Federal Register / Vol. 60, No. 96 / Thursday, May 18, 1995 / Notices 26747

1Subsequently, the Board submitted a letter to

extend the delay for effectiveness of the rule to 120

days following Commission approval. See letter

from Marianne I. Dunaitis, Assistant General

Counsel, MSRB, to Karl Varner, Staff Attorney,

Division of Market Regulation, SEC, dated April 3,

1995.

2Securities Exchange Act Release No. 34962

(Nov. 10, 1994), 59 FR 59612, corrected, Securities

Exchange Act Release No. 34962A (Nov. 25, 1994),

59 FR 60555.

3Categories include zero coupon securities,

variable rate securities, securities with adjustable

tender fees, stepped coupon securities, and stripped

coupon securities.

4Securities Exchange Act Release No. 34962

(Nov. 10, 1994), 59 FR 59612, corrected, Securities

Exchange Act Release No. 34962A (Nov. 25, 1994),

59 FR 60555.

[Release No. 34–35700; File No. SR–MSRB–

95–4]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Municipal Securities Rulemaking

Board Relating to Customer

Confirmations

May 10, 1995.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on March 30, 1995,

the Municipal Securities Rulemaking

Board (‘‘Board’’ or ‘‘MSRB’’) filed with

the Securities and Exchange

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

the proposed rule change (File No. SR–

MSRB–95–4) as described in Items I, II

and III below, which Items have been

prepared by the self-regulatory

organization.1 The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Board is filing an amendment to

rule G–15(a), on customer confirmations

(hereinafter referred to as ‘‘the proposed

rule change’’). The proposed rule

change: (1) Will clarify the current

customer confirmation requirements by

reorganizing the rule and incorporating

previous Board interpretations into the

language of the rule; (2) will revise

certain requirements in areas where the

Board believes that more disclosure is

necessary; and (3) will include certain

other modifications to the current

confirmation disclosure requirements.

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

(a) Rule G–15(a) states various

requirements for the format and content

of confirmations to customers. As part

of the Board’s ongoing customer

protection review, the Board has

reviewed rule G–15(a), and the written

disclosures provided to municipal

securities customers. The proposed rule

change represents one of several Board

efforts to ensure that important

information is disclosed to customers.

In response to market developments

and regulatory concerns, rule G–15(a)

has been subject to numerous

amendments and Board interpretive

notices since it was adopted in 1977.

The proposed rule change will revise

certain requirements in areas where the

Board believes that more disclosure is

necessary. The proposed rule change

will clarify the current customer

confirmation requirements by

reorganizing the rule and incorporating

previous Board interpretations into the

language of the rule to promote better

compliance. Other modifications to the

rule’s requirements also are proposed to

simplify and clarify the requirements

and to promote better compliance. The

proposed rule change also will respond

to recent revisions by the SEC to its Rule

10b–10, the confirmation rule

applicable to transactions in securities

other than municipal securities, and to

its proposed Rule 15c2–13, to require

certain disclosures to be made on

confirmations for transactions in

municipal securities.2

Reorganization of Current Rule

Including Codification of Interpretations

The proposed rule change will clarify

rule G–15(a) by reorganizing the rule

and incorporating Board interpretations

into the rule. Most requirements are

subdivided by subject matter into three

broad categories that comprise the

content of municipal securities

confirmations—terms of the transaction,

securities identification, and securities

description (listing the various features

of the security). Under each category,

Board rules and interpretations are

organized by specific confirmation

requirement. For example, under the

securities identification section of the

proposed rule change, all existing rules

and Board interpretive notices

specifying how the interest rate should

be expressed on the confirmation for

various categories of municipal

securities transactions have been

codified.3 This reorganization should

assist operations personnel in

programming automated systems for

generating municipal securities

confirmations since it will no longer be

necessary to review all previous

interpretive notices on confirmations to

find those that may address the

statement of interest rate for a particular

type of municipal security.

Revisions in Customer Confirmation

Requirements

The proposed rule change will revise

some requirements that the Board feels

will strengthen the disclosure and

customer protection objectives of the

rule while updating the requirements of

the customer confirmation.

Disclosure if a security is unrated. In

November 1994, the SEC approved

amendments to its Rule 10b–10 of the

Securities Exchange Act, the

confirmation rule applicable to

transactions in securities other than

municipal securities.4 At the same time,

the SEC deferred consideration of

proposed Rule 15c2–13 that would have

established certain confirmation

requirements applicable to transactions

in municipal securities. The SEC’s

amendments to Rule 10b–10 require,

among other things, that dealers

disclose if a debt security, other than a

governmental security, has not been

rated by a nationally recognized

statistical rating organization. The SEC

also had proposed a similar requirement

for municipal SEC confirmations in its

proposed Rule 15c2–13. The SEC noted

that this disclosure is not intended to

suggest that an unrated security is

inherently riskier than a rated security;

instead, this disclosure is intended to

alert customers that they may wish to

obtain further information or

clarification from their dealer.

Previously, the Board indicated in its

comment letter to the SEC that, if the

SEC determined that such information

were needed by investors in debt

securities, the Board would amend rule

G–15 to include this requirement. The

proposed rule change will include this

provision in rule G–15(a)(i)(C)(3)(f).

Call provisions. Currently, for many

bonds, only a designation of ‘‘callable’’

is required by rule G–15(a)(i)(E), along

with the following legend provided by
26748 Federal Register / Vol. 60, No. 96 / Thursday, May 18, 1995 / Notices

5The proposed rule change in rule G–15(a)(vi)(F)

defines ‘‘pricing call’’ as a call feature that

represents ‘‘an in-whole call’’ of the type that may

be used by the issuer without restriction in a

refunding. Consistent with the current rule, pricing

calls do not include catastrophe calls, that is, calls

which occur as a result of events specified in the

bond indenture which are beyond the control of the

issuer or calls that may operate to call part of an

outstanding issue. See Interpretation of Nov. 7,

1977, published in MSRB Manual (CCH) at

¶ 3571.10.

rule G–15(a)(iii)(F) which can be

indicated ‘‘in a footnote or otherwise:’’

‘‘Call features may exist which could

affect yield; complete information will

be provided upon request.’’ Specifically,

rule G–15(a)(i)(I) currently provides that

disclosure of the date and price of the

first in-whole call is required to be

noted on the confirmation only if the

security is priced to that call date. In

addition, current rule G–15(a)(i)(I)

requires that the price or yield

calculated for a confirmation must be

computed ‘‘to the first in-whole call’’ if

this produces a lower price or yield than

a calculation of price or yield to

maturity. The Board’s interpretation of

December 10, 1980, MSRB Manual at

¶ 3571 describes the type of call features

that are considered for purposes of these

calculations (‘‘pricing calls’’).

The proposed rule change, in rule G–

15(a)(i)(C)(2)(a), will revise the existing

confirmation requirements regarding

call features. It requires that the date

and price of the next pricing call always

be disclosed.5 It also requires the

following notation on the confirmation

if any call features exist in addition to

the next pricing call—‘‘Additional call

features exist that may affect yield;

complete information will be provided

upon request.’’ The proposed rule

change in rule G–15(a)(i)(E) will require

this notation to be on the front of the

confirmation. This substitutes for the

current legend requirement, which

typically has resulted in call legends

being pre-printed on the back of the

confirmation.

The Board believes that disclosure of

call features is particularly important to

customers and that the pre-printed

legend on the back of the confirmation

was not always effective in alerting

customers to the existence of call

features. The proposed rule change will

put customers clearly on notice as to the

presence of call features on the front of

the confirmation, including a specific

date and price for the next pricing call

(one of the most important elements of

call information) and the existence of

any other call features in addition to

this call.

Revenue bonds and additional

obligors. Currently, with regard to

revenue bonds, dealers are required

under rule G–15(a)(i)(E) to disclose the

source of revenue on the confirmation

only ‘‘if necessary for a materially

complete description of the securities.’’

The proposed rule change in rule G–

15(a)(i)(C)(1)(a) will require dealers to

put the primary revenue source for such

bonds on the confirmation (e.g., project

name) and deletes the language ‘‘if

necessary for a materially complete

description of the securities.’’ The Board

believes that requiring disclosure of the

primary revenue source of revenue

bonds on the confirmation will help

ensure that customers receive important

information about such bonds.

Additional obligors. Currently, with

regard to additional obligors

confirmation disclosure of such

information currently is required under

rule G–15(a)(i)(E) only ‘‘if necessary for

a materially complete description of the

securities.’’ In such instances, the

confirmation must disclose the name of

any company or other person in

addition to the issuer obligated, directly

or indirectly, with respect to debt

service or, if there is more than one such

obligor, the statement ‘‘multiple

obligors’’ may be shown. The proposed

rule change in rule G–15(a)(i)(C)(1)(b)

will delete the language ‘‘if necessary

for a materially complete description of

the securities;’’ thus the amendment

requires dealers always to identity the

additional obligor on the confirmation

or indicate ‘‘multiple obligors’’ if there

is more than one additional obligor. The

Board believes this will simplify and

clarify the intent of the rule. The

proposed rule change also will clarify

that, if a letter of credit is used, the

identity of the bank issuing the letter of

credit must be noted.

Limited tax. Currently, rule G–

15(a)(i)(E) provides that the description

of the bonds should specify if they are

‘‘limited tax.’’ Traditionally, a limited

tax bond is a general obligation bond

secured by the pledge of a specified tax

(usually the property tax) or category of

taxes which is limited as to rate or

amount. However, the meaning of this

‘‘limited tax’’ designation has become

ambiguous as various states have

implemented a variety of tax limitation

measures and the Board is unaware of

any clear standards that may be used to

separate limited and unlimited tax

municipal securities. The proposed rule

change accordingly will delete the

‘‘limited tax’’ designation requirement.

Dealers acting as agent and receiving

‘‘other remuneration’’. Currently, rule

G–15(a)(ii) provides that, in agency

transactions, remuneration paid by the

customer always must be disclosed, but

if a dealer receives ‘‘other’’

remuneration (i.e., remuneration from a

source other than the customer), it is

sufficient to indicate that other

remuneration was received and that

details will be furnished to the customer

upon written request. The Board has

received inquiries whether the

‘‘discount’’ received by a dealer in an

inter-dealer transaction undertaken as

agent for a customer should be

considered as ‘‘other remuneration.’’

The proposed rule change in rule G–

15(a)(i)(A)(1)(e) will clarify this by

stating that in an agency transaction for

a customer, if a dealer acquires a bond

from another dealer at a discount (e.g.,

‘‘net’’ price less concession) and the

customer pays the ‘‘net’’ price, the interdealer discount or concession received

by the dealer cannot be considered

‘‘other remuneration,’’ but rather should

be considered remuneration received

from the customer. Thus, the proposed

rule change will clarify that the amount

of the ‘‘discount’’ or concession must be

disclosed on the confirmation in these

agency transactions pursuant to

proposed rule G–15(a)(i)(A)(1)(e).

‘‘Ex legal’’ delivery designation.

Currently, rule G–15(a)(iii)(I)(1) requires

that the confirmation must note whether

a transaction is ‘‘ex-legal.’’ This term

refers to the absence of a written copy

of the legal opinion to be included with

the physical delivery of a bond

certificate. This provision was adopted

when nearly all deliveries of municipal

securities were accomplished with

physical deliveries of certificates which

included a copy of the legal opinion.

With the movement away from physical

deliveries and the high percentage of

book-entry-only securities in the market,

the Board believes that this requirement

is no longer necessary and the proposed

rule change will delete the ‘‘ex-legal’’

delivery designation.

Zero coupon bonds. Currently, rule

G–15(a)(v) provides a number of specific

confirmation requirements for zero

coupon bonds, including disclosure that

the interest rate is 0% and, if the

securities are callable and available in

bearer form, a statement to that effect

which can be satisfied by the following

legend: ‘‘No periodic payments—

callable below maturity value without

prior notice by mail to holder unless

registered.’’ The proposed rule change

will retain these requirements.

In addition, the proposed change to

rule G–15(a)(i)(A)(6)(h) will require that

the amount of any premium paid over

accreted value for callable zero coupon

bonds be included on confirmations.

The accreted value for a zero coupon

bond reflects the increase in the

security’s value as it approaches the

maturity date. For zero coupon bonds

that are callable, the call price is
Federal Register / Vol. 60, No. 96 / Thursday, May 18, 1995 / Notices 26749

6Of course, the proposed change to rule G–

15(a)(i)(C)(2)(e), consistent with current rule G–

15(a)(iii)(I), provides if securities pay interest on

other than semi-annual basis, a statement of the

basis on which interest is paid.

7MSRB Interpretation of July 27, 1981, MSRB

Manual (CCH) ¶¶ 3571.35 and 3571.41.

generally at the accreted value. The

Board believes it is important for

customers to know that such securities

may be affected by an early call and that

a premium over the accreted value is

being paid in the purchase price. In

general, a customer purchasing a

typical, interest-paying municipal

security understands that a price above

‘‘100’’ indicates a premium price and

that, if the security contains any call

features, such features should be

considered carefully. The importance of

reviewing call features, however, is not

as apparent with callable zero coupon

securities, where a customer may not be

aware of the relationship between a

potential call price and the accreted

value of the security being purchased.

Accordingly, the proposed rule change

will require dealers to disclose on the

confirmation any premium paid over

the accreted value for callable zero

coupon bonds.

Original issue discount securities.

Currently, a dealer must disclose on the

confirmation whether securities are sold

as ‘‘original issue discount’’ securities

pursuant to rule G–15(a)(iii)(H). The

proposed change to rule G–

15(a)(i)(C)(4)(c) also will require the

dealer to disclose the initial public

offering price for the original issue

discount security. The Board believes

that this information is particularly

important to customers since it may be

needed for tax reasons also may be

important if the security is subject to

any early call.

First interest payment date (including

if not semi-annual). Currently, rule G–

15(a)(III)(A) states that the confirmation

shall provide, if it affects the price or

interest calculation, the first interest

payment date if other than semi-annual.

This provision is ambiguous as to

whether the first interest payment date

must be included on the confirmation in

all instances in which there is no

regular semi-annual interest payment, or

only if the first payment date is

necessary for purposes of calculation of

final monies. The proposed change to

rule G–15(a)(i)(A)(6)(g) will clarify that

the first interest payment date is

required on the confirmation only in

those cases in which it is necessary for

the calculation of final money. If would,

for example, not be required for

transactions in the issue occurring after

the first interest payment date.6

Yield information. Currently, there is

not a specific exemption for statement

of yield on transactions in defaulted

bonds, bonds that prepay principal and

variable rate securities that are not sold

on basis of yield to put. The proposed

change to rule G–15(a)(i)(A)(5)(d) will

include specific exemptions for these

types of transactions.

Disclosure regarding CMOs. The

SEC’s amendment to its Rule 10b–10

provides that the dealer must include a

statement on the confirmation

indicating that the actual yield of nonmunicipal collateralized mortgage

obligations (‘‘CMOs’’) may vary

according to the rate at which the

underlying receivables or other financial

assets are prepaid, and a statement of

the fact that information concerning the

factors that affect yield (including, at a

minimum, estimated yield, weighted

average life, and the prepayment

assumptions underlying yield) will be

furnished upon the written request of a

customer. The proposed change to rule

G–15(a)(i)(D)(2) will include a similar

provision regarding municipal CMOs.

Modifications and Clarifications to

Confirmation Format

Multi-transaction data should not be

aggregated on one confirmation.

Currently, rule G–15(a) provides that, at

or before the completion of a transaction

in municipal securities, dealers must

provide the customer with a written

confirmation of the transaction. The

current rule does not specifically

indicate that customers should receive a

separate confirmation for each

transaction. The Board previously has

stated that, if a customer purchased

from a dealer several different securities

of one issuer, it would be inappropriate

for the dealer to aggregate on the

confirmation the accrued interest for all

the bonds acquired or to aggregate yield

data and disclose the ‘‘yield to the

average life’’ rather than providing yield

to maturity information for each bond

acquired.7 The proposed change to G–

15(a)(ii) will clarify that a separate

confirmation should be provided for

each municipal securities transaction

whenever several transactions are done

at one time.

Clarification of confirmation format.

The proposed rule change will require

that all disclosure, with certain

exceptions, be clearly and specifically

indicated on the front of the

confirmation. To address concerns

about the ‘‘crowding’’ of information on

the front side of the confirmation, the

proposed rule change will allow certain

requirements to be met by statements on

the back of the confirmation, namely: (1)

The required legend for zero coupon

bonds; (2) the requirement that permits

a dealer in agency transactions, rather

than naming the person from whom the

securities were purchased or to whom

the securities were sold, to include a

statement that this information will be

furnished upon the written request of

the customer; and (3) the requirement

that permits a dealer, rather than

indicating the time of execution, to

include a statement that the time of

execution will be furnished upon the

written request of the customer. In

addition, consistent with the SEC’s

amendment to Rule 10b–10, the

amendment will not require the

disclosure statement for transactions in

municipal collateralized mortgage

obligations required in proposed rule

change G–15(a)(i)(D)(2) to be on the

front of the confirmation.

(b) The Board believes the proposed

rule change is consistent with Section

15B(b)(2)(C) of the Act, which provides

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.

The Board believes that the proposed

rule change will protect investors and

the public interest because it clarifies

the current customer confirmation

requirements by reorganizing the rule

and incorporating previous Board

interpretations into the language of the

rule and it revises certain requirements

in areas where the Board believes more

disclosure is necessary.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Board does not believe that the

proposed rule change, which will have

an equal impact on dealers, will have

any impact on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

June 1994 Request for Comments

In June 1994, as part of the Board’s ongoing

customer protection review, the Board

requested comments on the proposed rule

change, which was designed to clarify the

current customer confirmation requirements

by reorganizing the rule and incorporating

previous Board interpretations into the

language of the rule, and which also revised

certain requirements where the Board
26750 Federal Register / Vol. 60, No. 96 / Thursday, May 18, 1995 / Notices

8The Board also requested comment on broader

issues associated with disclosure to customers and

the role of the customer confirmation in providing

such disclosure. The Board is not, however,

proposing rulemaking in these areas at the present

time.

9After reviewing comments received, the Board

decided not to include in the proposed rule change

certain provisions that were included in the draft

rule. For example, the Board decided to retain

disclosure on the confirmation if municipal

securities are available only in book-entry form. The

Board also determined not to require that the dated

date always be included on the confirmation or that

the confirmation indicate if a municipal security

was issued without a legal opinion.

believed more disclosure was necessary.8

The draft amendments published for

comment were substantially similar to the

proposed rule change.9

The Board received 12 comment

letters from the following:

Automatic Data Processing (‘‘ADP I’’)

Beta Systems (‘‘BETA’’)

JB Hanauer & Co. (‘‘Hanauer’’)

Edward D. Jones & Co. (‘‘Jones’’)

Kenny S&P Information Services

(‘‘Kenny’’)

Liberty Bank and Trust Co. (‘‘Liberty’’)

Pershing

Public Securities Association (‘‘PSA’’)

Rauscher Pierce Refsnes, Inc.

(‘‘Rauscher’’)

Regional Municipal Operations

Association (‘‘RMOA’’)

Securities Industry Software Corp./

Division of ADP (‘‘ADP II’’)

Sweeney Cartwright & Co. (‘‘Sweeney’’)

In general, the codification and

reorganization of the rule received

favorable comment, but some

commentators raised concerns with

certain provisions.

Comments Received

Call provisions. The draft amendment

proposed to alter call disclosure on the

confirmation in several ways. It would

have required that the date and price of

the first refunding call always be

disclosed. It would have deleted the

legend that generally is pre-printed on

the back of the confirmation. Instead, if

there were any call features in addition

to the first refunding call, it would have

required that disclosure be made on the

front of the confirmation that ‘‘special

call features exist.’’

Several commentators commented on

the Board’s proposal to improve the

disclosure of call features on the

customer confirmation. With regard to

the proposed disclosure of the first inwhole call, two commentators believed

that such disclosure would be beneficial

to investors. Another commentator,

however, suggested that the Board may

wish to modify the draft language to

require the date and price of the ‘‘next’’

pricing call, instead of the ‘‘first pricing

call, because after the first pricing call

has passed, the ‘‘next’’ pricing call

should be noted on the confirmation.

The proposed rule change will

incorporate this suggestion.

Some commentators supported the

replacement of the current legend ‘‘Call

features may exist which could affect

yield; complete information will be

provided upon request,’’ that generally

is contained on the back of the

confirmation, with the notation on the

front of the confirmation that ‘‘special

call features exist,’’ because they

believed that an affirmative statement as

to the presence of other call features

would be beneficial to investors. In this

regard, one commentator suggested the

draft legend could be clarified by noting

‘‘other call features exist’’ instead of

‘‘special call features exist.’’

Other commentators, however,

expressed concern because they

believed that dealers, if their knowledge

of a bond is incomplete, should be able

to use the current legend. Another

commentator supported deletion of the

current legend, but opposed placing an

affirmative notation regarding the

presence of call features on the front of

the confirmation because of the

practical difficulties in obtaining call

information. However, with regard to

the availability of information regarding

the presence of these call features, a

number of commentators indicated that

sufficient data regarding call features is

available to support the disclosures

being proposed.

The Board continues to believe that

disclosure of call features is important

to customers and that it is appropriate

to improve existing disclosure by

requiring an affirmative notation on the

front of the confirmation if there are any

calls in addition to the first in-whole

pricing call. Dealers should have

information regarding the presence of

call features before they sell municipal

securities to their customers and such

information appears to be readily

available for most municipal securities.

Thus, the proposed rule change will

delete the current legend that permits

dealers to indicate generally in a preprinted format that other call features

may exist.

After reviewing the wide variety of

comments on this aspect of the draft

amendment, the Board changed the

notation ‘‘Special call features exist’’ to

‘‘Additional call features exist that may

affect yield’’ to better reflect the

potential types of calls that might exist.

The Board believes that this statement

will best reflect the potential types of

calls that might exist. Additionally, the

Board added the second half of the

existing legend ‘‘complete information

will be provided upon request’’ to the

notation to ensure that customers

recognize that they can request

additional information regarding call

features.

Revenue bonds. Five commentators

opposed the provision of the draft

amendment to require that the revenue

source for revenue bonds always be

disclosed. In general, these

commentators noted difficulties

describing the revenue source for

certain bonds, particularly those with

complex sources of revenue or those

that have a lengthy list of revenue

sources or too complex a funding

scheme to allow for full disclosure on a

confirmation. Because of confirmation

space concerns, one commentator

suggested that only the most significant

sources of revenue be disclosed on the

confirmation. With regard to the

availability of information regarding

revenue sources, two commentators,

however, noted that the project or

company name which identifies the

revenue source currently is available.

In response to commentators’

concerns about the practical difficulties

in listing numerous revenue sources, the

proposed rule change will require

dealers to put only the primary revenue

source for revenue bonds on the

confirmation (e.g., project name). The

Board believes that this information is

available and would be helpful to

customers.

Limited tax. Several commentators

commented on the proposal to delete

the ‘‘limited tax’’ designation. One

supported the deletion of the limited tax

designation because it believed that

investors should refer to the official

statement as a source of such

information. However, other

commentators questioned whether

deletion of this provision would further

the Board’s objective of improving

disclosure to customers. Two such

commentators recognized that the

meaning of ‘‘limited tax’’ is ambiguous

in today’s markets, but nevertheless

suggested the ‘‘limited tax’’ should be

retained because they believed the

‘‘limited tax’’ designation is useful

information.

The proposed rule change will delete

the ‘‘limited tax’’ designation because

the Board believes that its meaning has

become so ambiguous and so subject to

differing views as to its applicability

that is of doubtful use to investors. The

Board notes, however, that deletion of

this provision does not affect a dealer’s

obligation to disclose all material facts

to the customer at the time of the

transaction. If a general obligation bond

has a limitation on taxes that is material

to the investment decision, dealers must
Federal Register / Vol. 60, No. 96 / Thursday, May 18, 1995 / Notices 26751

ensure that their customers are aware of

the relevant facts, at or before the time

of the transaction.

Dealers acting as agent and receiving

‘‘other remuneration’’. Four

commentators commented on the

proposal to clarify when it would be

sufficient for a dealer to indicate that it

received ‘‘other remuneration’’ in a

transaction and that details will be

furnished to the customer upon written

request. In general, commentators

supported the proposal, but some

commentators suggested that the Board

provide clarification regarding this

provision.

The proposed rule change will clarify

when it is appropriate to disclose ‘‘other

remuneration’’ on the confirmation by

providing that in an agency transaction

if a dealer acquires a bond from another

dealer at discount and the customer

pays the ‘‘net’’ price, the inter-dealer

discount cannot be considered ‘‘other

remuneration’’ but rather should be

considered remuneration received from

the customer and disclosed pursuant to

proposed rule G–15(a)(i)(A)(6)(f). The

Board believes that the clarification

included in the proposed rule change

should ensure that dealers only disclose

‘‘other remuneration’’ in those

situations where such a designation is

appropriate.

‘‘Ex legal’’ delivery designation. Two

commentators supported the proposed

deletion of the current requirement that

the confirmation indicate if a bond

certificate is physically delivered

without a legal opinion attached.

Another commentator recognized that,

with the movement away from the

delivery of certificates, this provision is

seldom noted on a confirmation.

Nevertheless, this commentator believed

this provision should be retained.

The Board believes that, with the

general movement away from the

physical delivery of certificates, it is no

longer appropriate for the confirmation

rule to focus on the physical delivery of

a legal opinion. Since the concept of ‘‘ex

legal’’ has no applicability except in

cases involving physical delivery of

certificates, the Board believe that, as

part of the update of the customer

confirmation rule, this provision should

be deleted. Of course, even with the

deletion of this requirement, given facts

and circumstances of a specific

transaction, if it was material that a

municipal security was delivered

without a legal opinion, this fact would

have to be disclosed to the customer at

or before the execution of the

transaction as part of a dealer’s duties

under rule G–17.

Zero coupon bonds. Numerous

commentators commented on the

proposed disclosure requirements for

zero coupon bonds. One commentator

supported the proposed rule change to

require disclosure of any premium over

accreted value even though it would

require additional programming for

dealers. Several other commentators,

however, opposed the disclosure of any

premium over accreted value for

transactions in zero coupon bonds. Two

commentators believed it would be

difficult to obtain this information and

another commentator noted that some

reprogramming would be required to

include this information on the

confirmation. One commentator

suggested that the Board may wish to

consider requiring that the rate of

accretion for a zero coupon bond be

disclosed on the confirmation because

this would be more important to

investors than being informed of any

premium they paid over accreted value.

The Board originally proposed that

the premium over accreted value be

disclosed for all zero coupon bonds, but

the amendment only requires that this

premium be disclosed for zero coupon

bonds that are callable. As discussed

above, the accreted value of zero coupon

bonds reflects the increase in the

security’s value as it approaches the

redemption date, and if the bond is

called prior to maturity it generally

would be called at a price reflecting that

value. The Board believes that requiring

dealers to disclose any premium over

the accreted value for callable zero

coupon bonds is necessary so that

customers are provided with sufficient

information to assess the transaction.

The Board believes that although

informing customers of the rate of

accretion could be helpful if

supplemented with appropriate time of

trade disclosure regarding the current

accreted value of the bonds, the most

appropriate mechanism to ensure that

customers understand these possible

risks associated with callable zero

coupon bonds is to require the bond’s

accreted value on the confirmation.

Another commentator suggested that

the Board consider a different approach

because it believed that a discount or

premium to the accreted value of a bond

is equally important for any callable

original issue discount bond (‘‘OID’’).

This commentator suggested the

following statement on confirmations

relating to transactions in original issue

discount bonds which are callable in

part at an accreted value: ‘‘If a premium

was paid, a lower yield may result from

early call.’’ Although the Board does not

believe this legend is appropriate for

OID municipal securities, the Board

does believe that additional information

is necessary for such securities, and, as

discussed above, the proposed rule

change will require that the initial

public offering price be disclosed for

OID issues.

Additional obligors. Five

commentators commented on the

provision to require that dealers always

be required to disclose information

regarding additional obligors. In general,

these commentators opposed requiring

dealers to provide complete information

regarding obligors. One commentator

believed that the existence of obligors

should be disclosed on the

confirmation, but customers should rely

on credit ratings to judge the risk factors

represented by such obligors because

they believe it could be difficult to

obtain such information. This

commentator also suggested that banks

or other providers of letters of credit

should be disclosed on the

confirmation. Another commentator

suggested the official statement should

be used as a source if an investor has

questions regarding obligors.

The Board believes that it is always

important for customers to understand if

there are any obligors in addition to the

issuer and the Board believes this

information should always be placed on

the confirmation rather than making

customers review official statements.

The Board, however, recognizes that it

could be difficult in certain instances

for dealers to include on the

confirmation complete information

regarding obligors, if there are numerous

obligors. The proposed rule change

accordingly will permit dealers in such

instances to note ‘‘multiple obligors’’ on

the confirmation.

Multi-transaction data should not be

aggregated on one confirmation. In

general, commentators supported this

clarification as the believed it will be

beneficial for customers to have a

separate confirmation for each

transaction if they acquire several

municipal securities. One commentator,

however, suggested that, if a customer

executes multiple transactions, the

dealer should be able to send a single

document that would provide all

required information, except that certain

information such as purchase/sale and

settlement data would not have to be

listed for each transaction. The Board

does not believe that it is too

burdensome for dealers to ensure that

the confirmation data for each

transaction is complete. Accordingly,

the proposed rule change will require a

separate confirmation for each

transaction.

New sections to clarify confirmation

format. The draft amendment as

published proposed that all

confirmation requirements, except the
26752 Federal Register / Vol. 60, No. 96 / Thursday, May 18, 1995 / Notices

1See letter from David Rusoff, Foley & Lardner,

to Sharon Lawson, SEC, dated April 19, 1995.

zero coupon legend, be clearly and

specifically noted on the front of the

confirmation. Several commentators

supported this format because they

believed that disclosing more provisions

on the front of the confirmation rather

than pre-printed on the back, would be

beneficial to customers.

One commentator, however,

suggested that dealers be permitted to

continue to put two notations on the

back of the confirmation. First, for

agency transactions, rule G–15(a)(ii)(A)

currently provides that the dealer shall

indicate on the confirmation either the

name of the person from whom the

securities were purchased or to whom

the securities were sold for the customer

or a statement that this information will

be furnished upon written request of the

customer. Second, rule G–15(a)(i)(G)

currently provides that a dealer shall

indicate on the confirmation the time of

execution or a statement that the time of

execution will be furnished upon

written request of the customer. The

amendment incorporates these

suggestions because, in view of

concerns regarding confirmation

crowding, the Board does not believe

these statements are so crucial to a

typical customer that it is necessary to

include these statements on the front of

the confirmation. In addition, consistent

with the SEC’s amendment to Rule 10b–

10, the amendment will not require that

the statement regarding factors affecting

the yield for municipal CMOs be placed

on the front of the confirmation.

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 other 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.

The Board requests that the

Commission delay effectiveness of the

proposed rule change until 120 days

after approval by the Commission is

published in the Federal Register to

ensure that firms’ confirmation practices

are in compliance.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing.

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 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–95–4 and should be

submitted by June 8, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority, 17 CFR 200.30–3(a)(12).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–12185 Filed 5–17–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35709; File No. 10–101]

Self-Regulatory Organizations; Notice

of Filing of Application for Registration

as a National Securities Exchange by

the United States Stock Exchange,

Inc., and Amendment No. 1 Thereto

May 11, 1995.

Pursuant to Section 19(a) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(a), notice is

hereby given that on March 28, 1995,

the United States Stock Exchange, Inc.

(‘‘USSE’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) an application for

registration as a national securities

exchange. On April 25, 1995, the USSE

filed Amendment No. 1 to the

Application for Registration.1 The

Commission is publishing this notice to

solicit comments on the application

from interested persons.

The USSE initially intends to trade

the most active issues that meet the

proposed Exchange’s listing

requirements and are now eligible for

trading on national securities

exchanges, as well as those companies

that choose to list on the Exchange. The

proposed Exchange would operate

through an electronic securities

communication and execution facility

(the ‘‘System’’). Because there would be

no physical trading floor, members of

the Exchange (‘‘Members’’) would enter

orders through System terminals, i.e.,

computer interfaces that have

communications capability with the

System and are directly linked to the

System. The proposed System would

combine the display of limit orders and

current quotation/last sale information

with a matching and execution facility

for like-priced orders. Additionally, the

System would enable Dealers (i.e.,

members who meet certain financial

and market-making obligations) to

perform brokerage and market-making

functions on the Exchange, while

allowing the Dealers to retain and

execute their internal order flow by

preferencing the public agency orders

for which they act as agent.

The USSE would have Type A

Members that are broker-dealers in

securities, and one Type B Members

that would be the Chicago Stock

Exchange, Inc. The Board of Directors

would be composed of eight directors

elected by the Type A Members (the

‘‘Class A Directors’’) and two directors

elected by the Type B Members (the

‘‘Class B Directors’’). Four of the eight

directors elected by the Type A

Members would be public directors

(‘‘Class A Public Directors’’), and four

would be representatives of Type A

member firms.

You are invited to submit written

data, views and arguments concerning

the application by June 19, 1995. Such

written data, views and arguments will

be considered by the Commission in

granting registration or instituting

proceedings to determine whether

registration should be denied. Persons

making written submissions should file

six copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street NW., Washington, DC

20549. Reference should be made to File

No. 10–101.

The USSE’s submission explains the

operation of the proposed Exchange and

its membership structure in more detail.

Copies of the submission, all subsequent

amendments, all written statements

with respect to the application that are

filed with the Commission, and all

written communications relating to the

application 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 at the Commission’s Public

Reference Section, 450 Fifth Street NW.,

Washington, DC 20549.