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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This notice addresses several questions that have arisen concerning Board rules G-12 and G-15. Board rule G-12 establishes uniform industry procedures for the processing, clearance, and settlement of transactions in municipal securities... Board rule G-15 requires municipal securities professionals to send written confirmations of transactions to customers, and specifies the information required to be set forth on the confirmation.

 

Settlement Dates

In order to establish uniform settlement dates for "regular way" transactions in municipal securities, rule G-12(b)(i)(B) defines the term "business day" as "a day recognized by the National Association of Securities Dealers, Inc. [the "NASD"] as a day on which securities transactions may be settled." The practice of the NASD has been to exclude from the category of "business day," any day widely designated as a legal bank holiday, and to notify the NASD membership accordingly. Such notices set forth the NASD’s trade and settlement date schedules for periods which include a legal holiday.

"Catastrophe" Call Features

Rules G-12 and G-15 require that confirmations of transactions set forth a "description of the securities, including at a minimum… if the securities are subject to redemption prior to maturity (callable)… an indication to such effect…" (paragraphs G-12(c)(v)(E) and G-15(a)(v)[*]). Both rules also require that in transactions in callable securities effected on a yield basis, dollar price must be shown and "the calculation of dollar price shall be to the lower of price to call or price to maturity" (paragraphs G-12(c)(v)(I) and G-15(a)(viii)[†]).

The references to "callable" securities and pricing to call in rules G-12 and G-15 do not refer to "catastrophe" call features, such as those relating to acts of God or eminent domain, which are beyond the control of the issuer of the securities.

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

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

Agency transactions: remuneration. This will acknowledge receipt of your letter dated November 1, 1977 in which you request an interpretation concerning the provision in Board rule G-15(b)(ii)[*] which requires that "the source and amount of any commission or other remuneration" received by a municipal securities dealer in a transaction in which the municipal securities dealer is acting as agent for a customer be disclosed on the confirmation to the customer.

The reference to the "amount of any commission or other remuneration" requires that an aggregate dollar amount be shown, in a purchase transaction on behalf of an equivalent of the dealer concession, and, if applicable, any additional charge to the customer above the price paid to the seller of the securities. In a sale transaction on behalf of a customer, this would normally be the difference between the net price paid by the purchaser of the securities and the proceeds to the customer. If a percentage of par value or unit profit were shown it would be difficult for many customers to relate this information to the "total dollar amount of [the] transaction" required by rule G-15(a)(xi)[†] to be shown on the confirmation.

The reference in rule G-15(b)(ii)[*] to the "source" of remuneration would not require you to differentiate between the concession and any additional charge. Standard language could be included on the confirmation to indicate that your remuneration may include dealer concessions and other charges. MSRB interpretation of November 10, 1977.

 

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

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

Callable securities: "catastrophe" calls. This will acknowledge receipt of your letter dated October 20, 1977 which has been referred to me for reply. In your letter you request an interpretation of the provisions in rules G-12 and G-15 requiring that the dollar price for transactions in callable securities effected on a yield basis be priced to the lower of price to call or price to maturity. (See rules G-12(c)(v)(I) and G-15(a)(viii))[*].

At its meeting held October 25-26, 1977, the Board confirmed that the requirements in rules G-12 and G-15 relating to pricing to call do not include "catastrophe" calls, that is, calls which occur as a result of events specified in the bond indenture which are beyond the control of the issuer. MSRB interpretation of November 7, 1977.

 

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

The Municipal Securities Rulemaking Board (the "Board") has received a number of inquiries concerning Board rules G-8 and G-9. These rules require municipal securities brokers and municipal securities dealers to make and keep current certain specified records concerning their municipal securities business and to preserve such records for specified periods of time. This interpretive notice addresses several of the more frequent inquiries received by the Board regarding these rules.

General Purposes of Recordkeeping Rules

The Board’s recordkeeping rules are designed to require organizations engaged in the municipal securities business to maintain appropriate records concerning their activities in such business. In writing the rules, the Board adopted the approach of specifying in some detail the information to be reflected in the various records. The Board believed that this approach would provide helpful guidance to municipal securities professionals as well as the regulatory agencies charged with the responsibility of examining the records of such firms. At the same time, the Board attempted to provide a degree of flexibility to firms concerning the manner in which their records are to be maintained, recognizing that various recordkeeping systems could provide a complete and accurate record of a firm’s municipal securities activities. The interpretations set forth in this notice are intended to be consistent with the foregoing purposes.

This notice is not intended to address all of the questions which have arisen, or may arise; the Board will continue its policy of responding to written requests for individual interpretations and may issue further interpretive notices on recordkeeping should additional questions of general interest arise.

The following topics are covered in this interpretive notice:General Purposes of Recordkeeping Rules

Election to Follow Board or Commission Recordkeeping Rules

Maintenance of Records on a Trade Date or Settlement Date Basis

Current Posting of Records

Unit System Method of Recordkeeping

Rule G-8(a)(ii)—Account Records

Rule G-8(a)(iii)—Securities Records

Rules G-8(a)(vi) and (vii)—Records for Agency and Principal Transactions

Rule G-8(a)(xi)—Customer Account Information

Rule G-8(c)—Non-Clearing Municipal Securities Brokers and Municipal Securities Dealers

Rule G-9(b)(viii)(C)—Preservation of Written Communications

Election to Follow Board or Commission Recordkeeping Rules

Rules G-8(f) and G-9(g) provide that municipal securities brokers and municipal securities dealers other than bank dealers, who are in compliance with the recordkeeping rules of the Securities and Exchange Commission (the "Commission"), will be deemed to be in compliance with Board rules G-8 and G-9, provided that the following additional records, not specified in the Commission’s rules, are maintained by such firms: records of uncompleted transactions involving customers (subparagraph (a)(iv)(D)); records relating to syndicate transactions (paragraph (a)(viii)); new account information (paragraph (a)(xi)); and information concerning customer complaints (paragraph (a)(xii)). Conversely, Commission rules 17a-3 and 17a-4 provide that securities firms engaged in the municipal securities business will satisfy all regulatory requirements concerning recordkeeping with respect to their municipal securities business if they are in compliance with the Board’s rules.

Securities firms must determine to comply with either the Board or Commission rules, but are not required to file with either the Board or the commission a formal written notice of election. Satisfactory compliance with either set of rules will be subject to determination in the course of periodic compliance examinations conducted by the regulatory organizations charged with enforcement of Board and Commission rules.

Maintenance of Records on a Trade Date or Settlement Date Basis

Under rule G-8, records concerning purchases and sales of municipal securities may be maintained on either a trade date or settlement date basis, provided that all records relating to purchases and sales are maintained on a consistent basis. For example, if a municipal securities broker or municipal securities dealer maintains its records of original entry concerning purchases and sales (rule G-8(a)(i)) on a settlement date basis, the municipal securities broker or municipal securities dealer must also maintain its account records (rule G-8(a)(ii)) and securities records (rule G-8(a)(iii)) on the same basis.

The above records may not be maintained on a clearance date basis, that is, the date the securities are actually delivered or received. Records maintained on a clearance date basis would not accurately reflect obligations of a municipal securities broker or municipal securities dealer to deliver or accept delivery of securities. Of course, the date of clearance should be noted in the records of original entry, account records and securities records, regardless of whether these records are kept on a trade date or settlement date basis.

Current Posting of Records

Rule G-8 provides that every municipal securities broker or municipal securities dealer must make and keep current the records specified in the rule. The Board has received inquiries as to the time within which records must be posted to satisfy the currency requirement.

Blotters or other records of original entry showing purchases and sales of municipal securities should be prepared no later than the end of the business day following the trade date. Transactions involving the purchase and sale of securities should be posted to the account records no later than settlement date and to the securities records no later than the end of the business day following the settlement date. Records relating to securities movements and cash receipts and disbursements should reflect such events on the date they occur and should be posted to the appropriate records no later than the end of the following business day.

Commission rule 17a-11 requires municipal securities dealers, other than bank dealers, to give immediate notice to the Commission and their designated examining authorities of any failure to make and keep current the required records, and to take corrective action within forty-eight hours after the transmittal of such notice.

Unit System Method of Recordkeeping

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. For example, customer account records may consist of copies of confirmations and other related source documents, if necessary, arranged by customer.

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 overall recordkeeping system for purposes of posting to general ledger accounts.

Rules G-8(a)(ii)—Account Records

Rule G-8(a)(ii) requires every municipal securities broker and municipal securities dealer to maintain account records for each customer account and the account of the municipal securities broker and municipal securities dealer, showing all purchases and sales, all receipts and deliveries of securities, all receipts and disbursements of cash, and all other debits and credits to such account.

The account records may be kept in several different formats. Ledger entries organized separately for each customer and for the municipal securities broker or municipal securities dealer, showing the requisite information, would clearly satisfy the requirements of rule G-8(a)(ii).

The requirements of rule G-8(a)(ii) can also be satisfied by a unit system of recordkeeping. See discussion above. Under such a system, a municipal securities professional might maintain files, organized by customer, containing copies of confirmations and other pertinent documents, if necessary, which reflect all the information required by rule G-8(a)(ii).

The question has also been raised whether the account records requirement of rule G-8(a)(ii) can be satisfied by an electronic data processing system which can produce account records by tracing through separate transactions. The Board is of the view that such a system is acceptable if the account records should be obtainable without delay, although the records need not be maintained by customer prior to being produced. The account records so produced must also reflect clearly and accurately all the required information, provide an adequate basis for audit and be fully integrated into the overall recordkeeping system. Under rule G-27, on supervision, a municipal securities principal is required to supervise the activities of municipal securities representatives with respect to customer accounts and other matters. In this connection, it may be appropriate to obtain printouts of customer accounts on a periodic basis.

The Board believes that it is important to maintain account records in the fashion described above in view of several of the Board’s fair practice rules, such as the rules on suitability and churning. Account records will be important both as a tool for management to detect violations of these rules and for enforcement of these rules by the regulatory agencies conducting compliance examinations or responding to complaints.

The requirement to maintain account records does not apply to a firm which effects transactions exclusively with other municipal securities professionals and has no customers, as defined in paragraph (e) of rule G-8.

Rule G-8(a)(iii)—Securities Records

Rule G-8(a)(iii) requires that records be kept showing separately for each municipal security all long and short positions carried by a municipal securities broker or municipal securities dealer for its account or for the account of a customer, the location of all such securities long and the offsetting position to all such securities short, and the name or other designation of the account in which each position is carried.

The securities records should reflect not only purchases and sales, but also any movement of securities, such as whether securities have been sent out for validation or transfer. If there is no activity with respect to a particular security, it is not necessary to make daily entries for the security in the securities records. The last entry will be deemed to be carried forward until there is further activity involving the security.

Rule G-8(a)(iii) requires that the securities records show all long security count differences and short count differences classified by the date of physical count and verification on which they were discovered. The Board currently has no rule requiring municipal securities professionals to make periodic securities counts. However, if such counts are made, all count differences must be noted as provided in this section. Commission rule 17a-13 requires municipal securities dealers, other than bank dealers and certain securities firms exempted from the rule, to examine and count securities at least once in each quarter.

The requirement to maintain securities records under rule G-8 does not apply to a firm which effects municipal securities transactions exclusively with other municipal securities professionals and has no customers, as defined in paragraph (e) of rule G-8, provided the firm does not carry positions for its own account and records or fails to deliver, fails to receive and bank loans are reflected in other records of the firm.

Rules G-8(a)(vi) and (vii)—Records for Agency and Principal Transactions

Rules G-8(a)(vi) and (vii) require municipal securities brokers and municipal securities dealers to make and keep records for each agency order and each transaction effected by the municipal securities broker or municipal securities dealer as principal. The records may be in the form of trading tickets or similar documents. In each case, the records must contain certain specified information, including "to the extent feasible, the time of execution."

The phrase "to the extent feasible" is intended to require municipal securities professionals to note the time of execution for each agency and principal transaction except in extraordinary circumstances when it is impossible to determine the exact time of execution. In such cases, the municipal securities professional should note the approximate time of execution and indicate that it is an approximation.

Rule G-8(a)(xi)—Customer Account Information

Rule G-8(a)(xi) requires a municipal securities broker or municipal securities dealer to obtain certain information for each customer. Several distinct questions have been raised with respect to this provision.

The requirement to obtain the requisite information may be satisfied in a number of ways. Some municipal securities brokers and municipal securities dealers have prepared questionnaires which they have had their customers complete and return. Others have instructed their salesmen to obtain the information from customers over the telephone at the time orders are placed. It is not necessary to obtain a written statement from a customer to be in compliance with the provision.

Except for the tax identification or social security number of a customer, the customer account information required by this provision must be obtained prior to the settlement of a transaction. The Board believes that such a requirement is reasonable since the information is basic and important.

The requirement in subparagraph (C) of rule G-8(a)(xi) to obtain the tax identification or social security number of a customer tracks the requirement in section 103.35, Part 103 of Title 31 of the Code of Federal Regulations, which was adopted by the Treasury Department and became effective in June 1972. Under this section, every broker, dealer and bank must obtain the tax identification or social security number of customers. If a broker, dealer or bank is unable to secure such information after reasonable effort, it must maintain a record identifying all such accounts. The Board interprets subparagraph (C) of rule G-8(a)(xi) in a similar fashion to require municipal securities professionals to make a reasonable effort to obtain a customer’s tax identification or social security number and, if they are unable to do so, to keep a record of that fact.

Several inquiries have focused on the scope of subparagraph (G) of rule G-8(a)(xi) which requires that a record be made and kept of the name and address of the beneficial owner or owners of such account if other than the customer and transactions are to be confirmed to such owner or owners.

This provision applies to the situation in which securities are confirmed to an account which has not directly placed the order for the securities. This frequently occurs in connection with investment advisory accounts, where the investment advisor places an order for a client and directs the executing firm to confirm the transaction directly to the investment advisor’s client.

Under rule G-8, the only information which must be obtained in such circumstances for the account to which the transaction is confirmed is the name and address of the account, information which would have to be obtained in any event in order to transmit the confirmation. Since the investment advisor itself is the customer, the other items of customer account information set forth in rule G-8(a)(xi) need not be obtained for the investment advisor’s client. The customer account information applicable to institutional accounts, however, must be obtained with respect to the investment advisor. Also, the account records required by rule G-8(a)(ii) would not be required to be maintained for the investment advisor’s client, although such records would have to be maintained with respect to the account of the investment advisor.

A municipal securities professional is not required to ascertain the name and address of the beneficial owner or owners of an account if such information is not voluntarily furnished. Subparagraph G-8(a)(xi)(G) applies only when an order is entered on behalf of another person and the transaction is to be confirmed directly to the other person.

A recent court decision, Rolf v. Blyth Eastman Dillon & Co. Inc., et al. issued on January 17, 1977, in the United States District Court, Southern District of New York, may have important implications with respect to the obligations generally of securities professionals to beneficial owners of accounts, especially to clients of investment advisors. We commend your attention to this decision, which has been appealed.

Rule G-8(c)—Non-Clearing Municipal Securities Brokers and Municipal Securities Dealers

Rule G-8(c) provides that a non-clearing municipal securities broker or municipal securities dealer is not required to make and keep the books and records prescribed by rule G-8 if they are made and kept by a clearing broker, dealer, bank or clearing agency. Accordingly, to the extent that records required by rule G-8 are maintained for a municipal securities broker or municipal securities dealer by a clearing agent, the municipal securities broker or municipal securities dealer does not have to maintain such records. A non-clearing municipal securities broker or municipal securities dealer is still responsible for the accurate maintenance and preservation of the records if they are maintained by a clearing agent other than a clearing broker or dealer, and should assure itself that the records are being maintained by the clearing agent in accordance with applicable recordkeeping requirements of the Board.

In the case of a bank dealer, clearing arrangements must be approved by the appropriate regulatory agency for the bank dealer. The bank regulatory agencies are each considering the adoption of procedures to approve clearing arrangements. It is contemplated that these procedures will require the inclusion of certain provisions in clearing agreements, such as an undertaking by the clearing agent to maintain the bank dealer’s records in compliance with rules G-8 and G-9, and will specify the mechanics for having such arrangements considered and approved. The bank regulatory agencies indicate that they will advise bank dealers subject to their respective jurisdictions on this matter in the near future.

In the case of a securities firm, Commission approval is required for all clearing arrangements with entities other than a broker, dealer or bank. The Commission has recently proposed an amendment to its rule 17a-4 which would eliminate the need to obtain Commission approval of clearing arrangements with such other entities, provided that certain specified conditions are met. If the proposed rule is adopted, the Board would make a corresponding change in rule G-8.

If an agent clears transactions, but transmits copies of all records to the municipal securities broker or municipal securities dealer, and these records are preserved by the municipal securities broker or municipal securities dealer in accordance with rule G-9, the clearing arrangement is not subject to the rule G-8(c).

Rule G-9(b)(viii)(C)—Preservation of Written Communications

Subparagraph (C) of rule G-9(b)(viii) requires municipal securities brokers and municipal securities dealers to preserve for three years all written communications received or sent, including inter-office memoranda, relating to the conduct of the activities of such municipal securities broker or municipal securities dealer with respect to municipal securities.

The communications required to be preserved by this provision relate to the conduct of a firm’s activities with respect to municipal securities. Accordingly, such documents as internal memoranda regarding offerings or bids, letters to or from customers and other municipal securities professionals regarding municipal securities, and research reports must be preserved. Documents pertaining purely to administrative matters, such as vacation policy and the like, would not have to be preserved for purposes of the rule.

Quotation of municipal securities. This will acknowledge receipt of your letter dated February 9, 1977 concerning the Board’s proposed rule G-13 on quotations relating to municipal securities. In your letter you raise certain questions concerning the intent and application of paragraph (b)(ii) of proposed rule G-13, which prohibits a municipal securities professional from distributing or publishing a municipal securities quotation, or causing such a quotation to be distributed or published, unless the quotation is based upon the professional’s best judgment as to the fair market value of the security.

While the provision in question would undoubtedly apply to situations involving outright fraud, the Board believes the rule to have appropriate application in other circumstances as well.  Thus, the Board has attempted in paragraph (b)(ii) to proscribe conduct which, in the Board’s opinion, constitutes bad business practice but may not, depending on the circumstances, constitute fraud. The Board firmly believes that as a matter of just and equitable principles of trade in the municipal securities industry and with a view to promoting free and open markets in municipal securities, certain practices should not be condoned, even though they do not necessarily rise to the level of fraud or cannot be proven to constitute fraud.

Some examples of how paragraph (b)(ii) would operate may be useful.  First, assume that a dealer submits a bid for bonds, knowing that they have been called by the issuer.  The bonds are not general market bonds and the fact that they have been called is not widely known. While called bonds ordinarily trade at a premium, the dealer’s bid is based on the value of the bonds as though they had not been called and is accepted by the dealer on the other side of the trade who is unaware of the called status of the bonds.  In these circumstances, the bid clearly would not have been based upon the best judgment of the dealer making it as to the fair market value of the bonds. While one might argue that the dealer accepting the bid should have known of the called status of the bonds, the dealer making the bid acted unethically and in a manner not conducive to free and open markets in municipal securities. In the Board’s view, the actions of the dealer making the bid should not be condoned, although a charge of fraud might be difficult to sustain in dealings between professionals and might be inappropriate. The improper nature of the dealer’s conduct would be exacerbated, of course, if the person on the other side of the transaction is a non-professional.  However, difficulties in proof that the conduct of the dealer was fraudulent suggest that the best judgment rule would provide an appropriate alternative basis for enforcement action.

Another situation that would be covered by the best judgment rule is one in which a dealer submits a bid for bonds based on valuations obtained from independent sources, which in turn are based on mistaken assumptions concerning the nature of the securities in question.  The circumstances indicate that the dealer submitting the bid knows that the securities have a substantially greater market value than the price bid, but the fact that independent valuations were obtained, albeit based on mistaken facts, clouds the dealer’s culpability.

A third situation to which the best judgment rule would apply is one in which a dealer makes a bid for or offer of a security without any knowledge as to the value of the security or the value of comparable securities. While the Board does not intend that the best judgment of a dealer as to the fair market value of a security be second-guessed for purposes of the proposed rule, the Board does intend that the dealer be required to act responsibly and to exercise some judgment in submitting a quotation.  In other words, a quotation which has been “pulled out of the air” is not based on the best judgment of the dealer and, in the interests of promoting free and open markets in municipal securities, should not be encouraged.

Given the manner in which the Board intends the “best judgment” rule to operate, the Board concluded that it would not have an anti-competitive impact on the municipal markets. The proposed rule is not intended to prohibit legitimate price discounts or mark-ups, as the case may be, based upon a dealer’s anticipation of the direction of the movement of the markets and other factors. The Board does not intend to interfere with legitimate pricing mechanisms and recognizes that there may be a variety of quotations with respect to a given security, each of which would comply with the terms of the proposed rule.

While it is not possible to anticipate all of the specific fact situations that might run afoul of the “best judgment” rule, I would like to make some general observations concerning the operation of the proposed rule. As you know, one of Congress’ principal purposes in calling for the establishment of the Board was to promote the development of a body of rules for the municipal securities industry that would furnish quidelines for good business conduct. The Senate Committee on Banking, Housing and Urban Affairs observed in its Report on the Securities Acts Amendments of 1975 that prior to the legislation, the conduct of municipal market professionals could be controlled only after the fact through enforcement by the Commission of the fraud prohibitions of the federal securities laws.  The Senate Committee expressed hope that a self-regulatory body like the Board would develop prophylactic rules for the industry which would deter unethical and fraudulent practices in the first instance. See Senate Report 94-75, 94th Cong., 1st Sess., 42-43. MSRB interpretation of February 24, 1977.

On December 23, 1976, the Municipal Securities Rulemaking Board (the "Board") issued an interpretive notice addressing certain questions received by the Board with respect to its professional qualifications rules (rules G-2 through G-7). Since that time, the Board has received additional questions concerning rule G-3 which are discussed in this interpretive notice.

1. Requirements for Financial and Operations Principals.

Under the rule G-3(b)(ii)[*], every municipal securities broker and municipal securities dealer other than a bank dealer is required to have at least one qualified financial and operations principal. As defined in the rule, this person is responsible for the overall supervision and preparation of financial reports to the Securities and Exchange Commission and self-regulatory organizations and for the processing, clearance, safekeeping and recordkeeping activities of the firm. If more than one person shares these overall supervisory responsibilities, each such person must be qualified as a financial and operations principal.

The question has been asked whether a financial and operations principal whose duties relate solely to financial and operational matters and not, for example, to underwriting, trading, or sales functions must qualify also as a municipal securities principal by passing the Board's municipal securities principal examination when it is prescribed. The Board does not intend to impose such a requirement on persons whose functions are limited to those set forth in the definition of a financial and operations principal.

The question has also been asked whether a person performing only the functions of a financial and operations principal on and after December 1, 1975 would be "grandfathered" as a municipal securities principal for purposes of taking the Board's municipal securities principal examination when prescribed if such person begins supervising underwriting, trading or sales functions. Activities relating to financial and operational matters are substantially different from those relating to underwriting, trading and sales or other categories of activities supervised by municipal securities principals. The Board does not intend, therefore, that financial and operations principals be "grandfathered" for purposes of the Board's examination requirements for municipal securities principals, or that a financial and operations principal would be qualified to engage in such other supervisory activities solely by reason of having met the Board's requirements for financial and operations principals.

The Board has also been asked whether senior officers or general partners of a firm, who may bear ultimate legal responsibility for the financial and operational activities of the firm, must be qualified as financial and operations principals under the Board's rules. Although the answer depends on the particular factual situation, officers or partners not directly involved in the financial and operations affairs of a firm generally would not be required to qualify as financial and operations principals.

2. Activities Requiring Qualification as a Municipal Securities Principal.

The question has been asked whether supervisory personnel in the processing and clearance areas must qualify as the municipal securities principals under rule G-3. In a securities firm, the financial and operations principal ordinarily would be the only person supervising operations-related activities who will be required to pass an examination. With respect to bank dealer supervisory personnel, to whom the financial and operations principal classification does not apply, qualification in a principal capacity in the operations area will not be required unless the person in question exercises policy-making authority. Thus, an individual may supervise a bank dealer's processing activities without qualifying as a municipal securities principal, regardless of the number of persons supervised by such individual, if policy-making functions and discretionary authority are delegated to a higher level.

Somewhat different considerations apply in determining which persons are required to be qualified as municipal securities principals in connection with underwriting, trading, sales or other activities referred to in the Board's rules as municipal securities principal activities. In these areas, the qualification requirements apply to persons having supervisory responsibility with respect to the day-to-day conduct of the activities in question, even though such persons may not have a policy-making role. The Board's conclusions in this regard are based on the fact that in these other areas the supervisory person is responsible for the activities of personnel who communicate directly with issuers, traders, and investors.

3. Activities Requiring Qualification as a Municipal Securities Representative.

In certain cases, communications from customers may be received at a time when a duly qualified municipal securities representative or municipal securities principal is unavailable. Similarly, there may be situations in which it becomes important to advise a customer promptly of transactions effected and orders confirmed, even though the individual responsible for the account may not be able to communicate with the customer at that time.

In many cases under the rules of other self-regulatory organizations, communications of this nature, which in essence reflect a mechanical function, may be received and made by properly supervised competent individuals whose clerical and ministerial functions would not otherwise subject them to qualification requirements. The Board believes the principle underlying this practice and the application of other self-regulatory organizations' qualification rules is sound.

Accordingly, the Board interprets rule G-3 to permit the recording and transmission in customary channels of orders, the reading of approved quotations, and the giving of reports of transactions by non-qualified clerical personnel when the duly qualified municipal securities representative or municipal securities principal who normally handles the account or customer is unavailable. The foregoing interpretation is applicable only to clerical personnel who are: (a) deemed capable and competent by a municipal securities principal or general securities principal to engage in such activities; (b) specifically authorized in writing to perform such functions on an occasional basis as necessary or directed to perform such functions in specific instances, in either case by a duly qualified municipal securities principal or general securities principal; (c) familiar with the normal type and size of transaction effected with or for the customer or the account; and (d) closely supervised by duly qualified municipal personnel.

All orders for municipal securities received by clerical personnel under the foregoing interpretation must be reviewed and approved by duly qualified municipal personnel familiar with the customer or account prior to being accepted or effected by the municipal securities broker or municipal securities dealer. Solicitation of orders by clerical personnel is not permitted. Confirmations of transactions may be given and quotations read by clerical personnel only when approved by duly qualified municipal personnel. Individuals subject to the 90-day apprenticeship requirements of rule G-3(i)[†] are not clerical personnel and are not authorized or permitted to engage in such activities with members of the public.

Also, the question has been raised whether a bank's branch office personnel, who are not otherwise required to be qualified under rule G-3, will be required to take and pass the qualification examination for municipal securities representatives in order to respond to a depositor's inquiry concerning possible investments in municipal securities. Insofar as the branch office personnel merely refer the depositor to qualified bank dealer personnel for discussion concerning the merits of an investment in municipal securities and execution of the depositor's order, the branch office personnel would not be required to be qualified under the Board's professional qualifications requirements. However, if branch office personnel seek to advise the depositor concerning the merits of a possible investment, or otherwise perform more than a purely ministerial function, qualification under the Board's rules would be required.

 

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

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

Previously registered entitites. Thank you for your letter [name and date deleted] which has been referred to me for response. The letter relates to the Municipal Securities Rulemaking Board's rule A-12, which imposes an initial fee of $100 on municipal securities brokers and municipal securities dealers.

We note that the terms "municipal securities broker" and "municipal securities dealer" are not restricted under the Securities Acts Amendments of 1975 (the "1975 Amendments") to securities firms and banks effecting transactions exclusively in municipal securities. Many municipal securities brokers and municipal securities dealers (other than bank dealers) were registered with the Securities and Exchange Commission (the "Commission") as brokers or dealers prior to the 1975 Amendments. Municipal securities brokers and municipal securities dealers already registered with the Commission were not required to re-register with respect to their municipal securities activities, but nevertheless are subject to payment of the Board's initial fee. In addition, many municipal securities brokers and municipal securities dealers have been and are members of the national securities exchanges and the National Association of Securities Dealers, Inc.

We are unable to conclude from the information set forth in your letter that the initial fee imposed by the Board's rule A-12 is inapplicable to your firm. MSRB interpretation of June 16, 1976.

The Municipal Securities Rulemaking Board (the “Board”) has received several requests for interpretation of rule A-13, which requires each municipal securities broker and municipal securities dealer to pay the Board a fee [on] … the face amount of municipal securities purchased from an issuer as part of a new issue. These requests concern the applicability of the fee to securities which have a stated maturity of [nine months or less], but are part of a new issue having a final stated maturity of [more than nine months]. Rule A-13 is intended to impose the … underwriting assessment on the face amount of all securities purchased from an issuer that are part of a new issue of municipal securities if any part of the issue has a final stated maturity of [nine months or less]… from the date of the securities. Thus, calculation of the fee should be based upon all municipal securities which are part of such new issue, including securities having a stated maturity of [nine months or less]. The assessment is not intended to apply, however, to short-term issues having a final maturity of [nine months or less].
NOTE: Revised to reflect subsequent amendments.

Separately identifiable department or division of a bank. This will acknowledge receipt of your letter of November 12, 1975, in which you request, on behalf of the Dealer Bank Association, an interpretative opinion with respect to the rule of the Municipal Securities Rulemaking Board (the "Board") defining the term "separately identifiable department or division of a bank," as used in section 3(a)(30) of the Securities Exchange Act of 1934, as amended (the "Act"). Such rule was originally numbered rule 4 of the Board and became effective on October 15, 1975. The rule is presently numbered rule G-1 of the Board.

In your letter you pose a series of questions concerning rule G-1, as follows: 

1. A bank has an operations department that performs processing and clearance activities, and maintains records, with respect to the bank's underwriting, trading and sales of municipal securities, as well as with respect to certain other bank activities. Can this bank have a "separately identifiable department or division" as defined in rule G-1?
2. In a bank with numerous branches, an employee or officer in a branch will on occasion accept or solicit an order from a customer for municipal securities. Does this preclude a finding that the bank has a "separately identifiable department or division"?
3. Mr. X is a senior vice president of a bank. He is not a director. Mr. X's only relationship to the bank's municipal securities dealer activities is that he is a member of a management committee within the bank that determines the amount of the bank's funds that will be made available for the bank's municipal securities dealer activities, as well as for other bank activities. The bank has a separately identifiable department or division that otherwise meets the requirements of rule G-1. Is Mr. X a person who must be designated by the board of directors of the bank under rule G-1(a)(1)?
4. A bank has a corporate trust department that, among other things, serves as paying agent for certain municipal securities and performs clearing functions in municipal securities, in addition to the processing and clearance activities performed in connection with the bank's underwriting, trading and sales of municipal securities. Are the persons in the bank's corporate trust department who engage solely in activities that do not relate to the underwriting, trading and sales of municipal securities by the bank performing municipal securities dealer activities?

With respect to question (1) above, paragraph (d) of rule G-1 contemplates that the municipal securities dealer activities of a bank, as such activities are defined in paragraph (b) of the rule, may be conducted in more than one organizational or operational unit of the bank, for example, underwriting, trading and sales activities in the bond department, and processing and clearance activities in the operations department of the bank. Under the rule, all such units can be aggregated to constitute a separately identifiable department or division within the meaning of section 3(a)(30) of the Act, provided that each such unit is identifiable and under the direct supervision of an officer designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities. The officer so designated need not be the same for all such units. For example, the senior officer of the bank's bond department may be designated as responsible for the municipal securities dealer activities conducted by that department, while the senior officer of the bank's operations department may be designated as responsible for the municipal securities dealer activities conducted by that department. In addition, the records of each such unit relating to municipal securities dealer activities must be separately maintained or separately extractable so as to permit independent examination of such records and enforcement of applicable provisions of the Act, the rules and regulations of the Commission thereunder and the rules of the Board. Finally, each such unit comprising the separately identifiable department or division may be engaged in activities other than those relating to municipal securities dealer activities. For example, the bond department may also engage in activities relating to United States government obligations, while the operations department may perform processing and clearance functions for departments of the bank other than the bond department.

With respect to question (2) above, paragraph (d) of rule G-1 also contemplates that the municipal securities dealer activities of a bank may be conducted at more than one geographic location. However, in order for such a bank to have a separately identifiable department or division, the branch employees who accept or solicit orders for municipal securities must, with respect to acceptance or solicitation of such orders, be affiliated with one of the identifiable units of the bank comprising such department or division and must, with respect to acceptance or solicitation of such orders, be responsible to an officer designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's municipal securities dealer activities. Further, the bank's records relating to the transactions effected by such branch employees must meet the criteria of paragraph (a) of rule G-1 with respect to separate maintenance and accessibility.

With respect to question (3) above, paragraph (c) of rule G-1 recognizes that senior officers of a bank may make determinations affecting bank policy as a whole which have an indirect effect on the municipal securities dealer activities of the bank. For example, determinations with respect to the deployment of the bank's funds may affect the size of the bank's inventory of municipal securities or volume of underwriting. Ordinarily such determinations would not directly relate to the day-to-day conduct of the bank's municipal securities dealer activities and senior officers making such determinations need not be designated by the board of directors of the bank as responsible for the conduct of such activities. However, if the determinations of senior officers have a direct and immediate impact on the day-to-day conduct of the bank's municipal securities dealer activities, whether by reason of the scope of such determinations, the frequency with which such determinations are made, or by reason of other factors, such officers may be considered to be directly engaged in the conduct of the bank's municipal securities dealer activities and required to be designated by the board of directors of the bank as responsible for the day-to-day conduct of such activities.

With respect to question (4) above, the regulatory focus of section 15B(b)(2)(H) of the Act is on the dealer activities of a bank. Accordingly, subparagraph (b)(2) of rule G-1 was intended to relate to such dealer activities, and not to describe other activities of the bank which might involve municipal securities. Employees of a bank's corporate trust department who perform clearance and other functions with respect to municipal securities, but which do not relate to the underwriting, trading and sales activities of the bank, do not perform municipal securities dealer activities within the meaning of rule G-1.

This opinion is rendered on behalf of the Board, pursuant to authority delegated by the Board. Copies of this opinion are being sent to the Securities and Exchange Commission, the bank regulatory agencies and the National Association of Securities Dealers, Inc. MSRB interpretation of November 17, 1975.

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Archive 2009

MSRB Notice 2009-64 (December 21, 2009)
Amendment Filed to Pending Proposal on Underwriter Submission of Information About Continuing Disclosure Undertakings to EMMA

MSRB Notice 2009-63 (December 21, 2009)
Amendment Filed to Pending Proposal on Additional Voluntary Submissions by Issuers and Obligated Persons to EMMA

MSRB Notice 2009-62 (December 4, 2009)
Amendments Filed to Rule G-37 Regarding Contributions to Bond Ballot Campaigns

MSRB Notice 2009-61 (December 1, 2009)
Reminder of December 1, 2009 Effective Date of Amendments to Rule A-13 on Underwriting Assessments

MSRB Notice 2009-60 (November 24, 2009)
MSRB Primary Market and Continuing Disclosure Submission Services - Reminder of Upcoming Word-Searchable Document Requirement and Update on Other Submission-Related Matters

MSRB Notice 2009-59 (November 18, 2009)
Rule Amendments and Interpretive Notice Filed Regarding Priority of Orders in Primary Offerings

MSRB Notice 2009-58 (November 5, 2009)
Proposed Rule A-16 on Examination Fees

MSRB Notice 2009-57 (October 21, 2009)
Upcoming Changes to the Real-Time Transaction Reporting System

MSRB Notice 2009-56 (September 30, 2009)
Amendments to Rule A-13 on Underwriting Assessments

MSRB Notice 2009-55 (September 30, 2009)
Amendments Approved to Rules G-11 and G-12 Regarding Settlement Dates and Payments of Designations

MSRB Notice 2009-54 (September 29, 2009)
Reminder Notice on Fair Practice Duties to Issuers of Municipal Securities

MSRB Notice 2009-53 (September 22, 2009)
MSRB and SIFMA to Co-Host Regulatory and Compliance Seminars in New York and Chicago

MSRB Notice 2009-52 (September 22, 2009)
MSRB Hosts Webinar Series on Market Information Programs

MSRB Notice 2009-51 (September 16, 2009)
Request for Comment: Disclosure of Bank and Bank Holding Company Political Action Committee Contributions

Comments received are available for this notice.

MSRB Notice 2009-50 (September 15, 2009)
Use of Electronic Confirmations Produced By a Clearing Agency or Qualified Vendor to Satisfy the Requirements of Rule G-15(a)

MSRB Notice 2009-49 (August 25, 2009)
Build America Bonds: Reminder of Customer Confirmation Yield Disclosure Requirement

MSRB Notice 2009-48 (August 13, 2009)
Amendment to Rule A-14, on Annual Fee

MSRB Notice 2009-47 (August 11, 2009)
Request for Comment Regarding Priority of Orders in Primary Offerings

Comments received are available for this notice.

MSRB Notice 2009-46 (August 6, 2009)
Amendments to Rules G-11 and G-12 Filed with SEC

MSRB Notice 2009-45 (July 29, 2009)
Amendments Filed to Administrative Rules: Rules A-3, A-4, A-5 and A-6

MSRB Notice 2009-44 (July 15, 2009)
Proposals Filed to Provide for Additional Primary Market and Continuing Disclosure Information to Be Made Available Through EMMA

MSRB Notice 2009-43 (July 14, 2009)
Request for Comment on Additional Increases in Transparency of Municipal ARS and VRDO

Comments received are available for this notice.

MSRB Notice 2009-42 (July 14, 2009)
MSRB Issues Interpretive Guidance on Disclosure and Other Sales Practice Obligations to Individual and Other Retail Investors in Municipal Securities

MSRB Notice 2009-41 (July 10, 2009)
Applicability of MSRB Rules to California Registered Warrants

MSRB Notice 2009-40 (July 2, 2009)
Interpretive Letter Regarding Solicitation Activity on Behalf of an Affiliated Company Pursuant to Rules G-37 and G-38

MSRB Notice 2009-39 (July 1, 2009)
MSRB Launches the Continuing Disclosure Service of EMMA

MSRB Notice 2009-38 (June 30, 2009)
MSRB, FINRA Issue Joint Investor Education Notice

MSRB Notice 2009-37 (June 29, 2009)
Preparations by Issuers and Others for the July 1, 2009 Launch of the Continuing Disclosure Service of EMMA

MSRB Notice 2009-36 (June 25, 2009)
EMMA Dataport Submission System Outage on Friday, June 26, 2009 at 3:00 PM

MSRB Notice 2009-35 (June 22, 2009)
Comments Requested: Draft Amendments to Rule G-37 Regarding Bond Ballot Campaign Committee Contributions

Comments received are available for this notice.

MSRB Notice 2009-34 (June 18, 2009)
MSRB Announces Webinars for Issuers on Continuing Disclosure Registration

MSRB Notice 2009-33 ( June 11, 2009)
Final Specifications for the EMMA Continuing Disclosure Subscription Service

MSRB Notice 2009-32 (June 11, 2009)
Final Specifications for the EMMA Continuing Disclosure Automated Submission Interface

MSRB Notice 2009-31 (June 10, 2009)
MSRB to Accept Voluntary Continuing Disclosures to EMMA

MSRB Notice 2009-30 (June 9, 2009)
Build America Bonds: Application of Rule G-37 to Solicitations of Issuers

MSRB Notice 2009-29 (June 4, 2009)
Webinars About the Business-to-Business Submission and Subscription Process for the Primary Market Disclosure Service of EMMA

MSRB Notice 2009-28 (June 1, 2009)
MSRB Establishes Electronic Official Statement Dissemination Standard under Rule G-32 and Launches Permanent Primary Market Disclosure Service of EMMA

MSRB Notice 2009-27 (June 1, 2009)
MSRB Launches Continuing Disclosure Pilot of EMMA

MSRB Notice 2009-26 (May 29, 2009)
MSRB Files to Terminate its CDINet System Effective July 1, 2009

MSRB Notice 2009-25 (May 28, 2009)
Webinars About the Submission Process for Advance Refunding Documents and 529 College Savings Plan Documents to EMMA

MSRB Notice 2009-24 (May 27, 2009)
MSRB Discontinues e-OS System

MSRB Notice 2009-23 (May 22, 2009)
MSRB to Launch Continuing Disclosure Pilot Service on EMMA

MSRB Notice 2009-22 (May 22, 2009)
SEC Approves Primary Market Disclosure Service on EMMA for Electronic Dissemination of Official Statements

MSRB Notice 2009-21 (May 13, 2009)
Webinars About the Submission Process for the Primary Market Disclosure Service of EMMA

MSRB Notice 2009-20 (May 12, 2009)
Request for Comment Regarding Settlement of Syndicate Accounts and Secondary Market Trading Accounts

Comments received are available for this notice.

MSRB Notice 2009-19 (May 6, 2009)
Webinars About the Submission Process for the Continuing Disclosure Service of EMMA

MSRB Notice 2009-18 (May 6, 2009)
MSRB Updates Timing on Launch of New Services on EMMA

MSRB Notice 2009-17 (May 5, 2009)
Upcoming Enhancements to the SHORT System and Data Elements Clarification

MSRB Notice 2009-16 (April 28, 2009)
Notice of Filing of Amendment to Rule G-8, on Books and Records, Relating to ARS and VRDO

MSRB Notice 2009-15 (April 24, 2009)
MSRB Provides Guidance on Build America Bonds and Other Tax Credit Bonds

MSRB Notice 2009-14 (April 22, 2009)
MSRB Files EMMA Continuing Disclosure Subscription Service and Publishes Preliminary Specifications for Subscription and Document Submission Feeds

MSRB Notice 2009-13 (April 20, 2009)
MSRB and RBDA to Hold Municipal Securities Seminar on May 13, 2009

MSRB Notice 2009-12 (April 14, 2009)
MSRB Files to Allow Voluntary Continuing Disclosures on EMMA

MSRB Notice 2009-11 (March 27, 2009)
Reminder of April 1, 2009 Effective Date of MSRB Short System for Variable Rate Demand Obligations

MSRB Notice 2009-10 (March 25, 2009)
MSRB Files to Establish Pilot for EMMA’s Continuing Disclosure Service

MSRB Notice 2009-09 (March 24, 2009)
Final Specifications for the MSRB’s Electronic Municipal Market Access System (“EMMA”) Primary Market Subscription Service

MSRB Notice 2009-08 (March 24, 2009)
Final Specifications for the MSRB’s Electronic Municipal Market Access System (“EMMA”) Primary Market Automated Submission Interface

MSRB Notice 2009-07 (March 23, 2009)
MSRB Files for EMMA Primary Market Disclosure Service

MSRB Notice 2009-06 ( February 25, 2009)
MSRB Gateway Rollout and Training

MSRB Notice 2009-05 (January 28, 2009)
Reminder of January 30, 2009 Effective Date of MSRB SHORT System and New Location of SHORT System Web Service

MSRB Notice 2009-04 (January 9, 2009)
SEC Approves Proposal to Increase Transparency of Auction Rate Securities and Variable Rate Demand Obligations

MSRB Notice 2009-03 (January 7, 2009)
Recommendations Requested for Board Nominations

MSRB Notice 2009-02 (January 5, 2009)
MSRB Announces Availability of SHORT System Web User Interface

MSRB Notice 2009-01 (January 2, 2009)
MSRB Amends Proposal to Increase Transparency of Variable Rate Demand Obligations

 

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Amendment Approved Concerning Disclosure of Designation Information to Syndicate Members: Rule G-11(g)(iii)

On April 28, 1999, the Securities and Exchange Commission approved an amendment to rule G-11, on sales of new issue municipal securities during the underwriting period.¹ The amendment makes clear that all information about designations paid to syndicate and non-syndicate members is to be provided to each syndicate member and that the designation information must be expressed in total dollar amounts. The amendment became effective upon approval.

More information about the amendment can be found in the notice entitled "Amendment Filed to Rule G-11(g)(iii) Concerning the Disclosure of Designation Information to Syndicate Members."

April 30, 1999

 

TEXT OF AMENDMENT²

Rule G-11. Sales of New Issue Municipal Securities During the Underwriting Period

(a) – (f) No change.

(g) Designations and Allocations of Securities. The senior syndicate manager shall:

(i)–(ii) No change.
(iii) disclose, in writing, to the each members of the syndicate , in writing, all available information on designations paid to syndicate and non-syndicate members expressed in total dollar amounts designation information to members within 10 business days following the date of sale and all information about designations paid to syndicate and non-syndicate members expressed in total dollar amounts with the sending of the designation checks pursuant to rule G-12(k); and
(iv) No change.

(h) No change.

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ENDNOTES

1. Sec. Exch. Act Rel. No. 41338 (April 28, 1999).

2. Underlining indicates new language; strikethrough denotes deletions.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Notice regarding issuer selection of underwriters’ counsel

        In connection with the Board’s review of the underwriting process in 1997,¹ the Board expressed concern, and sought comment from the municipal securities community, regarding the practice of certain issuers in selecting the counsel to be used by underwriters in the offering of the issuer’s bonds. The Board emphasized that underwriters must be free to select counsel in whom they have confidence and who do not have conflicting allegiances that may compromise, or appear to compromise, their capacity to carry out their responsibilities. This is especially true in light of the special role of underwriters’ counsel in assisting underwriters with their due diligence responsibilities and in reviewing with a critical eye the disclosure information provided by issuers.²

        Comments and information received by the Board suggest that problems do exist in this area, but rulemaking does not appear to be an appropriate solution at this time.³ The Board recognizes, for example, that issuers often have a legitimate interest in the selection of underwriters’ counsel.⁴ An issuer may fairly object to the use of counsel where the issuer’s own experience has called into question the counsel’s conduct or competence. The issuer also may wish to promote the efficiencies gained by using counsel whose knowledge, location or prior experience will facilitate prompt and proper completion of the financing. It may encourage underwriters to consider the use of local firms or firms in which minorities and women undertake significant responsibilities. The fees of such counsel also are important since they are paid, directly or indirectly, by the issuer.⁵

        Ultimately, however, underwriters must be free to select their own counsel and to reject the imposition of counsel in circumstances where they lack the basis for placing their complete confidence in such counsel. In particular, underwriters should have a basis for concluding that counsel has the requisite experience and expertise in securities law matters, the resources to assist the underwriters in meeting their due diligence responsibilities and the independence to perform the critical role of such counsel in the disclosure process.⁶

        It is also important to remember the "counseling" role to be played by underwriters’ counsel. Underwriters often need to take their counsel into their confidence on difficult and sensitive questions. Underwriters and therefore their counsel are "adverse" to issuers on a variety of matters, including many related to investor protection. These include decisions regarding bond structure, security provisions, operating and reporting covenants and, above all, disclosure, especially in matters involving negative facts and circumstances. The potential for conflict of interest is inherent in the issuer’s selection of the counsel whose particular responsibilities may include advocating decisions that the issuer may oppose or may perceive as not in its best interest.

        The Board is aware of situations in which underwriters have retained counsel designated by an issuer where the underwriters lacked an adequate basis for placing their confidence in such counsel. The Board recognizes that pressure by issuers may be subtle and indirect and difficult to resist. It is also aware of situations where underwriters have had so little confidence in the designated underwriters’ counsel that they have privately consulted other lawyers regarding disclosure and other issues. While there may be circumstances where underwriters may wish to consult counsel other than their designated counsel for a transaction, such conduct suggests that the practices of some issuers have resulted in the selection of underwriters’ counsel who are not in fact fulfilling all of the obligations inherent in such role.

        In its March 1994 interpretive release on municipal disclosure,⁷ the Securities and Exchange Commission indicated that information "concerning financial and business relationships and arrangements among the parties involved in the issuance of municipal securities may be critical to an evaluation of an offering." Such information, the Commission pointed out, could indicate the "existence of actual or potential conflicts of interest" and "may reflect upon the qualifications, level of diligence and disinterestedness of financial advisors, underwriters, experts and other participants in an offering." The Commission listed selection of counsel as one of the issues to be considered and noted that investors reasonably expect participants in municipal securities offerings to follow appropriate standards and procedures. Any circumstances that might suggest that underwriters’ counsel – or any other party – might not perform its role in the expected and appropriate manner could be material.

        The Board reminds both issuers and underwriters that investors may be harmed in a variety of ways in any offering process that does not properly utilize the review, guidance and counseling of an independent, competent and appropriately critical underwriters’ counsel. The results may compromise the integrity of the securities market and undermine the ability of both issuers and underwriters to rely on the expertise and guidance of underwriters’ counsel.

        The Board urges both issuers and underwriters to ensure that underwriters select and utilize counsel in a manner that promotes investor protection.

September 3, 1998

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ENDNOTES

1. See "Board Review of Underwriting Process," MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.

2.See National Association of Bond Lawyers and Section of Urban, State and Local Government Law, American Bar Association, Disclosure Roles of Counsel in State and Local Government Securities Offerings (2d ed. 1994) ("Disclosure Roles of Counsel") at 17-18.

3.Rulemaking in this area would be problematic because of the difficulty of determining what influence was brought to bear, whether it was improper and whether the underwriters in fact had the appropriate basis for accepting the suggested counsel and placing their confidence in such counsel’s advice and service.

4.See Government Finance Officers Association’s ("GFOA") draft Recommended Practice – Issuer’s Role in Selection of Underwriter’s Counsel (1998) ("Draft GFOA Recommended Practice"). The Draft GFOA Recommended Practice is subject to final approval by the GFOA’s board. See also Disclosure Roles of Counsel at 18-20.

5. Fees are a legitimate concern for both issuers and underwriters and may be subject to controls, caps and other agreements. The Board, however, is concerned that in some circumstances limits imposed directly by an issuer may either prevent the selection of appropriate underwriters’ counsel or pressure such counsel to limit their role. Underwriters, issuers and those who advise them (including financial advisors and in some cases bond counsel) should recognize the potential risks of fee arrangements that may undermine investor protection.

6. The Draft GFOA Recommended Practice recognizes that the underwriter has a reasonable need to rely on the competence and confidential advice of its counsel and that the potential for conflicts of interest exists if an issuer designates a firm to serve as underwriters’ counsel. See also Disclosure Roles of Counsel at 19.

7.Securities Act Release No. 7049, Exchange Act Release No. 33741, Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others (March 9, 1994), 59 FR 12748 (March 17, 1994).

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

PRESS RELEASE

September 9, 1997

BOARD ELECTS OFFICERS

The Municipal Securities Rulemaking Board is pleased to announce the election of its Chairman and Vice Chairman for its 1998 fiscal year. Mr. Terry L. Atkinson will serve as Chairman and Ms. Phyllis E. Currie as Vice Chairman. They will begin their terms on October 1, 1997.

Mr. Atkinson replaces Roger G. Hayes as Chairman. Mr.Hayes is Managing Director of Municipal Finance for NationsBanc Capital Markets, Inc. in Charlotte, North Carolina. Ms. Currie replaces Charles D. Mires as Vice Chairman. Mr. Mires is Assistant Vice President and Manager of the Municipal Bond Division for Allstate Insurance Company in Northbrook, Illinois.

Mr. Atkinson is Managing Director and Director of the Municipal Securities Group for PaineWebber Incorporated in New York and has held this position since 1989. He is a member of the Board of Directors of PaineWebber, Inc. and the PSA The Bond Market Trade Association and was the 1995 Chairman of the Municipal Division of PSA. Mr. Atkinson received a B.A. from San Diego State University and a J.D. from the University of San Diego School of Law.

Ms. Phyllis E. Currie is Chief Financial Officer for the Los Angeles Department of Water and Power. Prior to her current position, she was Assistant City Administrative Officer for the City of Los Angeles. Ms. Currie is a former member of the California Debt Advisory Commission; a member of Government Finance Officers Association; and National Forum of Black Public Administrators. She received her B.A. and MBA from UCLA.

The Board consists of 15 members -- five representatives of bank dealers, five representatives of securities firms, and five public members not associated with any bank dealer or securities firm. At least one public member must be a representative of issuers and one of investors to ensure that all perspectives of the municipal securities market are represented.

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

 

ARBITRATION: RULE G-35

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On May 22, 1997, the Board filed with the Securities and Exchange Commission (SEC) a proposed amendment to rule G-35, the Board's Arbitration Code. [1] The amendment creates two new sections: Section 37 states that the Board will not accept any new arbitration claims filed on or after January 1, 1998; and Section 38 provides that, as of January 1, 1998, every bank dealer (as defined in rule D-8) shall be subject to the Code of Arbitration Procedure of the NASD for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. New Section 38 further provides that each bank dealer shall be subject to, and shall abide by, the NASD's Code of Arbitration Procedure as if the bank dealer were a "member" of the NASD.

The Board's arbitration program, which is limited to the resolution of disputes involving municipal securities, has been in effect since December 1978. The Board's caseload grew steadily for a time (for example, 21 cases were received in 1980; 82 in 1986; and 115 in 1988). Between 1978 and 1993, the NASD automatically transferred to the Board's arbitration program any claims received involving municipal securities, and until approximately 1993 the majority of the Board's cases were received in this manner. [2] In 1993, the NASD amended its arbitration code to require a customer's consent before it could transfer a case to another SRO. The practical effect of this amendment has been to virtually halt the transfer of municipal cases to the Board's arbitration program because customers choose to remain at the NASD. Consequently, the Board's caseload has declined dramatically from 115 cases received in 1988, to 10 cases received in 1996. For 1997, the Board has thus far received one case.

In September 1996, the Board published a notice expressing its concern over the costs of operating the arbitration program in light of the decreasing number of cases filed with the Board.[3] The Board stated that the decline in its caseload makes it difficult to justify the cost of continuing to operate the arbitration program, and that it was considering discontinuing its arbitration program. The Board requested comment on the impact that such action would have on the public and the industry, and specifically requested comment on what effect, if any, the elimination of its arbitration program would have on bank dealers who are not NASD members.

In response to its request, the Board received a comment letter from a dealer and from an individual who serves as an arbitrator for the Board. The dealer expressed its concern that arbitrators serving in other SRO arbitration programs do not have sufficient knowledge of the municipal securities industry. In an attempt to address this concern, the Board, in the next few months, plans to forward its list of arbitrators to the NASD.

With regard to bank dealers, the dealer stated that the Board's program should not be eliminated until an arbitration forum is established for these dealers, and suggested that the Board require bank dealers to use the NASD's arbitration program for resolving disputes involving municipal securities. The proposed rule change accomplishes this.

The other commentator expressed his belief that elimination of the Board's program will not impair the industry's arbitral process.

Accordingly, the Board has determined that, effective January 1, 1998, it will no longer accept any new claims filed with its arbitration program. The Board will, however, continue to operate its program in order to administer its current, open cases and any new claims received prior to January 1, 1998, but will discontinue its arbitration program when all such cases have been closed.

The Board notes that, currently, any customer or securities dealer with a claim, dispute or controversy against a dealer involving its municipal securities activities may submit that claim to the arbitration forum of any SRO of which the dealer is a member, including the NASD. Bank dealers, however, are unique in that they are subject to the Board's rules but are not members of any other SRO. In light of the Board's decision not to accept any new arbitration claims on or after January 1, 1998, it is necessary to amend rule G-35 to state this and to provide an alternative forum for claims involving the municipal securities activities of bank dealers. The proposed rule change accomplishes this by subjecting every bank dealer, as of January 1, 1998, to the NASD's Code of Arbitration Procedure for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. In addition, the proposed rule change requires that bank dealers abide by the NASD's Code just as if they were "members" of the NASD for purposes of arbitration.

May 22, 1997

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TEXT OF PROPOSED AMENDMENT (Language between *asterisks* is proposed new language : language between brackets is proposed deleted language)

Rule G-35. Arbitration Every broker, dealer and municipal securities dealer shall be subject to the Arbitration Code set forth herein.

Arbitration Code Section 1 though Section 36. No change. *Section 37. Arbitration Claims Filed On or After January 1, 1998. The Board will not accept any new arbitration claims filed on or after January 1, 1998.* *Section 38. Arbitration Involving Bank Dealers. As of January 1, 1998, every bank dealer (as defined in rule D-8) shall be subject to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. ("NASD") for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. For purposes of this rule, each bank dealer shall be subject to, and shall abide by, the NASD's Code of Arbitration Procedure as if the bank dealer were a "member" of the NASD.*

 

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ENDNOTES

[1] File No. SR-MSRB-97-4. Comments submitted to the SEC should refer to this file number.

[2] The NASD also transferred cases (other than those involving municipal securities) to other self-regulatory organizations (SROs), such as the New York Stock Exchange and the American Stock Exchange, if the particular claim arose out of a transaction in that SRO's market.

[3] MSRB Reports, Vol. 16, No. 3 (Sept. 1996) at 25.

 

 

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Archive 1997

Operational Start Date for Customer Transaction Reporting, December 29, 1997

The operational start date of the customer transaction phase of the Board's Transaction Reporting Program has been delayed from January 1, 1998 to March 1, 1998.

Proposed amendments to rules G-11, G-12, and G-8, December 23, 1997

The Board has filed with the SEC proposed amendments to rules G-11, on sales of new issue municipal securities, G-12, on uniform practice, and G-8, on books and records, in regard to syndicate practices.

Amendment filed to rule G-23, December 23, 1997

The Board has filed with the SEC an amendment to rule G-23 on activities of financial advisors. The amendment requires a financial advisor, prior to entering into a remarketing agreement for an issue on which it advised, to disclose, in writing, to the issuer the terms of the remuneration the financial advisor could earn as remarketing agent on such issue and that there may be a conflict of interest in changing from the capacity of financial advisor to remarketing agent.

Proposed amendments to rule G-32, December 22, 1997

The Board has filed proposed amendments to rule G-32, on disclosures in connection with new issues, relating to dissemination of official statements to purchasing dealers and initial offering prices of maturities not reoffered

Series 53 study outline, December 19, 1997

Effective date for revised Series 53 study outline changed to March 1, 1998.

Amendment filed, December 18, 1997

The Board has filed proposed amendments to rule G-37, on political contributions and prohibitions on municipal securities business, rule G-8, on recordkeeping, and rule G-38, on consultants

Notice of filing, December 16, 1997

The Board has established a fee relating to the public dissemination on CD-ROM of quarterly Form G-37/G-38 filings

Amendment Filed, revised forms G-36(OS) and G-36(ARD): December 2, 1997

The Board has filed revised Forms G-36(OS) and G-36(ARD) and an amendment to rule G-8(a)(xv), on recordkeeping. The revised Forms G-36(OS) and G-36(ARD) and amendment to rule G-8(a)(xv) become operative on January 1, 1998.

Consultants Rule G-38 November 25, 1997

The Board has filed an amendment to rule G-38, on consultants, that would give dealers the option of disclosing their consulting arrangements to issuers, pursuant to section (c) of the rule, on either an issue-specific or issuer-specific basis.

Arbitration Rule G-35 November 13, 1997

The Board has filed an amendment to its File No. SR-MSRB-97-4 relating to rule G-35.

The Board is publishing a third Question and Answer notice concerning consultants. November 13, 1997

Question and Answer notice concerning consultants.

Notice: October 1997

MSRB Transaction  Reporting Program Questions and Answers.

Amendments Filed: September 30, 1997

The Board has filed technical amendments to rule G-37, on political contributions and prohibitions on municipal securities bussiness, rule G-38, on consultants, and G-8, on recordkeeping.

Draft Amendments to Rules G-38 and G-8 and Draft Changes to Form G-37/G-38: September 11, 1997

The Board requests comment on a draft amendment to rule G-38, on consultants, that would require dealers to disclose their consultants' political contributions to officials of an issuer and payments to state and local political parties. The Board also is seeking comment on a related amendment to rule G-8, on recordkeeping, and revisions to Form G-37/G-38. Comments are due no later than December 15, 1997.

Additional Questions and Answers: Rule G-37 on Political Contributions and Prohibitions on Municipal Securities Business:

September 9, 1997

The Board has published an additional question-and-answer notice regarding rule G-37 on political contributions and prohibitions on municipal securities business. The questions and answers address the applicability of the rule to transition and inaugural expenses, the definition of issuer official, the definitions of municipal finance professional and executive officer, and reporting by syndicate members.

Rule G-35: Arbitration: May 22, 1997

The Board has filed an amendment to its Arbitration Code (rule G-35) to state that it will not accept any new arbitration claims filed on or after January 1, 1998, and that as of that date every bank dealer shall be subject to the NASD's Code of Arbitration Procedue.

Rule G-38: Consultants: May 21, 1997

The Board requests comment on a draft amendment to rule G-38 that would give dealers the option of disclosing information on their consulting arrangements to issuers on either an issue-specific or issuer-specific basis.

 

Text of Proposed Rule & Forms G-36 (OS) & G-36(ARD)

 

Proposed Change Filed to Establish a Fee Relating to the OS/ARD Subsystem: May 19, 1997

The Board has filed a proposed change to establish a fee relating to the operation of its OS/ARD subsystem of the MSIL system.

From the Chairman

The Board is publishing Chairman Roger Hayes' letter to the municipal securities industry

 

Rule G-32: Notice of the Draft Amendments

As announced after its February 1997 meeting, the MSRB has determined to withdraw the draft amendment to Rule G-32, on disclosure in connection with new issues.

Rule G-39: Telemarketing Rule Approved

Rule G-39 and amendments to rules G-21, G-8 and G-9 concern telemarketing requirements with respect to the municipal securities activities of brokers, dealers and municipal securities dealers.

 

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Arbitration: Rule G-35

Amendment to Filing

The Board has filed an amendment to its File No. SR-MSRB-97-4 relating to its Arbitration Code (rule G-35). The amendment will make publicly available the names of arbitrators on all customer awards rendered after May 10, 1989. The amendment is intended to conform this aspect of the Board's code to the arbitration codes of other self-regulatory organizations.

On May 22, 1997, the Board filed with the Commission a proposed amendment to

rule G-35, the Board's Arbitration Code, to create two new sections to the rule: new Section 37 provides that the Board will not accept any new arbitration claims filed on or after January 1, 1998; and new Section 38 provides that, as of January 1, 1998, every bank dealer (as defined in Board rule D-8) shall be subject to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. ("NASD") for every claim, dispute or controversy arising out of or in connection with the municipal securities activities of the bank dealer acting in its capacity as such. Section 38 further provides that bank dealers shall abide by the NASD's Code just as if they were "members" of the NASD for purposes of arbitration. ⁽¹⁾

In response to its request for public comment on the Board's proposed amendment to rule G-35, the Commission received one comment letter from an individual whose company collects data on arbitration awards and stores the information in a database which it makes available to subscribers and others. The commentator noted that most of the information comes from awards issued subsequent to May 10, 1989. He also noted that in 1993, the NASD began making arbitrators' names available to the public, and retroactively supplied the names of arbitrators for its customer-related awards rendered after May 10, 1989. The commentator suggested that the Board similarly disclose the names of arbitrators on all customer-related awards rendered after May 10, 1989.

The Board has reviewed the commentator's suggestion and has determined to amend its arbitration code to make publicly available the names of arbitrators for all customer awards rendered after May 10, 1989. The Board believes that, upon SEC approval of its filing, this amendment will facilitate the NASD's administration of those arbitration claims received after January 1, 1998 involving the municipal securities activities of brokers, dealers and municipal securities dealers where an arbitrator appointed to such a case previously served as an aribtrator in the Board's program but has never served as an NASD arbitrator.

In its filing, the Board stated that its declining caseload makes it difficult to justify the cost of continuing to operate its arbitration program and, therefore, the Board has determined that, effective January 1, 1998, it will no longer accept any new claims filed with its arbitration program. The Board stated that it will continue to operate its program in order to administer its current, open cases and any new claims received prior to January 1, 1998, but will discontinue its arbitration program when all such cases have been closed.

November 13, 1997

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ENDNOTES

1. File No. SR-MSRB-97-4. See also MSRB Reports, Vol. 17, No. 2 (June 1997) at 19-20.

 

 

 

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From The Chairman ,

In prior years, the Chairperson of the MSRB has written her or his letter to the industry in time for the January issue of MSRB Reports. This year, I waited until after the Board completed its review of the municipal industry's underwriting process so that I could share with you some observations on how and why we reached our conclusions and on rulemaking in general. The Board finished its review at its May meeting; the Board's proposals for rule changes in the municipal securities underwriting process are in this issue of MSRB Reports awaiting your comments.

The overall approach of these proposals is additional disclosure. I expect that various members of our industry may differ on the specifics of the rule proposals, but one thing stands out to me as crystal-clear: all of us underwriters, issuers, counsel, and financial advisors have a responsibility to see that the underwriting of a new issue is efficient and above reproach. Cities, towns, counties, and states, large and small, must raise money to build roads, schools and other public facilities necessary for our daily life. The cost of those improvements will only be at its lowest when we provide investors with a marketplace where they get fair treatment and assurance that all relevant aspects of the transactions are known to the parties involved.

To put these proposals into context, it is important that you understand how the process of rulemaking works in a self-regulating industry like ours. Of the fifteen Board members, five come from dealer firms and five are dealer bank representatives. Of its five public members, the Board currently has two issuers, two investors and one bond lawyer. The Board has large and small firm representatives and members from geographically diverse parts of the United States. Since all of the Board members are involved in the municipal market every working day, they see or hear of situations or activities that may be of concern.

When concerns of the industry are identified, the Board and the staff review current practices. The Board prioritizes the concerns for further discussion and study; it then instructs the staff to prepare options memorandum. The Board and staff have thorough discussions of the options. The Board may take several meetings to reach a consensus. The process is slow and deliberative because, while the Board is committed absolutely to protecting the integrity and fairness of the marketplace, it recognizes that non-essential regulation is burdensome and inefficient.

Once the Board approves proposed rule changes, they are released for your comment. Please take your opportunity to comment on the proposed rule changes seriously; the Board reviews every comment letter and will modify its proposals where better suggestions are made. After the comment period and review, the proposals are filed with the Securities and Exchange Commission (SEC). The SEC puts the proposed rule out for a second comment period. After the SEC reviews these comments, generally the rule is approved. At this point the rule has the force and effect of federal law.

Self-regulation has been the municipal industry's responsibility and privilege since 1975. As long as we act responsibly to protect the integrity of our marketplace and investors, I believe we will continue to enjoy that privilege. Our industry owes each Board member a debt of gratitude for their willingness to spend the time to become knowledgeable about the issues facing our industry and for their insights and thoughtful discussions throughout the process of creating the proposals. Now it is your turn to spend the time and effort to study the proposals for their effect on our marketplace. The Board will read and consider each of your comments.

The municipal securities industry and the MSRB have demonstrated a willingness to deal with tough issues. We have effectively dealt, I believe, with the influence of political contributions. We can take pride in the fact that we are the only industry in this country to have done so. With your help, the Board will continue to address vigorously any concern in this marketplace, a marketplace essential for the growth and development of this nation. Thank you for doing your part.

Roger G. Hayes Chairman, 1996-1997

 

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

DATA ELEMENT AND FILE SPECIFICATIONS FOR REPORTING CUSTOMER TRANSACTIONS FOR REPORTING CUSTOMER

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The following file specification applies to customer trade data files submitted directly to the MSRB by means of a personal computer (PC). This is known as the MSRB standard specification. The PC method of file submission is intended for dealers with relatively few transactions who now submit inter-dealer trade data to NSCC exclusively by means of a personal computer dial-up facility.

Other dealers, who submit customer trade data to MSRB through NSCC, must produce files formatted according to NSCC's specifications as described in NSCC's notice entitled "The MSRB's Transaction Reporting Program for Municipal Bond Securities: NSCC Interface Requirement" (Notice No. A-4571 and P&S 4155) dated April 2, 1997.

All dealers, regardless of file submission method, must adhere to the requirements of Tables 1 and 4 below. Table 1 defines the meaning of the data elements to be reported. This should guide managers in selecting information from the dealer's recordkeeping system for use in customer transaction reporting. Table 4 also provides guidance in the MSRB's specifications for transaction control numbers.

The other tables specify the physical formats of files and records, for the guidance of programmers. Again, these specifications apply to files sent directly to the MSRB via a personal computer.

This document is a minor revision of the Notice that appeared in MSRB Reports, Vol. 16, No. 3 (September 1996) at 10-16.

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DATA ITEMS REQUIRED FOR REPORTING A TRANSACTION

Table 1 presents the data items required to report, amend or cancel a single customer transaction. Each item is briefly defined. Fuller definitions are found in the Notice of the proposed rule change (MSRB Reports Vol. 16, No. 3 (September 1996) at 3-16.)

TABLE 1

DATA ITEM DEFINITIONS

 

FILE SPECIFICATIONS

Three types of file are currently specified: (1) Submissions of customer transaction data, sent by dealers to the Customer Transaction Reporting Subsystem(CTRS): (2) Receipt and error message files, sent to dealers by CTRS: and (3) Test files, which may be sent in either direction.

Each file has a header and detail records. The header identifies the submitter, the submission date and time, the version, and the file (detail record) type. The header includes a count of the following detail records. All records in the file must be of the same type (transaction, receipt and error message, or test). A transaction file may contain records for several dealers, and it may include both "first reports" of trades and corrections to or cancellations of previously reported trades. A receipt/error message file will always include at least one receipt for a submission file: if no errors are detected in the submission, there will be no error records. Test files will be defined before the test period.

All data submitted by dial-in connection to the CTRS will be coded as ASCII. Each record will end with a carriage-return/line feed (CR/LF) symbol. Data submitted through NSCC will be coded according to NSCC specifications.

 

HEADER RECORD FORMAT

The header identifies the format version being used. Thus, if MSRB changes the version, both the old and new formats could be used by different dealers during a transition period. The version number applies to all the record types; a change in any record format will require a new version number.

TABLE 2

HEADER RECORD FORMAT

 

TRANSACTION RECORD FORMAT

 

The transaction record format applies to records of trades submitted to the Customer Transaction Reporting Subsystem. A record may be the "first report" of a trade to CTRS or a "cancel/amend" record relating to a previously reported trade.

Dealers should submit "amend" records only when there has been a change in the transaction data items required for customer transaction reporting. Rebills that change account number, etc., should not be reported to MSRB.

The meaning of each data item is described in Table 1 above. Items that may be omitted for a particular trade may be reported as zeroes or left blank.

TABLE 3

TRANSACTION RECORD FORMAT

 

GUIDELINES FOR REPORTING TRANSACTION CONTROL NUMBERS

All records pertaining to a transaction must share the same dealer-assigned control number. This allows the Transaction Reporting System to update the records of a transaction based on dealer input.

When the dealer submits a cancel/amend record (C/A record), it is recommended that the "dealer's transaction control number" field contain the same number as the record that first reported the trade to the system. In such a case, the "previous record reference" field is optional. However, to allow for different dealer practices - such as dealer systems that assign unique numbers to each record - the C/A record may contain a "new" control number, i.e., one not previously reported. In such a case, the "previous record reference" field must contain the control number of the record that first reported the trade. The table below shows valid and invalid input patterns. (Note that

the C/A record cannot be used to change the dealer's original number used in MSRB's database. If an incorrect control number was originally reported, that record must be changed and a new record with a different control number must be submitted.)

TABLE 4

VALID PATTERNS FOR REPORTING TRANSACTION CONTROL NUMBER

 

RECEIPT/ERROR MESSAGE FORMAT

The receipt/error message file is generated by CTRS after a file is received and processed. Normally one receipt record is generated per input file. It is preceded by a file header that indicates the file type is "receipt."

CTRS sends receipt/error message information by fax to the submitter, and in addition makes a receipt/error message file available for downloading to the submitter's computer, at the submitter's option.

The receipt/error message file has three record types. Type 1 is a fixed-length record identifying the input file and stating that the file was or was not received satisfactorily. Type 2 is a variable-length record containing text that describes an error. Type 3 is a fixed-length record containing a copy of the input record in which the error was found. A file of receipt/error messages contains: one header; one type 1 (receipt) record; and a pair of type 2 (text) and type 3 (transaction) records corresponding to each input transaction record that contains an error.

 

TABLE 5

RECEIPT/ERROR RECORD TYPE 1: RECEIPT

 

 

 

TABLE 6

RECEIPT/ERROR RECORD TYPE 2: DESCRIPTION OF ERROR

 

 

TABLE 7

RECEIPT/ERROR RECORD TYPE 3:

COPY OF TRANSACTION RECORD RECEIVED

 

 

SPECIFICATIONS FOR DATA SUBMISSION VIA DIAL-IN CONNECTION

 

Dealers may submit customer trade information to the MSRB in either of two ways: by uploading customer trade files to National Securities Clearing Corporation (NSCC) or by dialing in to the Customer Transaction Reporting Subsystem of the MSRB's Transaction Reporting System. NSCC will forward customer transaction files to the CTRS without making any change to the file contents. Procedures for uploading files to NSCC will be found in NSCC documentation.

 

Dealers with lower volumes of customer trades that choose to dial-in to the CTRS must use software provided, free of charge, by the MSRB for this purpose. The hardware/software requirements for the dealer's facility are:

 

• Software: Any version of Microsoft Windows that is supported by Microsoft Corporation.⁽¹⁾
• Hardware: A personal computer⁽²⁾ capable of running the above software; a modem (9600 baud or faster) and an analog telephone line.
  
  

The MSRB-provided software will include programs to make remote procedure calls with a minimum of dealer staff involvement. In ordinary operations the dealer staff will simply initiate the upload process and check that the process is successfully completed. Dealers will dial-in and transmit files using the Remote Procedure Call (RPC) features of Windows. RPC running on the dealer's computer and the CTRS will use standard protocols to communicate with one another.

The CTRS will send the receipt and any error messages to the submitting dealer by facsimile. Dealers wishing to download the receipt and error messages electronically will have the option to do so, using the MSRB-provided software.

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ENDNOTES

1. I.e., Windows 95, and Windows NT. Shortly after Microsoft discontinues support for an older product, the MSRB may discontinue use of that product for customer data submission.

2. Windows NT runs on workstations and other platforms that are not "personal computers." These are also suitable for file submission.

Copyright 2000 Municipal Securities Rulemaking Board. All Rights Reserved. Terms and Conditions of Use.

Operational Start Date for Customer Transaction Reporting

 

The operational start date of the customer transaction phase of the Board's Transaction Reporting Program has been delayed from January 1, 1998 to March 1, 1998. However, the Board's testing program is ongoing and dealers should ensure that they are testing their transaction reporting capabilities with the Board at this time or have scheduled a date to do so.

The Board's Transaction Reporting Program is designed to provide transparency and audit trail capabilities in the municipal securities market. Since 1995, the program has accepted dealer reports of inter-dealer transactions in municipal securities. Using these transaction reports, the Board publishes daily summaries of price and volume information about frequently traded municipal securities. The Board also maintains a surveillance database containing all transactions reported to the Board, and makes this database available to market regulators responsible for market surveillance and enforcement of Board rules.

During the next phase of the Transaction Reporting Program, dealers will report their dealer-customer transactions in municipal securities to the Board. This will allow information on customer transactions to be included in the daily price/volume summaries and in the surveillance database. Toward this end, the Securities and Exchange Commission in November 1996 approved amendments to Board rule G-14 on transaction reporting that require dealers to report their dealer-customer transactions to the Board.⁽¹⁾ When effective, these amendments will require that dealers send to the Board each day an electronic file containing the municipal securities transactions that were effected with customers on that day. An individual dealer may send the electronic file directly to the Board or may use an intermediary such as a clearing broker or a service bureau.⁽²⁾

At the time the amendments to rule G-14 were approved, the Board also announced a mandatory testing program. This program requires that dealers who will submit transactions to the Board under rule G-14 test their transaction reporting capabilities with the Board to ensure that their electronic files of transaction data are in the correct format and otherwise comply with the Board's requirements. The Board began the testing program with dealers in July 1997, and has received test data from over 40 service bureaus and clearing brokers on behalf of over 330 dealers. Most other dealers and service bureaus that will be submitting data to the Board are scheduled to begin testing before year-end.

Because of technical difficulties encountered in the development of computer systems that will operate Transaction Reporting Program, it is necessary for the Board to delay the operational start date for the customer transaction phase of the program -- originally scheduled for January 1, 1998 -- to March 1, 1998. This delay in the effective date for full operation of rule G-14 does not affect dealer obligations under the ongoing testing program. During December 1997, the Board will provide test dates to all dealers that have not yet been scheduled for testing. Dealers that plan to use the "PC dial-up" option for submitting data to the MSRB have now been sent necessary software and user manuals to submit test transactions to the MSRB. Dealers that plan to submit transactions via a clearing broker or service bureau may consider themselves as having tested if the clearing broker or service bureau is submitting (or is scheduled to submit) test data on their behalf. Dealers that plan to submit transactions via National Securities Clearing Corporation should have begun testing or have a test date scheduled and should contact the MSRB immediately if they do not have a test date.

As part of the testing program, dealers will continue to submit data reflecting their actual transactions once their initial test protocols have been successfully completed with the Board. Submission of the transaction data should be done by midnight of trade date -- the same deadline as will exist in the operational system. Testing in this manner will continue until the operational start date for the Program in March. Using live transaction data during the testing period will serve two purposes. It will assist the Board in designing the daily reports of price and volume information that will be provided to increase transparency in the municipal securities market and also will provide dealers and the Board with an opportunity to uncover and address problems that may arise in the reporting of specific types of transactions. This, in turn, will help the Board and the industry to ensure that system operations begin successfully in March 1998.

December 23, 1997

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ENDNOTES

1. Securities Exchange Act Release No. 37998 (November 29, 1996).

2. The format for these electronic files, data element definitions and other requirements concerning the details of customer transaction reporting may be found in MSRB Reports, Volume 16, No.3 (September 1996), at 3. The most current status of the Transaction Reporting Program, frequently asked questions, additional technical details, and other helpful explanatory material can be found on the Board's World Wide Web site at www.msrb.org.

 

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