
[Federal Register: January 13, 2009 (Volume 74, Number 8)]
[Notices]               
[Page 1741-1743]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13ja09-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59212, File No. SR-MSRB-2008-07]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change as Modified by 
Amendment No. 1 Relating to MSRB Rule G-34, CUSIP Numbers and New Issue 
Requirements, to Establish a Transparency System for Municipal Auction 
Rate Securities and Municipal Variable Rate Demand Obligations

January 7, 2009.
    On November 18, 2008, the Municipal Securities Rulemaking Board 
(``MSRB''), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), 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 to MSRB Rule G-34, CUSIP Numbers 
and New Issue Requirements, to establish a transparency system for 
municipal auction rate securities and municipal variable rate demand 
obligations. The proposed rule change was published for comment in the 
Federal Register on November 28, 2008.\3\ The Commission received three 
comment letters about the proposed rule change.\4\ On January 2, 2009, 
the MSRB filed Amendment No. 1 to the proposed rule change.\5\ This 
order approves the proposed rule change as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 58998 (Nov. 21, 
2008), 73 FR 72540 (Nov. 28, 2008) (``Commission's Notice'').
    \4\ See letter from Jeffrey A. Schuh, Vice President, Chief 
Compliance Officer, Wells Fargo Brokerage Services, LLC (``WFBS''), 
dated December 18, 2008; letter from Leslie M. Norwood, Managing 
Director and Associate General Counsel, Securities Industry and 
Financial Markets Association (``SIFMA''), dated December 19, 2008; 
and letter from Michael Decker and Mike Nicholas, Co-Chief Executive 
Officers, Regional Bond Dealers Association (``RBDA''), dated 
December 29, 2008.
    \5\ In Amendment No. 1, the MSRB responded to the three comment 
letters and, in response to the comment letters, postponed the 
effective date of the proposed amendments to Rule G-34 that relate 
to Variable Rate Demand Obligations from January 30, 2009 to April 
1, 2009. The proposed January 30, 2009 effective date for the 
proposed amendments to Rule G-34 that relate to Auction Rate 
Securities remains unchanged. This is a technical amendment and is 
not subject to notice and comment.
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    The proposed rule change would establish a transparency system for 
municipal Auction Rate Securities (``ARS'') and municipal Variable Rate 
Demand Obligations (``VRDO''). The proposed rule change would: (i) 
Implement an electronic system that would collect and disseminate ARS 
and VRDO information (the ``Short-term Obligation Rate Transparency 
System Proposal''); (ii) provide free public access to information 
disseminated from the Short-term Obligation Rate Transparency 
(``SHORT'') System through the MSRB's Electronic Municipal Market 
Access (EMMA) system (the ``EMMA short-term obligation rate 
transparency service''); and (iii) amend Rule G-34, on CUSIP numbers 
and new issue requirements, to require brokers, dealers and municipal 
securities dealers (collectively ``dealers'') to report, or ensure the 
reporting of, interest rate and descriptive information to the SHORT 
System about ARS and VRDO following an ARS auction or VRDO interest 
rate reset. A full description of the proposal is contained in the 
Commission's Notice.
    As previously noted, the Commission received three comment letters 
relating to the proposed rule change.\6\ The commenters generally 
supported the concept of the proposal, but raised concerns about the 
timing of its implementation and certain data points required to be 
collected. WFBS commented only with respect to the proposed effective 
date of the proposal. WFBS requested that the implementation date of 
the proposal be extended to four months from the date of publication of 
the final rule so that changes needed to support the SHORT proposal 
could be designed, thoroughly tested and implemented prior to the 
proposed implementation date.
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    \6\ See supra note 4.
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    SIFMA supported the concept of collection and display of auction 
rate reset and remarketing rate reset information, and focused its 
comments on the timing of implementation and certain data points 
proposed to be collected. SIFMA stated that its members feel strongly 
that January 30, 2009 is an unrealistically short timeframe for 
implementing the new regulatory requirement. SIFMA noted that this year 
has been a historic year for technological and operational issues due 
to the market dislocation, and that this as well as other issues have 
resulted in many urgent technology and operation projects queued at 
broker dealer firms. SIFMA requested that the proposal be delayed until 
the later of April 1, 2009 or 90 days after the final rule is approved 
by the SEC.
    SIFMA also recommended that maximum and minimum VRDO rates not be 
required by the SHORT system. SIFMA stated that the terms of VRDO 
securities, by and large, have been negotiated on a bespoke basis for 
each transaction, that maximum rate formulas are not standardized, and 
that the administrative burden of calculating and reporting the maximum 
rate for every reset period is in excess of the theoretical benefits it 
provides. SIFMA also found no evidence of minimum rates in any VRDO 
transaction and stated that this is a superfluous field which should be 
eliminated.
    SIFMA stated that the broker dealers regulated by the MSRB do not 
have control over all of the ARS data points being requested in the 
proposal because broker dealers merely receive the auction information 
from the auction agent. Therefore SIFMA believes that there should be 
an acknowledgement in Rule G-34(c)(i) that the broker dealer is only 
responsible for forwarding the information it has received from the 
auction agent and not be responsible for the accuracy of that data.
    RBDA stated in its letter that they support the implementation of 
the proposal as early as is practical, but believe the intended 
effective date of January 30, 2009 will not give market participants 
sufficient time to implement and thoroughly test automated systems that 
will facilitate compliance with rules associated with the new system. 
RBDA requested that the effective date for full

[[Page 1742]]

implementation of the proposal be moved to April 1, 2009.
    In Amendment No. 1, the MSRB responded to the three comment letters 
and, in response to the comment letters, postponed the effective date 
of the proposed amendments to Rule G-34 that relate to Variable Rate 
Demand Obligations from January 30, 2009 to April 1, 2009. The proposed 
January 30, 2009 effective date for the proposed amendments to Rule G-
34 that relate to Auction Rate Securities remains unchanged.
    The MSRB noted in response to the comments from SIFMA with respect 
to the data points to be collected that the SHORT System has been 
designed to accept reports of VRDO in which the minimum rate is 
unspecified by allowing a dealer to not include a value for the minimum 
rate. SIFMA also stated that some VRDO maximum rates are not stated in 
official documents for the VRDO or are set pursuant to a formula for 
which some VRDO maximum rates are not able to be calculated on the day 
that an interest rate reset occurs. The MSRB stated that the purpose of 
the requirement in the proposed amendments to Rule G-34 to report the 
current maximum rate is to improve the availability of important 
characteristics of a VRDO that have been set by drafters of official 
documents for VRDO. Therefore, dealers would be required to report 
under the proposed amendments to Rule G-34 VRDO maximum rates that are 
stated in official documents either as absolute values or that are able 
to be calculated pursuant to formulas on the day of an interest rate 
reset. For VRDO maximum rates that are not able to be calculated on the 
day an interest rate reset occurs, the SHORT System has been designed 
to accept a value of ``not calculable.'' In addition, the SHORT System 
also has been designed to accept reports of VRDO in which the maximum 
rate is unspecified by allowing a dealer to not include a value for the 
maximum rate.
    The MSRB acknowledged that many of the items of information about 
ARS that would be required to be reported to the MSRB under the 
proposed amendments to Rule G-34 are produced by ARS auction agents and 
that dealers may not always be able to verify the accuracy of such 
information. Accordingly, the MSRB stated that it has designed the 
SHORT System to accept submissions of information directly from ARS 
auction agents and has incorporated into the proposed amendments to 
Rule G-34 that dealers ``may rely on the accuracy of such information 
if the [dealer] makes a good faith and reasonable effort to cause the 
Auction Agent to correct any inaccuracies known to the [dealer].'' In 
the event that an ARS auction agent does not submit information 
directly to the SHORT System but instead a dealer reports to the SHORT 
System information it receives from the ARS auction agent, the 
reporting dealer would have a similar responsibility for correcting any 
inaccuracies known to the dealer in the data provided to it by an ARS 
auction agent. Therefore, so long as the dealer reports the information 
about the auction as provided by the ARS auction agent and fulfills its 
responsibility to correct known inaccuracies, and the dealer does not 
itself introduce any inaccuracies to the data submitted, the dealer 
would be entitled to the same reliance as in the case of a direct 
submission to the SHORT System by the ARS auction agent. The Commission 
believes that the MSRB has adequately addressed the concerns raised by 
SIFMA about the collection of data points for VRDO and ARS.
    The MSRB filed Amendment No. 1 in response to concerns raised by 
all three commenters about the effective date of the proposal. The 
proposed January 30, 2009 effective date for the proposed amendments to 
Rule G-34 that relate to Auction Rate Securities remains unchanged. 
While the MSRB acknowledged that some dealers may need additional time 
to perform and test system changes to report data to the MSRB using an 
automated system, the MSRB believes that dealers will be able to report 
information about ARS to the MSRB manually using the SHORT System Web 
User Interface if those system changes are not able to be fully 
implemented by January 30, 2009, particularly since the number of ARS 
issues is relatively small. In addition, since ARS are primarily a 
retail product, the MSRB believes it is important to provide 
transparency of ARS as early as practicable. Accordingly, the MSRB does 
not believe that a change to the proposed January 30, 2009 effective 
date for ARS is warranted. The Commission agrees that a change to the 
proposed January 30, 2009 effective date for ARS is not warranted 
because the dislocations in the ARS market necessitate the improvement 
of price transparency for ARS as soon as possible.
    Amendment No. 1 postpones the effective date of the proposed 
amendments to Rule G-34 that relate to Variable Rate Demand Obligations 
from January 30, 2009 to April 1, 2009. While the SHORT System allows 
data to be reported manually using the SHORT System Web User Interface, 
the MSRB agrees with commenters that manual submission of data for VRDO 
would be impractical in many cases due to the high number of VRDO 
securities and the frequency with which VRDO interest rates reset. 
Therefore, the MSRB believes that a revised effective date of April 1, 
2009 would allow additional time for dealers to implement automated 
systems to submit data about VRDO to the SHORT System and should 
address commenters concerns. The Commission believes that this 
extension provides a reasonable accommodation to dealers.
    The Commission has carefully considered the proposed rule change, 
the comment letters received, and the MSRB's response to the comment 
letters and finds that the proposed rule change is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to the MSRB \7\ and, in particular, the requirements of 
Section 15B(b)(2)(C) of the Act \8\ and the rules and regulations 
thereunder. Section 15B(b)(2)(C) of the Act requires, among other 
things, that the MSRB's rules 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.\9\ In particular, the 
Commission finds that the proposed rule change is consistent with the 
Act because it would serve as an additional mechanism by which the MSRB 
works toward removing impediments to and helping to perfect the 
mechanisms of a free and open market in municipal securities by 
providing a centralized venue for free public access to information 
about ARS and VRDO. The proposed rule change would provide greater 
access to information about ARS and VRDO to all participants in the 
municipal securities market on an equal basis thereby removing 
potential barriers to obtaining such information and will allow the 
municipal securities industry to produce more accurate trade reporting 
and transparency. These factors serve to promote the statutory

[[Page 1743]]

mandate of the MSRB to protect investors and the public interest.
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    \7\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78o-4(b)(2)(C).
    \9\ Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-MSRB-2008-07), as modified 
by Amendment No. 1, be, and it hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-441 Filed 1-12-09; 8:45 am]

BILLING CODE 8011-01-P
