WASHINGTON - Despite a surprising delay in moving forward with its controversial sophisticated municipal market professionals concept, the MSRB announced yesterday that it will seek comments on revisions to its Rule G-37 on political contributions as well as on a plan to begin real-time reporting of muni trade information by mid-2003.
The Municipal Securities Rulemaking Board also will file a proposal with the Securities and Exchange Commission that would allow underwriters to send official statements to the board electronically.
In addition, the board will issue new guidance on how Rules G-37 and G-38 on consultants should be applied to bank affiliates and employees and will publish a notice seeking public comments on how its municipal fund securities rules affect certain college savings bond programs.
Further, the board will publish a notice warning industry officials about the timing of filings of official statements and refunding documents, provide guidance on transaction fees for electronic trades, and file an amendment with the SEC on the regulatory component of its firms' continuing education programs.
MSRB chairman Daniel L. Keating, a senior managing director at Bear, Stearns & Co., and Christopher Taylor, the board's executive director, described these initiatives and the delay on SMMP concept yesterday in a telephone briefing with reporters following the board's meeting here late last week.
SMMP
The board had been expected to approve the issuance of a new notice on the controversial SMMP concept soon that would better explain the proposal, as well as clear up confusion and misunderstandings about it. Keating and Taylor said the staff felt they could address the concerns that had been raised. Taylor said the board had approved a general outline of the notice. But both Keating and Taylor said yesterday that the board is still working on the notice and could publish it next month.
"It's still a very hot topic that the industry is very interested in pursing," Keating said. "We're still working it out. We hope to have something out in the next two or three weeks .... Part of it's the wording. We've got to move slowly on this." He noted that electronic trading is not moving as fast as expected and added, "We don't want to rush this. There's no gun to our head to be premature."
The MSRB proposed the concept last September in an interpretative release that detailed how its rules should be applied to electronic and conventional trading. SMMPs would be a new class of investor that would be deemed on a par with dealers in terms of access to information and market knowledge. They would receive less regulatory protections than retail investors. But the proposal has pitted the dealers against analyst and investor groups. Industry officials claim adoption of the concept is critical for the growth of electronic trading in the municipal market. But analyst and investor groups adamantly oppose it, warning the concept is unfair and based on a flawed premise. These groups said they rely on dealers for information.
RULE G-37
The board will issue a notice the week of June 4 that asks for public comments on revising G-37, the rule that was adopted in April 1994 to prohibit municipal dealers from engaging in pay-to-play practices. The rule generally bars dealers from engaging in negotiated municipal securities business with an issuer for two years if they or any of their municipal finance professionals make significant political contributions to issuer officials. The MSRB launched a major review of the rule last month to determine if certain provisions should be eased or modified to eliminate confusion, make compliance easier, and prevent unintended consequences. The Bond Market Association since has called for changes or clarifications in at least a half dozen of the rule's provisions.
"We believe that Rule G-37 has been very successful in eliminating the role of political contributions in an issuer's selection of underwriters," Keating said yesterday. "Nonetheless, we think after seven years we should look at the rule to see if there are ways to avoid unintended consequences and reduce inadvertent compliance problems."
MSRB officials say they are not contemplating major changes in the rule. The notice will ask for comments on the definition of municipal finance professionals (who are covered by the rule), the waiver provisions allowing regulators to grant firms relief from the rule's two-year ban, political contributions made by bank political action committees, and the roles of syndicate and selling group members. But it will not propose easing of these provisions.
"We're not proposing anything at this time," Taylor said. "We're not suggesting a loosening or tightening of any provision." The MSRB will ask how these provisions work and will set a Sept. 30 deadline for public comments, with a view toward considering the comments at its November board meeting here and possibly proposing rule changes in December.
TRANSACTION REPORTING
The board will issue a notice Friday proposing a schedule for moving to real-time reporting of pricing and other trade information in mid-2003. The schedule will be coordinated to industry moves to a T+1 settlement environment and straight-through processing of securities, and this will save municipal dealers money, Taylor said. Real-time means reporting prices and other trade information immediately after a trade occurs. T+1 means that transactions would be confirmed and settled within one day from when they occur. In a straight-through processing system, trades would be processed immediately after they occur instead of in batches at the end of the day.
The notice will set a Sept. 30 deadline for receiving comments on the proposed schedule, the board said. The schedule will call for developing and publishing specifications and operational procedures by the end of the second quarter of 2002, issuing a concept release by mid-2002, and testing the program in early 2003. Under the proposed system, firms would send trade information to a subsidiary of the Depository Trust and Clearing Corp., which in turn would clear and settle the trades as well as report them to the MSRB.
ELECTRONIC SUBMISSION OF OSs
The MSRB will file changes to Rule G-36 with the SEC the week of June 11 that would give underwriters the option of submitting official statements for municipal offerings to the board electronically. The notice will propose underwriters use a secure, password-protected Internet Web site to submit the documents. The MSRB initially proposed the idea last September in a draft release that sought comments.
"We are constantly looking at ways to employ technology to increase the availability of disclosure documents," Taylor said. "This rule will do that."
G-37/G-38 GUIDANCE ON BANK AFFILIATES
Next week, the board will issue guidance in a question-and-answer format clarifying that when bank affiliates or their employees refer municipal securities business to dealers in return for "referral credits" they may become municipal finance professionals under Rule G-37 rather than consultants under Rule G-38. The notice will be a follow-up to guidance the board issued in 1998, which Taylor said yesterday has been misunderstood by some bank affiliates and their employees.
The MSRB contends that the referral credits are compensation. Under the board's rules, if a bank affiliate or employee receives compensation for soliciting municipal securities business and is also deemed to be an "associated person" of a dealer under the Securities Exchange Act of 1934, then it must comply with all MSRB rules, including G-37. Some bank officials had thought these affiliates or individuals merely would be consultants who only would have to disclose contributions to issuer officials under G-38 and would not be subject to any ban on business.
COLLEGE SAVINGS BONDS
The board expects to issue a notice next month on how its municipal fund securities rules apply to new distribution systems that have evolved for college savings bonds. Historically, such bonds were marketed by one broker-dealer firm. But now many firms may be involved in the distribution process. The MSRB is concerned that some of these structures look as if a lead firm is serving as an underwriter and there are syndicate members that would have to comply with MSRB rules. The notice will clarify how the board's rules apply to the disclosures of fees and which party must file official statements under Rule G-36. It also will ask for comments on whether sales constitute agency, principal, or interdealer trades, and how Rules G-37 and G-38 should apply to these programs.
ELECTRONIC TRADING AND G-15
In response to questions from electronic trading systems, the MSRB will issue a notice the week of June 12 clarifying that if a platform charges a $15 per transaction fee, this will be deemed to be a miscellaneous fee that does not have to be incorporated into the stated yield of the bonds. However, the fee will still have to be disclosed in confirmation notices to customers.
COMPLIANCE ALERT ON G-36 AND G-32
The board will issue a notice next month warning issuers and underwriters that they must take steps to make sure they send official statements to customers and to the MSRB within the specified timeframes. The notice will say that because the time period between when a new issue is sold and closed has become compressed, dealers face increased pressure to send customers official statements under G-32 by the closing. The notice will also warn issuers and underwriters that advance refunding documents must be finalized by the closing of the refunding issue so that the official statements can be sent to the MSRB on time under G-36.
CONTINUING EDUCATION
The board plans to file amendments to its Rule G-3 on continuing education with the SEC that would allow dealers to conduct training on regulatory issues in-house for employees instead of having to send them to computerized training centers run by Sylvan/Prometric Technology Center. "It will be a tremendous convenience for larger firms with sophisticated computer systems" and will conform with actions taken by the National Association of Securities Dealers and the New York Stock Exchange, Taylor said.
