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.

Disclosures in connection with new issues. This is in response to your November 30, 1993 letter requesting interpretive guidance regarding Board rule G-32(a)(ii)(C). That provision requires dealers in connection with a negotiated sale of new issue municipal securities to disclose "the initial offering price for each maturity in the issue that is offered or to be offered in whole or in part by the underwriters." You inquired as to whether the term "initial offering price" as used in this provision could be stated in terms of yield. The Board has reviewed your request and authorized this response.

Rule G-32 requires dealers selling new issue municipal securities to provide certain written information to customers. In connection with new negotiated issues, paragraph (a)(ii) of the rule requires that this written information include the underwriting spread, the amount of any fee received by a dealer as agent for the issuer in the distribution of the securities for each maturity in the issue that is offered or to be offered in whole or in part by the underwriters, and the initial offering price of each maturity.[1]

New products are constantly being introduced into the municipal securities market. Dealers must ensure that, prior to effecting transactions with customers in municipal securities with new features, they obtain all necessary information regarding these features. The Board will attempt periodically through educational notices to describe new products or features of municipal securities and review the responsibilities of dealers to customers in these transactions. In this notice, the Board will review detachable call features.

Certain recent issues of municipal securities include a new feature called a detachable call right. This feature allows the issuer to sell its right to call the bond. Thus, upon the sale of this call right, the owner of the right has the ability, at certain times, to require the mandatory tender of the underlying municipal bond. The dates of mandatory tender of the underlying bonds generally correlate with the optional call dates. If the holder exercises such rights, the underlying bondholder tenders its bond to the issuer (just as if the issuer had called the bond) and the holder of the call right purchases the bond. In some instances, issuers already have issued municipal call rights and the underlying bonds in such cases are sometimes referred to as being subject to "detached" call rights.

Bonds subject to detachable call rights generally include a provision that permits an investor that owns both the detached call right and the underlying bond to link the two instruments together, subject to certain conditions. Such "linked" municipal securities would not be subject to being called at certain times by holders of call rights or the issuer. They may, however, be subject to other calls, such as sinking fund provisions. If a customer obtains a linked security, thereafter the customer has the option to de-link the security, again subject to certain conditions, into a municipal call right and an underlying bond subject to a right of mandatory tender.

Applicability of Board Rules

Of course, the Board’s rules apply to bonds subject to detachable call features and "linked" securities just as they apply to all other municipal securities. The Board, however, would like to remind dealers of certain Board rules that should be considered in transactions involving these municipal securities.

Rule G-15(a) on Customer Confirmations

Rule G-15(a)(i)(E)[*] requires customer 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." Additionally, rule G-15(a)(iii)(F)[*] requires a legend to be placed on customer confirmations of transactions in callable securities which notes that "Call features may exist which could affect yield; complete information will be provided upon request."

Confirmations of transactions in bonds subject to detachable call rights, therefore, would have to indicate this information.[1] In addition, the details of the call provisions of such securities would have to be provided to the customer upon the customer’s request.

Confirmation disclosure, however, serves merely to support—not to satisfy—a dealer’s general disclosure obligations. More specifically, the disclosure items required on the confirmation do not encompass "all material facts" that must be disclosed to customers at the time of trade pursuant to rule G-17.

Rule G-17 on Fair Dealing

Rule G-17 of the Board’s rules of fair practice requires municipal securities dealers to deal fairly with all persons and prohibits them from engaging in any deceptive, dishonest, or unfair practice. The Board has interpreted this rule to require that a dealer must disclose, at or before the sale of municipal securities to a customer, all material facts concerning the transaction, including a complete description of the security, and must not omit any material facts which would render other statements misleading. Among other things, a dealer must disclose at the time of trade whether a security may be redeemed prior to maturity in-whole, in-part, or in extraordinary circumstances because this knowledge is essential to a customer’s investment decision.

Clearly, bonds subject to detachable calls must be described as callable at the time of the trade.[2] In addition, if a dealer is asked by a customer at the time of trade for specific information regarding call features, this information must be obtained and relayed promptly.

Although the Board requires dealers to indicate to customers at the time of trade whether municipal securities are callable, the Board has not categorized which, if any, specific call features it considers to be material and therefore also must be disclosed. Instead, the Board believes that it is the responsibility of the dealer to determine whether a particular feature is material.

With regard to detachable calls, dealers must decide whether the ability of a third party to call the bond is a material fact that should be disclosed to investors. Dealers should make this determination in the same way they determine whether other facets of a municipal securities transaction are material—is it a fact that a reasonable investor would want to know when making an investment decision? For example, would a reasonable investor who knows a bond is callable base an investment decision on whether someone other than the issuer can call the bond? Does this new feature affect the pricing of the bond?

*  *  *

The Board is continuing its review of detachable call rights and may take additional related action at a later date. The Board welcomes the views of all persons on the application of Board rules to transactions in securities subject to detachable call rights.

[1] With regard to the confirmation requirement for linked securities, if these securities are subject to other call provisions such as sinking fund calls, the customer confirmation must indicate that these securities are callable.

[2] Similarly, when considering the application of rule G-17 to transactions in "linked" securities, as with other municipal securities, dealers have the obligation to ensure that investors understand the features of the security. In particular, if a linked security to other call provisions, dealers should ensure that retail customers do not mistakenly believe the bond is "non-callable."

[*] [Currently codified at rule G-15(a)(i)(C)(2)(a)]