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[Federal Register Volume 63, Number 81 (Tuesday, April 28, 1998)]
[Notices]
[Pages 23311-23315]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-11208]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39904; File No. SR-MSRB-97-14]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Municipal Securities Rulemaking Board Relating to Rule G-
32, on Disclosures in Connection With New Issues

April 22, 1998.
    On March 12, 1998,\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-97-14), pursuant to Section 19(b)(1) of the Securities Exchange 
Act of 1934

[[Page 23312]]

(``Act''),\2\ and Rule 19b-4 thereunder.\3\ The proposed rule change 
and Amendment Nos. 1 and 2 (collectively referred to herein as the 
``proposed rule change'') are 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\ The Board initially filed this proposal on December 22, 
1997. However, a substantive amendment was requested to restore rule 
language that had been deleted. The Board filed Amendment No. 1 on 
March 12, 1998. Pursuant to section 19(b), Amendment No. 1 is 
subject to notice and comment; thus, the proposed rule change is 
deemed filed as of the date of the amendment. 15 U.S.C. 78s.
    On April 22, 1998, the Board filed Amendment No. 2 clarifying 
the underwriter's obligation if it prepares the official statement 
on behalf of issuers. See letter from Ernesto A. Lanza, Assistant 
General Counsel, MSRB, to Katherine A. England, Esq., Assistant 
Director, Division of Market Regulation, SEC, dated April 22, 1998.
    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 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 
consisting of amendments of Rule G-32, on disclosures in connection 
with new issues. The proposed rule change will strengthen the 
provisions of the rule relating to dissemination of official statements 
among dealers and incorporate a long-standing Board interpretation 
relating to disclosures required to be made to customers in connection 
with negotiated sales of new issue municipal securities. Below is the 
text of the proposed rule change. Additions are italicized; deletions 
are in brackets.

Rule G-32. Disclosures in Connection with New Issues

    (a) Disclosure Requirements. No broker, dealer or municipal 
securities dealer shall sell, whether as principal or agent, any new 
issue municipal securities to a customer unless such broker, dealer or 
municipal securities dealer delivers to the customer no later than the 
settlement of the transaction:
    (i) No change.
    (ii) in connection with a negotiated sale of new issue municipal 
securities, the following information concerning the underwriting 
arrangements:
    (A)-(B) No change.
    (C) the initial offering price for each maturity in the issue that 
is offered or to be offered in whole or in part by the underwriters, 
including maturities that are not reoffered.
    In the event an official statement in final form will not be 
prepared by or on behalf of the issuer, an official statement in 
preliminary form, if any, shall be sent to the customer with a notice 
that no final official statement is being prepared.
    Every broker, dealer or municipal securities dealer shall send, 
upon request, [promptly furnish] the documents and information referred 
to in this section (a) to any broker, dealer or municipal securities 
dealer to which it sells new issue municipal securities [, upon the 
request of such broker, dealer or municipal securities dealer.] no 
later than the business day following the request or, if an official 
statement in final form is being prepared but has not been received 
from the issuer or its agent, no later than the business day following 
such receipt. Such items shall be sent by first class mail or other 
equally prompt means, unless the purchasing broker, dealer or municipal 
securities dealer arranges some other method of delivery and pays or 
agrees to pay for such delivery.
    (b) Responsibility of Managing Underwriters, and Sole Underwriters 
and Financial Advisors. (i) Managing Underwriters and Sole 
Underwriters. When an [a final] official statement in final form is 
prepared by or on behalf of an issuer, the managing underwriter or sole 
underwriter, upon request, shall send to [provided] all brokers, 
dealers and municipal securities dealers that purchase the new issue 
municipal securities [with] an official statement in final form and 
other information required by paragraph (a)(ii) of this rule and not 
less than one additional official statement in final form per $100,000 
par value of the new issue purchased by the broker, dealer or municipal 
securities dealer and sold to customers. Such items shall be sent no 
later than the business day following the request or, if an official 
statement in final form is being prepared but has not been received 
from the issuer or its agent, no later than the business day following 
such receipt. Such items shall be sent by first class mail or other 
equally prompt means, unless the purchasing broker, dealer or municipal 
securities dealer arranges some other method of delivery and pays or 
agrees to pay for such delivery. In addition, the managing underwriter 
or sole underwriter, upon request, [and] shall provide all purchasing 
brokers, dealers and municipal securities dealers with instructions on 
how to order additional copies of the [final] official statement in 
final form directly from the printer. [A managing underwriter or sole 
underwriter that prepares an official statement on behalf of an issuer 
shall print the final official statement and other information required 
by paragraph (a)(ii) of this rule and make them available promptly 
after the date of sale of the issue but no later than two business days 
before the date all securities are delivered by the syndicate manager 
to the syndicate members.]
    (ii) Financial Advisors. A broker, dealer or municipal securities 
dealer that, acting as financial advisor, prepares an [a final] 
official statement in final form on behalf of an issuer, shall make 
that official statement in final form available to the managing 
underwriter or sole underwriter promptly after the issuer approves its 
distribution. [award is made. If the financial advisor is responsible 
for printing the final official statement, it shall make adequate 
copies of the final official statement available to the managing 
underwriter or sole underwriter promptly after the award is made but no 
later than two business days before the date all securities are 
delivered by the syndicate manager to the syndicate members to permit 
their compliance with paragraph (b)(i) of this rule.]
    (c) 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 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 
texts 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
    Rule G-32, on disclosures in connection with new issues, provides 
that no broker, dealer or municipal securities dealer (``dealer'') 
shall sell any new issue municipal securities to a customer unless such 
dealer delivers to the customer no later than the settlement of the 
transaction a copy of the official statement in final form, if one is 
being prepared. In connection with a negotiated sale of new issue 
municipal securities, dealers are also required to deliver to their 
customers, by no later than settlement with the customer, information 
regarding, among other things, the initial offering price for each 
maturity in the new issue (termed the ``Offering Price Disclosure 
Provision''). Managing underwriters and other dealers that sell new 
issue municipal securities to purchasing dealers are required to 
furnish copies of the official statement to such purchasing dealers 
upon request, and dealers acting as financial advisors are also 
required to ensure that official statements are made available to the 
underwriters in a timely

[[Page 23313]]

manner (termed the ``Dealer Dissemination Provisions''). The Board is 
proposing amendment to Rule G-32 to strengthen the Dealer Dissemination 
Provisions and to explicitly incorporate into the Offering Price 
Disclosure Provision a long-standing Board interpretation of such 
provision.

Amendments to Dealer Dissemination Provisions

    All dealers selling new issue municipal securities to customers, 
not just dealers that participated in the underwriting of the new 
issue, are required to deliver official statements to their customers 
by no later than settlement of their transactions. As a result, the 
Dealer Dissemination Provisions were included in Rule G-32 to make 
official statements for new issues available to all dealers so that 
they may fulfill their customer delivery obligation under the rule. 
Dealers that are not part of the underwriting group have indicated from 
time to time that they have had some difficulty in obtaining official 
statements from the managing underwriter or other selling dealers on a 
timely basis. The Board, therefore, is proposing amendments to the 
Dealer Dissemination Provisions of Rule G-32 to provide a specific 
timeframe and method for delivery of official statements to purchasing 
dealers.
    The proposed rule change would retain the existing responsibility 
of the managing underwriter under the rule to provide, upon request, 
one copy of the official statement to purchasing dealers, together with 
the disclosure information required for negotiated offerings, and one 
additional official statement per $100,000 par value purchased for 
resale to customers. The managing underwriter also would continue to be 
required to provide purchasing dealers, upon request, with instructions 
on how to order copies of the official statement from the printer.\4\ 
The amendments would add a requirement that the official statement be 
sent by the managing underwriter to the purchasing dealer no later than 
the business day after the request or, if the official statement has 
not been received from the issuer or its agent, the business day after 
receipt. The managing underwriters would be required to send official 
statements by first class mail or other equally prompt means unless the 
purchasing dealer arranges some other method of delivery at its own 
expense. These obligations of the managing underwriter would continue 
to apply with respect to all purchasing dealers, even where the 
managing underwriter did not sell the securities to the purchasing 
dealer.
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    \4\ Consistent with the position taken by the Commission in 
connection with its Rule 15c2-12, the Board recognizes that the 
official statement is the issuer's document. As a result, the 
proposed rule change would remove references in the existing rule to 
the preparation of official statements by underwriters.
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    In addition, the proposed rule change would retain the existing 
requirement that every dealer selling a new issue municipal security to 
another dealer must furnish the official statement to such purchasing 
dealer upon request. The amendments would add a requirement that the 
selling dealer send the official statement to the purchasing dealer 
within the same timeframe and by the same means as would be required of 
the managing underwriter.
    The Board believes that the proposed rule change will help dealers 
to comply with their obligation to deliver official statements to their 
customers by settlement and will more effectively ensure rapid 
dissemination of official statements to customers and to the 
marketplace generally than is occurring in many instances under the 
current version of the rule. In particular, the Board believes that the 
provisions of the proposed rule change and of The Bond Market 
Association's Standard Agreement Among Underwriters would effectively 
obligate the managing underwriter to send the official statement to 
syndicate members within one business day of its receipt from the 
issuer.\5\ Furthermore, although the proposed amendment removes 
specific references in the existing rule to underwriters that prepare 
official statements on behalf of issuers, the Board is of the view that 
an underwriter that prepares an official statement on behalf of an 
issuer would be deemed to have received the official statement from the 
issuer immediately upon such issuer approving the distribution of the 
completed official statement in final form.\6\
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    \5\ The Bond Market Association's Standard Agreement Among 
Underwriters provides that syndicate members must place orders for 
the official statement by the business day following the date of 
execution of the purchase contract and states that any syndicate 
member that fails to place such an order will be assumed to have 
requested the quantity required under Rule G-32(b)(i). See Agreement 
Among Underwriters, Instructions, Terms and Acceptance, The Bond 
Market Association, (Oct. 1, 1997) at para. 3. Thus, except in the 
rare instances where an official statement in final form is 
completed and available for distribution on the date of sale, 
syndicate members will have made or have been deemed to have made 
their requests for official statements by the time the managing 
underwriter receives the official statement from the issuer, thereby 
obligating the managing underwriter under the proposed rule change 
to send the official statement to syndicate members within one 
business day of receipt.
    \6\ See supra note 1, Amendment No. 2.
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    The proposed rule change would retain the existing requirement 
under Rule G-32 that a dealer acting as financial advisor that prepares 
an official statement on behalf of an issuer must make that official 
statement available to the managing or sole underwriter, but would 
change the timing for such availability from promptly after the award 
is made, as provided in the current rule, to promptly after the issuer 
approves distribution of the official statement in final form. However, 
as the Board cannot prescribe the content, timing, quantity or manner 
of production of the official statement by the issuer or its agents, 
the portions of the existing rule that would regulate such production 
on behalf of an issuer by a dealer acting as financial advisor would be 
deleted. The Board is proposing this amendment to ensure that, once the 
official statement is completed and approved by the issuer for 
distribution, dealers acting as financial advisors will be obligated to 
commence the dissemination process promptly.\7\ The Board urges issuers 
that utilize the services of non-dealer financial advisors to hold such 
financial advisor to the same standards for prompt delivery of official 
statements to the underwriters.
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    \7\ Of course, this amendment would not relieve dealers acting 
as financial advisors of their obligations to comply with their 
contractual arrangements entered into with issuers and with all 
applicable state and federal statutes, regulations and common law. 
Thus, in particular, in instances where a dealer, acting as 
financial advisor, has a contractual or other legal duty to assist 
an issuer in complying with its contractual obligation to deliver 
final official statements within the timeframe and in the quantities 
set forth in Rule 15c2-12(b)(3) under the Act, such obligation would 
not be diminished by operation of the revised amendment.
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Amendment to Offering Price Disclosure Provision

    Since January 1983,\8\ the Board has interpreted the Offering Price 
Disclosure Provision to require that the initial offering price of all 
maturities of a new issue of municipal securities in a negotiated 
offering must be disclosed to customers, even for maturities that are 
not reoffered. The proposed amendment to the Offering Price Disclosure 
Provision of Rule G-32 would incorporate into the rule language this

[[Page 23314]]

long-standing Board interpretation. The Board believes that the 
application of the Offering Price Disclosure Provision to maturities 
that are not reoffered permits customers to determine whether the price 
they paid for a new issue municipal security is substantially different 
from the price being paid by presale purchasers.
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    \8\ See MSRB Reports, Vol. 3, No. 1 (Jan. 1983), ``Rule G-32 + 
Frequently Asked Questions Concerning Disclosures in Connection with 
New Issues,'' at 25-27. See also MSRB Reports, Vol. 6, No. 4 (Sept. 
1986), ``Disclosure Requirements for New Issue Securities: Rule G-
32,'' at 17-20 and MSRB Reports, Vol. 16, No. 3 (Sept. 1996), 
``Disclosures in Connection with New Issues: Rule G-32,'' at 19-23.
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2. Statutory Basis
    The Board believes the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act.\9\ The Board believes that the 
proposed rule change would help dealers to comply with their obligation 
to deliver official statements to their customers by settlement, would 
improve dissemination of official statements to the marketplace 
generally during the underwriting period, and would ensure the 
continued availability of important pricing information to new issue 
customers.
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    \9\ Section 15B(b)(2)(C) states 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.
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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 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

    In September 1996, the Board published a notice (the ``Notice'') in 
which the Board proposed certain amendments to Rule G-32 that, among 
other things, would have strengthened the rule's Dealer Dissemination 
Provisions and incorporated into the Offering Price Disclosure 
Provision the Board's interpretation regarding disclosure in a 
negotiated offering of the initial offering prices of maturities that 
are not reoffered.\10\
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    \10\ See MSRB Reports, Vol. 16, No. 3 (Sept. 1996), 
``Disclosures in Connection with New Issues: Rule G-32,'' at 19-23.
    The proposed amendments described in the Notice included, in 
addition to the proposed amendments to the Dealer Dissemination 
Provisions (other than the proposed amendment to require dealers 
acting as financial advisors to make the official statement 
available promptly after the issuer approves its distribution) and 
the Offering Price Disclosure Provision, a requirement that official 
statements for primary offerings of municipal securities subject to 
Rule 15c2-12 under the Act be sent to customers no later than the 
date that final money confirmations are sent (the ``Customer 
Delivery Proposal''). In conjunction with this proposed change to 
the official statement delivery requirement, the Board proposed 
reorganizing Rule G-32 to address separately those offerings that 
are subject to Rule 15c2-12 and those that are not. The Board 
subsequently withdrew the proposed amendments and is not, at this 
time, filing with the Commission the Customer Delivery Proposal. 
Furthermore, because the Customer Delivery Proposal is not being 
filed, the Board also is not proposing to reorganize the rule as 
described in the Notice.
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    In response to its request for comments, the Board received three 
comment letters,\11\ each of which addressed the proposed amendments to 
the Dealer Dissemination Provisions and one of which also addressed the 
proposed amendment to the Offering Price Disclosure Provision.
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    \11\ Chase Securities of Texas, Inc. (``Chase''), J.C. Bradford 
& Co., and Paine Webber Incorporated.
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    One commentator supports the proposed amendments to the Dealer 
Dissemination Provisions of Rule G-32\12\ This dealer noted that it was 
already responding to requests from purchasing dealers for official 
statements within one business day so that the proposed amendments 
would not pose any operational problems for it. In addition, the dealer 
stated that placing such an obligation on all dealers would make it 
possible for dealers to deliver official statements to their customers 
in a more timely manner.
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    \12\ Chase.
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    Two commentators did not object to any of the changes in the 
proposed amendments, but criticized certain of the existing provisions 
of the Dealer Dissemination Provisions. One dealer objected to the 
open-ended requirement that managing underwriters provide purchasing 
dealers with official statements and proposed that purchasing dealers 
be required to obtain the official statement from a nationally 
recognized municipal securities information repository (``NRMSIR'') if 
the managing underwriter has exhausted its supply of official 
statements.\13\ Another dealer noted that the requirement to provide an 
official statement to purchasing dealers is limited to one per $100,000 
par value of securities sold to customers and that this limitation puts 
a heavier burden on regional, retail-oriented firms that are compelled 
to photocopy additional copies.\14\
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    \13\ PaineWebber Incorporated.
    \14\ J.C. Bradford & Co.
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    The Board recognizes that there may not be sufficient quantities of 
the original printed official statement for every new issue to comply 
with dealers' obligations under Board rules. It believes, however, that 
requiring selling dealers to provide a copy of the official statement 
to purchasing dealers, upon request, and requiring managing 
underwriters to provide to purchasing dealers, upon request, one 
official statement plus one additional official statement per $100,000 
par value purchased for resale to customers serves as a reasonable 
floor on the number of official statements that are available in the 
marketplace to meet the requirements of Board rules.\15\ If a managing 
underwriter does not have sufficient printed copies of the official 
statement to meet its obligations with respect to any particular new 
issue, it may need to photocopy or otherwise obtain additional copies 
of the official statement. In addition, if a dealer selling municipal 
securities to customers is unable to obtain sufficient numbers of 
official statements from the managing underwriter or from the dealer 
that sold the securities to it, then this dealer may need to photocopy 
or otherwise obtain additional copies of the official statement. Such 
other sources of official statements include, but are not limited to, 
the Board's Municipal Securities Information Library 
(MSIL) system,\16\ the NRMSIRs, or other information 
vendors.
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    \15\ In addition, Rule G-32 will continue to require that 
managing underwriters provide all purchasing dealers with 
instructions on how to order additional copies of the final official 
statement directly from the printer.
    \16\ Municipal Securities Information Library and MSIL are 
registered trademarks of the Board.
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    One commentators supports the proposed amendment to the Offering 
Price Disclosure Requirement.\17\
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    \17\ Chase
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III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the publication of this notice in the 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 self-regulatory organization 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

[[Page 23315]]

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. 
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 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 Board's principal offices. 
All submissions should refer to File No. SR-MSRB-97-14 and should be 
submitted by May 19, 1998.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-11208 Filed 4-27-98; 8:45 am]
BILLING CODE 8010-01-M
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