Document ID: SEC-2009-1036-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Guidance on Disclosure and Other Sales Practice Obligations to Individual and Other Retail Investors in Municipal Securities
Posted Date: 2009-07-27T04:00Z

[Federal Register: July 27, 2009 (Volume 74, Number 142)]
[Notices]               
[Page 37079-37081]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jy09-92]                         

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60359; File No. SR-MSRB-2009-08]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Guidance on Disclosure and Other Sales Practice 
Obligations to Individual and Other Retail Investors in Municipal 
Securities

July 21, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 14, 2009, the Municipal Securities Rulemaking Board (``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 substantially prepared by the MSRB. The MSRB has 
designated the proposed rule change as constituting a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of the self-
regulatory organization pursuant to Section 19(b)(3)(A)(i) of the 
Act,\3\ and Rule 19b-4(f)(1) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB has filed with the Commission a proposed rule change 
consisting of interpretive guidance on disclosure and other sales 
practice obligations of brokers, dealers and municipal securities 
dealers (``dealers'') relating to sales of municipal securities to 
individual and other retail investors. The text of the proposed rule 
change is available on the MSRB's Web site (http://www.msrb.org), at 
the MSRB's principal office, and at the Commission's Public Reference 
Room.

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

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The MSRB has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The proposed rule change provides guidance to brokers, dealers and 
municipal securities dealers (``dealers'') of their sales practice 
obligations under MSRB rules as applied specifically to individual and 
other retail investors. Among other things, the proposed rule change 
updates guidance to dealers on (i) their obligations to disclose 
material information about issuers, their securities and credit/
liquidity support for such securities in connection with the 
fulfillment of their disclosure obligations under MSRB Rule G-17, (ii) 
their obligations to use such material information in fulfilling their 
suitability obligations under MSRB Rule G-19, and (iii) their fair 
pricing obligations under MSRB Rules G-18 and G-30. The proposed rule 
change also applies previous guidance on bond insurance rating 
downgrades and wide-scale auction failures for municipal auction rate 
securities (``ARS''), to municipal securities transactions in general 
and specifically to transactions with individual and other retail 
investors in variable rate demand obligations (``VRDOs'').
Disclosure
    The proposed rule change makes clear that dealers are responsible 
under Rule G-17 for disclosing to their customers, at or prior to the 
time of trade for any municipal securities transaction, all material 
information about the transaction known by the dealer, as well as 
material information about the security that is reasonably accessible 
to the market, including information available from established 
industry sources. Dealers must provide such disclosures notwithstanding 
the availability to investors of comprehensive information from the 
MSRB's Electronic Municipal Market Access system (EMMA) and other 
established industry sources. Dealers are expected to establish 
procedures reasonably designed to ensure that information known to the 
dealer is communicated internally or otherwise

[[Page 37080]]

made available to relevant personnel in a manner reasonably designed to 
ensure compliance with this disclosure obligation.
    The proposed rule change provides that, in general, information is 
considered ``material'' if there is a substantial likelihood that its 
disclosure would have been considered important or significant by a 
reasonable investor. The duty to disclose material information to a 
customer in a municipal securities transaction includes the duty to 
give a complete description of the security, including a description of 
the features that likely would be considered significant by a 
reasonable investor and facts that are material to assessing the 
potential risks of the investment. For VRDOs, ARS or other securities 
for which interest payments may fluctuate, such material facts would 
include a description of the basis on which periodic interest rate 
resets are determined.
    The proposed rule change provides that the following information 
will generally be material information required to be disclosed to 
investors in credit/liquidity enhanced securities, including but not 
limited to VRDOs, if known to the dealer or if reasonably available 
from established industry sources: (i) The credit rating of the issue 
or lack thereof; (ii) the underlying credit rating or lack thereof, 
(iii) the identity of any credit enhancer or liquidity provider; and 
(iv) the credit rating of the credit provider and liquidity provider, 
including potential rating actions (e.g., downgrade). Additionally, 
material terms of the credit facility or liquidity facility should be 
disclosed (e.g., any circumstances under which a standby bond purchase 
agreement (``SBPA'') would terminate without a mandatory tender). If 
the remarketing agent for a VRDO has customarily or from time-to-time 
taken tendered bonds into inventory to make it unnecessary to draw on 
the liquidity facility for unremarketed bonds (thereby in effect 
providing liquidity support), the fact that the remarketing agent is 
not contractually obligated to maintain such practice will generally be 
material information required to be disclosed to customers to which 
VRDOs are sold. This list is not exhaustive. Other information may also 
be material to investors in credit/liquidity enhanced securities.
    The proposed rule change reminds dealers that they are not relieved 
of their suitability obligations under MSRB Rule G-19 or their fair 
pricing obligations to their customers under MSRB Rules G-18 and G-30 
simply by disclosing material information to the customer. The 
information known by a dealer in connection with a municipal security, 
together with the information available from established industry 
sources, generally should inform the dealer, to the extent applicable, 
in undertaking the necessary analyses and determinations needed to meet 
these other customer protection obligations.
Suitability
    Under the proposed rule change, dealers are obligated to make a 
suitability determination arising under Rule G-19 in connection with a 
recommended transaction. This requires a meaningful analysis, taking 
into consideration the information obtained about the investor and the 
security, which establishes the reasonable grounds for believing that 
the recommendation is suitable. Such suitability determinations are 
required regardless of the apparent safety of a particular security or 
issuer or the apparent wealth or sophistication of a particular 
investor. Suitability determinations should be based on the 
appropriately weighted factors that are relevant in any particular set 
of facts and circumstances, and those factors may vary from transaction 
to transaction. Factors to be considered include, but are not limited 
to, the investor's financial profile, tax status, investment objectives 
(including portfolio concentration/diversification), and the specific 
characteristics and risks of the municipal security recommended to the 
investor.
    In the proposed rule change, the MSRB notes that Section (c) of 
Exchange Act Rule 15c2-12 provides that it is impermissible for a 
dealer to recommend the purchase or sale of a municipal security unless 
the dealer has procedures in place that provide reasonable assurance 
that it will receive prompt notice of the specified material events 
that are subject to the continuing disclosure obligations of the rule. 
A dealer would be expected to have reviewed any applicable continuing 
disclosures made available through EMMA or other established industry 
sources and to have taken such disclosures into account in undertaking 
its suitability determination.
    The proposed rule change provides guidance specifically with regard 
to credit-enhanced securities. Facts relating to the credit rating of 
the credit enhancer may affect suitability determinations, particularly 
for investors who have conveyed to the dealer investment objectives 
relating to credit quality of investments. In the case of recommended 
VRDOs or any other securities that are viewed as providing significant 
liquidity to investors, a dealer must consider both the liquidity 
characteristics of the security and the investor's need for a liquid 
investment when making a suitability determination. Facts relating to 
the short-term credit rating, if any, of a letter of credit or SBPA 
provider, or of any other third-party liquidity facility provider, 
generally would affect suitability determinations in such securities. 
To the extent that an investor seeks to invest in VRDOs due to their 
liquidity characteristics, a suitability analysis also generally would 
require a dealer, in recommending a VRDO to an individual investor, to 
consider carefully the circumstances, if any, under which the liquidity 
feature may no longer be effectively available to the customer.
    With respect to new products introduced into the municipal 
securities market, the proposed rule change reminds dealers that they 
must review the relevant disclosure documents to become familiar with 
the specific characteristics of the product, including the tax 
features, prior to recommending such products to their customers.
Pricing
    The proposed rule change provides that, as a general matter, in 
addition to information about prices of transactions effected by 
dealers and other market participants in a particular municipal 
security, material information about a security available through EMMA 
or other established industry sources may also be among the relevant 
factors that the dealer should consider in connection with ensuring 
fair pricing of its transactions with investors. Among other things, 
dealers would be expected to have reviewed any applicable continuing 
disclosures made available through EMMA or other established industry 
sources and to have taken such disclosures into account in determining 
a fair and reasonable transaction price. In addition, dealers should 
consider the effect of ratings on the value of the securities involved 
in customer transactions, and should specifically consider the effect 
of information from rating agencies, both with respect to actual or 
potential changes in the underlying rating of a security and with 
respect to actual or potential changes in the rating of any third-party 
credit enhancement applicable to the security.
    Dealers are reminded that an issuer's use of a retail order period 
based on a perception that the retail order period will improve pricing 
of the new issue for the issuer does not create a safe harbor for 
dealers to engage in pricing that violates the fair pricing obligation

[[Page 37081]]

under Rule G-30. Large differences between institutional and individual 
prices that exceed the price/yield variance that normally applies to 
transactions of different sizes in the primary market provide evidence 
that the duty of fair pricing to individual clients may not have been 
met.
2. Statutory Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(C) of the Act,\5\ which provides that the MSRB's rules shall:
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78o-4(b)(2)(C).

    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 MSRB believes that the proposed rule change is consistent with 
the Act because it will further investor protection by strengthening 
and clarifying dealers' customer protection obligations relating to 
sales of municipal securities to individual and other retail customers, 
including but not limited to the duty to provide material information 
to customers investing in municipal securities and to use material 
information in fulfilling their suitability obligations and their fair 
pricing obligations.

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

    The MSRB does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended, since it would 
apply equally to all 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 on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change has become effective pursuant to Section 
19(b)(3)(A)(i) of the Act \6\ and Rule 19b-4(f)(1) thereunder,\7\ in 
that the proposed rule change constitutes a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule of the self-regulatory organization. At 
any time within 60 days of the filing of the proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.\8\
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78s(b)(3)(A)(i).
    \7\ 17 CFR 240.19b-4(f)(1).
    \8\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
---------------------------------------------------------------------------

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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2009-08 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-MSRB-2009-08. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/
sro.shtml). 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, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of the MSRB. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MSRB-2009-08 and should be 
submitted on or before August 17, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\9\
---------------------------------------------------------------------------

    \9\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-17820 Filed 7-24-09; 8:45 am]

BILLING CODE 8010-01-P