Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval to Proposed Rule Change Relating to an Amendment to Rule G-16 on Periodic Compliance Examinations

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42019; File No. SR-MSRB-99-7]

Self-Regulatory Organizations; Municipal Securities Rulemaking

Board; Order Granting Approval to Proposed Rule Change Relating to an

Amendment to Rule G-16 on Periodic Compliance Examinations

October 15, 1999.

I. Introduction

On August 13, 1999, the Municipal Securities Rulemaking Board

(``Board'' or ``MSRB'') submitted to the Securities and Exchange

Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of

the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4

thereunder,\2\ a proposed rule change relating to Rule G-16 on periodic

compliance examinations. The proposed rule change was published for

comment in the Federal Register on August 20, 1999.\3\ No comments were

received on the proposed rule change. This order approves the proposed

rule change.

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

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

\2\ 17 CFR 240.19b-4.

\3\ See Exchange Act Release No. 41773 (Aug. 20, 1999), 64 FR

47209 (Aug. 30, 1999).

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

II. Description of the Proposal

Section 15B(c)(7)(A) \4\ of the Act provides that periodic

examinations of dealers for compliance with MSRB rules are to be

conducted by the National Association of Securities Dealers, Inc.

(``NASD'') with respect to securities firms and by the appropriate

federal bank regulatory agencies with respect to bank dealers. Rule G-

16 permits periodic examinations of dealers for compliance with MSRB

rules to be combined with other periodic examinations of securities

firms and bank dealers to avoid unnecessary regulatory duplication and

undue regulatory burdens for such firms and bank dealers. Rule G-16

currently requires that compliance examinations for dealers be

conducted at least once every 24 months.

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

\4\ 15 U.S.C. 78o-4(c)(7)(A).

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

By letter dated April 28, 1999, NASD Regulation, Inc. (``NASDR'')

requested that the Board revise Rule G-16. The letter stated that

because of NASDR's efforts to coordinate examination schedules, NASDR

believes that the Board should change the 24-month requirement in Rule

G-16 to a two calendar year requirement.

NASDR stated that the requirement in Rule G-16 that municipal

securities examinations commence within 24 months of the previous

examination takes precedence over all examinations when coordinating

examination schedules. NASDR uses the ``field work start date'' of a

firm's prior municipal securities examination to calculate the 24-month

period for the purposes of Rule G-16. Applying this methodology, NASDR

identifies all municipal securities examinations required in a given

calendar year. A determination is then made as to whether the

identified firms are also scheduled for a routine cycle examination

during the same year.

If a routine cycle examination is required of a firm that is

subject to a municipal inspection, the routine and municipal

examinations are combined. If a routine cycle examination is not

required, a separate ``off-cycle'' municipal examination may have to be

conducted on-site. Whenever a municipal securities examination is

accelerated, the due date for commencement of a subsequent examination

is moved to an earlier period; increasingly the first quarter. NASDR

stated that this hampers both current and future examination planning

and coordination. NASDR stated that without the rule change it may be

necessary to remove municipal securities examinations from the

coordinated examination programs.

The proposed rule change alters Rule G-16's requirement that

compliance examinations be conducted once every 24 months to once every

two calendar years. The rule change is intended to facilitate

coordination of on-site examinations to eliminate unnecessary

regulatory duplication without negatively affecting investor

protection. A formal Memorandum of Understanding among the North

American Securities Administrators Association, Inc., Commission, NASDR

and other securities industry self-regulatory organizations reflect the

joint commitment to coordinated examinations.

III. Discussion

The Commission believes that the proposed rule change is consistent

with the requirements of the Act and the rules and regulations

thereunder.\5\ In particular, the Commission finds that the proposed

rule change is consistent

[[Page 57506]]

with Section 15B(b)(2(C) \6\ of the Act. Section 15B(b)(2)(C) of the

Act requires, among other things, that the rules of the Board be

designed to prevent fraudulent and manipulative acts and practices, to

promote just and equitable principles of trade, to remove impediments

to and perfect the mechanism of a free and open market, and, in

general, to protect investors and the public interest. Specifically,

the Commission believes that the proposed rule change will prevent

fraudulent and manipulative acts and practices and promote just and

equitable principles of trade by enabling the NASD to better coordinate

periodic examination schedules.

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

\5\ In reviewing this proposal, the Commission has considered

the proposed rule's impact on efficiency, competition, and capital

formation. The proposed rule change should improve efficiency and

competition because it permits flexibility for scheduling periodic

compliance examinations. 15 U.S.C. 78c(f).

\6\ 15 U.S.C. 78o-4(b)(2)(C).

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

The rule change will extend the maximum period between compliance

examinations to three years. For example, if a dealer is examined in

January, the two calendar year clock would not start running for the

next compliance examination under Rule G-16 until the following

January. While this could lengthen the time between compliance

examinations, the Commission believes that enhancing the NASD's ability

to coordinate examinations should reduce unnecessary regulatory

duplication and regulatory burdens for dealers as well as permit the

NASD to better allocate its examination resources. The Commission

believes that the proposed rule change will ease the burdens for both

the examiners and the dealers. By permitted more flexibility in

arranging examination schedules, the change to Rule G-16 should result

in scheduling examinations based on efficiency and methodology rather

than the calendar.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) \7\ of the

Act, that the proposed rule change (SR-MSRB-99-7) is approved.

\7\ 15 U.S.C. 78s(b)(2).

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

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\8\

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

\8\ 17 CFR 200.30-3(a)(12).

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

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-27717 Filed 10-22-99; 8:45 am]

BILLING CODE 8010-01-M