[Federal Register Volume 65, Number 28 (Thursday, February 10, 2000)]
[Notices]
[Pages 6669-6673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3038]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42385; File No. SR-MSRB-00-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to 
Supervision of Correspondence With the Public

February 3, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 6670]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 7, 2000, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Board. 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 proposed amendments to MSRB Rules G-8, on books 
and records, G-9, on record retention, and G-27, on supervision 
(hereinafter referred to as the ``proposed rule change''). The proposed 
rule change will revise the Board's supervision and record retention 
rules to provide dealers with flexibility in developing reasonable 
procedures for the review of correspondence with the public. The 
amendments are intended to recognize the growing use of correspondence 
sent and received in electronic format while still providing for 
effective supervision. The Board has also filed with the Commission a 
draft notice that will provide guidance to dealers on how to implement 
these rule changes. The proposed rule change and accompanying notice 
are modeled after and designed to conform to the rules and guidance of 
the National Association of Securities Dealers (``NASD''). The text of 
the proposed rule change is set forth below. Additional are italicized 
and deletions are bracketed.

* * * * *

Rule G-8: Books and Records to be made by Brokers, Dealers and 
Municipal Securities Dealers

    (a) Description of Books and Records Required to be Made. Except 
as otherwise specifically indicated in this rule, every broker, 
dealer and municipal securities dealer shall make and keep current 
the following books and records, to the extend applicable to the 
business of such broker, dealer or municipal securities dealer:
    (i)-(xix) No Change.
    (xx) Records Concerning Compliance with Rule G-27. Each broker, 
dealer and municipal securities dealer shall maintain the records 
required under G-27(c) and G-27(d).
    (b)-(f) No Change.

Rule G-: Preservation of Records

    (a) No Change.
    (b) Records to be Preserved for Three Years. Every broker, 
dealer and municipal securities dealer shall preserve the following 
records for a period of not less than three years:
    (i)-(vii) No Change.
    (viii) the following records, to the extent made or received by 
such broker, dealer or municipal securities dealer in connection 
with its business as such broker, dealer or municipal securities 
dealer and not otherwise described in this rule:
    (A)-(B) No Change.
    (C) all written and electronic communications received and sent, 
including inter-office memoranda, relating to the conduct of the 
activities of such broker, dealer or municipal securities dealer 
with respect to municipal securities;
    (D)-(E) No Change.
    (ix)-(xiii) No Change.
    (xiv) the records to be maintained pursuant to Rule G-8(a)(xx).

Rule G-27: Supervision

    (a)-(b) No change
    (c) Written supervisory procedures. Each dealer shall adopt, 
maintain and enforce written supervisory procedures reasonably 
designed to ensure that the conduct of the municipal securities 
activities of the dealer and its associated persons are in 
compliance as required in section (a) of this rule. Such procedures 
shall codify the dealer's supervisory system for ensuring compliance 
and, at a minimum, shall establish procedures
    (i)-(vi) No change
    (vii) for the prompt review and written approval by a designated 
principal of:
    (A) the opening of each customer account introduced or carried 
by the dealer in which transactions in municipal securities may be 
effected; and
    (B) each transaction in municipal securities on a daily basis, 
including each transaction in municipal securities effected with or 
for a discretionary account introduced or carried by the dealer [; 
and
    (C) all correspondence pertaining to the solicitation or 
execution of transactions in municipal securities].
    (d) Review of Correspondence
    (i) Supervision of Municipal Securities Representatives. Each 
dealer shall establish procedures for the review by a designated 
principal of incoming and outgoing written (i.e., non-electronic) 
and electronic correspondence of its municipal securities 
representatives with the public relating to the municipal securities 
activities of such dealer. Such procedures must be in writing and be 
designed to reasonably supervise each municipal securities 
representative. Evidence that these supervisory procedures have been 
implemented and carried out must be maintained and made available, 
upon request, to a registered securities association or the 
appropriate regulatory agency as defined in Section 3(a)(34) of the 
Act.
    (ii) Review of correspondence. Each dealer shall develop written 
procedures that are appropriate to its business, size, structure, 
and customers for the review of incoming and outgoing written (i.e., 
non-electronic) and electronic correspondence with the public 
relating to its municipal securities activities. Procedures shall 
include the review of incoming, written correspondence directed to 
municipal securities representatives and related to the dealer's 
municipal securities activities to properly identify and handle 
customer complaints and to ensure that customer funds and securities 
are handled in accordance with the dealer's procedures. Where such 
procedures for the review of correspondence do not require review of 
all correspondence prior to use or distribution, they must include 
provisions for the education and training of associated persons as 
to the dealer's procedures governing correspondence; documentation 
of such education and training; and surveillance and follow-up to 
ensure that such procedures are implemented and adhered to.
    (iii) Retention of correspondence. Each dealer shall retain 
correspondence of municipal securities representatives relating to 
its municipal securities activities in accordance with rules G-
8(a)(xx) and G-9(b)(viii) and (xiv). The names of the persons who 
prepared outgoing correspondence and who reviewed the correspondence 
shall be ascertainable from the retained records and the retained 
records shall be readily available, upon request, to a registered 
securities association or the appropriate regulatory agency as 
defined in section 3(a)(34) of the Act.
    [(d)] (e) Deputy to update and review written procedures. Each 
dealer shall revise and update its written supervisory procedures as 
necessary to respond to changes in Board or other applicable rules 
and as other circumstances require. In addition, each dealer shall 
review, at least on an annual basis, its supervisory system and 
written supervisory procedures adopted under sections (c) and (d) of 
this rule to determine whether they are adequate and up-to-date and 
shall ensure that the dealer is in compliance with this rule.
* * * * *

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 Board 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 may be examined at the places specified in 
Item IV below. The Board 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
i. Background
    In May 1996, the Commission issued an Interpretive Release on the 
use of Electronic Media by the Broker-Dealers,

[[Page 6671]]

Transfer Agents, and Investment Advisors for Delivery of 
Information.\3\ That release expressed the views of the Commission with 
respect to the delivery of information through electronic media in 
satisfaction of requirements in the federal securities laws, but did 
not address the applicability of any self-regulatory organization 
(``SRO'') rules. In the release the Commission did, however, strongly 
encourage the SROs to work with broker-dealer firms to adopt SRO 
supervisory review requirements governing communications with customers 
to accommodate the use of electronic media.\4\
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    \3\ See Securities Act Release No. 7288, Exchange Act Release 
No. 37182, Investment Company Act Release No. 21945, Investment 
Advisor Act Release No. 1562 (May 9, 1996), 61 FR 24644 (May 15, 
1996) (File No. S7-13-96).
    \4\ Id.
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    On December 31, 1997, the Commission approved proposed rule changes 
filed by the NASD \5\ and New York Stock Exchange (``NYSE'') \6\ to 
update rules governing supervision of communication with the public. 
NASD Notice to Members (``NTM'') 98-11 announced approval of the 
proposed rule change and provided implementation guidance to dealers.
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    \5\ See Exchange Act Release No. 39510 (December 31, 1997), 63 
FR 1131 (January 8, 1998).
    \6\ See Exchange Act Release No. 39511 (December 31, 1997), 63 
FR 1135 (January 8, 1998).
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    Most of these rules became effective on April 7, 1998.\7\ In 
response to public comment and certain Commission concerns, the NASD 
subsequently proposed further changes to these rules which were 
approved by the Commission and became effective on March 15, 1999.\8\ 
NASD NTM 99-03 provided guidance on the further changes.\9\
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    \7\ See Exchange Act Release No. 39866 (April 14, 1998), 63 FR 
19778 (April 21, 1998).
    \8\ See Exchange Act Release No. 40372 (August 27, 1998), 63 FR 
47059 (September 3, 1998).
    \9\ See NTM 99-03 (January 1999).
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    As amended, NASD Rule 3010(d)(1) provides that procedures for 
review of correspondence with the public relating to a member's 
investment banking of securities business be designed to provide 
reasonable supervision for each registered representative, be described 
in an organization's written supervisory procedures, and be evidenced 
in an appropriate manner.
    NASD Rule 3010(d)(2), as amended, requires each member to develop 
written policies and procedures for review of correspondence with the 
public relating to its investment banking or securities business 
tailored to its structure and the nature and size of its business and 
customers. These procedures must also include the review of incoming, 
written correspondence directed to registered representatives and 
related to the member's investment banking or securities business to 
properly identify and handle customer complaints and to ensure that 
customer funds and securities are handled in accordance with dealer's 
procedures.
    The Board has determined to adopt substantially similar rule 
changes. The Board believes that conforming its rule language to the 
language in the NASD rules will help ensure a coordinated regulatory 
approach to the supervision of correspondence. In addition, in 
connection with Commission approval of the proposed rule change, the 
Board will issue a notice to dealers to provide guidance to dealers on 
how to implement the proposed rule changes. This guidance has been 
coordinated with NASD NTM 98-11 and NASD NTM 99-03 and is described 
below.
ii. Description of the Rule as Revised
Supervision of Municipal Securities Representatives
    The proposed amendments to MSRB Rule G-27(d), provide, among other 
things, that a dealer must establish procedures for the review by a 
designated principal of each municipal securities representative's 
incoming and outgoing written (i.e., non-electronic) and electronic 
correspondence with the public relating to the municipal securities 
activities of such dealer. The procedures must be designed to provide 
reasonable supervision of each municipal securities representative and 
must be described in the dealer's written supervisory procedures. 
Implementation and execution of these procedures must be clearly 
evidenced, and the evidence must be maintained and be made available 
upon request to a registered securities association or the appropriate 
regulatory agency as defined in section 3(a)(34) \10\ of the Act.
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    \10\ 15 U.S.C. 78c(a)(34).
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Procedures for Review of Correspondence
    Currently, MSRB Rule 27(c)(vii)(C) provides that each dealer shall 
establish procedures for the review and written approval by a 
designated principal of all correspondence pertaining to the 
solicitation or execution of transactions in municipal securities. 
Under the proposed MSRB Rule G-27(d)(ii), a review of each item of 
correspondence will no longer be required. Dealers will be allowed 
flexibility in developing procedures for the review of correspondence 
relating to the dealer's municipal securities activities--both incoming 
and outgoing, written or electronic--tailored to the nature and size of 
the dealer's business and customers.
    With respect to incoming, written (i.e., non-electronic) 
correspondence directed to municipal securities representatives and 
related to the municipal securities activities of the dealer, the 
proposal would require review of the correspondence to properly 
identify and handle customer complaints and to ensure that customer 
funds and securities are handled in accordance with the dealer's 
procedures. The proposed rule change does not require review of all 
correspondence prior to use or distribution. However, any dealer that 
does not conduct electronic or manual pre-use review of each item of 
correspondence will be required to regularly educate and train its 
associated persons as to the dealer's procedures governing review of 
correspondence, document such education and training, and monitor to 
ensure compliance with such procedures.
Retention of Correspondence
    The proposed rule change will include amendments to MSRB Rules G-
8(a)(xx), G-9(b)(viii) and (xiv), and G-7(d)(i), (ii), and (iii) 
requiring each dealer to preserve correspondence of municipal 
securities representatives relating to the municipal securities 
activities and maintain the records of written supervisory procedures, 
education and training required under Rule G-27(c) and (d) for three 
years. The proposed rule change also requires that the names of the 
persons who prepared and reviewed correspondence must be ascertainable 
from the retained records and the records must be made available, upon 
request, to the appropriate enforcement agency (i.e., NASD or federal 
bank regulatory agency).
Draft Notice-Guidelines for Supervision and Review
    The notice to dealers will provide guidance on how to implement the 
proposed rule change. In particular, the notice states that in adopting 
review procedures pursuant to Rule G-27(d)(i), dealers must:

    <bullet> Specify, in writing, the dealer's policies and 
procedures for reviewing different types of correspondence;
    <bullet> Identify how supervisory reviews will be conducted and 
documented;
    <bullet> Identify what types of correspondence will be pre- or 
post-reviewed;
    <bullet> Identify the organizational position(s) responsible for 
conducting review of the different types of correspondence;

[[Page 6672]]

    <bullet> Specify the minimum frequency of the reviews for each 
type of correspondence;
    <bullet> Monitor the implementation of and compliance with the 
dealer's procedures for reviewing public correspondence; and
    <bullet> Periodically re-evaluate the effectiveness of the 
dealer's procedures for reviewing public correspondence and consider 
any necessary revisions.

    The notice also states that in conducting reviews, dealers may use 
reasonable sampling techniques. As an example of appropriate evidence 
of review, e-mail related to the dealer's municipal securities 
activities may be reviewed electronically and the evidence of review 
may be recorded electronically.
    In developing supervisory procedures for the review of 
correspondence with the public pursuant to Rule G-27(d)(ii), the notice 
states that each dealer must consider its structure, the nature and 
size of its business, other pertinent characteristics, and the 
appropriateness of implementing uniform firm-wide procedures or 
tailored procedures (i.e., by specific function, office/location, 
individual, or group of persons).
    The notice also provides guidance on adopting review procedures 
pursuant to Rule G-27(d)(ii), and states that dealers must, at a 
minimum:

    <bullet> Specify procedures for reviewing municipal securities 
representatives' recommendations to customers;
    <bullet> Require supervisory review of some of each municipal 
securities representative's public correspondence, including 
recommendations to customers;
    <bullet> Consider the complaint and overall disciplinary 
history, if any, of municipal securities representatives and other 
employees (with particular emphasis on complaints regarding written 
or oral communications with clients); and
    <bullet> Consider the nature and extent of training provided 
municipal securities representatives and other employees, as well as 
their experience in using communications media (although a dealer's 
procedures may not eliminate or provide for minimal supervisory 
reviews based on an employee's training or level of experience in 
using communications media).

    In addition, the notice provides that supervisory and procedures 
must also:

    <bullet> Provide that all customer complaints, whether received 
via e-mail or in written form from the customer, are kept and 
maintained;
    <bullet> Describe any dealer standards for the content of 
different types of correspondence; and
    <bullet> Prohibit municipal securities representatives' and 
other employees' use of electronic correspondence to the public 
unless such communications are subject to supervisory and review 
procedures developed by the dealer. For example, the Board would 
expect dealers to prohibit correspondence with customers from 
employees' home computers or through third party systems unless the 
dealer is capable of monitoring such communications.

    The notice also states that the method used for conducting reviews 
of incoming, written correspondence to identify customer complaints and 
funds may vary depending on the dealer's office structure. Where the 
office structure permits review of all correspondence, dealers should 
designate a municipal securities representative or other appropriate 
person to open and review correspondence prior to use or distribution 
to identify customer complaints and funds. The designated person must 
not be supervised or under the control of the municipal securities 
representative whose correspondence is opened and reviewed. 
Unregistered persons who have received sufficient training to enable 
them to identify complaints and funds would be permitted to review 
correspondence.
    Where the office structure does not permit the review of 
correspondence \11\ prior to use or distribution, appropriate 
procedures that could be adopted include the following:

    \11\ Amended language per telephone conservation between Carolyn 
Walsh, Assistant General Counsel, MSRB, and Ira L. Brandriss, the 
Commission, February 3, 2000.
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    <bullet> Forwarding opened incoming, written correspondence 
related to the dealer's municipal securities activities to a 
designated office, or supervising branch office, for review on a 
weekly basis;
    <bullet> Maintenance of a separate log for all checks received 
and securities products sold, which is forwarded to the supervising 
branch office on a weekly basis;
    <bullet> Communication to clients that they can contact the 
dealer directly for any matter, including the filing of a complaint, 
and providing them with an address and telephone number of a central 
office of the dealer for this purpose; and
    <bullet> Branch examination verification that the procedures are 
being followed.

2. Statutory Basis
    The Board believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) \12\ of the Act, which requires, in pertinent 
part, that the Board's rules shall:

    \12\ 15 U.S.C. 78o-4(b)(2)(c).
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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.

    In particular, the Board believes that the proposed rule change is 
consistent with the Act in allowing dealers to use new technology, such 
as e-mail and the Internet, while still providing for appropriate 
supervision and review. In addition, the proposed rule change will make 
the Board's rules on supervision and record retention substantially 
similar to the NASD rules. The Board believes that such similar rules 
by the self-regulatory organizations should facilitate dealer 
compliance with these requirements.

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 the 
furtherance of the Act's purposes because it would apply equally to all 
brokers, dealers and municipal securities dealers.

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

    Written comments were neither solicited nor received.

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 Federal 
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 Board consents, the Commission will:
    (A) By order approve such 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, N.W., Washington, D.C. 20549-
0609. Copies of the submission, 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 person, other than

[[Page 6673]]

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 in the Commission's Public Reference Room. Copies of the filing 
will also be available for inspection and copying at the principal 
offices of the Board. All submissions should refer to File No. SR-MSRB-
00-01 and should be submitted by March 2, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-3038 Filed 2-9-00; 8:45am]
BILLING CODE 8010-01-M