[Federal Register Volume 65, Number 27 (Wednesday, February 9, 2000)]
[Notices]
[Pages 6427-6430]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2880]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42374; File No. SR-MSRB-99-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board to Amend Rule G-36

February 2, 2000.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 10, 1999, the Municipal Securities Rulemaking Board 
(``MSRB'' or the ``Board'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II and III below, which Items have been prepared 
by the Exchange. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Board has filed with the Commission a proposed rule change to 
amend Rule G-36, on delivery of official statements, advance refunding 
documents and Forms G-36(OS) and G-36(ARD) to the Board or its 
designee. The text of the proposed rule change is set forth below. 
Deletions are in brackets; additions are in italics.

Rule G-36--Delivery of Official Statements, Advance Refunding 
Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee

    (a)-(b) No Change.
    (c) Delivery Requirements for Issues not Subject to Securities 
Exchange Act Rule 15c2-12.
    (i) Subject to paragraph (iii) below, each broker, dealer, or 
municipal securities dealer that acts as an underwriter in a primary 
offering of municipal securities not subject to Securities Exchange Act 
Rule 15c2-12 for which an official statement in final form is prepared 
by or on behalf of the issuer shall send to the Board or its designee, 
by certified or registered mail, or some other equally prompt means 
that provides a record of sending, [within] by the later of one 
business day [of] after delivery of the securities by the issuer to the 
broker, dealer, or municipal securities dealer or one business day 
after receipt of the official statement in final form from the issuer 
or its designated agent, the following documents and written 
information: two copies of the official statement in final form[, if 
prepared by or on behalf of the issuer]; and[, if an official statement 
in final form is prepared,] two copies of completed Form G-36(OS) 
prescribed by the Board, including the CUSIP number or numbers for the 
issue.
    (ii)-(iii) \3\ No change.
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    \3\ Filing amended to clarify text of proposed rule change by 
including (iii). Phone conversation between Ernesto A. Lanza, 
Associate General Counsel, MSRB, and Melinda R. Diller, Attorney, 
Division of Market Regulation, Commission on January 24, 2000.
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    (d)-(f) No change.
* * * * *

II Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements

[[Page 6428]]

may be examined at the places specified in Item IV below. The MSRB has 
prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Rule G-36 requires, among other things, that a broker, dealer or 
municipal securities dealer (a ``dealer'') acting as underwriter in a 
primary offering of municipal securities (with certain limited 
exceptions) send to the Board copies of the official statement and 
completed Form G-36(OS). The rule was adopted by the Board for the 
purpose of creating a repository for official statements that would 
function much like a public library that stores, indexes and provides 
copies of official statements.\4\ This library, known as the Municipal 
Securities Information Library<Register> (or MSL<Register>) system,\5\ 
is intended to serve as a central source for information regarding 
municipal securities trading in the primary and secondary markets. As 
originally adopted by the Board and approved by the Commission, Rule G-
36 applied to all primary offerings of municipal securities regardless 
of principal amount, other than primary offerings that qualified for 
exemption under paragraph (d)(1) of Rule 15c2-12 under the Act.\6\ The 
Board subsequently amended Rule G-36 to subject to its requirements 
certain categories of primary offerings that are exempt under Rule 
15c2-12(d)(1), thereby further extending the reach of Rule G-36 beyond 
the scope of Rule 15c2-12.\7\ The Board felt that expanding the scope 
of the rule to include such offerings would result in a more complete 
collection of disclosure documents and the overall integrity, 
efficiency, and liquidity of the municipal securities market would be 
increased.
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    \4\ See Securities Exchange Act Release No. 28081 (June 1, 
1990), 55 FR 23333 (June 7, 1990); ``Delivery of Official Statement 
to the Board: Rules G-36 and G-8,'' MSRB Reports, Vol. 9, No. 3 
(November 1989) at 3.
    \5\ Municipal Securities Information Library and MSIL are 
registered trademarks of the Board.
    \6\ In primary offerings subject to Rule 15c2-12, the 
underwriter is required under paragraph (b)(3) of the Rule to 
contract with the issuer to receive the final official statement 
within seven business days after any final agreement to purchase, 
offer or sell the municipal securities (the ``sale date'') and in 
sufficient time to accompany any confirmation that requests payment 
from any customer. Rule 15c2-12 does not apply to primary offerings 
with an aggregate principal amount of less than $1,000,000 (``Small 
Issue Securities''). In addition, paragraph (d)(1) of the Rule 
exempts primary offerings in authorized denominations of $100,000 or 
more if the securities (i) are sold to no more than 35 persons with 
knowledge and experience in financial and business matters, capable 
of evaluating the merits and risks of the investment and not 
purchasing for more than one account or with a view to distribution 
(`Limited Offering Securities''); (ii) have a maturity of nine 
months or less (`Short-Term Securities''); or (iii) at the option of 
the holder may be tendered to the issuer or its agent for redemption 
or purchase at par value or more at least as frequently as every 
nine months until maturity, earlier redemption, or purchase by the 
issuer or its agent (``Puttable Securities''). Thus, as originally 
adopted, Rule G-36 applied to all primary offerings subject to Rule 
15c2-12 as well as to Small Issue Securities for which an official 
statement in final form was prepared, but did not apply to Limited 
Offering Securities, Short-Term Securities and Puttable Securities.
    \7\ See Securities Exchange Act Release No. 32086 (March 31, 
1993), 58 FR 18290 (April 8, 1993); ``Delivery of Official 
Statements to the Board: Rule G-36,'' MSRB Reports, Vol. 12, No. 3 
(September 1992) at 11. Thus only primary offerings exempt from Rule 
15c2-12 for which no official statement in final form is prepared 
and Limited Offering Securities remain exempt from Rule G-36. Those 
offerings that currently are subject to Section (c)(i) of Rule G-36 
consist of Small Issue Securities, Short-Term Securities and 
Puttable Securities, if an official statement in final form has been 
prepared by or on behalf of the issuer.
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    For any primary offering subject to Rule G-36(c)(i), the 
underwriter currently is required to send two copies of the official 
statement, if one is prepared, in final form with two copies of Form G-
36(OS), to the board by the business day after the issuer delivers the 
municipal securities to the underwriter (the ``bond closing''). The 
Board reviewed certain information included by underwriters on Forms G-
36(OS) submitted to the Board's MSIL<Register> system in 1998, 
including approximately 2,000 such forms submitted in connection with 
primary offerings subject to Rule G-36(c)(i).\8\ For these offerings, 
the Board found that 96% of the official statements in final form were 
reported to have been delivered by issuers to underwriters within one 
business day after closing. The 4% of official statement deliveries by 
issuers to underwriters that were reported as being made more than one 
business day after closing and therefore too late to permit 
underwriters to comply with Rule G-36(c)(i) constituted more than half 
(approximately 54%) of all underwriter failures to meet the time frame 
of that section.\9\
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    \8\ The Board reviewed all Forms G-36(OS) for primary offerings 
having sale dates in 1998 received in acceptable form by the 
MSIL<Register> system on or prior to December 31, 1998. Excluded 
from this review were any Forms G-36(OS) that omitted the sale date, 
date of receipt by the underwriter of the official statement from 
the issuer or date that the underwriter sent the official statement 
to the MSIL<Register> system. Information provided by underwriters 
on Form G-36(OS) is not independently verified by the Board but is 
provided to the appropriate enforcement agency on a regular basis. 
Underwriters are required to certify that all information contained 
in each Form G-36(OS) submitted to the MSIL<Register> system is true 
and correct. Inaccuracies in the information reported by 
underwriters on Form G-36(OS) could subject such underwriter to 
appropriate enforcement action. The results of the Board's review 
could be affected by any such inaccuracies. The full results of this 
review, including results relating to other provisions of Rule G-36 
and to the provisions of Rule G-32 and Rule 15c2-12, were published 
in ``Official Statement Deliveries Under Rules G-32 and G-36 and 
Exchange Act Rule 15c2-12,'' MSRB Reports, Vol. 19, No. 3 (Sept. 
1999) at 29 (the ``Board Notice'').
    \9\ The remaining failures consisted of situations where the 
issuer was reported to have delivered the official statement to the 
underwriter in sufficient time for the underwriter to comply with 
Rule G-36(c)(i) but the underwriter delayed sending the official 
statement to the Board until later than the business day after the 
bond closing.
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    The Board believes that there is significant room for improvement 
with respect to underwriter compliance with Rule G-36(c)(i) in those 
situations in which the official statement is received in sufficient 
time to send to the Board on a timely basis. Underwriters experiencing 
problems in this area should review their internal procedures for 
ensuring that official statements delivered by issuers are handled in a 
manner that permits the accurate completion and the prompt sending of 
Form G-36(OS) and the official statement to the Board.
    However, the Board is concerned that more than half of the 
instances in which underwriters have not met the time frame of Rule G-
36(c)(i) resulted from official statements that were reported to have 
been delivered by issuers more than one business day after closing. Of 
course, the Board has no authority to require that an issuer prepare an 
official statement or that any official statement that is prepared be 
delivered to underwriters within a specified time frame. In addition, 
the Commission excepted those primary offerings that are subject to 
Rule G-36(c)(i) from Rule 15c2-12. Therefore, the MSRB believes that no 
regulatory framework exists to compel, directly or indirectly, the 
preparation and delivery of an official statement in such offerings.
    The Board notes that in approximately 36% of the offerings subject 
to Rule G-36(c)(i) the number of business days between the sale date 
and the business day following closing is less than ten. As a result, 
for these offerings, the requirement in Rule G-36(c)(i) that the 
underwriter send the official statement to the Board within one 
business day after the bond closing provides the underwriter with less 
time to comply with its official statement submission requirement than 
the ten business day outside time frame of Rule G-36(c)(i), were such a 
time frame

[[Page 6429]]

applicable to these offerings.\10\ At the same time, however, issuers 
in these offerings generally have not contracted with underwriters to 
deliver official statements within seven business days of the sale 
date, as provided in paragraph (b)(3) of Rule 15c2-12, since such 
offerings are exempt from that rule. Thus, in more than one-third of 
all offerings subject to Rule G-36(c)(i), underwriters are required to 
act more quickly than they would under Rule G-36(b)(i) even though 
there is no concomitant obligation on the part of issuers to deliver an 
official statement within any particular time frame.
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    \10\ Section (b)(i) of Rule G-36 requires the underwriter of a 
primary offering subject to Rule 15c2-12 to send two copies of the 
final statement, together with two copies of Form G-36(OS), to the 
Board within one business day after receipt of the final official 
statement from the issuer but no later than 10 business days after 
the sale date.
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    As a result, the Board published the Board Notice seeking comment 
on, among other things, a draft amendment to Rule G-36(c)(i) which the 
Board believed would address this situation. After reviewing the 
comments received on the Board Notice, the Board determined to adopt 
the draft amendment, with a minor clarifying change.\11\ As amended, 
the rule would provide that an underwriter in a primary offering 
subject to Rule G-36(c)(i) for which an official statement in final 
form is prepared by the issuer must send two copies of the official 
statement in final form, together with two copies of Form G-36(OS), to 
the Board by the later of (i) one business day after the bond closing 
or (ii) one business day after receipt of the official statement from 
the issuer.\12\ The proposed rule change is intended solely to provide 
relief to underwriters that face violation of Rule G-36(c)(i) as a 
result of circumstances beyond their control and is not intended to 
imply that underwriters and other dealers may ignore their continuing 
obligation to deliver official statements for new issue municipal 
securities to customers by settlement, as required under rule G-32.
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    \11\ The change in language makes clearer the fact that Section 
(c)(i) will continue to apply to a primary offering only if an 
official statement in final form is prepared.
    \12\ In contrast, Rule G-36(c)(i) currently requires that the 
underwriter send the official statement to the Board by the business 
day after the bond closing, regardless of whether the underwriter 
has in fact received the official statement by such day.
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2. Statutory Purpose
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) \13\ of the Act, which provides, in part, that the 
Board's rules shall:
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    \13\ 15 U.S.C. 78o-4(b)(2)(C).

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just an 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 
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the public interest.

    The Board believes that the proposed rule change is consistent with 
the Act in that it removes an impediment to a free and open market in 
municipal securities without adversely affecting the protection of 
investors and of the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Board does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act because it would apply equally 
to all municipal underwriters.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    In the Board Notice, the Board sought comment on a draft amendment 
to Rule G-36(c)(i) that would require an underwriter in a primary 
offering subject to Rule G-36(c)(i) for which an official statement in 
final form has been prepared to send the official statement to the 
Board by the later of (i) one business day after the bond closing or 
(ii) one business day after receipt of the official statement from the 
issuer. The Board received two comment letters in response to the Board 
Notice, only one of which addressed the draft amendment.\14\
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    \14\ TBMA's letter addressed the draft amendment as well as 
certain other issues relating to Board Rules G-36 and G-32 and Rule 
15c2-12. The comment letter from Charles Schwab & Co. Inc. 
(``Schwab'') addressed certain issues relating to Rule G-32. The 
Board is considering the comments received on these other matters 
but has not determined to take any rulemaking action with respect to 
Rule G-32 or any provisions of Rule G-36, other than Section (c)(i), 
at this time.
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    The Bond Market Association (TBMA) states that it ``strongly 
supports'' the draft amendment. TBMA further states that the change in 
the timing requirement ``means that underwriters and issuers could 
schedule closings on the basis of the needs of the transaction, rather 
than for the purpose of allowing a sufficient number of days to 
increase the odds that the official statement will be ready in time for 
the closing.''
    The Board strongly believes that this second statement of TBMA 
demonstrates a misunderstanding of the nature of the proposed rule 
change, the purpose of official statements in the municipal securities 
market and the other obligations of dealers with respect to delivery of 
official statements. In the Board Notice, the Board observed that for 
new issue municipal securities, dealers typically seek, and customers 
generally expect, to settle their trades on the same day as the closing 
of the underwriting. As a result, underwriters need to receive the 
official statement from the issuer in sufficient time to ensure that 
the official statement can be delivered to customers by settlement of 
their transactions, as required under Rule G-32. If an issuer prepares 
an official statement in final form but does not deliver it to the 
underwriter by the bond closing, dealers would continue to be 
prohibited from settling their transactions with customers until they 
have delivered the official statement to the customers, with certain 
very limited exceptions.\15\ Thus, other than offerings falling within 
the narrow exceptions provided under Rule G-32, the only offerings in 
which ``the needs of the transaction'' would not include delivery of 
the official statement by closing would be those in which underwriters 
expect to hold the securities in inventory until the official statement 
is in fact delivered and therefore made available for redelivery to 
customers.
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    \15\ Commercial paper is wholly exempt from the Rule G-32 
customer delivery requirement and preliminary official statements 
may be delivered by settlement (with official statements in final 
form sent when they become available) for Puttable Securities.
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    The completion and delivery of an official statement by the closing 
of the underwriting is not a technical requirement imposed by the 
Board. If an official statement serves no purpose in an offering that 
is exempt from Rule 15c2-12, then the issuer need not prepare one. 
Unless an issuer is preparing an official statement for reasons 
entirely unrelated to the offering that it describes, it is difficult 
to understand how completion of an official statement after the 
underwriters and initial customers have received delivery of their 
securities can be rationalized.\16\
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    \16\ Of course, the Board believes that there is significant 
value to the secondary market in having official statements 
available throughout the life of the issue. Nonetheless, the Board 
sees no way of justifying the existence of an official statement 
based on the needs of the secondary market while ignoring the needs 
of the primary market.

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[[Page 6430]]

    Although the submission requirement under current Rule G-36(c)(i) 
may influence an issuer to give completion of the official statement in 
final form a higher priority, this requirement also may serve as a 
disincentive to prepare the official statement in final form, since an 
underwriter currently can avoid a Rule G-36(c)(i) violation by 
prevailing upon the issuer not to prepare an official statement in 
final form at all (e.g., an underwriter that has purchased an issue 
based on a preliminary official statement could advise an issuer that 
it need not finalize the official statement). Changing the time frame 
of the Rule G-36(c)(i) submission requirement would eliminate this 
disincentive while providing relief for underwriters that may face a 
potential rule violation for reasons beyond their control. The official 
statement delivery requirement under Rule G-32 would continue to 
provide a powerful incentive to underwriters to urge issuers to 
complete the official statement in final form in sufficient time to 
permit the underwriters and the other dealers to which they sell such 
new issue municipal securities to deliver the official statement to 
customers by settlement.
    Although TBMA supports the draft amendment to Rule G-36(c)(i), it 
suggests that the Board further amend Rule G-36(c)(i) to extend the 
one-business day time frame to two-business days. TBMA argues that ``it 
is often logistically difficult to meet the one-day requirement'' and 
that the MSIL<Register> systems serves ``archival rather than real-time 
disclosure purposes.'' \17\ In adopting Rule G-36(c)(i) and creating 
the MSIL<Register> system, the Board undertook to make available to the 
industry a comprehensive repository of official statements for use in 
both the primary and secondary markets. In addition to serving the 
vital archival purpose of ensuring that information regarding municipal 
securities is available throughout the life of the securities, the 
MSIL<Register> system serves an important function in the primary 
market as an alternate source (through its subscribers) of official 
statements for dealers seeking to fulfill their Rule G-32 customer 
delivery obligation. Delaying the submission of official statements to 
the Board could impair the MSIL<Register> system`s usefulness in the 
primary market.\18\ Without a more substantial showing of hardship to 
the dealer community, the Board believes that extension of the time 
frame for underwriters to turn the official statement around to the 
Board is not justified at this time. The ability to meet this 
requirement is entirely within the control of dealers, and they should 
review their procedures to ensure that this task is assigned to the 
appropriate personnel having a clear understanding of the procedural 
and substantive requirements of Rule G-36. To the extent that dealers 
experience difficulty in coordinating the actions of various personnel 
involved in the handling of official statements, they should consider 
whether they have instituted procedures that adequately provide for 
compliance with the rule.
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    \17\ TBMA states ``that it is diffuclt to ensure the desirable 
level of coordination between the underwriter personnel who are 
best-positioned to authenticate the official statement as the final 
official statement and the personnel who are responsible for filing 
with the Board.''
    \18\ Schwab notes that it has `found that if the dealers [from 
which it purchases new issue municipal securities] do not have 
copies of the final official statement, such copies are also 
generally unavailable from the managing underwriter financial 
printer. Bloomberg or another Nationally Recognized Municipal 
Securities Information Repository.'' Delays in receiving official 
statements by the MSIL<Register> system would further reduce their 
availability from these other sources.
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III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which the MSRB consents, the Commission will:
    a. by order approve the proposed rule change, or
    b. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any persons, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission`s Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
MSRB. All submissions should refer to File No. SR-MSRB-99-11 and should 
be submitted by March 1, 2000.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority. \19\
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    \19\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-2880 Filed 2-8-00; 8:45 am]
BILLING CODE 8010-01-M