Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Proposed Rule Change Relating to Depository Eligibility of New Issue Municipal Securities

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34607; File No. SR-MSRB-94-13]

Self-Regulatory Organizations; Municipal Securities Rulemaking

Board; Notice of Filing of Proposed Rule Change Relating to Depository

Eligibility of New Issue Municipal Securities

August 26, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''),\1\ notice is hereby given that on August 17, 1994, 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 prepared primarily by MSRB. The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

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\1\15 U.S.C. Sec. 78s(b)(1) (1988).

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

of the Proposed Rule Change

The proposed rule change will amend MSRB Rule G-34 on CUSIP Numbers

and Dissemination of Initial Trade Date Information concerning

depository eligibility of new issue municipal securities. MSRB requests

that the Commission delay the effectiveness of the proposed rule change

until sixty (60) days after Commission approval to allow dealers to

adjust their underwriting procedures to obtain compliance.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, 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

texts of these statements may be examined at the places specified in

Item IV below. 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

On October 6, 1993, the Commission adopted Rule 15c6-1 under the

Act, which establishes three business days after the trade date

(``T+3'') instead of five business days (``T+5'') as the standard

settlement timeframe for most broker-dealer transactions.\2\ The rule

becomes effective June 1, 1995. Although municipal securities were not

included within the scope of Rule 15c6-1, the Commission did request

that MSRB provide a plan for implementing T+3 settlement in the

municipal securities market.\3\ In response, MSRB submitted to the

Commission its Report of the Municipal Securities Rulemaking Board on

T+3 Settlement for the Municipal Securities Market (March 17, 1994)

(``T+3 Report''). The T+3 Report detailed changes in operational

practices and regulatory actions that would be necessary in a T+3

environment for municipal securities.

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\2\Securities Exchange Act Release No. 33023 (October 6, 1993),

58 FR 52891.

\3\Letter from Arthur Levitt, Chairman, SEC, to David Clapp,

Chairman, MSRB (October 7, 1993).

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The T+3 Report discussed the need for changes concerning the use of

physical securities certificates to settle interdealer and

institutional customer transactions. Because these transactions are

settled on a delivery vs. payment or receipt vs. payment (``DVP/RVP'')

basis, it is critical that the delivery of securities be made in a

timely manner on settlement date. The physical delivery of securities

certificates, however, is a relatively time-consuming and inefficient

practice as compared to book-entry delivery through a securities

depository. A shortened settlement cycle will provide dealers,

institutional customers, and their clearing agents with considerably

less time to deal with the processing requirements and inevitable

problems that arise in connection with transportation, delivery, and

acceptance of physical securities certificates.

In 1993, MSRB amended MSRB Rules G-12(f)(ii) and G-15(d)(iii) to

require essentially all interdealer and institutional customer

transactions to be settled by book-entry when the securities involved

in the transactions are listed as eligible for deposit in a depository.

While these rules have assisted the municipal securities industry in

moving toward more universal use of book-entry settlement, the rules

only apply to transactions in securities that are depository-eligible.

The proposed rule change will facilitate book-entry settlement of

transactions in municipal securities by requiring, with limited

exceptions, dealers acquiring new issue municipal securities to apply

for depository eligibility. This requirement will serve to ensure that

the great majority of new issue municipal securities are made

depository eligible. As a result, the number of interdealer and

institutional customer transactions that must be settled by book-entry

under MSRB Rules G-12(f)(ii) and G-15(d)(iii) will greatly increase.

This will facilitate the conversion to T+3 settlement and will enhance

the efficiency of clearance and settlement of municipal securities by

reducing the number of physical deliveries of interdealer and

institutional customer transactions in favor of book-entry settlement.

Under the proposed rule change, brokers, dealers, and municipal

securities dealers will be required to apply for depository eligibility

within one business day of the date of sale of a new issue municipal

security.\4\ The proposed rule change will exempt (1) issues not

meeting the eligibility criteria of all depositories that accept

municipal securities for deposit and (2) issues maturing in sixty days

or less. The proposed rule change also will provide an exemption until

July 1, 1996, for issues under $1 million in par value. MSRB has

adopted the rule change pursuant to Section 15B(b)(2)(C) of the Act,

which provides that MSRB has the authority to adopt rules:

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\4\For competitively sold issues, the date of award from the

issuer is considered the date of sale. For negotiated issues, the

date of execution of the contract to purchase the securities from

the issuer is considered the date of sale.

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

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the public interest.***

As noted above, MSRB believes that the proposed rule change will

facilitate clearance and settlement of municipal securities and,

therefore, is consistent with the provisions of the Act.

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

MSRB does not believe that the rule change will impose any burden

on competition not necessary or appropriate in furtherance of the

purposes of the Act because it will 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 March 1994, MSRB requested comment on a draft amendment to Rule

G-34 that would require dealers to apply for depository eligibility of

all new issue municipal securities. The draft amendment included

exemptions for issues not meeting the criteria set by depositories for

eligibility and for new issues under $1 million in par value. MSRB

received ten comment letters in response to the draft amendments.\5\

The comments were generally supportive; however, some commenters

suggested modifications to the draft amendments.

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\5\Letters from A.G. Edwards & Sons, Inc.; The Cashiers'

Association of Wall Street, Inc.; Fleet Securities; Goldman, Sachs &

Co.; The New York Clearing House; The Public Securities Association;

The Regional Municipal Operations Association; The Securities

Industry Association; Summers & Company, Inc.; and Dean Witter

Reynolds, Inc.

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The Ten-day Application Period

The draft amendment would have required dealers to apply to a

depository at least ten days prior to the closing date of a new issue

to establish depository eligibility. This provision was intended to

support the routine practice recommended by depositories even though

depositories can and do make new issues eligible on shorter notice when

it is necessary. A majority of commenters, however, believe that the

ten day application period is inappropriate for an MSRB rule in light

of the need of underwriters occasionally to settle a new issue with an

issuer on short notice. Three commenters proposed a different approach

that would tie the application requirement to the date of sale rather

than the date of closing. These commenters suggested that the provision

be changed to require the application to be made within twenty-four

hours of the award of the issue.

MSRB notes that this suggestion will avoid potential problems that

might occur in the occasional cases in which there is less than ten

days between the date of award of a competitively sold issue and the

settlement of the issue. At the same time, the requirement for

underwriters to apply to a depository on the day after the date of sale

gives depositories the maximum amount of time available to establish

eligibility and prepare for a book-entry distribution. Therefore, MSRB

has included in the proposed rule change a provision requiring that the

application to a depository must be made within one business day of the

date of sale of the issue. The proposed rule change also includes a

requirement that if the full documentation and information required to

establish depository eligibility is not available from the underwriter

at the time the initial application is submitted to the depository, the

underwriter shall forward such documentation to the depository as soon

as it is available.

Exemption Until July 1, 1996, for Issues Under $1 Million in Par Value

The draft amendment included exemptive language for issues under $1

million in par value. This exemption was included because of concerns

that had been expressed by some dealers relating to their desire to

continue to use physical settlements for small issues with limited

distribution. Eight commenters urged MSRB to include issues under $1

million in par value within the rule with most citing the need for

increased settlement efficiencies offered by book-entry when T+3

becomes effective. Two commenters suggested a temporary exemption for

small issues and noted that ultimately all issues should be included

within the scope of the rule but that some underwriters of small issues

may need time to adjust their procedures associated with clearance and

settlement of small issues. MSRB believes that this is a reasonable

approach and has adopted a provision in the proposed rule change that

will exempt issues under $1 million in par value until July 1, 1996.

Four commenters suggested that a reduction in depository

application fees would reduce the need for an exemption for small

issues. MSRB, however, has no authority to change the fees charged by

depositories.

Exemption for Issues Maturing in Sixty Days or Less

Three commenters suggested an exemption for issues maturing in

sixty days or less and noted that these issues typically do not trade

in the secondary market. MSRB is not aware of any substantial trading

in such short-term securities and agrees that an exemption for issues

maturing in sixty days or less would be appropriate. The exemption

accordingly has been included within the proposed rule change.

Other Suggested Exemptions

One commenter suggested exempting leases, notes, and bonds sold to

nondepository participants. MSRB is not aware of any reason that these

types of securities should be treated differently than other municipal

securities. It accordingly has not provided exemptions for these types

of issues in the proposed rule change.

Depository Eligibility Criteria

MSRB understands that of the three depositories accepting municipal

securities for deposit, the eligibility criteria is essentially the

same and that nearly all municipal securities meet the criteria for

depository eligibility. If, however, an issue could not be made

eligible at any of these depositories, the proposed rule change will

not require the underwriter to make an application.\6\ One commenter

urged that depositories reach agreement on uniform minimum guidelines

to minimize the burden on underwriters and inefficiencies that might be

caused by any differing eligibility criteria among the depositories.,

While MSRB agrees with this goal, MSRB does not have regulatory

authority over depositories. MSRB will continue to monitor any problems

created by differing eligibility criteria and may suggest remedial

actions to the Commission in the future if differing eligibility

criteria create problems under the proposed rule change.

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\6\The exception in the proposed rule change for new issues that

do not meet a depository's eligibility criteria is necessary because

the terms of a new issue ultimately are controlled by the issuer of

the securities, which is not subject to MSRB rules.

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III. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Within thirty-five 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 ninety days of such date if it finds

such longer period to be appropriate and publishes its reasons for so

filing or (ii) as to which the self-regulatory organization 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.

MSRB requests that the Commission delay effectiveness of the

proposed rule change until sixty days after Commission approval to

allow dealers to adjust their underwriting procedures to obtain

compliance.

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 submissions, 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, 450 Fifth Street NW., Washington,

DC. 20549. Copies of the filing will also be available for inspection

and copying at MSRB's principal offices. All submissions should refer

to File No. SR-MSRB-94-13 and should be submitted by September 27,

1994.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\7\

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\7\17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-21812 Filed 9-2-94; 8:45 am]

BILLING CODE 8010-01-M