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[Federal Register Volume 89, Number 30 (Tuesday, February 13, 2024)]
[Notices]
[Pages 10110-10114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-02862]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-99484; File No. SR-MSRB-2023-07]

Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of a Proposed Rule Change To Amend MSRB 
Rule G-12 To Promote the Completion of Allocations, Confirmations, and 
Affirmations by the End of Trade Date

February 7, 2024.

I. Introduction

    On December 20, 2023, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend MSRB Rules G-12 (``Rule 
G-12''), on uniform practice, to promote the completion of allocations, 
confirmations, and affirmations by the end of the day on trade date for 
municipal securities transactions between brokers, dealers and 
municipal securities dealers and their institutional customers to 
facilitate the move to a settlement cycle of one business day (the 
``proposed rule change'').\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 34-99226 (December 21, 
2023), 88 FR 89796 (December 28, 2023) (``Notice'').
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    The MSRB requested that the proposed rule change be approved with 
an implementation date of May 28, 2024, to align with the 
implementation date for Exchange Act Rule 15c6-1, as

[[Page 10111]]

amended,\4\ and new Exchange Act Rule 15c6-2.\5\
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    \4\ See Securities Exchange Act Release No. 96930 (Feb. 15, 
2023), 88 FR 13872, 13916 (Mar. 6, 2023) (``SEC's T+1 Adopting 
Release'').
    \5\ See SEC's T+1 Adopting Release, 88 FR at 13918. If the 
Commission's compliance date were to change, the MSRB stated that it 
would issue a regulatory notice to modify the compliance date to 
remain aligned with the Commission's compliance date. See Notice, 88 
FR at 89799.
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    The proposed rule change was published for comment in the Federal 
Register on December 28, 2023.\6\ The Commission received two comment 
letters \7\ on the proposed rule change. On February 1, 2024, the MSRB 
responded to the comment letters.\8\ As described further below, the 
Commission is approving the proposed rule change.
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    \6\ See Notice, 88 FR at 89796.
    \7\ See Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, Securities Industry and Financial Markets 
Association, dated January 18, 2024 (``SIFMA Letter''); and Letter 
from RJ Rondini, Director, Securities Operations, Investment Company 
Institute, dated January 18, 2024 (``ICI Letter'').
    \8\ See Letter to Secretary, Commission, from Ernesto A. Lanza, 
Chief Regulatory and Policy Officer, MSRB, dated February 1, 2024 
(``MSRB Letter'').
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II. Description of the Proposed Rule Change

    The MSRB stated that the proposed rule change would amend Rule G-12 
by adding a new section (k) to promote the completion of allocations, 
confirmations, and affirmations by the end of the day on trade date for 
transactions in municipal securities between brokers, dealers and 
municipal securities dealers (``dealers'') and their institutional 
customers.\9\ According to the MSRB, this proposed rule change would 
align with the same-day allocation, confirmation, and affirmation 
process for equities and corporate bonds under Exchange Act Rule 15c6-
2, as adopted.\10\ Although Exchange Act Rule 15c6-2, as adopted,\11\ 
does not apply to municipal securities transactions, the MSRB believes 
that the same-day allocation, confirmation, and affirmation process for 
municipal securities transactions in the secondary market should be 
consistent with that for equity and corporate bond transactions.\12\ 
According to the MSRB, the proposed rule change is designed to 
facilitate the industry's move to a settlement cycle of one business 
day (``T+1'') as described further below.\13\ To align with Exchange 
Act Rule 15c6-2, as adopted,\14\ the MSRB is proposing to amend Rule G-
12 by adding a section (k) to require dealers effecting municipal 
securities transactions subject to the T+1 settlement cycle to either 
enter into written agreements as specified in the proposed rule change 
or establish, maintain, and enforce written policies and procedures 
reasonably designed to address certain objectives related to completing 
allocations, confirmations, and affirmations as soon as technologically 
practicable and no later than the end of the day on the trade date.\15\
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    \9\ See Notice, 88 FR at 89797.
    \10\ 17 CFR 240.15c6-2.
    \11\ Id.
    \12\ See Notice, 88 FR at 89797.
    \13\ Id.
    \14\ Id.
    \15\ See Notice, 88 FR at 89797-98.
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A. Background

    The Commission initially adopted Exchange Act Rule 15c6-1 \16\ in 
1993 to shorten the settlement cycle of most equity and corporate bond 
transactions from the industry standard of within five business days 
(``T+5'') to requiring settlement within three business days 
(``T+3'').\17\ The T+3 settlement cycle remained in effect until 2017 
when the Commission amended Exchange Act Rule 15c6-1 \18\ to require 
the settlement of most equity and corporate bond transactions within 
two business days (``T+2'').\19\ On February 15, 2023, the Commission 
adopted amendments to Exchange Act Rule 15c6-1 (``Amended Exchange Act 
Rule 15c6-1'') \20\ to further shorten the settlement process, 
requiring the settlement of most equity and corporate bond transactions 
on T+1. In alignment with Amended Exchange Act Rule 15c6-1, the MSRB 
amended its Rule G-12(b)(ii)(B)-(D) and Rule G-15(b)(ii)(B)-(C) to 
define regular-way settlement as occurring on the first business day 
following the trade date rather than on the second business day 
following the trade date.\21\
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    \16\ 17 CFR 240.15c6-1.
    \17\ Exchange Act Release No. 33023 (Oct. 6, 1993), 58 FR 52891 
(Oct. 13, 1993). In adopting Exchange Act Rule 15c6-1, the 
Commission set a compliance date of June 1, 1995, 58 FR at 52891.
    \18\ 17 CFR 240.15c6-1.
    \19\ Securities Exchange Act Release No. 80295 (Mar. 22, 2017), 
82 FR 15564 (Mar. 29, 2017).
    \20\ 17 CFR 240.15c6-1.
    \21\ See Exchange Act Release No. 97585 (May 25, 2023), 88 FR 
35961 (June 1, 2023) (File No. SR-MSRB-2023-03).
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    In the SEC's T+1 Adopting Release, the Commission stated that 
implementing a T+1 standard settlement cycle would require significant 
improvements in the current rates of same-day allocations, 
confirmations, and affirmations to help ensure timely settlement in a 
T+1 environment.\22\ In the SEC's T+1 Adopting Release, the Commission 
adopted new Exchange Act Rule 15c6-2 to establish requirements that 
facilitate the completion of allocations, confirmations, and 
affirmations by the end of the trade date, helping to facilitate the 
settlement of institutional transactions in a T+1 or shorter standard 
settlement cycle by promoting the timely and orderly transmission of 
trade data necessary to achieve settlement.\23\
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    \22\ See SEC's T+1 Adopting Release, 88 FR at 13890.
    \23\ See id. at 13947.
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    Exchange Act Rule 15c6-2 provides two options by which broker-
dealers may comply with the rule, as adopted.\24\ The first option 
under Exchange Act Rule 15c6-2 provides that, where parties have agreed 
to engage in an allocation, confirmation, or affirmation process, a 
broker-dealer would be prohibited from effecting or entering into a 
contract for the purchase or sale of a security (other than an exempted 
security, a government security, a municipal security, commercial 
paper, bankers' acceptances, or commercial bills) on behalf of a 
customer unless such broker-dealer has entered into a written agreement 
with the customer that requires the allocation, confirmation, 
affirmation, or any combination thereof, to be completed no later than 
the end of the day on trade date in such form as may be necessary to 
achieve settlement in compliance with Exchange Act Rule 15c6-1(a).\25\ 
The second option under Exchange Act Rule 15c6-2 provides an 
alternative where, in lieu of a written agreement, a broker-dealer may 
choose to establish, maintain, and enforce written policies and 
procedures reasonably designed to ensure the completion of the 
allocation, confirmation, affirmation, or any combination thereof, for 
the transaction as soon as technologically practicable and no later 
than the end of the day on trade date in such form as necessary to 
achieve settlement of the transaction.\26\ Exchange Act Rule 15c6-2 
sets out several specific requirements for such written policies and 
procedures.\27\
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    \24\ 17 CFR 240.15c6-2.
    \25\ 17 CFR 240.15c6-2(a)(1).
    \26\ 17 CFR 240.15c6-2(a)(2).
    \27\ 17 CFR 240.15c6-2(b)(1-5).
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B. Summary of the Proposed Rule Change

    The MSRB explained that shortening the affirmation, allocation, and 
confirmation process can serve to reduce operational risks that can be 
present between trade date and settlement date, which can promote 
investor protection, help reduce the risk settlement fails and the 
capital required

[[Page 10112]]

to mitigate this risk.\28\ The MSRB stated that, in support of these 
objectives and to promote regulatory consistency, the affirmation, 
allocation, and confirmation processes for municipal securities 
transactions in the secondary market should be consistent with that for 
equity and corporate bond transactions.\29\ The MSRB noted that market 
efficiencies could be eroded if market participants encounter different 
affirmation, allocation, and confirmation processes when replacing 
equity or corporate bonds with municipal securities.\30\ According to 
the MSRB, in order to continue to maintain consistency across asset 
classes and harmonize with Amended Exchange Act Rule 15c6-2,\31\ it 
proposed to amend Rule G-12 to require affirmation, allocation, and 
confirmation as occurring on T+1.\32\
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    \28\ See Notice, 88 FR at 89800. See also SEC's T+1 Adopting 
Release, 88 FR at 13919.
    \29\ See Notice, 88 FR at 89797.
    \30\ See Notice, 88 FR at 89800.
    \31\ 17 CFR 240.15c6-2.
    \32\ See Notice, 88 FR at 89799.
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    The MSRB stated that the proposed amendments to Rule G-12 would add 
a new section (k) that would establish the core standard of same-day 
allocation, confirmation and affirmation for all regular-way 
transactions in municipal securities required to be settled on the 
first business day following the trade date under Rule G-12(b)(ii)(B) 
or MSRB Rule G-15(b)(ii)(B).\33\ The MSRB explained that, similar to 
Exchange Act Rule 15c6-2, proposed Rule G-12(k)(ii) would provide two 
options by which dealers would comply with the rule to meet the 
standard of same-day allocation, confirmation and affirmation for all 
regular-way transactions in municipal securities, also referred to as 
``same-day affirmation.'' \34\ According to the MSRB, the first option 
under the newly added section (k)(ii)(A) to Rule G-12 would allow 
dealers to enter into a written agreement with the relevant parties to 
ensure completion of the allocation, confirmation, affirmation, or any 
combination thereof, for the transaction as soon as technologically 
practicable and no later than the end of the day on trade date in such 
form as necessary to achieve settlement of the transaction.\35\
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    \33\ See id. at 89797.
    \34\ See id. at 89797-98.
    \35\ See id. at 89798.
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    The MSRB also explained the second option to meet the core standard 
of same-day allocation, confirmation, and affirmation is listed in the 
proposed amendment to Rule G-12 under the newly added section 
(k)(ii)(B).\36\ According to the MSRB, under this option dealers would 
be required to establish, maintain, and enforce written policies and 
procedures reasonably designed to ensure completion of the allocation, 
confirmation, and affirmation for the transaction as soon as 
technologically practicable and no later than the end of the day on 
trade date.\37\ The MSRB explained that the proposed new section Rule 
G-12(k)(ii)(B) sets five minimum requirements that the policies and 
procedures must meet.\38\ The MSRB also explained that under proposed 
Rule G-12(k)(iii)(A), such policies and procedures must be reasonably 
designed to ensure that the dealer considers holistically the range of 
systems and tools it has available to facilitate the same-day 
affirmation objective, as well as the range of operations and processes 
that a dealer uses to facilitate same-day affirmations across different 
customer and commercial relationships.\39\ The MSRB stated that this 
policies and procedures alternative in proposed Rule G-12(k)(ii)(B) 
could help ensure that, when the parties to a transaction encounter 
obstacles that may prevent them from completing an allocation, 
confirmation, or affirmation on trade date, they have policies and 
procedures to navigate, address, and, when possible, mitigate or 
overcome such obstacles.\40\
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    \36\ See id.
    \37\ See id.
    \38\ See id.
    \39\ See id.
    \40\ See id.
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C. Compliance Date

    The MSRB stated that the compliance date of the proposed rule 
change will correspond with the industry's transition to T+1 settlement 
consistent with the compliance date for amended Exchange Act Rule 15c6-
1,\41\ which is currently scheduled for May 28, 2024. The MSRB 
indicated that if the Commission's compliance date were to change, the 
MSRB would issue a regulatory notice to modify the compliance date of 
the proposed rule change to remain aligned with the Commission's 
revised compliance date.\42\
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    \41\ Notice, 88 FR at 89799. See also SEC's T+1 Adopting 
Release, 88 FR at 13916.
    \42\ Notice, 88 FR at 89799.
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III. Summary of Comments Received to the Proposed Rule Change

    The Commission received two comment letters \43\ on the proposed 
rule change, as well as a response \44\ from the MSRB to the comment 
letters. The two commenters expressed support for the proposed rule 
change and no commenters objected to the proposed rule change.
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    \43\ See SIFMA Letter; ICI Letter.
    \44\ See MSRB Letter.
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    Two commenters expressed support for the proposed rule change 
related to the alignment of the allocation, confirmation, and 
affirmation process for municipal securities with the process for 
equities and corporate bonds under Exchange Act Rule 15c6-2, as 
amended.\45\
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    \45\ See SIFMA Letter; ICI Letter.
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    One commenter opined that that it is not practical for securities 
trading after 4:30 p.m. to meet the same-day affirmation requirements 
and requested that the affirmation process for securities trading after 
4:30 p.m. be extended to the next day.\46\ The MSRB responded that it 
appreciated this feedback, but noted that extending the affirmation 
process to the next day would deter the core purpose of the proposed 
rule change of facilitating the industry's move to T+1 settlement.\47\
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    \46\ See SIFMA Letter at 3.
    \47\ See MSRB Letter at 2-3.
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    One commenter questioned the practicality of requiring trade 
allocations by 7:00 p.m. and affirmations by 9:00 p.m. on trade 
date.\48\ The MSRB responded that the proposed rule change does not 
include a requirement to complete trade allocations by 7:00 p.m. and 
affirmations by 9:00 p.m. on trade date.\49\ Instead, the MSRB 
explained, the proposed rule change intentionally adopts the language 
``end of the day on trade date'' (rather than requiring a specific 
time) to allow firms to maximize their internal processes to meet the 
appropriate cutoff times and other deadlines, as soon as 
technologically practicable.\50\
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    \48\ See SIFMA Letter at 3.
    \49\ See MSRB Letter at 3.
    \50\ See id.
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    One commenter expressed concerns over examination and enforcement 
of the proposed rule change.\51\ The MSRB responded that it does not 
have enforcement or examination authority and believes that the 
appropriate regulatory agencies will undertake their examination and 
enforcement duties in a manner consistent with Exchange Act Rule 15c6-
2.\52\
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    \51\ See SIFMA Letter at 3.
    \52\ See MSRB Letter at 4.
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    One commenter requested that enforcement of the proposed rule 
change be delayed because of its opinion that dealers will have a 
shorter time frame to implement the provisions of the proposed rule 
change as compared to the implementation of Exchange Act Rule 15c6-
2.\53\ The MSRB

[[Page 10113]]

responded that while it believes that dealers have had adequate notice 
to allow them to make the necessary preparations to comply with the 
proposed rule change, it is ultimately up to the Commission, the 
Financial Industry Regulatory Authority (``FINRA''), and other 
appropriate regulatory agencies to make determinations regarding their 
examination or enforcement postures.\54\
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    \53\ See SIFMA Letter at 4.
    \54\ See MSRB Letter at 4-5.
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    The MSRB stated that it continues to believe the proposed rule 
change is reasonable and that the proposed rule change is necessary and 
appropriate to foster cooperation and coordination with persons engaged 
in regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities by applying 
the same standard for same-day affirmation across all asset 
classes.\55\
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    \55\ See id. at 5.
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IV. Discussion and Commission's Findings

    The Commission has carefully considered the proposed rule change, 
the comment letters received, and the MSRB's response thereto. The 
Commission finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the MSRB.
    In particular, the Commission believes that the proposed rule 
change is consistent with the provisions of Section 15B(b)(2)(C), which 
provides, in part, that the MSRB'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 and municipal financial products, to remove impediments to 
and perfect the mechanism of a free and open market in municipal 
securities and municipal financial products, and, in general, to 
protect investors, municipal entities, obligated persons, and the 
public interest.\56\ The Commission believes that the proposed rule 
change will: (i) foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in municipal securities by 
applying the same standard for same-day allocation, confirmation and 
affirmation established by the SEC to transactions in municipal 
securities; (ii) remove impediments to and perfect the mechanism of a 
free and open market in municipal securities and municipal financial 
products; and (iii) protect investors, municipal entities, obligated 
persons, and the public interest.
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    \56\ 15 U.S.C. 78o-4(b)(2)(C).
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A. Foster Cooperation and Coordination With Persons Engaged in 
Regulating, Clearing, Settling, Processing Information With Respect to, 
and Facilitating Transactions in Municipal Securities

    The Commission believes that the proposed amendments to Rule G-12 
would foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in municipal securities and municipal 
financial products. In particular, the Commission notes that the 
proposed rule change applies the same standard for same-day allocation, 
confirmation and affirmation established by the Commission to 
transactions in municipal securities. As such, the Commission finds 
that the proposed rule change would continue to ensure that the 
standard for same-day allocation, confirmation and affirmation remains 
synchronous across classes of securities (including municipal 
securities). By avoiding different standards for same-day allocation, 
confirmation and affirmation for municipal securities, the proposed 
rule change would avoid regulatory confusion, simplify compliance, and 
reduce risk (e.g., operational error).
    In addition, the proposed rule change would foster cooperation and 
coordination among regulators (such as the MSRB, the Commission, FINRA, 
and other authorities that examine dealers for compliance with MSRB 
rules) by having similar same-day allocation, confirmation, and 
affirmation standards as the Commission. The Commission further 
believes that the proposed rule change would foster cooperation and 
coordination among market participants by incentivizing dealers to 
identify and deploy effective practices for achieving allocations, 
confirmations, and affirmations ex ante, thereby improving the rate of 
allocations, confirmations, and affirmations over time, which in turn 
can enhance the adoption of the industry's move to T+1. These positive 
effects would be experienced by municipal securities market 
participants involved in regulating, clearing and settling, and 
processing information for municipal securities transactions. As the 
proposed rule change promotes cooperation and coordination among market 
participants and regulators, the Commission finds that the proposed 
rule change would foster cooperation and coordination with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in municipal securities and 
municipal financial products.

B. Remove Impediments to and Perfect the Mechanism of a Free and Open 
Market

    The Commission also believes the proposed rule change would serve 
to remove impediments to and perfect the mechanism of a free and open 
market in municipal securities and municipal financial products. The 
Commission notes that the proposed rule change yields long-term 
benefits for a range of market participants by promoting an orderly 
settlement process that reduces exceptions and other processing errors 
that could lead to settlement failures. In particular, the Commission 
notes that proposed rule change would allow for agreements or policies 
and procedures to be in place that would give dealers means by which to 
address potential obstacles in the same-day affirmation, allocation, 
and confirmation processes. The Commission believes that such 
agreements or policies and procedures will promote accuracy and 
efficiency in the market by lowering the likelihood of a settlement 
failure and fostering improvements to processes over time. As the 
proposed rule change reduces operational risk and increases accuracy 
and efficiency, the Commission finds that the proposed rule change 
removes impediments to and perfects the mechanism of a free and open 
market in municipal securities and municipal financial products.

C. Protect Investors, Municipal Entities, Obligated Persons, and the 
Public Interest

    The Commission believes that the proposed rule change would promote 
investor protection and the public interest. The Commission notes that 
without the proposed rule change, market participants would encounter 
different standards between municipal securities and other securities 
such as equity and corporate bonds, which could result in market 
inefficiencies and cause confusion, especially for investors who trade 
both municipal securities and other securities. The Commission notes 
that the proposed rule change harmonizes those standards across 
security classes, which reduces the potential for settlement failures, 
and more generally, reduces the potential for operational risk. Given 
the associated

[[Page 10114]]

risk reduction, the Commission finds that the proposed rule change 
would promote investor protection and the public interest.
    In approving the proposed rule change, the Commission has 
considered the proposed rule change's impact on efficiency, 
competition, and capital formation. Section 15B(b)(2)(C) of the Act 
\57\ requires that MSRB rules not be designed to impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. The Commission believes the proposed rule change to amend 
Rule G-12 would not impose any burden on competition and would not have 
an impact on competition, as the proposed rule change would apply a 
uniform standard for same-day allocation, confirmation, and affirmation 
for municipal securities to align with the standard applicable to, 
among other securities, equity and corporate bond transactions under 
Amended Exchange Act Rule 15c6-2.\58\ In addition, the proposed rule 
change would apply equally to all dealers. As all components of the 
proposed rule change would be applied equally to all registered dealers 
transacting in municipal securities, the Commission believes that the 
proposed rule change would not impose any additional burdens on 
competition that are not necessary or appropriate in furtherance of the 
purposes of the Act.
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    \57\ 15 U.S.C. 78o-4(b)(2)(C).
    \58\ 17 CFR 240.15c6-2.
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    The Commission also finds that the proposed rule change will not 
hinder capital formation. As noted above, the proposed rule change 
ensures a uniform standard for same-day allocation, confirmation, and 
affirmation across all asset classes of securities (including municipal 
securities), and would be applied equally to all dealers. As such, the 
Commission believes that the proposed rule change would promote clearer 
regulatory requirements for the trade matching and affirmation process 
of municipal securities transactions. Furthermore, a shorter standard 
for allocations, confirmations, and affirmations may reduce the volume 
of unsettled transactions that could potentially pose settlement risk, 
and decrease liquidity risk by enabling market participants to access 
the proceeds of their transactions sooner. Therefore, the Commission 
also finds that the proposed rule change would promote efficiency of 
the trade matching and affirmation process, and would not negatively 
impact the municipal securities market's operational efficiency.
    As noted above, the Commission received two comment letters on the 
filing. The Commission believes that the MSRB, through its response, 
addressed the commenters' concerns. For the reasons noted above, the 
Commission believes that the proposed rule change is consistent with 
the Exchange Act.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\59\ that the proposed rule change (SR-MSRB-2023-07) be, 
and hereby is, approved.
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    \59\ 15 U.S.C. 78s(b)(2).

    For the Commission, pursuant to delegated authority.\60\
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    \60\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-02862 Filed 2-12-24; 8:45 am]
BILLING CODE 8011-01-P
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