[Federal Register Volume 59, Number 149 (Thursday, August 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-19008]
[[Page Unknown]]
[Federal Register: August 4, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34458; File No. SR-MSRB-94-9]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Municipal Securities Rulemaking Board Relating to Reports
of Sales or Purchases, and Procedures for Reporting Inter-dealer
Transactions Pursuant to Rule G-14
July 28, 1994.
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 June 20,
1994, the Municipal Securities Rulemaking Board (``Board'' or ``MSRB'')
filed with the Securities and Exchange Commission (``Commission'' or
``SEC'') a proposed rule change (File No. SR-MSRB-94-9). The proposed
rule change is described in Items I, II, and III below, which Items
have been prepared by the Board. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Board is filing a proposal to amend Board rule G-14, concerning
reports of sales or purchases, and procedures for reporting inter-
dealer transactions (hereafter collectively referred to as ``the
proposed rule change'').\1\ The proposed rule change states that it is
the duty of brokers, dealers and municipal securities dealers to report
transactions in municipal securities to the Board or its designee, and
describes procedures for reporting.
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\1\The Commission notes that the MSRB intends to enact the
proposed rule change, in its entirely, as a temporary pilot program
to be in place for a minimum of one year. Telephone conversation
between Larry M. Lawrence, Policy and Technology Advisor, MSRB, and
Betsy Prout, Staff Attorney, Commission, on July 27, 1994.
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II. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
In its filing with the Commission, the Board included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
texts of these statements may be examined at the places specified in
Item IV below. The Board has prepared summaries, set forth in Section
(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) Purpose
The purpose of the proposed rule change is to achieve a certain
degree of transparency in the municipal securities market in a cost-
effective manner by collecting and disseminating information on inter-
dealer transactions. Under the proposed rule change, aggregate data
about market activity and certain volume and price information about
frequently traded securities would be disseminated to promote investor
confidence in the market and its pricing mechanisms. In addition, all
transaction information collected would be made available to regulatory
agencies responsible for enforcement of Board rules as a means to
assist in the inspection for compliance with, and the enforcement of,
Board rules.
The proposed rule change is a first step to increase transparency
in the municipal securities market. After gaining experience with the
collection and dissemination of inter-dealer transactions, the Board's
future steps would include adding institutional and retail customer
information, and moving toward the ultimate goal of making available
transaction information that is both comprehensive and contemporaneous.
Background. The municipal securities market has grown dramatically
in recent years. At the same time, retail investors have entered the
market in increasing numbers. These factors have increased the need for
access to information on municipal securities trading in the market,
including information which may help to establish more accurate
valuation of individual municipal securities.\2\ Recognizing this need,
the Board has adopted long-term goals and priorities for action, among
which is the goal of providing market participants with more
information about the value of securities.\3\
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\2\For a more general discussion of the evolution of the
municipal securities market, see MSRB, Report of the Municipal
Securities Rulemaking Board on Regulation of the Municipal
Securities Market (September 1993), at 19-27.
\3\See, e.g., ``From the Chairman,'' MSRB Reports, Vol. 8, No. 5
(December 1988), at 2.
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Similarly, the staff of the Division of Market Regulation of the
Commission has stated:
The Staff believes that the degree of transparency in the
municipal securities market is not adequate, and should be increased
to better inform investors in their dealings with broker-dealers and
to make the market more efficient.\4\
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\4\SEC, Division of Market Regulation, Staff Report on the
Municipal Securities Market (September 1993) (``Staff Report''), at
36.
In the equities markets, quotations, trade prices and volumes are
reported publicly for all securities listed on the exchanges and in the
National Association of Securities Dealers Automated Quotation
(``Nasdaq'') System. The Commission has noted at least three benefits
to the equities markets from transparency: enhanced investor
protection, market liquidity, and market efficiency.\5\ The Board
believes that these same benefits would be desirable in the municipal
securities market.
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\5\SEC, Division of Market Regulation, Market 2000: An
Examination of Current Equity Market Developments (January 1994), at
IV-2.
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The Pilot Program for Transaction Reporting. In 1993, the Board
announced its plan to undertake a pilot program to collect and publish
information on transactions occurring in the inter-dealer market for
municipal securities (the ``pilot program''). The Board has designed
the pilot program to take into account the distinctive aspects of the
municipal securities market that distinguish it from the exchange-
listed and Nasdaq markets. A primary distinguishing characteristic of
the municipal securities market is the large number of outstanding
issues. There are approximately 1.2 million municipal securities that
are distinct, non-fungible entities for purposes of trading and
reporting. In addition, the municipal securities market lacks any core
group of issues that trade frequently and consistently over sustained
periods of time. While, on any given day, a certain number of municipal
securities are traded frequently, the identity of these frequently
traded issues is continually changing over time. A third distinguishing
characteristic is that, in the municipal securities market, most issues
are purchased by ``buy and hold'' investors relatively quickly after
initial issuance. When frequent trading does occur in an issue, it
generally occurs immediately after issuance and then subsides within a
week to 10 days.\6\
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\6\The Board has examined inter-dealer trading data provided by
the National Securities Clearing Corporation (``NSCC'') for a six-
month period during 1991. During this six-month period, only 40
issues traded three or more times per day for a minimum of 10
consecutive business days. It is important to note that these 40
issues did not trade frequently for the entire six-month period and
that, on any given day, only a few of the 40 would be trading
frequently. In most cases, frequent trading in these issues--
primarily new issues--tended to trail off shortly after a 10-day
run. Altogether, approximately 75 percent of all issues trading
during the six-month period were traded only once or twice in a
given week.
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In the markets covered by Nasdaq and the National Association of
Securities Dealer's (``NASD's'') recently inaugurated Fixed Income
Pricing System (``FIPS'') for high-yield fixed-income corporate
securities,\7\ displays of data about a security are organized based on
firm quotations. The Board believes that a different concept is needed
for municipal securities, since firm two-sided quotations exist only
for very few municipal securities at any given time. There are several
reasons for this. For most municipal securities, there is only a small
``float'' of securities available to be the subject of trading. This
small ``float'' is a primary disincentive to market making. In
addition, the tax treatment of borrowing tax-exempt securities (along
with the small floats) effectively prevents short-sales of an issue.
This denies potential market makers a technique that otherwise could be
used to manage risks. Finally, the traditional ``buy and hold''
philosophy of most tax-exempt purchasers simply does to provide the
incentive or create the need for continuous, two-sided quotations
traditionally offered by market makers in equity securities.
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\7\See Securities Exchange Act Release No. 32019 (March 19,
1993), 58 FR 12428.
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The Board has designed the transaction reporting pilot program to
provide the public with price and volume information in a way that
reflects the unique aspects of the municipal securities market. The
pilot program will make information available in the form of a daily,
public report containing volume and pricing information for the inter-
dealer market (``daily report''). The issues that will be reported
individually each day will be those that traded at or above a threshold
number of times on the previous business day. Initially the threshold
will be four trades per day. As trading in an issue increases, it will
be reported; as an issue's trading frequency decreases, it will be
replaced by others that are trading frequently. In this way, the daily
report will reflect the ever-changing pattern of trading activity in
the universe of some 1.2 million municipal securities. The pilot
program will make information on all inter-dealer trades in municipal
securities available to the Commission and other regulatory agencies to
assist in the inspection for compliance with and the enforcement of
Board rules.
Requirement to Report. There is currently no affirmative
requirement for public reporting of transactions in municipal
securities. In its present form, the Board's rule G-14 does not require
the reporting of transactions in municipal securities, but does require
that any such report represent a legitimate trade. The rule requires a
dealer that distributes or publishes a report of a transaction in a
municipal security to know or have reason to believe that the
transaction was actually effected and to have no reason to believe that
the transaction was fictitious or in furtherance of any fraudulent,
misleading or deceptive purpose.
The proposed rule change would impose a duty upon dealers to report
inter-dealer transaction information to the Board or its designee. It
states that such information would be used to make public reports and
would be provided to the Commission, the NASD, and bank regulatory
organizations charged with enforcing Board rules, i.e., the Comptroller
of the Currency in the case of national banks, the Board of Governors
of the Federal Reserve System in the case of state member banks of the
Federal Reserve System, and the Federal Deposit Insurance Corporation
(``FDIC'') in the case of other banks insured by the FDIC.
Reporting Procedures. Brokers, dealers and municipal securities
dealers would report transactions under Rule G-14 Transaction Reporting
Procedures, which are also part of the proposed rule change. The
transaction reporting procedures designate the NSCC as the Board's
agent to receive transaction information. NSCC is a clearing agency
registered with the Commission under Section 17A of the Act and is the
central facility for automated comparison processing for inter-dealer
municipal securities transactions. Automated comparison is the process
by which each party to an inter-dealer trade ensures that its contra-
party knows the terms of the trade and will be ready to settle, on
those terms, on settlement date. In general, the automated comparison
process requires each dealer in a transaction to submit information on
a trade (e.g., price, quantity, contra-party) to a comparison system
operated by a clearing agency registered with the Commission. This
information is then matched (``compared'') by computer in the
comparison system and the results reported back to each dealer.
Currently, pursuant to the Board's rule G-12(f)(i), dealers must
use the facilities of a registered clearing agency to compare all
inter-dealer transactions in securities with CUSIP numbers. Since NSCC
and all other registered clearing agencies offering municipal
securities comparison services are linked by automated interfaces, it
will be possible for transactions to be submitted to NSCC by submitting
them to any such clearing agency. Accordingly, the proposed procedures
state that dealers may provide transaction information to NSCC or any
other registered clearing agency linked with NSCC for the purpose of
automated comparison. Dealers may submit transaction information
directly or through an agent that is a member of the registered
clearing agency.\8\ Thus, under the proposed rule change, dealers would
not be required to submit transaction data to a separate reporting
system and should not incur additional operational costs to fulfill
their reporting obligations.
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\8\These are the same procedures currently used to submit
information for automated comparison.
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With one exception, NSCC automated comparison procedures require
both the purchasing and selling dealers to submit information about the
trade. Thus, the proposed reporting procedures require transaction
information to be submitted by both parties. For transactions involving
the distribution of new issue securities from a syndicate manager to
syndicate members, however, NSCC comparison procedures require only a
submission from the syndicate manager. The proposed procedures allow
for the same ``one-sided'' submission of information for public
reporting.
The comparison process requires various data elements to be
submitted with regard to each transaction. The proposed transaction
reporting program makes an identical requirement for these data items.
The following transaction information will be collected by the Board
through NSCC:
Identification of seller
Identification of buyer
Trade date
CUSIP number of security traded
Trade type (e.g., syndicate takedown, new issue or regular way)
Par value (quantity) traded
Price, in one of the following formats:
Dollar price of security
``Final money'' (total dollar amount of the transaction)
Yield or basis of concession, if any
Settlement date, if not ``regular way''
As noted above, dealers already are required to provide this
information to a registered clearing agency as part of the automated
comparison process required under rule G-12(f)(i). Currently, the
accrued interest is an optional data element for the purpose of the
automated comparison process, ie., it can be submitted, but is not
required to match or compare a transaction. However, accrued interest
will be a mandatory submission for the purpose of transaction reporting
pursuant to the Rule G-14 Transaction Reporting Procedures. This
requirement is necessary for accurate computation of dollar price in
certain circumstances (see ``Price Computation,'' infra).
Timing. In the current comparison cycle, dealers submit required
information to a registered clearing agency by the evening of trade
date (``T''). NSCC, as the central facilities provider for the
comparison system, accepts this submitted data, compares the
submissions of the parties on the night of T and reports the results
back to the dealers on T+1. Trades that are successfully compared on T
will be the basis of the daily report produced by the Board's proposed
program. Accordingly, trades that are not successfully compared on the
night of the trade will not be subject to reporting on T+1.\9\ As an
indication of the reliability of the data in the daily report, the
percentage of submissions that were successfully compared (``comparison
rate'') will be shown in each day's report.\10\
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\9\It was determined to use data for compared trades rather than
data for both compared and uncompared trades because the compared
data is more reliable than uncompared data. If uncompared data were
reported, this might cause the daily report to include erroneous
prices or to include duplicate trades. Uncompared submissions
eventually are resolved as trades or as mistakes. Those that are
resolved as trades will be entered in the transaction reporting
database after T+1 and thus will be made available to the
enforcement agencies.
\10\ The Board has previously stated its concern about the need
to increase the comparison rate to obtain improvements as a
prerequisite to implementing T+3 settlement for municipal
securities.
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The Daily Report. The daily report will be provided to subscribers
for public use by approximately 6:00 a.m. on T+1. This will make the
data available prior to the beginning of trading activity. The daily
report will be available both as a computer-readable file and as a
printed report. The computer-readable file will be electronically
disseminated by an automated interface between Board computers and
those of subscribers or by magnetic tape delivered by a courier
service.
The Daily Report. The daily report will include aggregate
information for each day of trade, as follows:
(i) Total par value traded;
(ii) Total number of compared transactions; and
(iii) Total number of issues traded (i.e., the number of different
CUSIP numbers that were involved in compared transactions on that day).
In addition to the aggregate data, the daily report will contain
price and volume information about certain municipal securities that
were ``frequently traded'' on that day. The Board believes that it
would be appropriate to report issue-specific information only if four
or more transactions in the issue are reported as compared on a given
day. Using this threshold and based on recent levels of market
activity, the Board anticipates that the daily list of frequently
traded issues normally will range between 80 to 350 issues, with an
average of about 180 issues each day. The size and composition of the
list obviously would vary from day to day, depending upon market
activity in specific cases.
The information in the daily report about each ``frequently
traded'' security will include:
(i) The CUSIP number and security's description;
(ii) The total number of transactions in the security and total
volume traded;
(iii) The highest and lowest prices of transactions in the
security; and
(iv) ``Average price'' information, i.e., the number of
transactions in the security involving par values between $100,000 and
$1,000,000 inclusive, and the average price of those transactions.
The Board will provide a statement to be included in the report
pointing out that (a) the daily report represents only those inter-
dealer transactions that have been submitted for comparison and that
actually were compared on the previous day and (b) reported prices are
affected by various factors such as transaction size. This statement is
intended to ensure that readers unfamiliar with the municipal
securities market do not misinterpret the daily report.
Price Computation. Municipal securities transactions are sometimes
executed on a dollar price basis and sometimes executed on a yield
basis. The Board has chosen to use dollar price as the uniform
expression of ``price'' in the daily report to simplify reporting
procedures. In cases where dollar price is submitted for comparison,
that dollar price, as compared by the comparison system, will be used
in the daily report. In certain cases the security ``price'' for the
daily report will need to be computed from other submitted data. For
example, current procedures required for automated comparison allow the
submission of par value and ``final money'' (total dollar amount of the
transaction) to achieve comparison. The proposed Rule G-14 Transaction
Reporting Procedures provide that the dealers will submit the amount of
accrued interest in the trade to allow for computation of dollar price
in these cases. The following formula will be used:
Dollar price = (Final money--Accrued interest) / Par value
For ``when, as if issued'' trades submitted for comparison on a
yield basis, final money will be computed and a dollar price similarly
derived if a settlement date is known. For yield transactions whose
settlement date is not known, an assumed settlement date will be used.
The assumed settlement date will be 20 business days from the first
trade date on which that issue is submitted for comparison. On the
daily report, a note will be added to the trade information stating
that an assumed settlement date was used to compute the dollar price in
the trade and showing the date used. Once the actual settlement date is
known to NSCC, it will be used and noted as such when the issue is next
included on a daily report.
Fees and Costs. Subscription fees, estimated production costs for
the daily report, and further technical details of the pilot program
will be provided in a subsequent filing prior to beginning operation of
the facility.
Surveillance and Enforcement Uses of Pilot Program Information. In
addition to public reporting, the proposed rule change would make
transaction data available to the regulatory organizations charged with
enforcing Board rules. Commenting on the need for better information in
this area, the Commission's staff stated:
In the Staff's view, a central flaw in the present regulatory
system is the lack of an integrated audit trail in the municipal
securities market of the type that exists in the stock and options
markets. Because of the limited pricing information available in the
secondary market for many thinly traded municipal securities, it is
extremely difficult for the NASD to assess the fairness of the
prices being charged retail customers by municipal securities
broker-dealers. The Staff believes that the MSRB, the NASD, and the
banking agencies should work to create a cost-effective trade
reporting system that will provide the regulators with an integrated
audit trail of municipal securities and result in improved
surveillance for all segments of the market. The development of such
an audit trail would increase the NASD's ability to examine and
enforce the existing customer protection rules of the Commission and
the NASD.\11\
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\11\Staff Report, supra note 4, and 37.
The transaction reporting pilot program will result in a
centralized data base of trade information that is expected to improve
the efficiency and effectiveness of inspection for compliance with and
the enforcement of Board rules. All compared trades will be made
available to these regulatory organizations, including those that
compare after trade date and those not frequently traded. Comprehensive
information will be made available, including identification of parties
to each trade and the prices of all securities traded.
The information to be made available through the pilot program will
enable enforcement agencies to identify transaction patterns to detect
market manipulation and other anomalies. It will also assist regulators
in determining the market value of securities as they assess compliance
with the Board's rule G-30 on fair and reasonable prices and
commissions. The Board is working with the NASD and the bank regulatory
organizations to ensure that the pilot system's outputs will meet their
requirements for surveillance of the municipal securities market and
enforcement of the Board's rules.
The Board plans to evaluate expansion of the pilot program as
experience is gained and comments on program operations are received
from information users and the industry. The Board's first
consideration will be how the daily report and surveillance mechanisms
could be improved by including institutional customer transaction data
and information on the time of trade. During this evaluation, the
Board's goal will be not only to enhance the information contained in
the daily report, but also to find cost-effective methods for providing
even greater levels of transparency to the market, particularly with
respect to customer transactions and the dissemination of transaction
price information on a more contemporaneous basis.
Effect of Proposed Rule Change upon Dealers. Dealers should
experience minimal operational impact from the proposed rule change,
since, as mentioned above, they are now required, pursuant to the
Board's rule G-12(f)(i), to use the facilities of a registered clearing
agency for the automated comparison of transactions. The transaction
data submitted by dealers for comparison will be used by the
transaction reporting pilot program. Thus, under the proposed program,
dealers would not have to submit transaction data to a separate
reporting system and should not incur additional operational costs.
(b) Statutory Basis
The Board believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act, which requires, in pertinent part,
that the Board's rules be designed:
* * * 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 transaction reporting pilot program will make it possible to
provide pricing reports to all market participants and to the public.
The availability of this information is expected to support market
integrity, increase investor confidence, improve pricing efficiency and
increase liquidity in the market.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Board does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purpose of the Act, since it would apply equally to
all brokers, dealers and municipal securities dealers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In May 1993 the Board published a notice explaining its plan to
collect inter-dealer transaction data by using information required for
automated comparison, clearance and settlement. The notice set forth
the proposed method of collection inter-dealer transaction data and of
publishing it. The Board received four comments of which two supported
the proposed pilot program and made suggestions for expansion. The
remaining two commenters suggested certain modifications of the daily
report format and the selection criteria for reported issues without
expressing general support or opposition.
Sample Format for Daily Report. One commenter noted that the
reporting of transaction data by the Board should include a statement
stating that prices change with market conditions and that prices for
individual transactions may depend upon factors such as size of
transaction, interest rate, maturity date, and call features. Another
commenter stated that the daily report should note that the data
represents transactions that have been submitted for comparison. The
Board agrees that statements similar to those requested by the
commenters should be included on or with the daily reports to help
clarify the meaning of the data to the general public and has decided
to include such statements on the daily report. The Board also plans to
ask recipients of the daily report who intend to publish it for a
general audience also to include such statements in their publications.
Average Price Calculation. One commenter suggested widening the
band used for average price calculation to include more price
information. In contrast, another commenter suggested narrowing the
band to exclude some trades that might be considered ``odd lots''
(certain zero-coupon bond trades reported by NSCC on the basis of
maturity value).
The Board believes that it is appropriate to use the band from
$100,000 to $1 million for average price calculations for initial
production of the daily report. Once the program goes into operation
and feedback is received from data users, it will be possible to judge
how well the ``average price'' concept actually works in practice. As
experience is gained, the price band concept will be reviewed to
determine whether it is serving its intended purpose of indicating a
``typical'' inter-dealer market price. The pilot program's computer
system will be designed to enable the parameters of the price band to
be changed easily and quickly.
Compilations of Data. One commenter urged the Board to provide
compilations of transaction data (e.g., a month of data on a computer
disk) to facilitate study of the data by academics. The Board has
decided not to make such compilations available at the beginning of the
pilot program, but may do so in the future.
Information on Daily Reports. One commenter suggested that the
Board publish individual transaction data (CUSIP number, description,
par value, price) for each transaction, without regard to whether a
security is being frequently traded on a specific day. This commenter
believes that, by limiting reporting to individual maturities of an
issue that are trading frequently, the program would withhold
information that, in the aggregate, would be useful. For example, the
commenter believes that the general price levels for prerefunded
securities could be extracted from aggregate transaction data on
prerefunded securities, even when no one prerefunded security is
trading frequently.
The Board believes that reporting an isolated transaction in a
security does not necessarily provide a reliable indicator of ``market
price'' and might be misleading to an observer not familiar with the
market. Nevertheless, after the pilot program begins operation and
experience is obtained, the Board will review the use of the daily
report and consider expanding the information included to accommodate
requests from information users and the industry.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the MSRB consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested people are invited to submit written data, views, and
arguments concerning the foregoing. People making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of the filing will also be
available for inspection and copying at the Board's principal offices.
All submissions should refer to File No. SR-MSRB-94-9 and should be
submitted by August 25, 1994.
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. 94-19008 Filed 8-3-94; 8:45 am]
BILLING CODE 8010-01-M
