior to August 29, 2005. In effect, all paid solicitation activities by non-affiliated persons on behalf of dealers were required to cease as of August 30, 2005, regardless of whether such activities arise from earlier contractual commitments, since any payments by dealers for such activities would violate Rule G-38. Further, as noted above, one of the conditions for permitting transitional payments for solicitations occurring on or prior to August 29, 2005 is that the former consultant does not solicit municipal securities business from any issuer on behalf of the dealer at any time after August 29, 2005. Thus, if a dealer has a pending payment to a former consultant for a solicitation made to an issuer on or prior to August 29, 2005, a subsequent solicitation on behalf of the dealer by such former consultant to the same or a different issuer after August 29, 2005 would disqualify such pending payment from being treated as a valid transitional payment under Rule G-38.  

Rule G-21, on advertising, establishes specific requirements for advertisements by brokers, dealers and municipal securities dealers (“dealers”) of municipal fund securities, including but not limited to advertisements for 529 college savings plans (“529 plans”).  This notice sets forth interpretive guidance under Rule G-21 with respect to time-limited broadcast advertisements, blind advertisements, and annual reports or other similar information required to be distributed under state mandates.

General Disclosures in Time-Limited Broadcast Advertisements

Rule G-21(e)(i)(A) requires certain basic disclosures to be provided in product advertisements for municipal fund securities. These disclosures are not legends requiring the inclusion of specific language. Rather, these disclosure requirements may be complied with if the substance of such information is effectively conveyed, regardless of the specific language used in the advertisement. In general, the context in which the information is provided is an important factor in determining whether the information is effectively conveyed.

These required disclosures may present challenges in  the context of broadcast advertisements, such as traditional television or radio commercials with 30-second run-times or public service announcements with shorter run-times.  In the context of time-limited  broadcast  advertisements,  dealers  should  provide  such disclosures in a manner that appropriately balances the intended message with the required disclosures. Given the unique nature of broadcast  advertisements, where the oral presentation of more information can often result in a decreased likelihood that  the central message of such information will be understood and retained, somewhat abbreviated forms of the required  disclosures may be appropriate for such time-limited  broadcast advertisements, particularly if the disclosures are made with close attention paid to ensuring that they are presented with equal prominence to the remainder of the message.

Thus, for example, in a time-limited broadcast  advertisement for a non-money market 529 plan, the following language, spoken in a manner consistent with the remaining oral presentation of information, generally would satisfy the disclosure requirements of Rule G-21(e)(i)(A): “To learn about [529 plan name], its investment objectives, risks and costs, read the official statement available from [source]. Check with your home state to learn if it offers tax or other benefits for investing in its own 529 plan.”  Further, in a time-limited television advertisement, the source for the official statement, together with a contact telephone number or web address, generally could be displayed on screen while other portions of the disclosures are spoken. This example is intended to be illustrative and is not intended to be exclusive or to necessarily establish a baseline for disclosure.

Blind Advertisements

Under Rule G-21(e)(i)(B)(2), certain product advertisements for municipal fund securities that promote an issuer and its public purpose without promoting specific municipal fund securities or identifying a dealer or its affiliates may omit the general disclosures otherwise required under Rule G-21(e)(i)(A). Among other things, such a blind advertisement may include contact information for the issuer or an agent of the issuer to obtain an official statement or other information, provided that if such issuer’s agent is a dealer or dealer affiliate, no orders may be accepted through such source unless initiated by the customer. Although the contact information may direct a potential customer to a dealer or its affiliate acting as agent of the issuer, the face of the advertisement may not identify such dealer or affiliate.

For example, a blind advertisement may say “call 1-800-xxx-xxxx for more information” or “go to www.[state-name]-529plan.com for more information” but may not say “call [dealer name] at 1-800-xxx-xxxx for more information” or “go to www.[dealer-name]-529plan.com for more information.” This provision does not preclude the person who answers a phone inquiry, or the website to which the URL links, from identifying the dealer or its affiliate, so long as such dealer or affiliate is clearly disclosed to be acting on behalf of the issuer identified in the advertisement.

If a potential customer initiates an order through the source identified in the advertisement, a distinct barrier between the providing of information and the seeking of orders must be maintained to qualify as a blind advertisement. For example, solely for purposes of Rule G-21(e)(i)(B)(2), a dealer may establish that the customer initiated the order by requiring, in the case of a telephone inquiry, that the customer be transferred from the initial dealer contact person to a different person before the customer provides any information used in connection with an order or, in the case of a web-based inquiry, that the customer navigate from the initial webpage referred to in the advertisement to another page on the same or different web site before entering any information used in connection with an order.[1]  Of course, the dealer must be mindful of its obligation under Rule G-17, on fair practice, to provide to the customer, at or prior to the time of trade, all material facts about the transaction known by the dealer as well as material facts about the security that are reasonably accessible to the market, regardless of whether the transaction was recommended or whether an order may be characterized as unsolicited.[2]  In addition, if the transaction is recommended, the dealer must fulfill its obligations with respect to suitability under Rule G-19, on suitability of recommendations and transactions.[3]

Required Annual Reports Excluded from Definition of Advertisement

In some cases, a dealer may be required, by state law or the rules and regulations adopted by the state or an instrumentality thereof governing a particular 529 plan or other municipal fund security program, to prepare or distribute an annual financial report or other similar information regarding such plan or program. So long as a dealer provides any such required report or information with respect to a 529 plan or other municipal fund securities program solely in the manner required by such state law or rules and regulations, such report or information will not be treated as an advertisement for purposes of Rule G-21.[4] However, the dealer would remain subject to Rule G-17, which requires that the dealer deal fairly with all persons, prohibits the dealer from engaging in any deceptive, dishonest or unfair practice and requires the dealer to provide to its customer, at or prior to the time of trade, all material facts about a transaction known by the dealer or that are reasonably accessible to the market. In addition, if such information is used in any manner beyond what is narrowly required by such law, rules or regulation, such use of the information would become subject to Rule G-21 as an advertisement.[5]

[2] See Rule G-17 Interpretation – Interpretive Notice Regarding Rule G-17, on Disclosure of Material Facts, March 20, 2002, reprinted in MSRB Rule Book.

[3] See Rule G-17 Interpretation – Interpretation on Customer Protection Obligations Relating to the Marketing of 529 College Savings Plans, August 7, 2006, reprinted in MSRB Rule Book.

[4] If such information is distributed through the official statement, then it would not be considered an advertisement by virtue of the exclusion of official statements from the definition of “advertisement” in Rule G-21(a)(i).

[5] This guidance is consistent with similar guidance provided by NASD with respect to its advertising rule, Rule 2210, as applied to certain performance information and hypothetical illustrations required by state laws to be provided by dealers in connection with retirement investments and variable annuity contracts. See letter dated November 29, 2004, to Therese Squillacote, Chief Compliance Officer, ING Financial Advisers,  LLC, from Philip A. Shaikun, Assistant General Counsel, NASD; letter dated September 30, 2002, to Sally Krawczyk, Esq., Sutherland, Asbill & Brennan, LLP, from Mr. Shaikun; and letter dated February 5, 1999, to W. Thomas Conner, Vice President, Regulatory Affairs, National Association of Variable  Annuities, from Robert J. Smith, Office of General Counsel,  NASD Regulation, Inc.

The Municipal Securities Rulemaking Board ("MSRB") is publishing this notice to remind brokers, dealers and municipal securities dealers ("dealers") of their customer protection obligations—specifically the application of Rule G-17, on fair dealing, and Rule G-19, on suitability—in connection with their municipal securities sales activities, including but not limited to situations in which dealers offer sales incentives.[1] 

Basic Customer Protection Obligation

At the core of the MSRB's customer protection rules is Rule G-17 which provides that, in the conduct of its municipal securities activities, each dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest or unfair practice.  The rule encompasses two basic principles: an anti-fraud prohibition similar to the standard set forth in Rule 10b-5 adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, and a general duty to deal fairly even in the absence of fraud.  All activities of dealers must be viewed in light of these basic principles, regardless of whether other MSRB rules establish specific requirements applicable to such activities.

Disclosure

The MSRB has interpreted Rule G-17 to require a dealer, in connection with any transaction in municipal securities, to disclose to its customer, at or prior to the sale of the securities to the customer, all material facts about the transaction known by the dealer, as well as material facts about the security that are reasonably accessible to the market.[2]  This duty applies to any transaction in a municipal security regardless of whether the dealer has recommended the transaction.  Dealers should make certain that information they provide to their customers, whether provided under an affirmative disclosure obligation imposed by MSRB rules or in response to questions from customers, is correct and not misleading.  Further, dealers are reminded that disclosures made to customers as required under MSRB rules do not relieve dealers of their suitability obligations—including the obligation to consider the customer's financial status, tax status and investment objectives—if they have recommended transactions in municipal securities.

Suitability

Under Rule G-19, a dealer that recommends to a customer a transaction in a municipal security must have reasonable grounds for believing that the recommendation is suitable, based upon information available from the issuer of the security or otherwise and the facts disclosed by or otherwise known about the customer.[3]  To assure that a dealer effecting a recommended transaction with a non-institutional customer has the information needed about the customer to make its suitability determination, Rule G-19 requires the dealer to make reasonable efforts to obtain information concerning the customer's financial status, tax status and investment objectives, as well as any other information reasonable and necessary in making the recommendation.[4]  Dealers are reminded that the obligation arising under Rule G-19 in connection with a recommended transaction requires a meaningful analysis, taking into consideration the information obtained about the customer and the security, which establishes the reasonable grounds for believing that the recommendation is suitable.  Such suitability determinations should be based on the appropriately weighted factors that are relevant in any particular set of facts and circumstances, which factors may vary from transaction to transaction.  Pursuant to Rule G-27, on supervision, dealers must have written supervisory procedures in place that are reasonably designed to ensure compliance with the Rule G-19 obligation to undertake a suitability analysis in connection with every recommended transaction, and dealers must enforce these procedures to ensure that such meaningful analysis does in fact occur in connection with the dealer's recommended transactions.

Other Sales Practice Principles

Dealers must keep in mind the requirements under Rule G-17—that they deal fairly with all persons and that they not engage in any deceptive, dishonest or unfair practice—when considering the appropriateness of day-to-day sales-related activities with respect to municipal securities.  In some cases, certain sales-related activities are governed in part by specific MSRB rules, such as Rule G-19 (as described above), Rule G-18 on execution of transactions, and Rule G-30 on prices and commissions.  Other activities may not be explicitly addressed by a specific MSRB rule.  In either case, the general principles of Rule G-17 always apply.

In particular, dealers must ensure that they do not engage in transactions that are unfair to customers under Rule G-17.  This principle applies in the case of an individual transaction to ensure that the dealer does not unfairly attempt to increase its own revenue or otherwise advance its interests without due regard to the customer's interests.  In addition, where a dealer consistently recommends that customers invest in the municipal securities that offer the dealer the highest compensation, such pattern or general practice may, depending on the facts and circumstances, constitute a violation of Rule G-17 if the recommendation of such municipal securities over the other municipal securities offered by the dealer does not reflect a legitimate investment-based purpose.

With respect to sales incentives, the MSRB has previously interpreted Rule G-20, relating to gifts, gratuities and non-cash compensation, to require a dealer that sponsors a sales contest involving representatives who are not employed by the sponsoring dealer to have in place written agreements with these representatives.[5]  Dealers are also reminded that Rule G-20(d) establishes standards regarding non-cash incentives for sales of municipal securities that are substantially similar to those currently applicable to the public offering of corporate securities under NASD Rule 2710(i) but also include "total production" and "equal weighting" requirements for internal sales contests.  Dealers should be mindful that financial incentives may cause an associated person (whether an associated person of the dealer offering the sales incentive or an associated person of another dealer) to favor one municipal security over another and thereby potentially compromise the dealer's obligations under MSRB rules, including Rules G-17 and G-19.  Rule G-17 may be violated if a dealer or any of its associated persons engages in any marketing activities that result in a customer being treated unfairly, or if the dealer or any of its associated persons engages in any deceptive, dishonest or unfair practice in connection with such marketing activities.  The MSRB also believes that, depending upon the specific facts and circumstances, a dealer may violate Rule G-17 if it acts in a manner that is reasonably likely to induce another dealer or such other dealer's associated persons to violate the principles of Rule G-17 or other MSRB customer protection rules, such as Rule G-18, G-19 or Rule G-30. 

[1] The principles enunciated in this notice were previously discussed, in the context of the 529 college savings plan market, in Rule G-17 Interpretation - Interpretation on Customer Protection Obligations Relating to the Marketing of 529 College Savings Plans (August 7, 2006), reprinted in MSRB Rule Book. This notice makes clear that the general principles discussed in the August 2006 interpretation also apply in the context of the markets for municipal bonds, notes and other types of municipal securities. This notice in no way alters the substance or applicability of the August 2006 interpretation with respect to the 529 college savings plan market.

[2] See Rule G-17 Interpretation - Interpretive Notice Regarding Rule G-17, on Disclosure of Material Facts (March 20, 2002), reprinted in MSRB Rule Book.

[3] The MSRB has previously stated that most situations in which a dealer brings a municipal security to the attention of a customer involve an implicit recommendation of the security to the customer, but determining whether a particular transaction is in fact recommended depends on an analysis of all the relevant facts and circumstances.  See , February 17, 1998Rule G-19 Interpretive Letter - Recommendations, reprinted in MSRB Rule Book.  The MSRB also has provided guidance on recommendations in the context of on-line communications in , September 25, 2002Rule G-19 Interpretation - Notice Regarding Application of Rule G-19, on Suitability of Recommendations and Transaction, to Online Communications, reprinted in MSRB Rule Book.

[4] Rule G-8(a)(x)(F) requires that dealers maintain records for each customer of such information about the customer used in making recommendations to the customer. Rule G-19(e), on churning, also prohibits a dealer from recommending transactions to a customer that are excessive in size or frequency, in view of information known to such dealer concerning the customer's financial background, tax status and investment objectives.

[5] See Rule G-20 Interpretive Letter - Authorization of sales contests, June 25, 1982, reprinted in MSRB Rule Book.

The Municipal Securities Rulemaking Board (“Board” or “MSRB”) is publishing this notice to remind brokers, dealers and municipal securities dealers (“dealers”) of the possible application of Rule G-37, on political contributions and prohibitions on municipal securities business, when dealers sponsor meetings and conferences where issuer officials are invited to attend or are featured speakers.  Dealers are responsible for ensuring that their supervisory policies and procedures established under Rule G-27, on supervision, are adequate to prevent and detect violations of MSRB rules.  Thus, it is incumbent on dealers to have appropriate supervisory procedures in place to review the nature of, and activities surrounding, the types of events discussed in this notice to ensure that Rule G-37 is not violated, directly or indirectly.

Rule G-37, in general, prohibits dealers from engaging in municipal securities business with issuers for a two-year period if certain political contributions have been made to officials of such issuers by the dealer or a municipal finance professional (“MFP”) (other than certain de minimis contributions), and requires dealers to record and disclose certain political party payments and municipal securities business to assist in severing the connection between contributions and the awarding of municipal securities business.  The rule also includes, among other things, a prohibition on dealers and their MFPs from (1) soliciting any person (including, but not limited to, any affiliated entity of the dealer) or political action committee (“PAC”) to make any contribution, or (2) coordinating any contributions to an official of an issuer with which the dealer is engaging or seeking to engage in business.  Dealers and MFPs are prohibited from, directly or indirectly, through or by any other person or means, doing any act which would result in violation of the rule’s ban on business or prohibition on soliciting and coordinating (bundling) contributions.

A dealer sponsoring a meeting or conference where an issuer official is invited to attend or is a featured speaker should be mindful of the parameters of Rule G-37, including the prohibition on soliciting and coordinating contributions.  For example, if the issuer official (or his/her staff) solicits contributions in connection with the event, or dealer personnel solicit or coordinate contributions, such activities may constitute fundraising activities. [1]  If a determination is made, based on the particular facts and circumstances, that the event is a fundraising event for the issuer official, then expenses incurred by the dealer for hosting the event may be deemed a contribution, thereby triggering the two-year ban on municipal securities business with that issuer.  Such expenses may include, but are not limited to, the cost of the facility; the cost of refreshments; any expenses paid for administrative staff; and the payment or reimbursement of any of the issuer official’s expenses for the event. [2]

The dollar amount of an expense incurred by the dealer for hosting the event is not dispositive of whether that expense constitutes a contribution and therefore triggers the ban on municipal securities business under Rule G-37.  If, depending on the particular facts and circumstances, the event is a fundraising event, then any expense incurred by the dealer may be deemed a contribution to the issuer official, thereby triggering the two-year ban on municipal securities business with that issuer.

By publishing this notice, the MSRB is not suggesting that dealers curtail their legitimate hosting or sponsoring of meetings or conferences where issuer officials are invited to attend or are featured speakers.  However, dealers should consider carefully the true nature of such events and the possible application of Rule G-37 if the meeting or conference involves fundraising activities in support of an issuer official.

In addition to dealers’ Rule G-37 obligations, Rule G-27, on supervision, requires that dealers supervise the conduct of their municipal securities activities, and that of their associated persons, to ensure compliance with MSRB rules, and that dealers adopt, maintain and enforce written supervisory procedures reasonably designed to ensure such compliance.  It is therefore incumbent on dealers to have appropriate supervisory procedures in place to review the nature of, and activities surrounding, the types of events discussed in this notice to ensure that Rule G-37 is not violated, directly or indirectly. Dealers should therefore take appropriate steps to ensure that such events are not fundraising events by, among other things, ensuring that: (i) contributions are not solicited by the issuer official or his/her staff; (ii) any attendee contact information provided by the dealer is not used by the issuer official or his/her staff to solicit contributions; and (iii) contributions are not solicited, coordinated or made by dealer personnel in connection with the event. [3]

[1] The MSRB has previously stated that “Dealers may not engage in municipal securities business with issuers if they or their municipal finance professionals engage in any kind of fundraising activities for officials of such issuers….”  See Securities Exchange Act Release No. 33868 (April 7, 1994), 59 FR 17621 (April 13, 1994).  See also Questions and Answers Concerning Political Contributions and Prohibitions on Municipal Securities Business: Rule G-37 (May 24, 1994), reprinted in MSRB Rule Book; MSRB Interpretation of November 7, 1994 (Solicitation of Contributions), reprinted in MSRB Rule Book; MSRB Interpretation of May 31, 1995 (Campaign for Federal Office), reprinted in MSRB Rule Book.

The Municipal Securities Rulemaking Board (“MSRB”) is publishing this notice to remind brokers, dealers and municipal securities dealers (collectively, “dealers”) of the application of Rule G-20, on gifts, gratuities and non-cash compensation, and Rule G-17, on fair dealing, in connection with certain payments made and expenses reimbursed during the municipal bond issuance process.  These rules are designed to avoid conflicts of interest and to promote fair practices in the municipal securities market.

Rule G-20, among other things, prohibits dealers from giving, directly or indirectly, any thing or service of value, including gratuities, in excess of $100 per year to a person other than an employee or partner of the dealer, if such payments or services are in relation to the municipal securities activities of the recipient’s employer.  The rule provides an exception from the $100 annual limit for “normal business dealings,” which includes occasional gifts of meals or tickets to theatrical, sporting, and other entertainments hosted by the dealer (i.e., if dealer personnel accompany the recipient to the meal, sporting or other event), legitimate business functions sponsored by the dealer that are recognized by the Internal Revenue Service as a deductible business expense, or gifts of reminder advertising.  However, these “gifts” must not be “so frequent or so extensive as to raise any question of propriety.”  Rule G-17 provides that, in the conduct of its municipal securities activities, each dealer shall deal fairly with all persons and shall not engage in any deceptive, dishonest or unfair practice.

Dealers should consider carefully whether payments they make in regard to expenses of issuer personnel in the course of the bond issuance process, including in particular but not limited to payments for which dealers seek reimbursement from bond proceeds, comport with the requirements of these rules.  Payment of excessive or lavish entertainment or travel expenses may violate Rule G-20 if they result in benefits to issuer personnel that exceed the limits set forth in the rule, and can be especially problematic where such payments cover expenses incurred by family or other guests of issuer personnel.  Depending on the specific facts and circumstances, excessive payments could be considered to be gifts or gratuities made to such issuer personnel in relation to the issuer’s municipal securities activities.  Thus, for example, a dealer acting as a financial advisor or underwriter may violate Rule G-20 by paying for excessive or lavish travel, meal, lodging and entertainment expenses in connection with an offering (such as may be incurred for rating agency trips, bond closing dinners and other functions) that inure to the personal benefit of issuer personnel and that exceed the limits or otherwise violate the requirements of the rule.

Furthermore, dealers should be aware that characterizing excessive or lavish expenses for the personal benefit of issuer personnel as an expense of the issue may, depending on all the facts and circumstances, constitute a deceptive, dishonest or unfair practice.  A dealer may violate Rule G-17 by knowingly facilitating such a practice by, for example, making arrangements and advancing funds for the excessive or lavish expenses to be incurred and thereafter claiming such expenses as an expense of the issue.

Dealers are responsible for ensuring that their supervisory policies and procedures established under Rule G-27, on supervision, are adequate to prevent and detect violations of MSRB rules in this area.  The MSRB notes that state and local laws also may limit or proscribe activities of the type addressed in this notice. 

By publishing this notice, the MSRB does not mean to suggest that issuers or dealers curtail legitimate expenses in connection with the bond issuance process.  For example, it sometimes is advantageous for issuer officials to visit bond rating agencies to provide information that will facilitate the rating of the new issue.  It is the character, nature and extent of expenses paid by dealers or reimbursed as an expense of issue, even if thought to be a common industry practice, which may raise a question under applicable MSRB rules. 

The MSRB encourages all parties involved in the municipal bond issuance process to maintain the integrity of this process and investor and public confidence in the municipal securities market by adhering to the highest ethical standards. 

NOTE: This notice was revised effective May 6, 2016. View Notice 2015-21 (November 9, 2015).

On January 8, 2007, certain amendments to Rule G-14 concerning the “List  Offering Price/Takedown” indicator became effective. These amendments require the use of the “List Offering Price/Takedown” indicator on primary market sale transactions executed on the first day of trading of a new issue:

• by a sole underwriter, syndicate manager, syndicate member or selling group member at the published list offering price for the security (“List Offering Price Transaction”); or
• by a sole underwriter or syndicate manager to a syndicate or selling group member at a discount from the published list offering price for the security (“RTRS Takedown Transaction”).[1]

Since implementation of the revised “List Offering Price/Takedown” indicator, the MSRB has received several questions concerning the use of the indicator on certain transactions executed by sole underwriters, syndicate managers, syndicate members, or selling group members on the first day of trading in a new issue. These questions relate to whether inter-dealer transactions at a price equal to the “list offering price” are included in the definition of “List Offering Price Transactions.” The MSRB wishes to clarify that inter-dealer transactions are not included in the definition of “List Offering Price Transactions.”[2]

The MSRB has previously clarified that the published list offering price is defined as the “publicly announced ‘initial offering price’ at which a new issue of municipal securities is to be offered to the public.”[3] A large number of sales to investors at the published list price are expected on the first day of trading of a new issue, and these transactions offer relatively little value to real-time transparency. Consequently, the “List Offering Price” exception provides these transactions with an end-of-day exception to the 15-minute deadline. An inter-dealer sale transaction at a price equal to the list offering price, however, does provide useful current market information, since it can be presumed that the security is destined to be redistributed to investors at a price above the published list offering price. Inter-dealer transactions at the list offering price, therefore, are not included in the definition of “List Offering Price Transactions,” and identifying such transactions with the “List Offering Price/Takedown” indicator would violate MSRB Rule G-14.

[1] See Rule G-14 RTRS Procedures (d)(vii). A transaction reported with the “List Offering Price/Takedown” indicator receives an end-of-day exception to the 15-minute reporting deadline.

[2] An inter-dealer transaction may meet the definition of an “RTRS Takedown Transaction” when a sole underwriter or syndicate manager executes a transaction with a syndicate or selling group member at a discount from the published list offering price for the security.

[3] See “Reminder Notice on ‘List Offering Price’ and Three-Hour Exception for Real-Time Transaction Reporting: Rule G-14,” MSRB Notice 2004-40 (December 10, 2004). If the price is not publicly disseminated (e.g., if the security is a “not reoffered” maturity within a serial issue), the transaction is not considered a “List Offering Price Transaction.”

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.