Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39321

8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2CFR 240.19b–4.

3See Securities Exchange Act Rel. No. 39900

(April 22, 1998), 63 FR 23315.

4See letter from Sarah M. Starkweather, Vice

President and Associate General Counsel, The Bond

Market Association (‘‘TBMA’’), to Jonathan G. Katz,

Secretary, SEC, dated May 19, 1998.

5Securities Exchange Act Release No. 26985

(June 28, 1989), 54 FR 28700 (July 10, 1989).

6This compressed time frame arises as a result of

the fact that, as securities bearing short-term yields

sold at par, the market dictates that pricing (i.e., the

setting of the interest rate borne by the securities

during the initial rate period) and settlement occur

on a same-day or next-day basis.

7Standard industry practice dictated that issuers

deliver the securities to the underwriters two or

more weeks after the sale date for the securities.

8See MSRB Reports, Vol. 17, No. 2 (June 1997)

at 3–16.

help reduce the risk to GSCC that a

member will fail after it has received a

FOS payment from GSCC but before it

has satisfied its clearing fund deficiency

call. Thus, the proposal should enhance

GSCC’s risk management process.

III. Conclusion

On the basis of the foregoing, the

Commission finds that the proposal is

consistent with the requirements of the

Act and in particular with the

requirements of Section 17A of the Act

and the rules and regulations

thereunder.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act, that the

proposed rule change (File No. SR–

GSCC–98–01) be and hereby is

approved.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–19440 Filed 7–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40197; File No. SR–MSRB–

98–04]

Self-Regulatory Organizations,

Municipal Securities Rulemaking

Board; Order Granting Approval of

Proposed Rule Change Relating to

Rule G–32, on Disclosures in

Connection with New Issues

July 14, 1998.

I. Introduction

On March 25, 1998, the Municipal

Securities Rulemaking Board (‘‘Board’’

or ‘‘MSRB’’) submitted to the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’), pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’) 1 and Rule

19b–4 thereunder,2 a proposed rule

change to amend Rule G–32, on

disclosures in connection with new

issues. The proposed rule change

provides an alternate method of

compliance by brokers, dealers and

municipal securities dealers with their

obligation to deliver official statements

in final form to customers by settlement

for certain new issues of variable rate

demand obligations. Notice of the

proposed rule change appeared in the

Federal Register on April 28, 1998.3

The Commission received one comment

letter which endorsed the proposed rule

change.4 This order approves the

proposed rule change.

II. Description of the Proposal

The Board amended Rule G–32, on

disclosures in connection with new

issues, that would permit brokers,

dealers and municipal securities dealers

(‘‘dealers’’), selling variable rate demand

obligations (‘‘VRDO’s’’) to customers

during the underwriting period, to

deliver a preliminary official statement

by no later than settlement and to send

the official statement in final form

within one business day of receipt from

the issuer, provided these VRDOs

qualify for the exemption provided

under subparagraph (d)(1)(iii) of Rule

15c2–12 under the Act (‘‘Rule 15c2–

12’’).

In 1989, the Commission promulgated

Rule 15c2–12,5 which requires

underwriters in primary offerings

subject to the rule, among other things,

to contract with issuers to receive final

official statements within seven

business days after any final agreement

to purchase, offer or sell municipal

securities and to receive these

statements in sufficient time to

accompany any confirmation that

requests payment from any customer.

Commenters questioned applying this

provision of the rule to VRDOs. In

response, the Commission provided an

exemption to the rule for obligations

that can be tendered by their holders for

purchase by the issuer or its agent at

least as frequently as every nine months

and that are in authorized

denominations of $100,000 or more

(‘‘Exempt VRDOs’’). This exemption

reflects the fundamental structural

differences between VRDOs and other

traditional municipal securities. For

most VRDO issues, particularly those

that fall within the Exempt VRDO

category, the purchase contract is not

executed until the issue closing date or

the immediately preceding day.6 Thus,

in the vast majority of these issues, the

Bond Delivery Period, the period

between the purchase date and the

closing date, is at most one business

day. As issuers typically do not

authorized the printing of the official

statement in final form until the

execution of the purchase contract,

underwriters usually do not receive the

official statement in final form until the

closing date at the earliest and, in many

instances, the printed version is not

available until after the closing date, at

which point the issuer has already

delivered the Exempt VRDOs to the

underwriters.

At the time Rule 15c2–12 was drafted,

the industry’s standard Bond Delivery

Period was two or more weeks.7 For

example, the seven business day time

frame of paragraph (b)(3) of Rule 15c2–

12 presumably anticipated a typical

Bond Delivery Period of at least one and

one-half weeks, because the final official

statement is generally expected to be

available at least by closing of the

underwriting transaction. Presumably,

Rule G–32’s official statement delivery

obligation was premised, at least in part,

on this industry standard.

In 1997, the Board launch a review of

the underwriting process which focused

on, among other things, the manner and

timeliness of delivery of official

statements from issuers to underwriters

under Rule 15c2–12 and from

underwriters to the Board of Rule G–

36.8 The Board found that, in some

instances, issuers do not meet their

contractual obligations entered into

with underwriters pursuant to Rule

15c2–12 deliver official statements

within seven business days after the

date of final agreement to purchase,

offer or sell the municipal securities.

The Board noted that, if issuers are not

meeting the current delivery

requirement under Rule 15c2–12, it is

possible that final official statements

also are not being prepared in time to

deliver to customers by settlement as

required under Rule G–32.

Thus, the Board determined that,

because the Bond Delivery Period for

Exempt VRDOs is at most one business

day, it is often not possible for dealers

to settle with customers, who expect to

receive delivery of their securities on

the issue date, without causing a

violation of the requirement that they

deliver the official statement in final

form to such customers by settlement.

As a result, the Board amended Rule G–

32 to permit a dealer, selling new issue

Exempt VRDOs, to deliver the official

statement in preliminary form to the
39322 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

9As in the current rule, if no official statement

in final form is being prepared, such dealer would

deliver to the customer by settlement the official

statement in preliminary form, if any, and written

notice to the effect that an official statement in final

form is not being prepared. If neither a final nor a

preliminary official statement is being prepared, the

dealer would only be obligated to deliver by

settlement the written notice to the effect that no

official statement in final form is being prepared.

10The Commission has considered the proposed

rule’s impact on efficiency, competition and capital

formation. The amendment conforms the

requirements of MSRB Rule G–32 with those of SEC

Rule 15c2–12. Making the rules consistent lessens

the dealers’ burden of complying with one rule

while attempting to avoid violating the other. Also,

the dealer’s procedural and operational efficiency

should be enhanced as the date for determining

compliance will be that of receipt of some type of

notification from the issuer, which should make for

ease of recordkeeping and review. 15 U.S.C. 78c(f).

11Section 15B(b)(C) requires the Commission to

determine that the Board’s rules are 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.

12See supra note 5 at p. 28810.

13 15 U.S.C. 78s(b)(2).

14 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4

3Concurrent with the March 5, 1998, filing,

NASD Economic Research published an economic

study entitled ‘‘Evidence from the Pilot Expansion

on November 10, 1997, and the Market Stress of

October 27 and 28, 1997’’ (‘‘March 1998 Study’’).

This study followed an earlier study the NASD

conducted to analyze the effects of the Actual Size

Rule entitled ‘‘Effects of the Removal of Minimum

Sizes for Proprietary Quotes in The Nasdaq Stock

Market, Inc.’’ (‘‘June 1997 Study’’). The findings the

NASD made in each of these studies are discussed

below. Both studies were made publicly available

through the NASD’s web site.

On January 10, 1997, the Commission approved

an NASD proposal to implement the Actual Size

Rule on a pilot basis from January 20, 1997 through

April 18, 1997. Exchange Act Release No. 38156, 62

FR 2415 (January 16, 1997) (SR–NASD–96–43).

Under the initial three-month pilot, Nasdaq market

makers could quote in minimum sizes of 100 shares

in the 50 Nasdaq securities subject to mandatory

compliance with Exchange Act Rule 11Ac1–4

(‘‘Limit Order Display Rule’’). The remaining

Nasdaq securities were still subject to the existing

minimum quotation display requirements for

proprietary quotes.

On April 15, 1997, the Commission approved an

NASD proposal that extended the 50-stock pilot

from April 18, 1997 to July 18, 1997. Exchange Act

Release No. 38512, 62 FR 19373 (April 21, 1997)

(SR–NASD–97–25). On July 18, 1997, the

Commission approved the NASD’s request to

extend the 50-stock pilot from July 18, 1997 to

December 31, 1997. Exchange Act Release No.

38851, 62 FR 39565 (July 23, 1997) (SR–NASD–97–

49).

On October 29, 1997, the Commission approved

the NASD’s proposal to extend the pilot from

December 31, 1997 through March 27, 1998, and to

customer by settlement, together with a

written notice that the official statement

in final form will be sent to the

customer within one business day of

receipt. Thereafter, once the dealer

receives the official statement in final

form, it must send a copy to the

customer within one business day of

receipt. If no official statement in

preliminary form is being prepared, the

dealer would only be obligated to

deliver by settlement the written notice

regarding the official statement in final

form and to send the official statement

in final form upon receipt.9

The amendment provides an alternate

method of compliance with Rule G–32

in the case of Exempt VRDOs where the

final official statement is either

unavailable or incomplete. However, in

those limited circumstances where

dealers may in fact receive the official

statement in final form in sufficient time

to deliver it to customers by settlement

(e.g., if an issuer approves completion of

the official statement in final form prior

to execution of the purchase contract),

dealers must comply with the existing

provision of the rule by delivering the

official statement in final form to the

customer by settlement. If the final

official statement is available or if the

issuer approves the final official

statement prior to settlement, then the

existing provision of the rule would

control. The dealer’s compliance in this

case would not be optional.

III. Discussion

The Commission believes the

proposed rule change is consistent with

the Act and the rules and regulations

promulgate thereunder.10 Specifically,

the Commission believes that approval

of the proposed rule change is

consistent with Section 15B(b)(2)(C) 11

of the Act. This proposed rule change

should remove any potential timing

discrepancies concerning dealer and

customer receipt of official statements.

The rule clarifies dealers’ disclosure

requirements; if a dealer receives an

official statement from the issuer,

concerning exempt VRDOs, then it must

deliver this official statement within

one business day of receipt.

The Commission recognizes the

Board’s effort to make the disclosure

requirements in Rule G–32 consistent

with the requirements delineated in

Rule 15c2–12 under the Act. The

Commission understands that the use of

securities with a demand feature (e.g.

VRDOs) allows issuers to acquire the

necessary financing while protecting

against interest rate risk. These types of

obligations permit the issuer to convert

outstanding debt from short-term

variable rate notes to long-term fixed

rates.12 It is possible that the maturities

or reset dates of these VRDOs could be

so brief (i.e, one day) that the issuer is

unable to provide an official statement

at settlement. Given the sophisticated

nature of these instruments and the

rapidity with which they can be

converted, the Commission urges

dealers to facilitate full and timely

disclosure to investors. While the

requirements of Rule 15c2–12 are

inapplicable to these obligations, sound

business practice and general antifraud

provisions of the federal securities laws

should dictate access to and disclosure

of information covered by this rule.

IV. Conclusion

For the above reasons, the

Commission believes that the proposed

rule change is consistent with the

provision of the Act, and in particular

with Section 15B(b)(2)(C).

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,13 that the

proposed rule change (SR–MSRB–98–

04), is hereby approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–19445 Filed 7–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40211; File No. SR–NASD–

98–21]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving a

Proposed Rule Change to Permanently

Expand the NASD’s Rule Permitting

Market Makers to Display Their Actual

Quotation Size

July 15, 1998.

I. Introduction

On March 5, 1998, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) through its

wholly-owned subsidiary, The Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’), filed

with the Securities and Exchange

Commission (‘‘Commission’’ or ‘‘SEC’’)

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Exchange

Act’’), 1 and Rule 19b–4 thereunder,2 to

amend NASD Rule 4613(a)(1)(C)

permanently to allow market markers to

quote their actual size by reducing the

minimum quotation size requirement

for all Nasdaq securities to one normal

unit of trading (‘‘Actual Size Rule’’ or

‘‘ASR’’).3 The Commission issued the