I. Introduction
On June 28, 2012, the Municipal Securities Rulemaking Board (“MSRB”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 19b-4 thereunder, a proposed rule change consisting of amendments to Rule G-34 on CUSIP numbers, new issue, and market information requirements. The proposed rule change was published for comment in the Federal Register on July 10, 2012. The Commission received three comment letters regarding the proposed rule change. On August 23, 2012, the MSRB granted an extension of time for the Commission to act on the filing until September 14, 2012. On September 11, 2012, the MSRB granted a second extension of time until September 21, 2012. On September 17, 2012, the MSRB submitted a response to the comment letters. This order grants approval of the proposed rule change.
17 CFR 240.19b-4.
See Securities Exchange Act Release No. 67344 (July 3, 2012), 77 FR 40668 (“Notice”).
See Letter to Elizabeth M. Murphy, Secretary, Commission, from Susan Gaffney, Director, Federal Liaison Center, Government Finance Officers Association, dated August 7, 2012 (“GFOA Letter”); and Web comments from Arthur Sinkler, dated July 8, 2012 (“Sinkler Letter”); and Shelly Frank, dated July 10, 2012 (“Frank Letter”). The comments received by the Commission are available at http://www.sec.gov/comments/sr-msrb-2012-06/msrb201206.shtml.
See Letter to Elizabeth M. Murphy, Secretary, Commission, from Karen Du Brul, Associate General Counsel, MSRB, dated September 17, 2002 (“MSRB's Response”).
II. Description of the Proposed Rule Change
The MSRB proposes to add new subsection (iv) to Rule G-34(a) to prohibit any broker, dealer, or municipal securities dealer from using the term “not reoffered” or other comparable term or designation (e.g., “NRO”) without also including the applicable price or yield information about the securities in any of its written communications, electronic or otherwise, sent by it or on its behalf from and after the time of initial award of a new issue of municipal securities. For purposes of MSRB Rule G-34(a)(iv), the “time of initial award” means the earlier of (A) the “Time of Formal Award” as defined in MSRB Rule G-34(a)(ii)(C)(1)(a), or (B) if applicable, the time at which the issuer initially accepts the terms of a new issue of municipal securities subject to subsequent formal award. The prohibition would not apply to communications occurring prior to the time of initial award of a new issue of municipal securities. According to the MSRB, the proposed rule change will prohibit certain communications that hinder price and market transparency, as well as facilitate new issue price discovery.
See Proposed MSRB Rule G-34(a)(iv).
MSRB Rule G-34(a)(ii)(C)(1)(a) defines “Time of Formal Award” as “for competitive issues, the later of the time the issuer announces the award or the time the issuer notifies the underwriter of the award, and for negotiated issues, the later of the time the contract to purchase the securities from the issuer is executed or the time the issuer notifies the underwriter of its execution.”
See Notice, supra note 3, at 40668. The MSRB also proposes to delete existing subsection (e)(iii) of MSRB Rule G-34, which includes provisions for compliance by dealers with certain registration and testing requirements previously applicable with respect to the start-up phase in 2008 of the New Issue Information Dissemination System (“NIIDS”) operated by the Depository Trust and Clearing Corporation (“DTCC”). The MSRB believes this amendment will streamline Rule G-34 by eliminating language from the Rule that no longer has any effect. See id. at 40669.
See id. at 40669.
MSRB Rules G-32 and G-34 set forth the reporting requirements for new issues of municipal securities. MSRB Rule G-32 requires underwriters to submit to the MSRB's Electronic Municipal Market Access (“EMMA®”) system certain information about the new issue, including the initial offering price or yield of all maturities, on or prior to the date of first execution. This information becomes available to the public on the EMMA Web site and to information vendors and other market participants through subscription services immediately upon submission and typically by the end of the date of first execution. MSRB Rule G-34 requires underwriters, with certain exceptions, to report to NIIDS certain information about new issues of municipal securities within two hours following the Time of Formal Award, including the initial price or yield at which each maturity of the new issue of municipal securities was sold.
See MSRB Rule G-32(b)(vi)(C)(1)(a).
See Notice, supra note 3, at 40669. In addition, while MSRB Rule G-14 requires dealers, with limited exceptions, to report the actual prices at which municipal securities are sold to the MSRB's Real-time Transaction Reporting System within 15 minutes of the time of trade, in many cases initial trades by syndicate or selling group members executed on the first day of trading at the published list offering price may be reported by the end of the day. See id. at 40669 n.4.
See supra note 7.
See MSRB Rule G-34(a)(ii)(C). DTCC disseminates this information to its subscribers, including market participants and information vendors, upon submission by underwriters for dissemination, typically within two hours following the Time of Formal Award. See Notice, supra note 3, at 40669.
While MSRB Rules G-32 and G-34 require underwriters to provide initial offering price or yield for all maturities, including those that are not reoffered, and prohibit underwriters from using the designation of NRO in their submissions, the rules do not prevent underwriters or other parties acting on the underwriters' behalf from substituting the designation of NRO for the initial offering price or yield for applicable maturities when sending information regarding a new issue directly to third-party vendors. According to the MSRB, the proposed rule change would result in information about the initial offering prices or yields for NRO maturities being included in any communication to or from third-party venders from and after the time of initial award.
See id. at 40669. Third-party vendors may then disseminate the new issue information, including the NRO designation without accompanying initial offering price or yield, to their subscribers shortly after receipt, and frequently before the complete initial offering price or yield information becomes available through NIIDS or the EMMA system. See id.
See id.
III. Summary of Comments Received and the MSRB's Response
The Commission received three comment letters on the proposed rule change. One commenter generally supported the proposed rule change but stated that underwriters should be required to provide yield information. The other two commenters raised issues that were not directly on point with the subject of the proposed rule change. Accordingly, the concerns raised in those comment letters are not addressed here.
See supra note 4.
See GFOA Letter.
For instance, the Frank and Sinkler Letters, as well as the GFOA Letter, stated that the timeframe for submitting pricing information should be shorter. Moreover, the Frank and Sinkler Letters encouraged release of scales before the pricing of a new issue is final and for retail investors to be able to purchase municipal securities at the issue price. Although the comments are not addressed here, those comments, as well as the MSRB's Response, are available at http://www.sec.gov/comments/sr-msrb-2012-06/msrb201206.shtml.
As stated above, one commenter opined that there should be mandatory reporting of yield data. The commenter reasoned that reporting just the maturity's price data requires issuers and investors to calculate the corresponding yield, which makes the information less useful to issuers and investors. According to the commenter, the MSRB would take positive steps toward transparency and a more efficient market by requiring yield data.
See GFOA Letter.
See id.
See id.
In its response, the MSRB stated that it is not requiring yield, rather than price or yield, because such a stipulation would create an inconsistency with other MSRB rules and the MSRB's information systems. The MSRB stated that it would be inconsistent to require yield when underwriters voluntarily provide such information to the public but permit price or yield when underwriters provide such information pursuant to mandatory reporting requirements, including submissions to EMMA and NIIDS, in connection with new issue underwritings or on customer confirmations. The MSRB acknowledged the value of having both price and yield data available for investors and also stated that, in the context of the MSRB's existing process outlined in its Long-Range Plan for Market Transparency Products (“MSRB Long-Range Plan”), it would consider as a potential next step whether to undertake a more universal approach to price and yield information for new issues of municipal securities.
See MSRB Letter at 2.
See id.
See MSRB Notice 2012-06 (February 23, 2012).
See MSRB Letter at 2, 3.
IV. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change, as well as the comment letters received and the MSRB's response, and finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to the MSRB. In particular, the proposed rule change is consistent with Section 15B(b)(2)(C) of the Exchange Act, which provides 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.
In approving the proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
15 U.S.C. 78 o-4(b)(2)(C).
The Commission believes that the proposed rule change is reasonably designed to remove impediments to and perfect the mechanism of a free and open market in municipal securities by prohibiting certain communications that hinder price and market transparency and by facilitating new issue price discovery. The proposed rule change would require underwriters to include the initial offering price or yield in any written communication it sends to any party from and after the time of initial award, including for those maturities that are not reoffered. Although MSRB Rules G-32 and G-34 require the initial offering price or yield for all maturities, including those that are not reoffered, and prohibit underwriters from using the designation of NRO in their submissions, this information may not be readily available until the end of the date of first execution. Accordingly, the Commission believes the proposed rule change should cause issuers, investors, and other market participants to receive more timely information about initial offering prices or yields (i.e., prior to the submission deadlines of MSRB Rules G-32 and G-34). This should aid issuers in pricing their own same-day transactions and benefit investors and other market participants seeking more contemporaneous price information.
The Commission also believes the proposed rule change could reduce pricing inefficiencies in the municipal securities market by providing timelier price or yield information to a larger universe of market participants. Currently, market participants have different levels of access to price or yield information about new issues of municipal securities, which could contribute to differences in prices for similar securities. The Commission believes price transparency is vital for assuring that markets are fair and efficient, and that the proposed rule change should help enhance price transparency and lead to greater price discovery in the primary market.
The Commission also believes that the MSRB's proposal to delete existing subsection (e)(iii) of MSRB Rule G-34 is consistent with the Act as it would eliminate language from the Rule that no longer has any effect.
With respect to the comment that reporting of yield data should be mandatory, the Commission recognizes that other MSRB rules do not require reporting of yield, but rather allow reporting of yield or price, and that requiring yield in the context of voluntary submissions in the instant proposed rule change would be inconsistent with existing mandatory reporting requirements under other MSRB rules. The Commission, however, notes that the MSRB has acknowledged the value of having both price and yield data available to investors and understands that, in connection with the MSRB's Long-Range Plan, it would consider a more universal approach to reporting of price and yield information for new issues of municipal securities.
See Notice, supra note 3, at 20670. See also MSRB's Response at 2, 3.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and the rules and regulations thereunder applicable to the MSRB and, in particular, Section 15B(b)(2)(C) of the Exchange Act. The proposal will become effective on the first calendar day of the next succeeding month beginning at least twenty-eight calendar days after the date of the Commission's order approving the proposed rule change.
15 U.S.C. 78 o-4(b)(2)(C).
It is therefore ordered, pursuant to Section 19(b)(2) of the Exchange Act, that the proposed rule change (SR-MSRB-2012-06) is approved.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-23767 Filed 9-26-12; 8:45 am]
BILLING CODE 8011-01-P