Notice2024-15678
Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval of a Proposed Rule Change To Amend MSRB Rule G-47, on Time of Trade Disclosure, To Codify and Retire Certain Existing Interpretive Guidance and Add New Time of Trade Disclosure Scenarios
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
July 17, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 137 (Wednesday, July 17, 2024)</title>
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[Federal Register Volume 89, Number 137 (Wednesday, July 17, 2024)]
[Notices]
[Pages 58229-58235]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-15678]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-100508; File No. SR-MSRB-2024-03]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of a Proposed Rule Change To Amend MSRB
Rule G-47, on Time of Trade Disclosure, To Codify and Retire Certain
Existing Interpretive Guidance and Add New Time of Trade Disclosure
Scenarios
July 11, 2024.
I. Introduction
On April 9, 2024, the Municipal Securities Rulemaking Board
(``MSRB'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend MSRB Rules G-47 (``Rule
G-47''), on time of trade disclosure, to codify certain existing
interpretive guidance and retire certain other existing interpretive
guidance, add new time of trade disclosure scenarios, and make
technical clarifications (the ``proposed rule change'').\3\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 34-99949 (April 9,
2024), 89 FR 27809 (April 18, 2024) (``Notice'').
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The MSRB will announce the effective date of the proposed rule
change in a regulatory notice to be published on the MSRB website no
later than 30 days following this approval. The effective date will be
no later than nine months following this approval.
The proposed rule change was published for comment in the Federal
Register on April 18, 2024.\4\ The Commission received one comment
letter on the proposed rule change.\5\ On June 14, 2024, the MSRB
responded to the comment letter.\6\ As described further below, the
Commission is approving the proposed rule change.
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\4\ See Notice, 89 FR at 27809.
\5\ See Letter from Leslie M. Norwood, Managing Director and
Associate General Counsel, Securities Industry and Financial Markets
Association (``SIFMA'') (May 9, 2024) (``SIFMA Letter''), available
at <a href="https://www.sec.gov/comments/sr-msrb-2024-03/srmsrb202403.htm">https://www.sec.gov/comments/sr-msrb-2024-03/srmsrb202403.htm</a>.
\6\ See Letter to Secretary, Commission, from Ernesto A. Lanza,
Chief Regulatory and Policy Officer, MSRB, dated June 14, 2024
(``MSRB Letter'').
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II. Description of the Proposed Rule Change
A. Background
MSRB Rule G-47 requires brokers, dealers, or municipal securities
dealers (``dealers'') to disclose to customers, at or prior to the time
of trade, all material information known or available publicly through
established industry sources. More specifically, MSRB Rule G-47
requires dealers selling a municipal security to a customer, or
purchasing a municipal security from a customer, to disclose to the
customer, orally or in writing, at or prior to the time of trade, all
material information known about the transaction, as well as
information about the municipal security that is reasonably accessible
to the market. This obligation exists for both unsolicited and
recommended transactions as well as primary and secondary market
transactions.\7\
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\7\ Dealers are also subject to Commission Rule 15l-1 under the
Exchange Act that requires broker-dealers to make certain prescribed
disclosures to their retail customer, before or at the time of the
recommendation, about the recommended transaction and the
relationship between the retail customer and the broker-dealer. See
17 CFR 240.15l-1(a)(2)(i).
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MSRB Rule G-47 Supplementary Material .03 contains examples of
information that may be material in specific scenarios and therefore
requires time of trade disclosures to a customer. The list of specific
scenarios is non-exhaustive and other information not listed in MSRB
Rule G-47 Supplementary Material .03 may be material to customers
depending upon the specific scenario. In addition to the specific
disclosure scenarios listed in MSRB Rule G-47 Supplementary Material
.03, various items of MSRB interpretive guidance list other
[[Page 58230]]
scenarios that could require a time of trade disclosure obligation to a
dealer transacting with a customer.
In summary, the MSRB stated that the proposed rule change would
amend MSRB Rule G-47 to:
<bullet> Clarify in section (a) of MSRB Rule G-47 that a dealer is
not obligated to disclose material information in violation of insider
trading rules or procedures; \8\
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\8\ See Notice, 89 FR at 27809.
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<bullet> Amend and simplify the definition of material information
in subsection (b)(ii) of MSRB Rule G-47 and make a conforming amendment
to Supplementary Material .01(a); \9\
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\9\ Id.
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<bullet> Codify into Supplementary Material .03 existing
interpretive guidance pertaining to market discount and to zero coupon
or stepped coupon securities; \10\
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\10\ Id.
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<bullet> Add a clarifying example of factor bonds as bonds that
prepay principal in Supplementary Material .03(i); \11\ and
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\11\ Id.
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<bullet> Add three new disclosure scenarios to Supplementary
Material .03.\12\
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\12\ Id.
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The MSRB also stated that proposed rule change would also retire
interpretive guidance on conversion costs and secondary market
insurance and consolidate existing inter-dealer time of trade
disclosure guidance into a single piece of interpretive guidance.\13\
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\13\ Id.
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B. Summary of the Proposed Rule Change
i. Disclosure of Material Information
The MSRB has stated that the proposed rule change would redesignate
the existing language of MSRB Rule G-47(a) as subsection (i) and add a
new subsection (ii) to MSRB Rule G-47(a) clarifying that information
that may be material to the transaction would not be required to be
disclosed to the customer if, pursuant to the dealer's policies and
procedures regarding insider trading and related securities laws, such
information is intentionally withheld from the dealer's registered
representatives who are engaged in sales to and purchases from
customers.\14\ The MSRB noted that it would be beneficial to the market
to clarify this point in the text of MSRB Rule G-47 given that it is
not the MSRB's intent for dealers to violate securities
regulations.\15\
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\14\ Id.
\15\ Id.
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ii. Definition of Material Information
Current MSRB Rule G-47(b)(ii) defines the term ``material
information'' and explains that information is considered to be
material if there is a substantial likelihood that the information
would be considered important or significant by a reasonable investor
in making an investment decision. According to the MSRB, the proposed
rule change would delete the language ``or significant'' in order to
streamline and simplify the definition.\16\ The MSRB has stated that it
does not believe that this would materially alter the definition of
material information or impose any additional burdens on dealers.\17\
The MSRB further stated that the proposed rule change would make a
conforming amendment in Supplementary Material .01(a) to change the
word ``significant'' to ``important.'' \18\
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\16\ See Notice, 89 FR at 27810.
\17\ Id.
\18\ Id.
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iii. Codify Existing Interpretive Guidance on Market Discount and Zero
Coupon or Stepped Coupon Securities
The MSRB states that the proposed rule change would codify and
retire November 2016 interpretive guidance (the ``Market Discount
Guidance'') \19\ on market discount.\20\ The Market Discount Guidance
states that, absent adequate disclosure that a security has market
discount, an investor might not be aware that all or a portion of such
investor's investment return represented by accretion of the market
discount is taxable as ordinary income.\21\ The Market Discount
Guidance goes on to state that the fact that a security has market
discount is material information that is required to be disclosed to a
customer under MSRB Rule G-47 at or prior to the time of trade.\22\ The
MSRB states that the proposed rule change would codify this information
into MSRB Rule G-47 Supplementary Material .03(p).\23\ Furthermore, the
MSRB states that the proposed rule change would retire the Market
Discount Guidance upon codification as the MSRB believes that it would
not retain any standalone value.\24\ The MSRB believes that codifying
this information into the text of MSRB Rule G-47 would facilitate
compliance and consolidate its rulebook by removing redundant
interpretive guidance.\25\ The MSRB notes, however, that proposed MSRB
Rule G-47 Supplementary Material .03(p) would not require dealers to
provide customers with more detailed or personalized information, or to
provide any information that could constitute tax advice, with respect
to market discount.\26\
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\19\ See MSRB Interpretive Guidance, Time of Trade Disclosure--
Disclosure of Market Discount (November 22, 2016), available at
<a href="https://www.msrb.org/Time-Trade-Disclosure-Disclosure-Market-Discount">https://www.msrb.org/Time-Trade-Disclosure-Disclosure-Market-Discount</a>.
\20\ See Notice, 89 FR at 27810.
\21\ See Market Discount Guidance.
\22\ Id.
\23\ See Notice, 89 FR at 27810.
\24\ Id.
\25\ Id.
\26\ Id.
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The MSRB also states that the proposed rule change would also
codify and retain April 1982 interpretive guidance (the ``Zero or
Stepped Coupon Guidance'') \27\ pertaining to municipal securities with
zero coupons or stepped coupons.\28\ The Zero or Stepped Coupon
Guidance states in the context of discussing zero coupon bonds and
stepped coupon bonds that the MSRB is of the view that persons selling
such securities to the public have an obligation to adequately disclose
the special characteristics of such securities in order to comply with
the MSRB's fair practice rules.\29\ The MSRB states that the proposed
rule change would incorporate this guidance into MSRB Rule G-47
Supplementary Material .03(q) but retain the Zero or Stepped Coupon
Guidance as it contains additional standalone value pertaining to MSRB
Rule G-12 and MSRB Rule G-15.\30\
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\27\ See MSRB Interpretive Guidance, Notice Concerning ``Zero
Coupon'' and ``Stepped Coupon'' Securities (April 27, 1982),
available at <a href="https://www.msrb.org/Notice-Concerning-Zero-Coupon-and-Stepped-Coupon-Securities">https://www.msrb.org/Notice-Concerning-Zero-Coupon-and-Stepped-Coupon-Securities</a>.
\28\ See Notice, 89 FR at 27810.
\29\ Id.
\30\ Id.
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iv. Retire Existing Interpretive Guidance on Conversion Costs and
Secondary Market Insurance
The MSRB states that the proposed rule change would retire two
pieces of interpretive guidance that the MSRB believes have become
outdated.\31\ The MSRB states that the first interpretive guidance to
be retired is interpretive guidance from August 1988 (the ``Conversion
Cost Guidance'') \32\ stating that transfer agents for some
interchangeable securities charge fees for the conversion of registered
certificates to bearer form, which can be substantial and, in some
cases, prohibitively expensive.\33\ The MSRB further states that the
Conversion Cost Guidance goes on to state that dealers therefore should
ascertain the amount of
[[Page 58231]]
the fee prior to agreeing to deliver bearer certificates and that, if a
dealer passes on the costs of converting registered securities to
bearer form to its customer, the dealer must disclose the amount of the
conversion fee to the customer at or prior to the time of trade and the
customer must agree to pay the conversion fee.\34\ The MSRB believes
that interchangeable securities are a rare occurrence in the
marketplace, and as such, the MSRB believes that there is limited
utility in retaining this guidance and proposes its retirement.\35\
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\31\ Id.
\32\ See MSRB Interpretive Guidance, Confirmation, Delivery and
Reclamation of Interchangeable Securities (August 10, 1988),
available at <a href="https://www.msrb.org/Confirmation-Delivery-and-Reclamation-Interchangeable-Securities">https://www.msrb.org/Confirmation-Delivery-and-Reclamation-Interchangeable-Securities</a>.
\33\ See Notice, 89 FR at 27810.
\34\ Id.
\35\ Id.
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The MSRB states that the second piece of interpretive guidance to
be retired is guidance from March 1984 (the ``Secondary Market
Insurance Guidance'') \36\ on secondary market insurance.\37\ The MSRB
states that the Secondary Market Insurance Guidance, in part, reminds
the industry that if a security has been insured or if arrangements for
insurance have been initiated, the market price of the security would
be affected and this information is material and must be disclosed to a
customer at or before the execution of a transaction in the
security.\38\ MSRB Rule G-47 Supplementary Material .03(e) currently
includes a disclosure obligation scenario detailing when a security has
been insured or arrangements for insurance have been initiated, the
credit rating of the insurance company, and information about potential
rating actions with respect to the bond insurance company, which,
according to the MSRB, effectively makes the comparable portion of the
Secondary Market Insurance Guidance superfluous.\39\ In addition, the
MSRB explained in the Secondary Market Insurance Guidance that it
believes that a dealer should advise a customer if evidence of
insurance or other credit enhancement features must be attached to the
security for effective transference of the insurance or device.\40\
However, the MSRB believes that it is no longer common practice to
require such evidence of insurance for effective transference, and as a
result, the MSRB proposed to retire the Secondary Market Insurance
Guidance.\41\
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\36\ See MSRB Interpretive Guidance, Application of Board Rules
to Transactions in Municipal Securities Subject to Secondary Market
Insurance or Other Credit Enhancement Features (March 6, 1984),
available at <a href="https://www.msrb.org/Application-Board-Rules-Transactions-Municipal-Securities-Subject-Secondary-Market-Insurance-or">https://www.msrb.org/Application-Board-Rules-Transactions-Municipal-Securities-Subject-Secondary-Market-Insurance-or</a>.
\37\ See Notice, 89 FR at 27810.
\38\ Id.
\39\ Id.
\40\ Id.
\41\ Id.
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v. Add an Example of a Bond That Prepays Principal
Current MSRB Rule G-47 Supplementary Material .03(i) lists bonds
that prepay principal as a specific scenario which may be material and
require disclosure at or prior to the time of trade. More specifically,
the scenario lists the fact that the security prepays principal and the
amount of unpaid principal that will be delivered on the transaction as
a scenario that may be material and require a time of trade disclosure.
The MSRB states that the proposed rule change would add factor bonds to
Rule G-47 Supplementary Material .03(i) as an example of a bond that
prepays principal.\42\ The MSRB described factor bonds as bonds for
which partial distributions are processed by a proportional return of
principal to each bondholder.\43\ After the partial distribution, the
factor must be applied to the face value to determine interest payments
as well as the principal amount for each future transaction.\44\ The
MSRB explains that factor bonds, by their terms, are already subject to
this scenario and therefore this addition does not add or remove any
disclosure burdens but instead simply provides an example of a
potential disclosure obligation currently contained in MSRB Rule G-47
that serves to remind dealers of the applicability of this provision to
factor bonds.\45\
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\42\ Id.
\43\ Id.
\44\ Id.
\45\ See Notice, 89 FR at 27810-27811.
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vi. Add Three New Disclosure Scenarios
The MSRB states that the proposed rule change would add three new
disclosure scenarios to MSRB Rule G-47 Supplementary Material .03's
non-exhaustive list of specific scenarios that could be material and
require a time of trade disclosure.\46\ Specifically, the MSRB states
that these three new scenarios are yield to worst, the unavailability
of the official statement, and the fact that continuing disclosures are
not available.\47\
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\46\ See Notice, 89 FR at 27811.
\47\ Id.
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Yield to Worst. The MSRB indicated that the proposed rule change
would add yield to worst as a disclosure scenario to MSRB Rule G-47
Supplementary Material .03 in new clause (r) thereof.\48\ MSRB Rule G-
15(a)(i)(A)(5) requires the yield at which a transaction is effected
for transactions that are computed on the basis of yield to maturity,
yield to a call date, or yield to a put date to be disclosed on a
customer's confirmation.\49\ Furthermore, the MSRB stated that if the
computed yield required by MSRB Rule G-15 is different than the yield
at which the transaction was effected, the computed yield must also be
disclosed on the confirmation.\50\ The MSRB explained that this
information is typically referred to as yield to worst.\51\ The MSRB
believes that this information may be material to a customer's
investment decision, as it could impact a decision to purchase a
municipal security at the current price or yield, and therefore may be
required to be disclosed at or prior to the time of trade in addition
to being disclosed on a customer's confirmation.\52\
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\48\ Id.
\49\ Id. The MSRB noted that, pursuant to MSRB Rule G-
15(a)(i)(A)(5)(c)(v), yield is to be calculated in accordance with
MSRB Rule G-33, on calculations. Id.
\50\ Id.; see also MSRB Rule G-15(a)(i)(A)(5)(c)(vii).
\51\ See Notice, 89 FR at 27811.
\52\ Id.
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Unavailability of Official Statement for New Issue Customers. The
MSRB states that the proposed rule change would add, in the case of
sales to customers of new issue municipal securities, the fact that an
official statement is unavailable or only available from the
underwriter as a disclosure scenario to MSRB Rule G-47 Supplementary
Material .03 in new clause (s) thereof.\53\ For purposes of this
scenario, the MSRB indicated that new issue municipal securities
consist of offered municipal securities within the meaning of MSRB Rule
G-32, which in general are municipal securities sold in a primary
offering until 25 days after the closing of the new issue.\54\ In
contrast, the MSRB explained that the potential for the lack of an
official statement to be material to a customer in a transaction
outside of the primary offering disclosure period is considerably lower
[[Page 58232]]
and therefore normally would not trigger an obligation under MSRB Rule
G-47.\55\
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\53\ Id.
\54\ Id. MSRB Rule G-32(c)(vi) defines offered municipal
securities as municipal securities that are sold by a dealer during
the securities' primary offering disclosure period, including but
not limited to municipal securities reoffered in a remarketing that
constitutes a primary offering and municipal securities sold in a
primary offering but designated as not reoffered. Primary offering
disclosure period is defined in MSRB Rule G-32(c)(ix) as the period
commencing with the first submission to an underwriter of an order
for the purchase of offered municipal securities or the purchase of
such securities from the issuer, whichever first occurs, and ending
25 days after the final delivery by the issuer or its agent of all
securities of the issue to or through the underwriting syndicate or
sole underwriter. Pursuant to MSRB Rule G-32(c)(viii), primary
offering means an offering defined in Exchange Act Rule 15c2-
12(f)(7) (17 CFR 240.15c2-12(f)(7)), including but not limited to
any remarketing of municipal securities that constitutes a primary
offering as such subsection (f)(7) may be interpreted from time to
time by the Commission.
\55\ See Notice, 89 FR at 27811.
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Exchange Act Rule 15c2-12 \56\ requires underwriters to obtain and
review an official statement for most primary offerings of municipal
securities.\57\ MSRB Rule G-32(b)(i)(B) generally requires that the
underwriter submit such official statement (as well as any official
statement produced for a primary offering exempt from Exchange Act Rule
15c2-12 \58\) for posting on the Electronic Municipal Market Access
(``EMMA[supreg]'') \59\ website. If no official statement is posted by
an underwriter to EMMA for a primary offering by the closing date, the
MSRB notes that the underwriter is generally required under MSRB Rule
G-32 to post to EMMA, as applicable, either: (i) notification that no
official statement exists pursuant to MSRB Rule G-32(b)(i)(C) or (ii)
in the case of a primary offering not subject to Exchange Act Rule
15c2-12 \60\ by virtue of paragraph (d)(1)(i) thereof (sometimes
referred to as a limited offering) and the underwriter has withheld
posting the official statement to EMMA pursuant to MSRB Rule G-
32(b)(i)(E), contact information for investors to request a copy of the
official statement.\61\
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\56\ 17 CFR 240.15c2-12.
\57\ Id.
\58\ Id.
\59\ EMMA[supreg] is a registered trademark of the MSRB.
\60\ 17 CFR 240.15c2-12.
\61\ See Notice, 89 FR at 27811. MSRB Rule G-32(b)(i)(F) also
provides an exemption for certain commercial paper offerings or
remarketings from the official statement submission requirement
assuming applicable conditions are met.
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Under certain circumstances, the MSRB notes that dealers currently
have obligations to inform new issue customers by trade settlement
regarding the availability or unavailability of the official statement
under MSRB Rule G-32(a)(i) or (a)(iii)(A).\62\ The MSRB believes that
the fact that an official statement is not available could be material
to a new issue investor in making an investment decision and therefore
should be included in MSRB Rule G-47's list of scenarios that could
trigger a time of trade disclosure.\63\ As a result, the MSRB states
that the new clause(s) of MSRB Rule G-47 Supplementary Material .03
would accelerate the timing for this disclosure to a point in time
where this information would be available to the customer while making
such investment decision, rather than merely by settlement of the
transaction and thus after such decision has been made.\64\
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\62\ See Notice, 89 FR at 27811.
\63\ Id.
\64\ Id.
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The MSRB states that dealers generally would be able to rely, for
purposes of proposed clause(s), on information posted on EMMA as of the
time of trade of a new issue municipal security with regard to whether
an official statement is unavailable or available only from the
underwriter.\65\ In the case of a customer trade by a dealer (other
than the underwriter of the municipal security) occurring prior to the
posting on EMMA of the official statement or any statement about the
official statement's availability,\66\ the MSRB states that such dealer
may presume that an official statement will become available unless the
dealer has knowledge that the official statement will not in fact be
posted or will only be made available through the underwriter.\67\
Dealers that serve as underwriters for a primary offering would, in
contrast, be deemed to know whether or not an official statement will
be posted for such offering or will be made available only from such
underwriters.\68\
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\65\ Id.
\66\ Id. The MSRB indicated that it is common for new issue
municipal securities to be traded beginning immediately after the
time of first execution within the meaning of MSRB Rule G-
34(a)(ii)(C)(1)(b) but before the underwriter timely posts the
official statement to EMMA under MSRB Rule G-32(b)(i)(B). Id. The
MSRB further noted that this gap typically is a result of the time
needed to finalize and produce the official statement that
incorporates the final terms of a new issue offering. Id.
\67\ See Notice, 89 FR at 27811. The MSRB noted that this is
somewhat analogous to the ability of dealers other than the
underwriter of a new issue to effectively presume that the
underwriter has made the required submissions to EMMA under MSRB
Rule G-32(a)(ii)(B). Id.
\68\ Id.
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Unavailability of Continuing Disclosure. The MSRB states that the
proposed rule change would add, as a disclosure scenario to MSRB Rule
G-47 Supplementary Material .03 in new clause (t) thereof, the fact
that no issuer of, or other obligated person with respect to, a
customer's municipal security has agreed to make continuing disclosures
as contemplated under Exchange Act Rule 15c2-12 \69\ available on
EMMA.\70\ Exchange Act Rule 15c2-12(b)(5) \71\ generally prohibits an
underwriter from purchasing or selling municipal securities in most new
issue offerings unless the underwriter has reasonably determined that
an issuer or obligated person for whom financial or operating data is
presented in the final official statement has undertaken in a written
agreement or contract to provide certain continuing disclosures to the
MSRB as specified in Exchange Act Rule 15c2-12(b)(5). Exchange Act Rule
15c2-12(d)(2)(ii) \72\ provides an exemption from Exchange Act Rule
15c2-12(b)(5),\73\ but requires a modified version of such continuing
disclosure agreement or contract. In addition, Exchange Act Rule 15c2-
12(d)(3) \74\ provides a partial exemption from Exchange Act Rule 15c2-
12(b)(5) \75\ but still requires a modified version of such continuing
disclosure agreement or contract limited to specified event
notices.\76\ The MSRB states that this new disclosure scenario in
proposed clause (t) would apply to any municipal securities of the
foregoing offerings.\77\ However, the MSRB notes that certain new issue
offerings are wholly exempt from or otherwise not subject to Exchange
Act Rule 15c2-12(b)(5) \78\ by virtue of paragraph (a) or subparagraph
(d)(1) of Exchange Act Rule 15c2-12,\79\ and therefore the MSRB states
that this new disclosure scenario would not apply to any municipal
securities of these specific types of exempt offerings.\80\
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\69\ 17 CFR 240.15c2-12.
\70\ See Notice, 89 FR at 27811.
\71\ 17 CFR 240.15c2-12(b)(5).
\72\ 17 CFR 240.15c2-12(d)(2)(ii).
\73\ 17 CFR 240.15c2-12(b)(5).
\74\ 17 CFR 240.15c2-12(d)(3).
\75\ 17 CFR 240.15c2-12(b)(5).
\76\ See Notice, 89 FR at 27812.
\77\ Id.
\78\ Id.
\79\ 17 CFR 240.15c2-12(a) and (d)(1). In addition, Exchange Act
Rule 15c2-12(d)(5) provides an exemption from Exchange Act Rule
15c2-12(b)(5) for municipal securities outstanding on November 30,
2010 so long as they continuously remain in authorized denominations
of $100,000 or more and may, at the option of the holder thereof, be
tendered to an issuer of such securities or its designated agent for
redemption or purchase at par value or more at least as frequently
as every nine months until maturity, earlier redemption, or purchase
by an issuer or its designated agent. 17 CFR 240.15c2-12(d)(5).
\80\ See Notice, 89 FR at 27812.
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The MSRB notes that continuing disclosure documents and related
information submitted by issuers and obligated persons to EMMA's
continuing disclosure service are made available on the EMMA
website.\81\ The MSRB states that such continuing disclosures currently
are accessible by users of the EMMA website through a variety of means,
including on the Disclosure Documents tab of the EMMA Security Details
page for each specific municipal security.\82\ The MSRB further states
that the disclosures provided on such page are generally accompanied by
certain information, as applicable, provided to EMMA by the underwriter
[[Page 58233]]
of the applicable municipal security at the time of its initial
issuance regarding any agreement by the issuer or other obligated
persons to undertake to provide continuing disclosures.\83\
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\81\ See Notice, 89 FR at 27812; see also MSRB Information
Facility IF-3, on Electronic Municipal Market Access System--EMMA,
available at <a href="https://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Informational/IF-3">https://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Informational/IF-3</a>.
\82\ See Notice, 89 FR at 27812.
\83\ Id. See also MSRB Rule G-32(b)(i)(A) and (b)(vi)(C)(1)(a).
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The MSRB states that dealers generally would be able to rely on
such information posted on EMMA by the underwriter regarding an
issuer's or other obligated person's continuing disclosure undertaking
for purposes of MSRB Rule G-47 Supplementary Material .03(t) unless the
dealer has knowledge to the contrary.\84\ In addition, the MSRB states
that particularly for municipal securities for which no such
underwriter-provided information concerning any continuing disclosure
agreement may be displayed on EMMA, a review of the official statement
or other information available on EMMA typically would indicate whether
the issuer or obligated person has undertaken to provide continuing
disclosures on the municipal securities.\85\
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\84\ See Notice, 89 FR at 27812. The MSRB states that the
ability of a dealer to rely on this posted information for purposes
of MSRB Rule G-47 Supplementary Material .03(t) would not
conclusively foreclose any other potential disclosure or other
obligation of a dealer, under MSRB Rule G-47(a), Exchange Act Rule
15c2-12 (17 CFR 240.15c2-12) or otherwise, that might arise relating
to the existence of or the performance or non-performance under any
continuing disclosure agreement by an issuer or obligated person, or
with regard to the content of such continuing disclosure, depending
on the specific facts and circumstances. Id.
\85\ See Notice, 89 FR at 27812.
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The MSRB believes that the fact that continuing disclosures are not
required to be made available to a customer on EMMA, which is where a
customer would typically go to review such information prior to trading
a municipal security, will generally be material and therefore should
be included in time of trade disclosures provided to a customer.\86\
The MSRB states that on occasion, an issuer or obligated person may
undertake to provide continuing disclosures not contemplated by
Exchange Act Rule 15c2-12 \87\ (sometimes referred to as voluntary
continuing disclosures).\88\ The MSRB further states that this proposed
scenario is not intended to require disclosures with regard to the
existence of an agreement solely in respect of such voluntary
continuing disclosures.\89\
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\86\ Id.
\87\ 17 CFR 240.15c2-12.
\88\ See Notice, 89 FR at 27812.
\89\ Id.
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vii. Consolidate Existing Inter-Dealer Time of Trade Disclosure
Guidance
The MSRB states that the proposed rule change would consolidate
three pieces of existing interpretive guidance relating to inter-dealer
time of trade disclosure into one standalone interpretive guidance in
order to better streamline time of trade disclosure guidance.\90\ The
MSRB further states that while MSRB Rule G-47 applies to customer
transactions and not transactions between dealers,\91\ the MSRB has
previously discussed a dealer's fair dealing disclosure obligations in
connection with inter-dealer transactions in these three pieces of
inter-dealer guidance.\92\ The MSRB believes that consolidating this
existing guidance into a single interpretive guidance would be
beneficial to the market and result in a more organized MSRB
rulebook.\93\ The MSRB does not believe that the three existing pieces
of inter-dealer guidance would otherwise retain any standalone value
upon consolidation into the new guidance and, therefore, these three
pieces of guidance would be retired.\94\
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\90\ See Notice, 89 FR at 27812. See also MSRB Interpretive
Guidance, Notice Concerning Securities that Prepay Principal (March
19, 1991), available at <a href="https://www.msrb.org/Notice-Concerning-Securities-Prepay-Principal">https://www.msrb.org/Notice-Concerning-Securities-Prepay-Principal</a>; MSRB Interpretive Guidance, Disclosure
of Pricing: Calculating the Dollar Price of Partially Prerefunded
Bonds (May 15, 1986), available at <a href="https://www.msrb.org/Disclosure-Pricing-Calculating-Dollar-Price-Partially-Prerefunded-Bonds">https://www.msrb.org/Disclosure-Pricing-Calculating-Dollar-Price-Partially-Prerefunded-Bonds</a>; and
MSRB Interpretive Guidance, Description Provided at or Prior to the
Time of Trade (April 30, 1986), available at <a href="https://www.msrb.org/Description-Provided-or-Prior-Time-Trade">https://www.msrb.org/Description-Provided-or-Prior-Time-Trade</a>. Any portions of such
interpretive pieces relating to customer disclosure standards are
already incorporated into MSRB Rule G-47.
\91\ See MSRB Rule G-47(a).
\92\ See Notice, 89 FR at 27812.
\93\ Id.
\94\ Id.
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III. Summary of Comments Received to the Proposed Rule Change
The Commission received one comment letter \95\ on the proposed
rule change, as well as a response \96\ from the MSRB to the comment
letter.
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\95\ See SIFMA Letter.
\96\ See MSRB Letter.
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The commenter stated that the MSRB should ``make clear that a
dealer should only be responsible for providing factor information
pursuant to the rule if there is an event filing on EMMA which
specifies that the factor concept applies, or the dealer otherwise has
specific knowledge of factor payments.'' \97\ The MSRB stated that if
factor information that may be material is not known by the dealer or
is not reasonably accessible to the market through established industry
sources, such factor information would not be required to be disclosed
pursuant to the proposed amendment to Supplementary Material
.03(i).\98\
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\97\ See SIFMA Letter at 2.
\98\ See MSRB Letter at 2.
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The commenter stated that ``it should be made clear that broker
dealers neither give tax advice nor should they be perceived to be
giving tax advice'' and that the original guidance should be preserved
due to the fact that it ``merely requires notification of the existence
of a discount'' and dealers are concerned that discount disclosures
``may force dealers to move closer to the line of giving tax advice.''
\99\ The MSRB responded that the proposed rule change would only
require dealers to disclose the fact that the security bears a market
discount and that an impact may exist, the proposed new Supplementary
Material .03(p) would not require dealers to provide customers with
more detailed or personalized information, or to provide any
information that could constitute tax advice, with respect to market
discount.\100\ Thus, the MSRB stated the proposed rule change would not
require dealers to calculate the impact or give tax advice.\101\
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\99\ See SIFMA Letter at 2.
\100\ See MSRB Letter at 2.
\101\ Id.
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The commenter stated that ``[d]ealers should be only required to
disclose whether bonds are zero coupon bonds or stepped coupon bonds,
but not the details of the special characteristics of these features,
such as the details of the increases to the interest rates'' due to the
fact that information is limited on the MSRB's primary market
feed.\102\ The MSRB noted that time of trade disclosures, including
those related to zero or stepped coupon bonds, are limited to
information that dealers know or that is reasonably accessible to the
market.\103\ Therefore, the MSRB stated, if the information available
via established industry sources (including but not limited to the
MSRB's primary market feed) is limited or not present, a dealer would
not be required to seek out additional information that is not known to
the dealer or not reasonably accessible to the market at the time of
trade.\104\
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\102\ See SIFMA Letter at 3.
\103\ See MSRB Letter at 3.
\104\ Id.
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The commenter expressed concern that describing a disclosure as
``Yield to Worst'' could be misleading or confusing and ``regulatory
examiners and/or customers alike may believe that
[[Page 58234]]
this is the computation which accounts for all potential scenarios and
represents the absolute worst possible yield a customer may experience
when purchasing a municipal security.'' \105\ In addition, the
commenter requested that ``if the MSRB moves forward with requiring
this time of trade disclosure, that the MSRB make clear that the time
of trade disclosure it is articulating in the proposed rule change is
the same `Computed Yield' calculation that is required under Rule G15's
confirmation requirements and that dealers are not expected to provide
any additional or different disclosures in this regard.'' \106\ The
MSRB responded that the proposed time of trade disclosure lists the
required information to be disclosed as the computed yield required by
MSRB Rule G-15(a)(i)(A)(5)(c), if different than the yield at which the
transaction was effected, and does not contemplate dealers providing
any additional or different disclosures in this regard.\107\ The MSRB
also stated that dealers are not required to refer to such computed
yield as ``yield to worst'' to their customers and may appropriately
refer to it is a computed yield consistent with the proposed rule
change.\108\
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\105\ Id.
\106\ Id.
\107\ See MSRB Letter at 3.
\108\ Id.
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The commenter requested that the MSRB remove certain time of trade
disclosure requirements related to whether an official statement is
unavailable or provide further guidance.\109\ The commenter stated that
``the proposed rule change as drafted would provide little to no
actionable information for investors in a public offering.'' \110\ The
MSRB responded that it believes that the fact that an official
statement is unavailable is material information that could impact
investors' investment decisions, especially retail customers, for whom
MSRB Rule G-47 is primarily oriented.
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\109\ See SIFMA Letter at 4.
\110\ Id.
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The commenter also requested that the MSRB clarify the application
and disclosure requirements of the proposed rule change in four
different scenarios.\111\ The scenarios were as follows: ``(1) public
offerings where it is anticipated that the issuer will produce a Final
Official Statement by settlement but a Final Official Statement is not
available at the Time of Trade; (2) Rule 15c2-12 exempt offerings where
an issuer has drafted and disseminated an offering document that does
not technically meet the Final Official Statement requirements of Rule
15c2-12 but would meet the official statement definition of Rule
G32(c)(vii); (3) Rule 15c2-12 exempt offerings where the issuer
declines to draft an offering document for the offering; and (4)
remarketings of municipal securities that may be deemed to be a primary
offering of municipal securities under Rule 15c2-12 and Rule G-32.''
(footnotes omitted).\112\ he commenter further stated that it
``supports the MSRB proposals that any such time of trade disclosure
should be limited to underwriters in new issue trades.'' \113\
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\111\ See SIFMA Letter at 5.
\112\ Id.
\113\ Id.
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The MSRB responded to the four scenarios.\114\
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\114\ See MSRB Letter at 5.
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With respect to the first scenario, the MSRB responded that if an
underwriter is expected to produce a final official statement, but it
is not yet available at the time of trade or it is still in production,
a dealer selling a new issue security constituting an offered municipal
security within the meaning of Rule G32 would not be required to
disclose that there is no official statement available for the
municipal security in question.\115\ The MSRB further stated that such
disclosure requirement only attaches when the underwriter is not
expected to produce an official statement at all, which would be
evidenced by the required notification by the underwriter, pursuant to
MSRB Rule G-32(b)(i)(C), that no official statement will be prepared,
which notification is displayed on EMMA.\116\ As the MSRB noted in its
proposed rule change, dealers (other than the underwriter of a new
issue of municipal securities) generally would be able to rely on
information posted on EMMA as of the time of trade of such new issue
municipal security with regard to whether an official statement is or
will be unavailable, while the underwriter for such new issue would be
deemed to know whether or not an official statement will be posted for
such offering.\117\
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\115\ Id.
\116\ Id.
\117\ Id.
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With respect to the second scenario, the MSRB responded that the
proposed rule change uses the term ``official statement'' for purposes
of proposed new Supplementary Material .03(s) with the same meaning as
in Rule G-32(c)(vii).\118\ The MSRB noted that underwriters have become
familiar over many years with the use of the term ``official
statement'' as defined under MSRB Rule G-32, including any distinctions
that exist between that term in Rule G-32 and the term ``final official
statement'' as used in Exchange Act Rule 15c2-12.\119\
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\118\ See MSRB Letter at 6.
\119\ Id.
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With respect to the third scenario, the MSRB responded that there
no official statement is anticipated, a dealer selling a new issue
security constituting an offered municipal security within the meaning
of Rule G-32 would be required to disclose to the customer that there
is no official statement.\120\ The MSRB noted that this disclosure
requirement would attach, and dealers other than the underwriter would
be entitled to rely on information posted to EMMA, as described in the
preceding paragraph.\121\
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\120\ Id.
\121\ Id.
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With respect to the fourth scenario, the MSRB responded that in
sales of new issue securities constituting offered municipal securities
within the meaning of Rule G-32 in a remarketing that is deemed to be a
primary offering, dealers are required to make a time of trade
disclosure if no official statement is available, with such disclosure
requirement attaching, and dealers other than the underwriter being
entitled to rely on information posted to EMMA, as described
above.\122\
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\122\ Id.
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The MSRB further stated that the proposed time of trade disclosure
would not apply to any sales occurring after the end of the primary
offering disclosure period, but such application would not be limited
to sales by underwriters of such securities but would apply to any sale
by any dealer of such securities during the primary offering disclosure
period (although dealers other than underwriters would be entitled to
certain reliance on information posted on EMMA in regard to such
requirement, as described in the proposed rule change).\123\
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\123\ See MSRB Letter at 5.
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The commenter stated that ``disclosing the issuer or obligated
person has not agreed to make continuing disclosures with respect to
the municipal securities, as contemplated under Securities Exchange Act
Rule 15c2-12, that will be available on EMMA should be limited to new
issue trades'' and that ``[s]ecurities exempt from 15c2-12 would
typically have such a disclosure in an investor letter'' and
``[i]nvestors making secondary market trades can see offering
documents, or the lack thereof, on
[[Page 58235]]
EMMA.'' \124\ The MSRB responded that it believes that the fact that
continuing disclosures may not be available is material information
that may impact an investor's investment decision and is relevant
beyond the primary offering disclosure period.\125\ In addition, the
MSRB noted that while it may be obvious to dealers or sophisticated
investors how to determine if continuing disclosures are not available,
it may not be so obvious to retail customers for whom MSRB Rule G-47 is
primarily oriented.\126\
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\124\ See SIFMA Letter at 5-6.
\125\ See MSRB Letter at 6.
\126\ See MSRB Letter at 6.
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IV. Discussion and Commission's Findings
The Commission has carefully considered the proposed rule change,
the comment letter received, and the MSRB's response thereto. The
Commission finds that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to the MSRB.
In particular, the Commission believes that the proposed rule
change is consistent with the provisions of Section 15B(b)(2)(C), which
provides, in part, that the MSRB'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 transactions in municipal
securities and municipal financial products, to remove impediments to
and perfect the mechanism of a free and open market in municipal
securities and municipal financial products, and, in general, to
protect investors, municipal entities, obligated persons, and the
public interest.\127\
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\127\ 15 U.S.C. 78o-4(b)(2)(C).
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The Commission believes the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Exchange Act because the proposed rule
change would protect investors and the public interest. The proposed
rule change would clarify for market participants the meaning of
material information under Rule G-47, and better ensure that retail and
other customers receive such material information at or prior to the
time of trade, allowing them to make a more informed investment
decision. The proposed rule change would add new requirements in
specific scenarios for dealers to disclose when an official statement
is unavailable, when continuing disclosures are not available, and the
yield to worst of a transaction, and these new requirements would
provide investors with material information when deciding to transact
in municipal securities. Finally, consolidating existing interpretive
guidance into the text of MSRB Rule G-47 and clarifying existing rule
language would also promote compliance by dealers with existing
requirements under MSRB Rule G-47 and thereby promote the protection of
investors and the public interest by assisting investors, particularly
retail customers who may or may not know how or where to access this
information, by providing them with material information that could
influence an investment decision.
In approving the proposed rule change, the Commission has
considered the proposed rule change's impact on efficiency,
competition, and capital formation. Section 15B(b)(2)(C) of the Act
\128\ requires that MSRB rules not be designed to impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of the Act. The Commission believes the proposed rule change to amend
Rule G-47 would not impose any burden on competition and would not have
an impact on competition, as the proposed rule change would apply a
uniform standard for disclosures required under MSRB Rule G-47. In
addition, the proposed rule change would apply equally to all dealers.
As all components of the proposed rule change would be applied equally
to all registered dealers transacting in municipal securities, the
Commission believes that the proposed rule change would not impose any
additional burdens on competition that are not necessary or appropriate
in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\128\ 15 U.S.C. 78o-4(b)(2)(C).
---------------------------------------------------------------------------
The Commission also finds that the proposed rule change will not
hinder capital formation. As noted above, the proposed rule change
ensures a uniform standard for disclosures required under MSRB Rule G-
47, and would be applied equally to all dealers. As such, the
Commission believes that the proposed rule change would promote clearer
regulatory requirements for the disclosures under MSRB Rule G-47 by
retiring interpretive guidance on conversion costs and secondary market
insurance and consolidating existing inter-dealer time of trade
disclosure guidance into a single piece of interpretive guidance. The
Commission also finds that the proposed rule change would promote
efficiency by retiring guidance no longer in use and consolidating
other existing interpretive guidance.
As noted above, the Commission received one comment letter on the
filing.\129\ The Commission believes that the MSRB, through its
response, addressed the commenter's concerns. For the reasons noted
above, the Commission believes that the proposed rule change is
consistent with the Exchange Act.
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\129\ See SIFMA Letter.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\130\ that the proposed rule change (SR-MSRB-2024-03) be,
and hereby is, approved.
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\130\ 15 U.S.C. 78s(b)(2).
\131\ 17 CFR 200.30-3(a)(12).
For the Commission, pursuant to delegated authority.\131\
J. Matthew DeLesDernier,
Deputy Secretary.
[FR Doc. 2024-15678 Filed 7-16-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on July 17, 2024.
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