Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Municipal Securities Rulemaking Board Relating to Rule G- 32, on Disclosures in Connection With New Issues

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39900; File No. SR-MSRB-98-4]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Municipal Securities Rulemaking Board Relating to Rule G-

32, on Disclosures in Connection With New Issues

April 22, 1998.

On March 25, 1998, 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-98-4) pursuant to Section 19(b)(1) of the Securities Exchange

Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder.\2\ 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.

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

\2\ 17 CFR 240.19b-4.

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

Substance of the Proposed Rule Change

The Board has filed with the Commission a proposed rule change

consisting of amendments to Rule G-32, on disclosures in connection

with new issues. The proposed rule change will provide an alternate

method of compliance by brokers, dealers and municipal securities

dealers with their obligation to deliver official statements in final

form to customers by settlement for certain new issues of variable rate

demand obligations. Below is the text of the proposed rule change.

Additions are italicized; deletions are in brackets.

Rule G-32. Disclosures in Connection With New Issues

(a) Disclosure Requirements. No broker, dealer or municipal

securities dealer shall sell, whether as principal or agent, any new

issue municipal securities to a customer unless such broker, dealer or

municipal securities dealer delivers to the customer no later than the

settlement of the transaction:

(i) a copy of the official statement in final form prepared by or

on behalf of the issuer or, if an [a final] official statement in final

form is not being prepared by or on behalf of the issuer, a written

notice to that effect together with a copy of an official statement in

preliminary form, if any; provided, however, that if an official

statement in final form is being prepared for new issue municipal

securities issued in a primary offering that qualifies for the

exemption set forth in paragraph (iii) of section (d)(1) of Securities

Exchange Act Rule 15c2-12, a broker, dealer or municipal securities

dealer may sell such new issue municipal securities to a customer if

such broker, dealer or municipal securities dealer:

(A) delivers to the customer no later than the settlement of the

transaction a copy of an official statement in preliminary form, if

any, and written notice that the official statement in final form will

be sent to the customer within one business day following receipt

thereof by the broker, dealer or municipal securities dealer, and

(B) sends to the customer a copy of the official statement in final

form, by first class mail or other equally prompt means, no later than

the business day following receipt thereof by the broker, dealer or

municipal securities dealer; and

(ii) No change.

[In the event an official statement in final form will not be

prepared by or on behalf of the issuer, an official statement in

preliminary form, if any, shall be sent to the customer with a notice

that no final official statement is being prepared.]

Every broker, dealer or municipal securities dealer shall promptly

furnish the documents and information referred to in this section (a)

to any broker, dealer or municipal securities dealer to which it sells

new issue municipal securities, upon the request of such broker, dealer

or municipal securities dealer.

(b) No change.

(c) Definitions [of New Issue Municipal Securities and Official

Statement].

For purposes of this rule, the following terms have the following

meanings:

(i)-(iii) No change.

(iv) The term ``primary offering'' shall mean an offering defined

in Securities Exchange Act Rule 15c2-12(f)(7).

* * * * *

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

texts 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

1. Purpose

The Board is proposing an amendment to Rule G-32, on disclosures in

connection with new issues, that would permit brokers, dealers and

municipal securities dealers (``dealers''), selling variable rate

demand obligations to customers during the underwriting period, to

deliver a preliminary official statement by no later than settlement

and to send the official statement in final form within one business

day of receipt from the issuer, provided these variable rate demand

obligations qualify for the exemption provided under subparagraph

(d)(1)(iii) of Rule 15c2-12 under the Act (``Rule 15c2-12'').

Background. Rule G-32 provides that no dealer shall sell any new

issue municipal securities to a customer unless that dealer delivers to

the

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customer, no later than the settlement of the transaction, a copy of

the official statement in final form or, if an official statement in

final form is not being prepared, a written notice to the effect

together with an official statement in preliminary form, if any.\3\ The

rule is designed to ensure that a customer who purchases a new issue

municipal securities is provided with all available information

relevant to his or her investment decision by settlement of the

transaction.

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\3\ The rule applies to all municipal securities (other than

commercial paper) that are sold by a dealer during the issue's

underwriting period, as such term is defined under Board rules.

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The structure of Rule G-32, as currently in effect, is premised on

the standard industry practice of issuers delivering the securities to

the underwriters two or more weeks after the sale date for the

securities (hereinafter referred to as the ``Bond Delivery

Period'').\4\ The rule was originally adopted by the Board in 1977 \5\

and was amended substantially to its current form in 1985.\6\ In 1989,

the Commission promulgated Rule 15c2-12,\7\ which requires underwriters

in primary offerings subject to the rule, among other things, to

contract with issuer to receive final official statements within seven

business days after any final agreement to purchase, offer or sell

municipal securities and to receive these statements in sufficient time

to accompany any confirmation that request payment from any customer.

At the time Rule 15c2-12 was drafted, the industry's standard Bond

Delivery Period was two or more weeks.\8\ Presumably, Rule G-32's

official statement delivery obligation was premised, at least in part,

on this timing requirement.

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\4\ The Bond Market Association states that ``[i]t usually takes

about one month from the sale date for the bonds to be actually

ready to be delivered to investors.'' Public Securities Association,

Fundamentals of Municipal Bonds, Fourth Edition (1990).

\5\ See Securities Exchange Act Release No. 15247 (October 19,

1978), 43 FR 50526 (October 30, 1978) (File No. SR-MSRB-77-12). The

Commission approved several Board rules in this release, including

G-32.

\6\ The Commission approved this amendment is Securities

Exchange Act Release No. 22374 (August 30, 1985), 50 FR 36505

(September 6, 1985) (File No. SR-MSRB-85-11). Subsequent amendments

have been limited to providing a definition of ``underwriting

period'' and clarifying the exemption for commercial paper. In

addition, the Board has filed with the Commission a proposed

amendment that relates primarily to dealer-to-dealer dissemination

of official statements. See File No. SR-MSRB-97-14 (December 22,

1997, amended March 12, 1998).

\7\ Securities Exchange Act Release No. 26985 (June 28, 1989),

54 FR 28799 (July 10, 1989).

\8\ For example, the seven business day time frame of paragraph

(b)(3) of Rule 15c2-12 presumably anticipated a typical Bond

Delivery Period of at least one and one-half weeks since the final

official statement is generally expected to be available at least by

closing of the underwriting transaction.

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The Board has previously sought to make Rule G-32 consistent with

the provisions of Rule 15c2-12. In 1996, the Board published a notice

requesting comments on a draft amendment to Rule G-32 that, among other

things, would have expedited the time that customers are provided with

a final official statement for primary offerings subject to Rule 15c2-

12 to the date of delivery of final money confirmations, as opposed to

settlement, as is currently required.\9\ The draft amendment was based

on the requirement under Rule 15c2-12 that underwriters contract with

issuers to receive final official statements in sufficient time to

accompany any confirmation that requests payment from any customer.

However, the Board decided not to proceed with the draft amendment

primarily due to commentators' complaints that frequent delays in

obtaining the final official statement from the issuer would often make

compliance with the accelerated timeframe impossible or unduly

expensive and burdensome.\10\

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\9\ See MSRB Reports, Vol. 16, No. 3 (Sept. 1996) at 19-23.

\10\ See MSRB Reports, Vol. 17, No. 2 (June 1997) at 23-24.

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In the interim, the Board had launched a review of the underwriting

process which focused on, among other things, the manner and timeliness

of delivery of official statements from issuers to underwriters under

Rule 15c2-12 and from underwriters to the Board under Rule G-36.\11\

The Board found that, in some instances, issuers do not meet their

contractual obligation entered into with underwriters pursuant to Rule

15c2-12 to deliver official statements within seven business days after

the date of final agreement to purchase, offer or sell the municipal

securities. The Board noted that, if issuers are not meeting the

current delivery requirement under Rule 15c2-12, it is possible that

final official statements also are not being prepared in time to

deliver to customers by settlement as required under Rule G-32. Thus,

to assist the agencies charged with enforcing Rules G-32 and G-36 and

to provide additional information to the Board in considering the

effectiveness of such rules, the Board proposed certain revisions to

Forms G-36(OS) and G-36(ARD) that would require that underwriters

indicate, among other things, the date that final official statements

are received from the issuer and the expected date of closing on the

underwriting. The revised forms went into effect on January 1, 1998 and

are currently being used by underwriting. The revised forms went into

effect on January 1, 1998 and are currently being used by

underwriters.\12\ The Board expects that information obtained through

the revised forms, as well as, through dialogue with industry

participants, will assist it in assessing the effectiveness of Rule G-

32 in the municipal marketplace as it has evolved since 1985 and

particularly since promulgation of Rule 15c2-12.

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\11\ See MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.

\12\ See Securities Exchange Act Release No. 39545 (January 13,

1998), 63 FR 3368 (January 22, 1998) (File No. SR-MSRB-97-10).

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Proposed Amendment. In promulgating Rule 15c2-12 and in response to

concerns raised by commentators that applying the provisions of the

rule to variable rate demand obligations ``might unnecessarily hinder

the operation of this market,'' \13\ the Commission provided an

exemption to the rule for any such obligations that can be tendered by

the holders thereof for purchase by the issuer or its agent at least as

frequently as every nine months and that are in authorized denomination

of $100,000 or more (``Exempt VRDOs''). The decision by the Commission

to exclude Exempt VRDOs from the operation of Rule 15c2-12 was

consistent with the fundamental structural differences between such

securities and most of the traditional market for municipal securities.

In most variable rate demand obligation issues, particularly those that

fall within the Exempt VRDO category, the purchase contract is not

executed until the issue closing date or the immediately preceding

day.\14\ Thus, in the vast majority of such issues, the Bond Delivery

Period--the period between the purchase date and the closing date--is

at most only one business day. As issuers typically do not authorize

the printing of the official statement in final form until the

execution of the purchase contract, underwriters usually do not receive

the official statement in final form until the closing date at the

earliest and, in many instances, the printed version is not available

until after the closing date, at which point the issuer has already

delivered the Exempt VRDOs to the underwriters.

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\13\ See Securities Exchange Act Release No. 26985 (June 28,

1989), 54 FR 28799 (July 10, 1989).

\14\ This compressed time frame arises as a result of the fact

that, as securities bearing short-term yields sold at par, the

market dictates that pricing--i.e., the setting of the interest rate

borne by the securities during the initial rate period--and

settlement occur on a same-day or next-day basis.

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[[Page 23317]]

The Board has determined that, because the Bond Delivery Period for

Exempt VRDOs is at most one business day, it is often not possible for

dealers to settle with customers--who expect to receive delivery of

their securities on the issue date--without causing a violation of the

requirement that they deliver the official statement in final form to

such customers by settlement. As a result, the Board is proposing an

amendment to Rule G-32 that would permit a dealer, selling new issue

Exempt VRDOs, to deliver the official statement in preliminary form to

the customer by settlement, together with a written notice that the

official statement in final form will be sent to the customer within

one business day of receipt. Thereafter, once the dealer receives the

official statement in final form, it must send a copy to the customer

within one business day of receipt. If no official statement in

preliminary form is being prepared, the dealer would only be obligated

to deliver by settlement the written notice regarding the official

statement in final form and to send the official statement in final

form upon receipt.\15\ The proposed amendment offers an alternative

method of compliance with Rule G-32 in the case of Exempt VRDOs. Thus,

in those limited circumstances where dealers may in fact receive the

official statement in final form in sufficient time to deliver it to

customers by settlement (e.g., if an issuer approves completion of the

official statement in final form prior to execution of the purchase

contract), dealers would have the option of complying with the existing

provision of the rule by delivering the official statement in final

form to the customer by settlement.

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\15\ As in the current rule, if no official statement in final

form is being prepared, such dealer would deliver to the customer by

settlement the official statement in preliminary form, if any, and

written notice to the effect that an official statement in final

form is not being prepared. If neither a final nor a preliminary

official statement is being prepared, the dealer would only be

obligated to deliver by settlement the written notice to the effect

that no official statement in final form is being prepared.

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2. Statutory Basis

The Board believes the proposed rule change is consistent with

Section 15B(b)(2)(C) of the Act.\16\ The Board believes that the

proposed rule change will ensure that the primary market in municipal

securities continues to experience adequate levels of disclosure

without disruption to the market for variable rate demand obligations.

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\16\ Section 15B(b)(2)(C) states 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 transaction 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.

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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 purposes of the Act, because 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

Written comments were neither solicited nor received.

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 longer period (i) as the Commission may

designated 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.

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. 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 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-98-4 and should be

submitted by May 19, 1998.

For the Commission by the Division of Market Regulation,

pursuant to delegated authority.\17\

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

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98-11209 Filed 4-27-98; 8:45 am]

BILLING CODE 8010-01-M