Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Interpretive Reminder Notice Regarding Rule G-17, on Disclosure of Material Facts-Disclosure of Original Issue Discount Bonds, 3079-3081 [E5-174]

Download as PDF Federal Register / Vol. 70, No. 12 / Wednesday, January 19, 2005 / Notices set a cut-off date of February 18, 2005,3 for the input of transactions.4 While EMCC management expects that all trades submitted to it by February 15, 2005, will settle promptly, it is possible that some trades may not settle timely. Accordingly, EMCC is establishing February 23, 2005, as EMCC’s final settlement date. This means that EMCC will exit from any trades that remain open as of February 23, 2005. Under revised Rule 3, Section 1 of EMCC’s rules, EMCC will issue deliver and receive instructions to the original buyers and sellers for any trades that have not settled by February 23, 2005. The legal obligations of those parties will continue to be subject to EMCC’s rules even though such trades will no longer settle pursuant to EMCC’s rules. To the extent that EMCC discontinues processing before the end of February 2005, EMCC will prorate its members’ February charges and will reflect any proration on the members’ final bill. EMCC believes that the proposed rule change is consistent with the requirements of Section 17A of the Act 5 and the rules and regulations thereunder because it will enable EMCC to process its final transactions in an orderly manner thereby promoting the prompt and accurate clearance and settlement of securities. B. Self-Regulatory Organization’s Statement on Burden on Competition EMCC does not believe that the proposed rule change will have an impact on or impose a burden on competition. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments relating to the proposed rule change have been solicited or received by EMCC. EMCC will notify the Commission of any written comments it receives. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The Commission finds that EMCC’s proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder and 3 Telephone conversation between Karen Saperstein, General Counsel and Secretary, EMCC, and Jerry Carpenter, Assistant Director of Market Regulation, Commission (January 12, 2005). 4 While EMCC expects that the dates set forth in this filing will be used, EMCC reserves the right to postpone these dates if, in its sole discretion, circumstances warrant. In the event EMCC postpones these dates, it will provide notice to the Commission and to its members. 5 15 U.S.C. 78q–1. VerDate jul<14>2003 15:11 Jan 18, 2005 Jkt 205001 particularly with the requirements of Section 17A(b)(3)(F) 6 of the Act. Section 17A(b)(3)(F) requires that the rules of a clearing agency be designed to promote the prompt and accurate clearance and settlement of securities transactions. The proposed rule change will enable EMCC to process its final transactions in an orderly and transparent manner thereby promoting the prompt and accurate clearance and settlement of securities. EMCC has requested that the Commission find good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice of filing. The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of notice of filing because such approval will afford EMCC sufficient time to give its members notice of its decision to cease operations and to wind down its clearing agency operations in an orderly fashion. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–EMCC–2005–01 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. All submissions should refer to File Number SR–EMCC–2005–01. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the PO 00000 proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will be available for inspection and copying at EMCC’s principal office and on EMCC’s Web site at <https://www.e-m-c-c. com/legal/>. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–EMCC–2005–01 and should be submitted on or before February 9, 2005. It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (File No. SR– EMCC–2005–01) be, and hereby is, approved on an accelerated basis. For the Commission by the Division of Market Regulation pursuant to delegated authority.7 Jill M. Peterson, Assistant Secretary. [FR Doc. E5–171 Filed 1–18–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51020; File No. SR–MSRB– 2005–01] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Interpretive Reminder Notice Regarding Rule G–17, on Disclosure of Material Facts— Disclosure of Original Issue Discount Bonds January 11, 2005. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 5, 2005, the Municipal Securities Rulemaking Board (‘‘MSRB’’ or ‘‘Board’’) filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the MSRB. The MSRB has designated this proposal 7 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 6 15 U.S.C. 78q–1(b)(3)(F). Frm 00085 Fmt 4703 Sfmt 4703 3079 E:\FR\FM\19JAN1.SGM 19JAN1 3080 Federal Register / Vol. 70, No. 12 / Wednesday, January 19, 2005 / Notices as constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule of the MSRB under Section 19(b)(3)(A)(i) of the Act 3 and Rule 19b–4(f)(1) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The MSRB is filing with the Commission an interpretive reminder notice regarding Rule G–17, on disclosure of material facts—disclosure of original issue discount bonds. The text of the notice follows, with italics indicating new language: * * * * * Reminder Notice Regarding Rule G–17, on Disclosure of Material Facts— Disclosure of Original Issue Discount Bonds The MSRB is publishing this notice to remind dealers of their affirmative disclosure obligations when effecting transactions with customers in original issue discount bonds. An original issue discount bond, or O.I.D. bond, is a bond that was sold at the time of issue at a price that included an original issue discount. The original issue discount is the amount by which the par value of the bond exceeded its public offering price at the time of its original issuance. The original issue discount is amortized over the life of the security and, on a municipal security, is generally treated as tax-exempt interest. When the investor sells the security before maturity, any profit realized on such sale is calculated (for tax purposes) on the adjusted book value, which is calculated for each year the security is outstanding by adding the accretion value to the original offering price. The amount of the accretion value (and the existence and total amount of original issue discount) is determined in accordance with the provisions of the Internal Revenue Code and the rules and regulations of the Internal Revenue Service.1 Rule G–17, the MSRB’s fair dealing rule, encompasses two general principles. First, the rule imposes a duty on dealers not to engage in deceptive, dishonest, or unfair practices. This first 3 15 U.S.C. 78s(b)(3)(A)(i). CFR 240.19b–4(f)(1). 1 See Glossary of Municipal Securities Terms, Second Edition (January 2004). 4 17 VerDate jul<14>2003 15:11 Jan 18, 2005 Jkt 205001 prong of Rule G–17 is essentially an antifraud prohibition. In addition to the basic antifraud provisions in the rule, the rule imposes a duty to deal fairly with all persons. As part of a dealer’s obligation to deal fairly, the MSRB has interpreted the rule to create affirmative disclosure obligations for dealers. The MSRB has stated that the 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.2 These obligations apply even when a dealer is effecting non-recommended secondary market transactions. In the context of the sale to customers of an original issue discount security, the MSRB’s customer confirmation rule, Rule G–15(a), provides that information regarding the status of bonds as original issue discount securities must be included on customer confirmations. Specifically, Rule G–15(a)(i)(C)(4)(c) provides that, ‘‘If the securities pay periodic interest and are sold by the underwriter as original issue discount securities, a designation that they are ‘‘original issue discount’’ securities and a statement of the initial public offering price of the securities, expressed as a dollar price’’ must be included on the customer’s confirmation. The MSRB previously has alerted dealers of their obligation to make original issue discount disclosures to customers and has stated that, ‘‘The Board believes that the fact that a security bears an original issue discount is material information (since it may affect the tax treatment of the security); therefore, this fact should be disclosed to a customer prior to or at the time of trade.’’ 3 The MSRB is publishing this notice to remind dealers of their disclosure obligations under Rule G–17 because it remains concerned that, absent adequate disclosure of a security’s original issue discount status, an investor might not be aware that all or a portion of the component of his or her investment return represented by accretion of the discount is tax-exempt, and therefore might sell the securities at an inappropriately low price (i.e., at a price not reflecting the tax-exempt portion of the discount) or pay capital gains tax on the accreted discount amount. Without appropriate 2 See e.g., Rule G–17 Interpretation—Educational Notice on Bonds Subject to ‘‘Detachable’’ Call Features, May 13, 1993, MSRB Rule Book (July 2004) at 135. 3 Rules G–12 and G–15, Comments Requested on Draft Amendments on Original Issue Discount Securities, MSRB Reports, Vol. 4, No. 6 (May 1994) at 7. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 disclosure, an investor also might not be aware of how his or her transaction price compares to the initial public offering price of the security. Appropriate disclosure of a security’s original issue discount feature should assist customers in computing the market discount or premium on their transaction. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposal. The text of these statements may be examined at the places specified in Item IV below. The MSRB has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The MSRB is publishing the proposed rule change to remind dealers of their affirmative disclosure obligations when effecting transactions with customers in original issue discount bonds. The MSRB previously has alerted dealers of their obligation to make original issue discount disclosures to customers and has stated that, ‘‘The Board believes that the fact that a security bears an original issue discount is material information (since it may affect the tax treatment of the security); therefore, this fact should be disclosed to a customer prior to or at the time of trade.’’ 5 The MSRB is publishing this notice to remind dealers of their disclosure obligations under Rule G–17 because it remains concerned that, absent adequate disclosure of a security’s original issue discount status, an investor might not be aware that all or a portion of the component of his or her investment return represented by accretion of the discount is tax-exempt, and therefore might sell the securities at an inappropriately low price (i.e., at a price not reflecting the tax-exempt portion of the discount) or pay capital gains tax on the accreted discount amount. Without appropriate disclosure, an investor also might not be 5 Rules G–12 and G–15, Comments Requested on Draft Amendments on Original Issue Discount Securities, MSRB Reports, Vol. 4, No. 6 (May 1994) at 7. E:\FR\FM\19JAN1.SGM 19JAN1 Federal Register / Vol. 70, No. 12 / Wednesday, January 19, 2005 / Notices aware of how his or her transaction price compares to the initial public offering price of the security. Appropriate disclosure of a security’s original issue discount feature should assist customers in computing the market discount or premium on their transaction. 2. Statutory Basis The MSRB has adopted the proposed rule change pursuant to Section 15B(b)(2)(C) of the Act,6 which authorizes the MSRB to adopt rules that 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, 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 MSRB has always interpreted its Rule G–17, on fair dealing, to encompass two general principles. First, the rule imposes a duty on dealers not to engage in deceptive, dishonest, or unfair practices. In addition to the basic antifraud provisions in the rule, the rule imposes a duty to deal fairly with all persons. As part of a dealer’s obligation to deal fairly, the MSRB has interpreted the rule to create affirmative disclosure obligations for dealers. The proposed rule change will further the purposes of Section 15B(b)(2)(C) by reminding dealers of their obligations to deal fairly with customers and affirmatively disclose, at or before the sale of municipal securities to a customer, all material facts concerning the transaction including a security’s original issue discount feature. B. Self-Regulatory Organization’s Statement on Burden on Competition The MSRB does not believe that the proposed rule change will impose any burden on competition among dealers not necessary or appropriate in furtherance of the purposes of the Act because it applies equally to all dealers in municipal securities. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. 6 15 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The MSRB has designated this proposed rule change as constituting a stated policy, practice or interpretation with respect to the meaning, administration or enforcement of an existing MSRB rule under Section 19(b)(3)(A)(i) of the Act,7 and Rule 19b– 4(f)(1) thereunder,8 which renders the proposed rule change effective upon filing with the Commission. At any time within 60 days of this filing, the Commission may summarily abrogate this proposal if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.9 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–MSRB–2005–01 on the subject line. Paper Comments • Send paper comments in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549–0609. All submissions should refer to File Number SR–MSRB–2005–01. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the U.S.C. 78s(b)(3)(A). 8 17 CFR 240.19b–4. 9 See 15 U.S.C. 78s(b)(3)(C). U.S.C. 78o–4(b)(2)(C). VerDate jul<14>2003 15:11 Jan 18, 2005 Jkt 205001 public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room. Copies of such filing also will be available for inspection and copying at the office of the MSRB. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–MSRB– 2005–01 and should be submitted on or before February 9, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.10 Jill M. Peterson, Assistant Secretary. [FR Doc. E5–174 Filed 1–18–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–51025; File No. SR–NASD– 2005–01] Self-Regulatory Organizations; Notice of a Proposed Rule Change by National Association of Securities Dealers, Inc. Relating to Changes to Rule 3360 in Light of the SEC Regulation SHO January 11, 2005. Pursuant to Section 19(b)(3) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 7, 2005, the National Association of Securities Dealers, Inc. (‘‘NASD’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by NASD. NASD has designated the proposed rule change as constituting a ‘‘non-controversial’’ rule change under paragraph (f)(6) of Rule 19b–4 under the Act,3 which renders the proposal effective upon receipt of this filing by the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 10 17 7 15 PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 3081 CFR 200.30–3(a)(12). U.S.C. 78s(b)(3). 2 17 CFR 240.19b–4. 3 17 CFR 240.19b–4. 1 15 E:\FR\FM\19JAN1.SGM 19JAN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 12 (Wednesday, January 19, 2005)]
[Notices]
[Pages 3079-3081]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-174]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51020; File No. SR-MSRB-2005-01]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Interpretive Reminder Notice Regarding Rule G-17, on 
Disclosure of Material Facts--Disclosure of Original Issue Discount 
Bonds

January 11, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 5, 2005, the Municipal Securities Rulemaking Board (``MSRB'' 
or ``Board'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the MSRB. The 
MSRB has designated this proposal

[[Page 3080]]

as constituting a stated policy, practice, or interpretation with 
respect to the meaning, administration, or enforcement of an existing 
rule of the MSRB under Section 19(b)(3)(A)(i) of the Act \3\ and Rule 
19b-4(f)(1) thereunder,\4\ which renders the proposal effective upon 
filing with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the Commission an interpretive reminder 
notice regarding Rule G-17, on disclosure of material facts--disclosure 
of original issue discount bonds. The text of the notice follows, with 
italics indicating new language:
* * * * *

Reminder Notice Regarding Rule G-17, on Disclosure of Material Facts--
Disclosure of Original Issue Discount Bonds

    The MSRB is publishing this notice to remind dealers of their 
affirmative disclosure obligations when effecting transactions with 
customers in original issue discount bonds. An original issue discount 
bond, or O.I.D. bond, is a bond that was sold at the time of issue at a 
price that included an original issue discount. The original issue 
discount is the amount by which the par value of the bond exceeded its 
public offering price at the time of its original issuance. The 
original issue discount is amortized over the life of the security and, 
on a municipal security, is generally treated as tax-exempt interest. 
When the investor sells the security before maturity, any profit 
realized on such sale is calculated (for tax purposes) on the adjusted 
book value, which is calculated for each year the security is 
outstanding by adding the accretion value to the original offering 
price. The amount of the accretion value (and the existence and total 
amount of original issue discount) is determined in accordance with the 
provisions of the Internal Revenue Code and the rules and regulations 
of the Internal Revenue Service.\1\
---------------------------------------------------------------------------

    \1\ See Glossary of Municipal Securities Terms, Second Edition 
(January 2004).
---------------------------------------------------------------------------

    Rule G-17, the MSRB's fair dealing rule, encompasses two general 
principles. First, the rule imposes a duty on dealers not to engage in 
deceptive, dishonest, or unfair practices. This first prong of Rule G-
17 is essentially an antifraud prohibition. In addition to the basic 
antifraud provisions in the rule, the rule imposes a duty to deal 
fairly with all persons. As part of a dealer's obligation to deal 
fairly, the MSRB has interpreted the rule to create affirmative 
disclosure obligations for dealers. The MSRB has stated that the 
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.\2\ These obligations apply even when a 
dealer is effecting non-recommended secondary market transactions. 
---------------------------------------------------------------------------

    \2\ See e.g., Rule G-17 Interpretation--Educational Notice on 
Bonds Subject to ``Detachable'' Call Features, May 13, 1993, MSRB 
Rule Book (July 2004) at 135.
---------------------------------------------------------------------------

    In the context of the sale to customers of an original issue 
discount security, the MSRB's customer confirmation rule, Rule G-15(a), 
provides that information regarding the status of bonds as original 
issue discount securities must be included on customer confirmations. 
Specifically, Rule G-15(a)(i)(C)(4)(c) provides that, ``If the 
securities pay periodic interest and are sold by the underwriter as 
original issue discount securities, a designation that they are 
``original issue discount'' securities and a statement of the initial 
public offering price of the securities, expressed as a dollar price'' 
must be included on the customer's confirmation.
    The MSRB previously has alerted dealers of their obligation to make 
original issue discount disclosures to customers and has stated that, 
``The Board believes that the fact that a security bears an original 
issue discount is material information (since it may affect the tax 
treatment of the security); therefore, this fact should be disclosed to 
a customer prior to or at the time of trade.'' \3\ The MSRB is 
publishing this notice to remind dealers of their disclosure 
obligations under Rule G-17 because it remains concerned that, absent 
adequate disclosure of a security's original issue discount status, an 
investor might not be aware that all or a portion of the component of 
his or her investment return represented by accretion of the discount 
is tax-exempt, and therefore might sell the securities at an 
inappropriately low price (i.e., at a price not reflecting the tax-
exempt portion of the discount) or pay capital gains tax on the 
accreted discount amount. Without appropriate disclosure, an investor 
also might not be aware of how his or her transaction price compares to 
the initial public offering price of the security. Appropriate 
disclosure of a security's original issue discount feature should 
assist customers in computing the market discount or premium on their 
transaction.
---------------------------------------------------------------------------

    \3\ Rules G-12 and G-15, Comments Requested on Draft Amendments 
on Original Issue Discount Securities, MSRB Reports, Vol. 4, No. 6 
(May 1994) at 7.
---------------------------------------------------------------------------

* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposal. The text of these 
statements may be examined at the places specified in Item IV below. 
The MSRB has prepared summaries, set forth in Sections A, B, and C 
below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The MSRB is publishing the proposed rule change to remind dealers 
of their affirmative disclosure obligations when effecting transactions 
with customers in original issue discount bonds.
    The MSRB previously has alerted dealers of their obligation to make 
original issue discount disclosures to customers and has stated that, 
``The Board believes that the fact that a security bears an original 
issue discount is material information (since it may affect the tax 
treatment of the security); therefore, this fact should be disclosed to 
a customer prior to or at the time of trade.'' \5\ The MSRB is 
publishing this notice to remind dealers of their disclosure 
obligations under Rule G-17 because it remains concerned that, absent 
adequate disclosure of a security's original issue discount status, an 
investor might not be aware that all or a portion of the component of 
his or her investment return represented by accretion of the discount 
is tax-exempt, and therefore might sell the securities at an 
inappropriately low price (i.e., at a price not reflecting the tax-
exempt portion of the discount) or pay capital gains tax on the 
accreted discount amount. Without appropriate disclosure, an investor 
also might not be

[[Page 3081]]

aware of how his or her transaction price compares to the initial 
public offering price of the security. Appropriate disclosure of a 
security's original issue discount feature should assist customers in 
computing the market discount or premium on their transaction.
---------------------------------------------------------------------------

    \5\ Rules G-12 and G-15, Comments Requested on Draft Amendments 
on Original Issue Discount Securities, MSRB Reports, Vol. 4, No. 6 
(May 1994) at 7.
---------------------------------------------------------------------------

2. Statutory Basis
    The MSRB has adopted the proposed rule change pursuant to Section 
15B(b)(2)(C) of the Act,\6\ which authorizes the MSRB to adopt rules 
that shall:
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78o-4(b)(2)(C).

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.

    The MSRB has always interpreted its Rule G-17, on fair dealing, to 
encompass two general principles. First, the rule imposes a duty on 
dealers not to engage in deceptive, dishonest, or unfair practices. In 
addition to the basic antifraud provisions in the rule, the rule 
imposes a duty to deal fairly with all persons. As part of a dealer's 
obligation to deal fairly, the MSRB has interpreted the rule to create 
affirmative disclosure obligations for dealers. The proposed rule 
change will further the purposes of Section 15B(b)(2)(C) by reminding 
dealers of their obligations to deal fairly with customers and 
affirmatively disclose, at or before the sale of municipal securities 
to a customer, all material facts concerning the transaction including 
a security's original issue discount feature.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change will impose 
any burden on competition among dealers not necessary or appropriate in 
furtherance of the purposes of the Act because it applies equally to 
all dealers in municipal securities.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The MSRB has designated this proposed rule change as constituting a 
stated policy, practice or interpretation with respect to the meaning, 
administration or enforcement of an existing MSRB rule under Section 
19(b)(3)(A)(i) of the Act,\7\ and Rule 19b-4(f)(1) thereunder,\8\ which 
renders the proposed rule change effective upon filing with the 
Commission.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    At any time within 60 days of this filing, the Commission may 
summarily abrogate this proposal if it appears to the Commission that 
such action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\9\
---------------------------------------------------------------------------

    \9\ See 15 U.S.C. 78s(b)(3)(C).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal is 
consistent with the Act. Comments may be submitted by any of the 
following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2005-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-MSRB-2005-01. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the office 
of the MSRB. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
MSRB-2005-01 and should be submitted on or before February 9, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E5-174 Filed 1-18-05; 8:45 am]
BILLING CODE 8010-01-P

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