[Federal Register Volume 60, Number 137 (Tuesday, July 18, 1995)]
[Notices]
[Pages 36842-36845]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17518]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35953; File No. SR-MSRB-95-4]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to
Customer Confirmations
July 11, 1995.
On April 3, 1995,\1\ the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') a proposed rule change (File No.
SR-MSRB-95-4) pursuant to Section 19(b)(1) of the Securities Exchange
Act of 1934 (``Act''), 15 U.S.C. 78s(b)(1). The proposed rule change
amends rule G-15(a), on customer confirmations. Notice of the proposed
rule change, together with the substance of the proposal, was issued by
Commission release (Securities Exchange Act Release No. 35700, May 10,
1995) and by publication in the Federal Register 60 FR 26747, May 18,
1995). Two comment letters were received. The Commission is approving
the proposed rule change.
\1\ The Municipal Securities Rulemaking Board initially
submitted the proposed rule change on March 30, 1995. Amendment No.
1, submitted on April 3, 1995, extended the delay for effectiveness
of the rule to 120 days following Commission approval. See letter
from Marianne I. Dunaitis, Assistant General Counsel, MSRB, to Karl
Varner, Staff Attorney, Division of Market Regulation, Securities
and Exchange Commission, dated April 3, 1995.
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I. Background
In response to market developments and regulatory concerns, the
present rule G-15(a) has been subject to numerous amendments and Board
interpretive notices since it was adopted in 1977. In November 1994,
the SEC approved amendments to Rule 10b-10 under the Act, governing
confirmation disclosure in securities other than municipal
securities.\2\ At the same time, the SEC deferred consideration of
proposed Rule 15c2-13 that would have established confirmation
disclosure requirements applicable to transactions in municipal
securities.\3\ In response to revisions by the SEC to Rule 10b-10, to
the SEC's proposed Rule 15c2-13 and to promote better compliance with
the MSRB's rule, the MSRB is amending rule G-15(a).
\2\ Securities Exchange Act Release No. 34962 (Nov. 10, 1994),
59 FR 59612, corrected, Securities Exchange Act Release No. 34962A
(Nov. 25, 1994), 59 FR 60555.
\3\ Securities Exchange Act Release No. 34962 (Nov. 10, 1994),
59 FR 59612, corrected, Securities Exchange Act Release No. 34962A
(Nov. 25, 1994), 59 FR 60555.
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II. Description
The change to rule G-15(a) will: (1) Clarify the current customer
confirmation requirements by reorganizing the rule and incorporating
previous Board interpretations into the language of the rule to promote
better compliance; (2) revise certain requirements in areas to provided
more disclosure; and (3) include modifications to the current
confirmation disclosure requirements.
The rule change reorganizes the rule and incorporates previous
Board interpretations into the rule. Most requirements are subdivided
by subject matter into three board categories that comprised the
content of municipal securities confirmations--terms of the
transactions, securities identification, and securities confirmations--
terms of the transactions, securities identification, and securities
description (listing the features of the security). Under each
category, Board rules and interpretations are organized by the specific
confirmation requirement.
The rule change clarifies the confirmation format with the
requirement that all disclosures, with certain exceptions, clearly and
specifically be indicated on the front of the confirmation. To address
concerns about the ``crowding'' of information on the front of the
confirmation, certain requirements can be met by statements on the back
of the confirmation, namely: (1) the required legend for zero coupon
bonds; (2) the requirement that permits a dealer in agency transactions
to include a statement that the name of the person from whom the
securities were purchased or sold will be furnished upon the written
request of the customer; (3) the requirement that permits a dealer,
rather than indicating the time of execution, to include a statement
that the time of execution will be furnished upon the written request
of the customer; and (4) the requirements for the disclosure statement
of actual yield and factors affecting yield of municipal collateralized
mortgage obligations (``CMOs'') in rule G-15(a)(i)(D)(2).
The rule change revises customer confirmation requirements to
provide that dealers disclose on the confirmation: (1) If a security
has not been rated by a nationally recognized statistical rating
organization; (2) if a letter of credit is used, the identify of the
bank issuing the letter of credit; (3) if call features exist in
addition to the next pricing call, that the additional call features
will be provided on request; (4) if necessary for the calculation of
final money, the first interest payment date; (5) if there is one
additional obligor, the identity of the additional obligor; and (6) if
there is more than one additional obligor, indication that there are
``multiple obligors.''
Furthermore, the rule change revises customer confirmation
requirements to provide that dealers disclose on the confirmation: (1)
A specific date and price for the next pricing call; (2) the primary
revenue source for revenue bonds; (3) the amount of the dealer's
``discount'' or concession in an agency transaction; (4) the amount of
any premium paid over accreted value for callable zero coupon bonds;
(5) the initial pubic offering price for an original issue discount
(``OID'') security; (6) that the actual yield of municipal CMOs may
vary according to the rate at which the underlying receivables or other
financial assets are prepaid; and (7) that information concerning
factors that affect yield of the municipal CMOs (including, at a
minimum, estimated yield, weighted average life, and the prepayment
assumptions underlying yield) will be furnished upon the customer's
written request.
However, the revisions to the customer confirmation requirements
will: (1) Retain the specific confirmation requirements for zero coupon
bonds; (2) delete the requirement for the ``limited tax'' and ``ex-
legal' designations of certificates; and (3) provide specific
exemptions for statement of yield on transactions in defaulted bonds,
bonds that prepay principal and variable rate securities that are not
sold on basis of yield to put.
Finally, the rule change modifies the confirmation requirement to
require that a separate confirmation be provided for each municipal
securities transaction whenever several transactions are done at one
time.
III. Summary of Comments
As noted above, the Commission received two comment letters on the
proposal.\4\ Latham's clients generally support the proposed
reorganization of rule G-15(a). However, Latham's clients believed the
proposal should be modified to allow the issuance of a master
confirmation that would not aggregate information nor omit any
information that proposed rule G-15(a) requires to be included in a
confirmation. Latham stated that the
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proposed addition of G-15(a)(ii) which requires delivery of a separate
confirmation for each transaction creates an administrative burden on
institutional investors that have multiple odd lot trades with the same
dealer at one time. Latham stated that late in the trading day
institutional investors are not receptive to the purchase of multiple
remarketed odd lot securities because of the administrative burdens
required to separately confirm the purchase of multiple securities
issued by many different municipal issuers, with each security having a
different CUSIP number. As a result of requiring a separate
confirmation for each transaction, Latham stated that multiple
remarketed odd lot securities often are not placed, which results in a
loss to the seller and the institutional investors who would have
purchased the securities late in the trading day.
\4\ Letter from Roger M. Zaitzeff and Carlos Alvarez, Esq.,
Latham and Watkins (``Latham''), on behalf of unnamed clients to
Jonathan G. Katz, Secretary, Commission (June 8, 1995); Letter from
Robert B. Mayers, Senior Vice President/Group Executive, Wachovia
Bank of North Carolina, N.A. (``Wachovia Bank'') to Jonathan G.
Katz, Secretary, Commission (June 6, 1995).
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The other commenter, Wachovia Bank, was generally in agreement with
the proposed changes to the customer confirmation requirements for
municipal securities transactions. however, Wachovia Bank believed: (1)
That disclosing the remuneration received in an agency transition may
mislead the customer, and (2) that disclosing the initial offering
price for an OID security could present difficulties for the secondary
municipal market because the information for older issues is not
readily available, or may not be available at all.
Wachovia Bank stated that disclosing any dealer concession or
discount received as a result of an agency transaction may mislead the
customer to conclude that the dealer through which the transaction was
executed received some additional compensation, paid by the customer,
that the customer would not have paid had the transaction been executed
through another dealer. Furthermore, Wachovia Bank stated that the
customer may mistakenly believe that the broker-dealer received other
compensation or profit beyond the amount shown as remuneration from the
customer and may not realize that the amount disclosed is the dealer's
total compensation for the transaction. Wachovia Bank believed that it
is the dealer's standing as a member of the broker-dealer community and
the selling dealer's willingness to sell at less than the net price to
another dealer, not to the customer, which allows the purchase at a
discount or concession from another dealer.
Finally, Wachovia Bank stated that disclosing the initial offering
price for an OID security could present difficulties for the secondary
municipal market because the information for older issues is not
readily available, or may not be available at all. Wachovia Bank stated
that older OID issues may become illiquid because a bidder may be
precluded from bidding for an OID security if the initial public
offering price is not known as the purchaser could not reoffer the
bonds without the OID price.
IV. Discussion
The Commission has considered the above comment letters. The
Commission believes that a separate confirmation should be provided for
each municipal securites transaction whenever several transactions are
effected at one time. The Commission believes that separate
confirmations are not too burdensome and that aggregating confirmation
data has the potential to confuse the customers. If a customer
purchases several different securities of one issuer from a dealer, it
would be inappropriate for the dealer to aggregate on the confirmation
the accrued interest for all the bonds acquired or to aggregate yield
data and disclose the ``yield to the average life'' rather than
providing yield to maturity information for each bond acquired.
Moreover, the MSRB's rules require members to use an automated
clearance and settlement system for transactions which makes it
necessary to have separate confirmations to enter transactions into the
automated system.
The Commission believes that a dealer, when acting as an agent for
the customer, has a fiduciary duty to disclose on the confirmation the
amount of the dealer's ``discount'' or concession received in the
transaction. In an agency transaction, if a dealer acquires a bond from
another dealer at a discount (e.g., ``net'' price less concession) and
the customer pays the ``net'' price, the inter-dealer discount or
concession received by the dealer should be considered remuneration
received from the customer and should be disclosed.
The Commission believes that requiring the dealer to disclose the
initial public offering price for the original issue discount security
information is particularly important to customers since it may be
needed for tax reasons and also may be important in determining the
investor's gain if the security is subject to an early call. Moreover,
most commercial information vendors will have the OID price available.
The Commission believes that the rule change is consistent with and
promotes better compliance with the provisions of Section 15B(b)(2)(C)
of the Act.\5\ The reorganization of the rule should assist operations
personnel in programming automated systems for generating municipal
securities confirmations since it will no longer be necessary to review
all previous interpretive notices on confirmations to find those that
may address the statement of interest rate for a particular type of
municipal security.
\5\ 15 U.S.C. 78o-3. Section 15B(b)(2)(C) provides that the
Board's rules shall be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
municipal securities, to remove impediments to and perfect the
mechanism of a free and open market in municipal securities, and, in
general, to protect investors and the public interest; and not be
designed to permit unfair discrimination between customers, issuers,
municipal securities brokers, or municipal securities dealers, to
fix minimum profits, to impose any schedule or fix rates of
commissions, allowances, discounts, or other fees to be charged by
municipal securities brokers or municipal securities dealers, to
regulate by virtue of any authority conferred by this title matters
not related to the purposes of this title or the administration of
the Board, or to impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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The Commission believes the rule change will strengthen the
disclosure requirements for municipal securities and customer
protection objectives of the rule. The change to rule G-15(a)(i)(E)
will require that all disclosures, with certain exceptions, be clearly
and specifically indicated on the front of the confirmation. The rule
change will allow certain requirements to be met by statements on the
back of the confirmation to avoid crowding of information on the front
side of the confirmation.
The Commission believes that the current disclosure of call
features in the pre-printed legend on the back of the confirmation has
not always been effective in alerting customers to the existence of all
features. The rule change will put customers clearly on notice as to
the presence of call features on the front of the confirmation,
including the requirement that a specific date and price for the next
pricing call (one of the most important elements of call information)
always be disclosed.\6\ If any call features exist in addition to the
next pricing call, the proposed rule change will require the following
notation on the front of the confirmation--``Additional call features
exist that may affect yield; complete
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information will be provided upon request.''
\6\ Rule G-15(a)(vi)(F) as amended defines ``pricing call'' as a
call feature that represents ``an in-whole call'' of the type that
may be used by the issuer without restriction in a refunding.
Consistent with the current rule, pricing calls 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 or calls that may operate to call part of an outstanding
issue. See Interpretation of Nov. 7, 1977, published in MSRB Manual
(CCH) at para. 3571.10.
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The change to rule G-15(a)(i)(C)(3)(f) will require that if a
security is unrated by a nationally recognized statistical rating
organization, a disclosure to that effect be made. The Commission
believes that this disclosure will alert customers that they may wish
to obtain further information or clarification from their dealer.
The change to rule G-15(a)(i)(C)(1)(a) will require dealers to put
the primary revenue source for revenue bonds on the confirmation (e.g.,
project name) and delete the language requiring disclosure of the
primary revenue source ``if necessary for a materially complete
description of the securities.'' The Commission believes that requiring
disclosure of the primary revenue source of revenue bonds on the
confirmation will help ensure that customers receive important
information about the purpose and source of payment of revenue bonds.
The change to rule G-15(a)(i)(C)(1)(b) will require dealers always
to identify the additional obligor on the confirmation or indicate
``multiple obligors'' if there is more than one additional obligor. The
Commission believes this will simplify and clarify the intent of the
rule. Also, the rule change will clarify that, if a letter of credit is
used, the identity of the bank issuing the letter of credit must be
noted.
The rule change will delete both the ``limited tax'' and the ``ex-
legal'' designations of certificates. The ``limited tax'' designation
is no longer necessary because the meaning of this ``limited tax''
designation has become ambiguous as various states have implemented a
variety of tax limitation measures. The ``ex-legal'' delivery
designation is no longer necessary because of the high percentage of
book-entry-only securities in the market and the movement away from
physical delivery of certificates which included a copy of the legal
opinion.
The rule change will retain the specific confirmation requirements
for zero coupon bonds, including disclosure that the interest rate is
0% and, if the securities are callable and available in bearer form, a
statement to that effect which can be satisfied by the following
legend: ``No periodic payments--callable below maturity value without
prior notice by mail to holder unless registered.''
In addition, the change to rule G-15(a)(i)(A)(6)(h) will require
that the amount of any premium paid over accreted value for callable
zero coupon bonds be included on confirmations.\7\ The Commission
believes it is important for customers to know that zero coupon
securities may be affected by an early call and that a premium over the
accreted value is being paid in the purchase price.
\7\ The accreted value for a zero coupon bond reflects the
increase in the security's value as it approaches the maturity date.
For zero coupon bonds that are callable, the call price is generally
at the accreted value.
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Rule G-15(a)(i)(A)(6)(g) will clarify that the first interest
payment date is required on the confirmation only in those cases in
which it is necessary for the calculation of final money, so as not to
be ambiguous as to whether the first interest payment date must be
included on the confirmation in all instances in which there is no
regular semi-annual interest payment, or only if the first payment date
is necessary for purposes of calculation of final monies. It would, for
example, not be required for transactions in the issue occurring after
the first interest payment date.\8\
\8\ The change to rule G-15(a)(i)(C)(2)(e), consistent with
current rule G-15(a)(ii)(I), requires that if securities pay
interest on other than semi-annual basis, a statement of the basis
on which interest is paid shall be included.
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The change to rule G-15 (a)(i)(A)(5)(d) will include specific
exemptions for statement of yield on transactions in defaulted bonds,
bonds that prepay principal and variable rate securities that are not
sold on basis of yield to put. The current rule includes no exemption
for these transactions. The Commission believes that a statement of
yield on these transactions may mislead investors.
Rule G-15(a)(i)(D)(2) will include a provision regarding municipal
CMOs that the dealer must include a statement on the confirmation
indicating that the actual yield of municipal CMOs may vary according
to the rate at which the underlying receivables or other financial
assets are prepaid, and a statement of the fact that information
concerning the factors that affect yield (including, at a minimum,
estimated yield, weighted average life, and the prepayment assumptions
underlying yield) will be furnished upon the written request of a
customer. The Commission believes that this provision should apply to
municipal securities as it is similar to the Commission's requirements
in Rule 10b-10, the rule for non-municipal securities.
Finally, the Commission believes the proposed rule change does not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of this title because the rule will apply
to all MSRB members. Thus, individual brokers and dealers will not be
disparately affected by the rule change.
At the MSRB's request, the Commission is delaying effectiveness of
the proposed rule change until 120 days after the approval order by the
Commission is published in the Federal Register to ensure that firms'
confirmation practices are in compliance.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change SR-MSRB-95-4 be, and hereby is, approved
and effective November 15, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-17518 Filed 7-17-95; 8:45 am]
BILLING CODE 8010-01-M