[Federal Register Volume 60, Number 96 (Thursday, May 18, 1995)]
[Notices]
[Pages 26747-26752]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12185]
[[Page 26747]]
SECURITIES AND EXCHANGE COMMISSION
[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.
\1\ Subsequently, 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.
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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\
\2\ Securities Exchange Act Release No. 34962 (Nov. 10, 1994),
59 FR 59612, corrected, Securities Exchange Act Release No. 34962A
(Nov. 25, 1994), 59 FR 60555.
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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.
\3\ Categories include zero coupon securities, variable rate
securities, securities with adjustable tender fees, stepped coupon
securities, and stripped coupon securities.
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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).
\4\ Securities Exchange Act Release No. 34962 (Nov. 10, 1994),
59 FR 59612, corrected, Securities Exchange Act Release No. 34962A
(Nov. 25, 1994), 59 FR 60555.
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 [[Page 26748]] 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 para. 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.
\5\ The 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 para. 3571.10.
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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 inter-dealer 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 [[Page 26749]] 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\
\6\ Of 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.
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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 non-municipal 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.
\7\ MSRB Interpretation of July 27, 1981, MSRB Manual (CCH)
Paras. 3571.35 and 3571.41.
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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 [[Page 26750]] believed
more disclosure was necessary.\8\ The draft amendments published for
comment were substantially similar to the proposed rule change.\9\
\8\ The 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.
\9\ After 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.
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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 in-whole 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 pre-printed
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
[[Page 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
[[Page 26752]] 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
