On January 25, 2002, pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 19b-4 thereunder, the Municipal Securities Rulemaking Board (“MSRB”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change relating to Rule G-17, on disclosure of material facts.
17 CFR 240.19b-4.
The Commission published the proposed rule change for comment in the Federal Register on February 12, 2002. The Commission received no comment letters relating to the forgoing proposed rule change. This order approves the proposal.
See Release No. 34-45361 (January 30, 2002), 67 FR 6562.
I. Description of the Proposed Rule Change
The proposed rule change provides an interpretation of the duty to deal fairly set forth in Rule G-17. The MSRB's proposed this interpretation to set forth an expanded explanation of what Rule G-17's obligation to “disclose all material facts” means in today's innovative market. The MSRB believes that technological changes necessitate interpretive guidance for the application of certain rules. Alternative trading systems present the most graphic example of changing dealer/customer relationships and the consequent need for regulatory change, but these relationship obligations are not necessarily limited to electronic trading venues.
As part of a dealer's obligation to deal fairly, the MSRB has consistently interpreted that Rule G-17 creates affirmative disclosure obligations for brokers, dealers and municipal securities dealers (collectively, “dealers”). The MSRB has stated that a dealer's affirmative disclosure obligations require that a dealer disclose, at or before the sale of municipal securities to a customer, all material facts concerning the transaction, including a complete description of the security. These obligations apply even when a dealer is acting as an order taker and effecting non-recommended secondary market transactions.
See e.g., Rule G-17 Interpretation—Educational Notice on Bonds Subject to “Detachable” Call Features, May 13, 1993, MSRB Rule Book (July 2001) at 129-130. The Commission described material facts as those “facts which a prudent investor should know in order to evaluate the offering before reaching an investment decision.” Municipal Securities Disclosure, Exchange Act Release No. 26100 (Sept. 22, 1988) 53 FR 37778 at note 76, quoting In re Walston & Co. Inc., and Harrington, Exchange Act Release No. 8165 (Sept. 22, 1967) 43 SEC 508, 1967 SEC LEXIS 553. Furthermore, the United States Supreme Court has stated that a fact is material if there is a substantial likelihood that its disclosure would have been considered significant by a reasonable investor. TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).
Rule G-17 requires that dealers disclose to a customer at the time of trade all material facts about a transaction known by the dealer. In addition, a dealer is required to disclose material facts about a security when such facts are reasonably accessible to the market. Thus, a dealer would be responsible for disclosing to a customer any material fact concerning a municipal securities transaction made publicly available through sources such as the NRMSIR system, the MSIL® system, TRS, rating agency reports and other sources of information relating to the municipal securities transaction generally used by dealers that effect transactions in the type of municipal securities at issue (collectively, “established industry sources”).
Dealers operating electronic trading platforms have inquired whether providing electronic access to material information is consistent with the obligation to disclose information under Rule G-17. The MSRB believes that the provision of electronic access to material information to customers who elect to transact in municipal securities on an electronic platform is generally consistent with a dealer's obligation to disclose such information, but that whether such access is effective disclosure ultimately depends upon the particular facts and circumstances present.
In addition to the basic disclosure obligations, the duty to “deal fairly” is intended to “refer to the customs and practices of the municipal securities markets, which may, in many instances differ from the corporate securities markets.” The customs and practices of the industry suggest that the sources of information generally used by a dealer that effects transactions in municipal securities may vary with the type of municipal security. For example, a dealer might have to draw on fewer industry sources to disclose all material facts about an insured “triple-A” rated general obligation bond than for a non-rated conduit issue. In addition, to the extent that a security is more complex, for example, because of complex structure or where credit quality is changing rapidly, a dealer might need to take into account a broader range of information sources prior to executing a transaction.
See Exchange Act Release No. 13987 (Sept. 22, 1977).
II. Discussion
The MSRB believes that the proposed rule change is consistent with section 15B(b)(2)(C) of the Exchange Act. The MSRB believes that this rule satisfies this standard because it is intended to clarify that a dealer's general obligation to provide disclosure is viewed within the context of reasonably available information about the municipal security and the dealer's actual knowledge of the municipal security. Additionally, the MSRB believes that the proposed rule change will not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act, since it applies equally to all brokers, dealers and municipal securities dealers.
MSRB rules shall, “be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade * * * to remove impediments to and perfect the mechanism of a free and open market in municipal securities, and, in general, to protect investors and the public interest.
The Commission must approve a proposed MSRB rule change if the Commission finds that the MSRB's proposal is consistent with the requirements of the Exchange Act and the rules and regulations thereunder that govern the MSRB. The language of section 15B(b)(2)(C) of the Exchange Act requires that the MSRB's rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principals of trade, to foster cooperation and coordination with persons engaged in regulating, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national system, and, in general, to protect investors and the public interest.
Additionally, in approving this rule, the Commission notes that it has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
15 U.S.C. 78o-4(b)(2)(c).
After careful review, the Commission finds that the MSRB's proposed rule change consisting of an interpretation of Rule G-17, on disclosure of material facts, meets this standard. The Commission believes that this proposed rule change is consistent with the requirements of the Exchange Act, and the rules and regulations thereunder. In particular, the Commission finds that the proposed rule is consistent with the requirements of section 15B(b)(2)(C) of the Act, set forth above.
III. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the Exchange Act, that the proposed rule change (File No. SR-MSRB-2002-01) be and hereby is, approved.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7042 Filed 3-22-02; 8:45 am]
BILLING CODE 8010-01-U