Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of Proposed Rule Change Relating to Amendments to Rule G-27, on Supervision, Rule G-8, on Recordkeeping, and Rule G-9, on Record Retention, 76400-76404 [E6-21779]
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Federal Register / Vol. 71, No. 244 / Wednesday, December 20, 2006 / Notices
Complex Trade is exempt from the
trade-through rule.3
In contrast to the Linkage definition of
‘‘Complex Trade,’’ ISE Rule 722(a)(6)
defines ‘‘complex orders’’ for other
purposes on the ISE. This definition
includes ‘‘ratio orders,’’ which do not
require that there be an equivalent
number of contracts in the orders.
Specifically, ISE Rule 722(a)(6) permits
ratios that are equal to or greater than
one-to-three, and less than or equal to
three-to-one. The ISE applies modified
priority rules to complex orders.
The proposal will conform the
Linkage definition of Complex Trade to
the ISE’s general definition of the
concept. According to the ISE, the other
five options exchanges are adopting a
similar definition, which will result in
uniform application of the term across
all options exchanges. The ISE believes
that such uniformity will facilitate the
speedy execution of complex trades on
all markets.
2. Statutory Basis
According to the ISE, the basis under
the Act for the proposed rule change is
the requirement under Section 6(b)(5) of
the Act 4 that the rules of a national
securities exchange be designed to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transaction in
securities, to remove impediments to
and perfect the mechanism for a free
and open market and a national market
system, and, in general, to protect
investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The ISE believes that the proposed
rule change does not impose any burden
on competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The ISE has not solicited, and does
not intend to solicit, comments on this
proposed rule change. The ISE has not
received any written comments from
members or other interested parties.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
3 See
4 15
ISE Rule 1902(b)(7).
U.S.C. 78f(b)(5).
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as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
A. By order approve such proposed
rule change; or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
submissions should refer to File
Number SR–ISE–2006–73 and should be
submitted on or before January 10, 2007.
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:
SECURITIES AND EXCHANGE
COMMISSION
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
No. SR–ISE–2006–73 on the subject
line.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.5
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–21653 Filed 12–19–06; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–54930; File No. SR–MSRB–
2006–10]
Self-Regulatory Organizations;
Municipal Securities Rulemaking
Board; Notice of Filing of Proposed
Rule Change Relating to Amendments
to Rule G–27, on Supervision, Rule G–
8, on Recordkeeping, and Rule G–9, on
Record Retention
December 13, 2006.
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 November
Paper Comments
24, 2006, the Municipal Securities
Rulemaking Board (‘‘MSRB’’ or
• Send paper comments in triplicate
‘‘Board’’) filed with the Securities and
to Nancy M. Morris, Secretary,
Exchange Commission (‘‘SEC’’ or
Securities and Exchange Commission,
‘‘Commission’’) the proposed rule
100 F Street, NE., Washington, DC
change as described in Items I, II, and
20549–1090.
III below, which Items have been
All submissions should refer to File
prepared by the MSRB. The
Number SR–ISE–2006–73. This file
Commission is publishing this notice to
number should be included on the
subject line if e-mail is used. To help the solicit comments on the proposed rule
change from interested persons.
Commission process and review your
comments more efficiently, please use
I. Self-Regulatory Organization’s
only one method. The Commission will Statement of the Terms of Substance of
post all comments on the Commissions
the Proposed Rule Change
Internet Web site (https://www.sec.gov/
The MSRB is filing with the
rules/sro.shtml). Copies of the
Commission a proposed rule change
submission, all subsequent
consisting of amendments to Rule G–27,
amendments, all written statements
on supervision, and the related
with respect to the proposed rule
recordkeeping and record retention
change that are filed with the
requirements of Rules G–8 and G–9. The
Commission, and all written
text of the proposed rule change is
communications relating to the
available on the MSRB’s Web site
proposed rule change between the
(https://www.msrb.org), at the MSRB’s
Commission and any person, other than
principal office, and at the
those that may be withheld from the
Commission’s Public Reference Room.
public in accordance with the
II. Self-Regulatory Organization’s
provisions of 5 U.S.C. 552, will be
Statement of the Purpose of, and
available for inspection and copying in
Statutory Basis for, the Proposed Rule
the Commission’s Public Reference
Room. Copies of such filing also will be Change
available for inspection and copying at
In its filing with the Commission, the
the principal office of the ISE. All
MSRB included statements concerning
comments received will be posted
the purpose of and basis for the
without change; the Commission does
proposed rule change and discussed any
not edit personal identifying
information from submissions. You
5 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
should submit only information that
2 17 CFR 240.19b-4.
you wish to make available publicly. All
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Federal Register / Vol. 71, No. 244 / Wednesday, December 20, 2006 / Notices
comments it received on the proposed
rule change. 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.
sroberts on PROD1PC70 with NOTICES
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Over the past two years, NASD and
the New York Stock Exchange (‘‘NYSE’’)
have adopted a series of rule changes
designed to strengthen the supervisory
control procedures of their member
firms. Specifically, NASD amended its
Rule 3010 (Supervision) to include more
stringent office inspection rules, and
adopted new Rule 3012 (Supervisory
Control System) to require the testing
and verification of a firm’s supervisory
procedures.3
MSRB Rule G–27, on supervision,
requires brokers, dealers and municipal
securities dealers (collectively referred
to as ‘‘dealers’’) to supervise their
municipal securities activities by
designating individuals with
supervisory responsibilities for
municipal securities activities, adopting
written supervisory procedures, and
reviewing transactions and
correspondence. Similarly, NASD Rule
3010 requires dealers to establish a
supervisory system, adopt written
supervisory procedures, review
transactions and correspondence, and,
most recently, to conduct internal
inspections with minimum inspection
cycles. NASD also recently adopted new
Rule 3012 to require that dealers: (1)
Test and verify that its supervisory
procedures are sufficient, and amend or
create additional supervisory
procedures where the testing and
verification identify a need; and (2)
establish procedures that are reasonably
designed to review and supervise, on a
day-to-day basis, the customer account
activity conducted by the dealer’s
producing managers.
In April 2006, the MSRB published
for comment draft amendments to Rule
G–27, which incorporated most of the
NASD requirements contained in Rules
3010 and 3012 in order to promote
regulatory consistency and make these
requirements specifically applicable to
the municipal securities activities of
securities firms and bank dealers.4 The
Board received two comment letters in
response to the notice, both of which
3 The NASD and NYSE amendments are
substantially similar.
4 MSRB Notice 2006–11 (April 21, 2006).
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expressed support for the draft
amendments, as more fully described
below.5 Based on the comment letters
received, as well as discussions with
various industry participants and the
relevant regulatory agencies, the Board
determined to adopt the draft
amendments with one substantive
revision relating to the designation of
appropriate principal. Although the new
supervisory activities required under
the proposed rule change are derived
from NASD requirements, these
activities relate specifically to a dealer’s
municipal securities activities and
require in-depth knowledge of MSRB
rules. Therefore, the Board believes it is
appropriate that these supervisory
activities be undertaken by a municipal
securities principal (or a municipal fund
securities limited principal in the case
of activities related to municipal fund
securities). The proposed rule change
clarifies these requirements by
amending the ‘‘Appropriate Principal’’
provision in Rule G–27(b)(ii)(C).6
The MSRB believes that adopting
most of the requirements of NASD Rules
3010 and 3012 will help ensure a
coordinated regulatory approach in the
area of supervision, and will facilitate
inspection and enforcement.7 The
5 Although the notice specifically requested
comment from bank dealers, particularly on their
ability to comply with the new requirements
relating to tape recording of conversations, office
inspection, and the new supervisory control
provisions, the Board did not receive comment
letters from bank dealers. Based on the absence of
comment letters from this segment of the industry,
as well as informal discussions with the bank
regulatory agencies, the Board has no reason to
believe that bank dealers will be unable to comply
with the new requirements for supervision.
6 This provision is also amended to make clear
that supervision with respect to correspondence
under Rule G–27(e) is to be undertaken by a
municipal securities principal (or a municipal fund
securities limited principal in the case of
correspondence relating to municipal fund
securities) or a municipal securities sales principal.
7 The MSRB notes that NASD Rule 3013 (Annual
Certification of Compliance and Supervisory
Processes) requires NASD member firms to
designate a principal to serve as chief compliance
officer and to certify, on an annual basis, that the
member has in place processes to establish,
maintain, review, test and modify written
compliance policies and written supervisory
procedures designed to achieve compliance with
applicable NASD rules, MSRB rules and federal
securities laws and regulations. This requirement
became fully operative on April 1, 2006. Since all
NASD member firms are subject to this rule (which
requires that firms have supervisory procedures for
compliance with MSRB rules), the Board has not
incorporated this requirement into amended Rule
G–27. Bank dealers, however, are not currently
subject to this requirement since they are not NASD
members. Therefore, after the Rule G–27
amendments have been in effect for approximately
a year, the Board will seek feedback from the bank
regulators concerning bank dealers’ ability to
comply with the new supervisory requirements
over that time period. Assuming there are no
compliance problems or concerns in this area, the
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proposed amendments to Rule G–27 are
described below.
Description of Proposed Amendments
The proposed amendments modify
section (b) of Rule G–27, on supervisory
system; add new subsection (c)(ii), on
tape recording of conversations; add
new subsection (c)(iii) on updating
written supervisory procedures; add
new section (d), on internal inspections;
add new section (f), on supervisory
control system; and add new definitions
section (g). As a general principle, the
requirements of Rule G–27 apply only
with respect to those registered persons
who engage in municipal securities
activities and those offices in which
such municipal securities activities are
undertaken (regardless of the level or
amount of such municipal securities
activities).
Supervisory System
The proposed amendments modify
section (b) of Rule G–27, on supervisory
system, to include the following five
provisions: 8
• Designation of certain locations as
offices of supervisory jurisdiction
(‘‘OSJ’’) (G–27(b)(iii));
• Designation of one or more
appropriately registered principals in
each OSJ, including the main office, and
one or more appropriately registered
representatives or principals in each
non-OSJ branch office with authority to
carry out the supervisory
responsibilities assigned to that office
by the dealer (G–27(b)(iv));
• Assignment of each registered
person to an appropriately registered
representative or principal who shall be
responsible for supervising that person’s
activities (G–27(b)(v));
• Reasonable efforts to determine that
all supervisory personnel are qualified
by virtue of experience or training to
carry out their assigned responsibilities
(G–27(b)(vi)); and
• Participation of each registered
representative and principal in an
annual meeting to discuss compliance
matters (G–27(b)(vii)).
The amendments also include a
reference in Rule G–27(b)(ii)(C) to
‘‘municipal fund securities limited
principal’’ that is added to explicitly
affirm the supervisory functions that
such a principal may undertake
pursuant to Rule G–3, on professional
qualifications. Specifically, paragraph
(b)(iv)(C) of Rule G–3 allows a
municipal fund securities limited
Board will then consider the propriety of adopting
an annual certification requirement for bank
dealers.
8 These provisions are based on NASD Rule
3010(a)(3)–(7).
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principal to ‘‘undertake all actions
required or permitted under any Board
rule to be taken by a municipal
securities principal, but solely with
respect to activities related to municipal
fund securities.’’
sroberts on PROD1PC70 with NOTICES
Tape Recording of Conversations
The amendments incorporate NASD
Rule 3010(b)(2), on tape recording of
conversations, in Rule G–27(c)(ii).
Subsection (c)(ii) requires dealers to
establish special supervisory
procedures, including the tape
recording of conversations, when they
have hired more than a specified
percentage of registered persons from
certain firms that have been expelled or
have had their broker/dealer
registrations revoked for violations of
sales practice rules. The requisite
percentage varies depending on the size
of the dealer, from 40 percent for a small
dealer to 20 percent for a larger dealer.
The dealer must establish the required
supervisory procedures within 30 days
of receiving notice from their registered
securities association or bank regulator,
or obtaining actual knowledge that it is
subject to this provision of the rule.
Under this provision, if the requisite
percentage of a dealer’s sales force
previously was employed by a
disciplined firm, the dealer will be
required to adopt special written
procedures to supervise the
telemarketing activities of all its
registered persons. The procedures
require, at a minimum, that the dealer
tape record all telephone conversations
between all of its registered persons and
both existing and potential customers
for a period of two years. The measures
required by this provision are designed
to prevent a recurrence of sales practice
abuse or other customer harm that
caused the disciplined firm to have its
registration revoked.
This provision also requires dealers
subject to the taping requirement to
establish reasonable procedures for
reviewing tape recordings to ensure
compliance with securities laws and
applicable rules and regulations, to
retain and catalog the tapes, and to
submit reports to the appropriate
registered securities association or bank
regulator on their supervision of
telemarketing.
Updating Written Supervisory
Procedures
Subsection (c)(iii) is added to replace
existing section (e), which currently
requires a dealer to revise and update its
written supervisory procedures as
necessary to respond to changes in
Board or other applicable rules.
Proposed subsection (c)(iii) has
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language that mirrors the language in
NASD Rule 3010(b)(4), and requires
each dealer to keep a copy of procedures
at each location where supervisory
activities are conducted and to amend
its written supervisory procedures
within a reasonable time after changes
occur.
Internal Inspections
The amendments incorporate NASD
Rule 3010(c), on internal inspections, in
new section (d) under Rule G–27. This
new section imposes office inspection
requirements that establish minimum
inspection cycles and delineate the
topics that must be covered during such
inspections as well as the manner in
which inspections are documented.9 In
addition, the amendments include new
section (g) which defines the
designations ‘‘office of supervisory
jurisdiction’’ and ‘‘branch office’’ used
in section (d), among other terms.
Mandatory Inspection Cycles. Section
(d) obligates dealers to inspect OSJs and
supervisory branch offices on at least an
annual basis.10 It also requires dealers to
inspect all non-supervisory branch
offices at least once every three years. It
directs dealers, however, to consider
when it might be appropriate to conduct
more frequent inspection of nonsupervisory branch offices. Further,
Rule G–27(d) requires dealers to inspect
non-branch locations ‘‘on a regular
periodic schedule.’’ Each dealer must
document, as part of its written
supervisory procedures, an explanation
of how the dealer determined the
frequency of its examination schedule.
In establishing the schedule, dealers
should consider the nature and
complexity of the securities activities
for which each non-branch location is
responsible, and the frequency of
customer contact at the non-branch
location.
Independent Office Inspections.
Section (d) places limits on who is
eligible to perform the required
inspection function. This provision
prohibits office inspections from being
performed by:
• The branch office manager;
9 The stringency of the office inspection
requirements is graduated and based on
designations of offices under specifically defined
categories, such as office of supervisory
jurisdiction, supervisory and non-supervisory
branch offices, and non-branch offices.
10 A ‘‘branch office’’ is defined in Rule G–27(g) as
‘‘any location where one or more associated persons
of a dealer regularly conducts the business of
effecting any transactions in, or inducing or
attempting to induce the purchase or sale of any
security, or is held out as such, excluding [certain
enumerated locations].’’ A ‘‘supervisory branch
office’’ is any non-OSJ branch office that is
responsible for supervising one or more non-branch
offices.
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• Any person within the office who
has supervisory responsibilities; or
• Any individual who is directly or
indirectly supervised by such person(s).
However, an exception to this
limitation is provided if the dealer is so
limited in size and resources that it
cannot comply with it.
Content of Inspections and
Requirements for Inspection Reports.
Dealers must document each office
inspection by preparing a written report
that documents when it conducted the
inspection and the results of its testing
and verification in the following areas:
• Safeguarding customer funds and
securities;
• Maintaining books and records;
• Supervising customer accounts
services by branch office managers;
• Transmitting funds between
customer and registered representative
and between customers and third
parties;
• Validating customer address
changes; and
• Validating changes in customer
account information.
Heightened Inspection Requirements.
Section (d) also requires dealers to
adopt, under certain circumstances,
procedures that require heightened
inspections designed to avoid conflicts
of interest arising from economic,
commercial or financial interests that
the branch manager’s supervisor holds
in the person or activities being
inspected. Such heightened inspection
procedures are required if (1) the person
conducting the inspection reports to the
branch office manager’s supervisor or
works in an office supervised by the
branch manager’s supervisor; and (2)
the branch office manager generates
20% or more of the revenue of the
business units supervised by the branch
office manager’s supervisor.11 Dealers
must calculate the 20% threshold in the
same manner as when determining
whether a producing manager must be
subject to heightened supervision, as
described below.
Supervisory Control System
The amendments also include new
section (f), derived from NASD Rule
3012, which incorporates the following
new requirements:
Testing and Verification of
Supervisory Control Procedures. Section
11 The 2004 NTM provides examples of such
heightened inspection procedures under NASD
Rule 3010, including, without limitation,
unannounced office inspections; increasing the
frequency of inspections; broadening the scope of
activities inspected; and/or having one or more
principals review or approve the inspection. The
MSRB would view these examples as equally
applicable to the heightened inspection procedures
required under Rule G–27(d)(iii).
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(f) requires dealers to designate and
identify one or more principals charged
with establishing, maintaining and
enforcing a system of ‘‘supervisory
control policies and procedures’’ that:
• Test and verify that a dealer’s
supervisory procedures are reasonably
designed to achieve compliance with
the federal securities laws and MSRB
rules; and
• Create additional or amended
supervisory procedures where a need
for such procedures is identified by
such testing.
Annual Submission of Report to
Senior Management. At least once
annually, the principal(s) designated
under section (f) must submit a report
to senior management that details the
dealer’s supervisory control policies and
procedures, summarizes the results of
testing and identifies significant
weaknesses, and discusses additional or
amended procedures implemented in
response to such testing.
The Board recognizes that situations
may arise where a dealer is required
under the rules of another selfregulatory organization to produce a
similar report. The Board does not
intend for a dealer to produce
duplicative reports in such situations.
Instead, for purposes of this section (f),
a dealer may prepare a single report so
long as there is coordination in the
preparation and submission of such
report between any principal(s)
designated by the dealer pursuant to the
rules of another self-regulatory
organization and the principal
designated under Rule G–27(b)(ii)(C) or
(f)(i). The dealer should adequately
document such coordination between or
among the various principals.
Supervision of Producing Manager’s
Customer Account Activity. Section (f)
requires dealers to adopt procedures to
review and supervise daily customer
account activities of each branch office
manager, sales manager, regional or
district sales manager, or any person
performing similar supervisory
functions (‘‘producing managers’’).
These policies and procedures must
include ‘‘a means of customer
confirmation, notification, or follow-up
that can be documented.’’ Specifically,
the provision requires that policies and
procedures must be reasonably designed
to review and monitor the following
activities:
• All transmittals of funds and
securities to and from customer
accounts;
• Changes of customer’s address,
including procedures to validate change
of address; and
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• Changes in customer investment
objectives, including validation of such
changes.12
Independent Review of Producing
Manager. Section (f) requires an
independent review of the producing
manager. This review must be
conducted by a person or persons who
are senior to, or ‘‘otherwise
independent’’ of, the producing
manager. To be considered ‘‘otherwise
independent’’ of the producing
manager, the person performing the
review:
• Must not report, either directly or
indirectly, to the producing manager he
or she is reviewing;
• Must be located at a different office
than the producing manager;
• Must not have supervisory
authority over any of the activity under
review, including not being directly
compensated in whole or in part as a
result of such activity; and
• Must alternate such review
responsibility with another person at
least once every two years.
Section (f) also requires dealers to
adopt, under certain circumstances,
heightened supervisory procedures
designed to avoid conflicts of interest
arising from economic, commercial or
financial interests that the supervisor
holds in the person or activities being
supervised. Such heightened
supervisory procedures are required
with respect to producing managers
who are responsible for generating at
least 20% of the revenue of the business
which is supervised by the producing
manager’s supervisor.13 As noted above,
the relevant provisions of Rule G–27
would apply if any portion of the 20%
threshold is attributable to revenue
generated through municipal securities
transactions. However, the heightened
supervision requirement does not apply
where an otherwise independent person
conducts the producing manager’s
reviews.
Finally, section (f) provides an
exception from the independent review
requirement if a dealer is so limited in
size and resources that it is unable to
identify anyone who is senior to or
otherwise independent of the producing
manager to conduct the review (the
‘‘limited size and resource’’ exception).
*
*
*
*
*
The MSRB intends generally that the
provisions of Rule G–27 be read
consistently with the analogous NASD
provisions, unless the MSRB
specifically indicates otherwise. Thus,
relevant NASD interpretations would be
presumed to apply to the comparable
MSRB provision, subject to the MSRB’s
right to make distinctions when
necessary and appropriate. The MSRB
recommends that dealers, including
bank dealers, regularly visit or link to
the relevant portions of the NASD Web
site on supervision for current NASD
interpretations of such analogous
provisions.14 Furthermore, the MSRB
intends to continue coordinating its
requirements relating to supervision
with those of the other relevant selfregulatory organizations in the
securities markets whenever appropriate
for dealers engaging in municipal
securities transactions.
Finally, NASD Rule 3012
(Supervisory Control System) provides
that ‘‘Any member in compliance with
substantially similar requirements of the
New York Stock Exchange, Inc. shall be
deemed to be in compliance with the
provisions of this Rule.’’ We note that
the amendments to Rule G–27
incorporate substantially all of NASD
Rule 3012. Therefore, the MSRB
believes that any dealer in compliance
with similar NASD or NYSE
requirements would be deemed in
compliance with the comparable
requirements of Rule G–27(f), on
supervisory control system, so long as
there is coordination between or among
any principal(s) designated by the
dealer pursuant to the rules of NASD or
the NYSE and the appropriate principal
designated pursuant to Rule G–
27(b)(ii)(C).
12 If a dealer does not engage in any of these
activities, then the dealer’s supervisory control
policies and procedures must note that the dealer
is not engaged in these activities and that the
supervisory control policies and procedures must
be amended before the dealer may engage in such
activities.
13 The 2004 NTM provides examples of such
heightened supervisory procedures under NASD
Rule 3012, including, without limitation,
unannounced supervisory reviews; increasing the
frequency of supervisory reviews by different
reviewers within a certain time period; broadening
the scope of activities reviewed; and/or having one
or more principals approve the supervisory review
of such producing manager. The MSRB would view
these examples as equally applicable to the
heightened supervisory procedures required under
Rule G–27(f)(ii)(C).
2. Statutory Basis
The MSRB believes that the proposed
rule change is consistent with Section
15B(b)(2)(C) of the Act,15 which
provides that the MSRB’s rules shall:
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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
14 NASD’s Web site on supervision is located at
https://www.nasd.com/RulesRegulation/IssueCenter/
SupervisoryControl/index.htm.
15 15 U.S.C. 78o–4(b)(2)(C).
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Federal Register / Vol. 71, No. 244 / Wednesday, December 20, 2006 / Notices
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 believes that by
conforming Rule G–27 to the relevant
NASD rules on supervision and thereby
making such requirements specifically
applicable to the municipal securities
activities of securities firms and bank
dealers, the proposed rule change will
promote regulatory consistency by
facilitating dealer compliance with such
requirements, as well as by facilitating
the inspection and enforcement thereof.
sroberts on PROD1PC70 with NOTICES
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The MSRB does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
In April 2006 the MSRB published for
comment draft amendments to Rule G–
27 which incorporated most of the
NASD requirements contained in Rules
3010 and 3012 in order to promote
regulatory consistency and make these
requirements specifically applicable to
the municipal securities activities of
securities firms and bank dealers. In
response to its notice, the Board
received two comment letters, both of
which expressed support for the draft
amendments. The Investment Company
Institute (‘‘ICI’’) noted that conforming
MSRB requirements to those of the
NASD ‘‘will strengthen the current
supervisory systems of municipal
securities dealers because NASD rules
require a more structured and
formalized supervisory system than
Rule G–27 in its current form.’’ ICI
further stated that the proposal will
‘‘facilitate compliance by those dealers
that are dually registered with the
MSRB and the NASD * * * [and that
this] conformity should also enable the
NASD to more efficiently inspect those
dealers that are subject to rules of both
self-regulatory organizations.’’
The other commentator—BSC
Securities—was supportive of the draft
amendments but was concerned about
‘‘unintended consequences of
rulemaking.’’ BSC noted that, as a small
firm, it is particularly concerned with
costs of compliance and therefore urged
the Board to adopt provisions that are
‘‘identical (not ‘substantially similar’) to
other SRO’s rules to ensure the
VerDate Aug<31>2005
20:03 Dec 19, 2006
Jkt 211001
coordination of regulatory approaches.’’
While the Board is sensitive to the costs
of compliance, particularly in the case
of smaller dealers, we believe that the
amendments are appropriate and will
result, as ICI stated, in ‘‘no substantive
difference in the supervisory systems
imposed by the rules of the MSRB and
the NASD.’’
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
A. By order approve such proposed
rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
The MSRB has proposed that the
amendments become effective six
months after Commission approval of
the proposed rule change.
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–MSRB–2006–10 on the
subject line.
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 MSRB’s offices. 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–
2006–10 and should be submitted on or
before January 10, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.16
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–21779 Filed 12–19–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54933; File No. SR–
NASDAQ–2006–051]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change and
Amendment No. 1 Thereto To
Temporarily Adjust Tier Volume Limits
December 13, 2006.
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 December
1, 2006, The NASDAQ Stock Market
Paper Comments
LLC (‘‘Nasdaq’’) filed with the Securities
and Exchange Commission
• Send paper comments in triplicate
(‘‘Commission’’) the proposed rule
to Nancy M. Morris, Secretary,
change as described in Items I, II, and
Securities and Exchange Commission,
III below, which Items have been
Station Place, 100 F Street, NE.,
substantially prepared by Nasdaq. On
Washington, DC 20549–1090.
December 7, 2006, the Exchange
All submissions should refer to File
submitted Amendment No. 1 to the
Number SR–MSRB–2006–10. This file
proposed rule change. Nasdaq has filed
number should be included on the
the proposal pursuant to Section
subject line if e-mail is used. To help the
19(b)(3)(A) of the Act 3 and Rule 19b–
Commission process and review your
4(f)(2) thereunder,4 which renders the
comments more efficiently, please use
proposal effective upon filing with the
only one method. The Commission will
post all comments on the Commission’s
16 17 CFR 200.30–3(a)(12).
Internet Web site (https://www.sec.gov/
1 5 U.S.C. 78s(b)(1).
rules/sro.shtml). Copies of the
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
submission, all subsequent
4 17 CFR 240.19b–4(f)(2).
amendments, all written statements
PO 00000
Frm 00134
Fmt 4703
Sfmt 4703
E:\FR\FM\20DEN1.SGM
20DEN1
]]>Agencies
[Federal Register Volume 71, Number 244 (Wednesday, December 20, 2006)]
[Notices]
[Pages 76400-76404]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-21779]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54930; File No. SR-MSRB-2006-10]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Notice of Filing of Proposed Rule Change Relating to Amendments
to Rule G-27, on Supervision, Rule G-8, on Recordkeeping, and Rule G-9,
on Record Retention
December 13, 2006.
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 November 24, 2006, the Municipal Securities Rulemaking Board
(``MSRB'' or ``Board'') 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 the MSRB. 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.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The MSRB is filing with the Commission a proposed rule change
consisting of amendments to Rule G-27, on supervision, and the related
recordkeeping and record retention requirements of Rules G-8 and G-9.
The text of the proposed rule change is available on the MSRB's Web
site (https://www.msrb.org), at the MSRB's principal office, and at the
Commission's Public Reference Room.
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
[[Page 76401]]
comments it received on the proposed rule change. 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
Over the past two years, NASD and the New York Stock Exchange
(``NYSE'') have adopted a series of rule changes designed to strengthen
the supervisory control procedures of their member firms. Specifically,
NASD amended its Rule 3010 (Supervision) to include more stringent
office inspection rules, and adopted new Rule 3012 (Supervisory Control
System) to require the testing and verification of a firm's supervisory
procedures.\3\
---------------------------------------------------------------------------
\3\ The NASD and NYSE amendments are substantially similar.
---------------------------------------------------------------------------
MSRB Rule G-27, on supervision, requires brokers, dealers and
municipal securities dealers (collectively referred to as ``dealers'')
to supervise their municipal securities activities by designating
individuals with supervisory responsibilities for municipal securities
activities, adopting written supervisory procedures, and reviewing
transactions and correspondence. Similarly, NASD Rule 3010 requires
dealers to establish a supervisory system, adopt written supervisory
procedures, review transactions and correspondence, and, most recently,
to conduct internal inspections with minimum inspection cycles. NASD
also recently adopted new Rule 3012 to require that dealers: (1) Test
and verify that its supervisory procedures are sufficient, and amend or
create additional supervisory procedures where the testing and
verification identify a need; and (2) establish procedures that are
reasonably designed to review and supervise, on a day-to-day basis, the
customer account activity conducted by the dealer's producing managers.
In April 2006, the MSRB published for comment draft amendments to
Rule G-27, which incorporated most of the NASD requirements contained
in Rules 3010 and 3012 in order to promote regulatory consistency and
make these requirements specifically applicable to the municipal
securities activities of securities firms and bank dealers.\4\ The
Board received two comment letters in response to the notice, both of
which expressed support for the draft amendments, as more fully
described below.\5\ Based on the comment letters received, as well as
discussions with various industry participants and the relevant
regulatory agencies, the Board determined to adopt the draft amendments
with one substantive revision relating to the designation of
appropriate principal. Although the new supervisory activities required
under the proposed rule change are derived from NASD requirements,
these activities relate specifically to a dealer's municipal securities
activities and require in-depth knowledge of MSRB rules. Therefore, the
Board believes it is appropriate that these supervisory activities be
undertaken by a municipal securities principal (or a municipal fund
securities limited principal in the case of activities related to
municipal fund securities). The proposed rule change clarifies these
requirements by amending the ``Appropriate Principal'' provision in
Rule G-27(b)(ii)(C).\6\
---------------------------------------------------------------------------
\4\ MSRB Notice 2006-11 (April 21, 2006).
\5\ Although the notice specifically requested comment from bank
dealers, particularly on their ability to comply with the new
requirements relating to tape recording of conversations, office
inspection, and the new supervisory control provisions, the Board
did not receive comment letters from bank dealers. Based on the
absence of comment letters from this segment of the industry, as
well as informal discussions with the bank regulatory agencies, the
Board has no reason to believe that bank dealers will be unable to
comply with the new requirements for supervision.
\6\ This provision is also amended to make clear that
supervision with respect to correspondence under Rule G-27(e) is to
be undertaken by a municipal securities principal (or a municipal
fund securities limited principal in the case of correspondence
relating to municipal fund securities) or a municipal securities
sales principal.
---------------------------------------------------------------------------
The MSRB believes that adopting most of the requirements of NASD
Rules 3010 and 3012 will help ensure a coordinated regulatory approach
in the area of supervision, and will facilitate inspection and
enforcement.\7\ The proposed amendments to Rule G-27 are described
below.
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\7\ The MSRB notes that NASD Rule 3013 (Annual Certification of
Compliance and Supervisory Processes) requires NASD member firms to
designate a principal to serve as chief compliance officer and to
certify, on an annual basis, that the member has in place processes
to establish, maintain, review, test and modify written compliance
policies and written supervisory procedures designed to achieve
compliance with applicable NASD rules, MSRB rules and federal
securities laws and regulations. This requirement became fully
operative on April 1, 2006. Since all NASD member firms are subject
to this rule (which requires that firms have supervisory procedures
for compliance with MSRB rules), the Board has not incorporated this
requirement into amended Rule G-27. Bank dealers, however, are not
currently subject to this requirement since they are not NASD
members. Therefore, after the Rule G-27 amendments have been in
effect for approximately a year, the Board will seek feedback from
the bank regulators concerning bank dealers' ability to comply with
the new supervisory requirements over that time period. Assuming
there are no compliance problems or concerns in this area, the Board
will then consider the propriety of adopting an annual certification
requirement for bank dealers.
---------------------------------------------------------------------------
Description of Proposed Amendments
The proposed amendments modify section (b) of Rule G-27, on
supervisory system; add new subsection (c)(ii), on tape recording of
conversations; add new subsection (c)(iii) on updating written
supervisory procedures; add new section (d), on internal inspections;
add new section (f), on supervisory control system; and add new
definitions section (g). As a general principle, the requirements of
Rule G-27 apply only with respect to those registered persons who
engage in municipal securities activities and those offices in which
such municipal securities activities are undertaken (regardless of the
level or amount of such municipal securities activities).
Supervisory System
The proposed amendments modify section (b) of Rule G-27, on
supervisory system, to include the following five provisions: \8\
---------------------------------------------------------------------------
\8\ These provisions are based on NASD Rule 3010(a)(3)-(7).
---------------------------------------------------------------------------
Designation of certain locations as offices of supervisory
jurisdiction (``OSJ'') (G-27(b)(iii));
Designation of one or more appropriately registered
principals in each OSJ, including the main office, and one or more
appropriately registered representatives or principals in each non-OSJ
branch office with authority to carry out the supervisory
responsibilities assigned to that office by the dealer (G-27(b)(iv));
Assignment of each registered person to an appropriately
registered representative or principal who shall be responsible for
supervising that person's activities (G-27(b)(v));
Reasonable efforts to determine that all supervisory
personnel are qualified by virtue of experience or training to carry
out their assigned responsibilities (G-27(b)(vi)); and
Participation of each registered representative and
principal in an annual meeting to discuss compliance matters (G-
27(b)(vii)).
The amendments also include a reference in Rule G-27(b)(ii)(C) to
``municipal fund securities limited principal'' that is added to
explicitly affirm the supervisory functions that such a principal may
undertake pursuant to Rule G-3, on professional qualifications.
Specifically, paragraph (b)(iv)(C) of Rule G-3 allows a municipal fund
securities limited
[[Page 76402]]
principal to ``undertake all actions required or permitted under any
Board rule to be taken by a municipal securities principal, but solely
with respect to activities related to municipal fund securities.''
Tape Recording of Conversations
The amendments incorporate NASD Rule 3010(b)(2), on tape recording
of conversations, in Rule G-27(c)(ii). Subsection (c)(ii) requires
dealers to establish special supervisory procedures, including the tape
recording of conversations, when they have hired more than a specified
percentage of registered persons from certain firms that have been
expelled or have had their broker/dealer registrations revoked for
violations of sales practice rules. The requisite percentage varies
depending on the size of the dealer, from 40 percent for a small dealer
to 20 percent for a larger dealer. The dealer must establish the
required supervisory procedures within 30 days of receiving notice from
their registered securities association or bank regulator, or obtaining
actual knowledge that it is subject to this provision of the rule.
Under this provision, if the requisite percentage of a dealer's
sales force previously was employed by a disciplined firm, the dealer
will be required to adopt special written procedures to supervise the
telemarketing activities of all its registered persons. The procedures
require, at a minimum, that the dealer tape record all telephone
conversations between all of its registered persons and both existing
and potential customers for a period of two years. The measures
required by this provision are designed to prevent a recurrence of
sales practice abuse or other customer harm that caused the disciplined
firm to have its registration revoked.
This provision also requires dealers subject to the taping
requirement to establish reasonable procedures for reviewing tape
recordings to ensure compliance with securities laws and applicable
rules and regulations, to retain and catalog the tapes, and to submit
reports to the appropriate registered securities association or bank
regulator on their supervision of telemarketing.
Updating Written Supervisory Procedures
Subsection (c)(iii) is added to replace existing section (e), which
currently requires a dealer to revise and update its written
supervisory procedures as necessary to respond to changes in Board or
other applicable rules. Proposed subsection (c)(iii) has language that
mirrors the language in NASD Rule 3010(b)(4), and requires each dealer
to keep a copy of procedures at each location where supervisory
activities are conducted and to amend its written supervisory
procedures within a reasonable time after changes occur.
Internal Inspections
The amendments incorporate NASD Rule 3010(c), on internal
inspections, in new section (d) under Rule G-27. This new section
imposes office inspection requirements that establish minimum
inspection cycles and delineate the topics that must be covered during
such inspections as well as the manner in which inspections are
documented.\9\ In addition, the amendments include new section (g)
which defines the designations ``office of supervisory jurisdiction''
and ``branch office'' used in section (d), among other terms.
---------------------------------------------------------------------------
\9\ The stringency of the office inspection requirements is
graduated and based on designations of offices under specifically
defined categories, such as office of supervisory jurisdiction,
supervisory and non-supervisory branch offices, and non-branch
offices.
---------------------------------------------------------------------------
Mandatory Inspection Cycles. Section (d) obligates dealers to
inspect OSJs and supervisory branch offices on at least an annual
basis.\10\ It also requires dealers to inspect all non-supervisory
branch offices at least once every three years. It directs dealers,
however, to consider when it might be appropriate to conduct more
frequent inspection of non-supervisory branch offices. Further, Rule G-
27(d) requires dealers to inspect non-branch locations ``on a regular
periodic schedule.'' Each dealer must document, as part of its written
supervisory procedures, an explanation of how the dealer determined the
frequency of its examination schedule. In establishing the schedule,
dealers should consider the nature and complexity of the securities
activities for which each non-branch location is responsible, and the
frequency of customer contact at the non-branch location.
---------------------------------------------------------------------------
\10\ A ``branch office'' is defined in Rule G-27(g) as ``any
location where one or more associated persons of a dealer regularly
conducts the business of effecting any transactions in, or inducing
or attempting to induce the purchase or sale of any security, or is
held out as such, excluding [certain enumerated locations].'' A
``supervisory branch office'' is any non-OSJ branch office that is
responsible for supervising one or more non-branch offices.
---------------------------------------------------------------------------
Independent Office Inspections. Section (d) places limits on who is
eligible to perform the required inspection function. This provision
prohibits office inspections from being performed by:
The branch office manager;
Any person within the office who has supervisory
responsibilities; or
Any individual who is directly or indirectly supervised by
such person(s).
However, an exception to this limitation is provided if the dealer
is so limited in size and resources that it cannot comply with it.
Content of Inspections and Requirements for Inspection Reports.
Dealers must document each office inspection by preparing a written
report that documents when it conducted the inspection and the results
of its testing and verification in the following areas:
Safeguarding customer funds and securities;
Maintaining books and records;
Supervising customer accounts services by branch office
managers;
Transmitting funds between customer and registered
representative and between customers and third parties;
Validating customer address changes; and
Validating changes in customer account information.
Heightened Inspection Requirements. Section (d) also requires
dealers to adopt, under certain circumstances, procedures that require
heightened inspections designed to avoid conflicts of interest arising
from economic, commercial or financial interests that the branch
manager's supervisor holds in the person or activities being inspected.
Such heightened inspection procedures are required if (1) the person
conducting the inspection reports to the branch office manager's
supervisor or works in an office supervised by the branch manager's
supervisor; and (2) the branch office manager generates 20% or more of
the revenue of the business units supervised by the branch office
manager's supervisor.\11\ Dealers must calculate the 20% threshold in
the same manner as when determining whether a producing manager must be
subject to heightened supervision, as described below.
---------------------------------------------------------------------------
\11\ The 2004 NTM provides examples of such heightened
inspection procedures under NASD Rule 3010, including, without
limitation, unannounced office inspections; increasing the frequency
of inspections; broadening the scope of activities inspected; and/or
having one or more principals review or approve the inspection. The
MSRB would view these examples as equally applicable to the
heightened inspection procedures required under Rule G-27(d)(iii).
---------------------------------------------------------------------------
Supervisory Control System
The amendments also include new section (f), derived from NASD Rule
3012, which incorporates the following new requirements:
Testing and Verification of Supervisory Control Procedures. Section
[[Page 76403]]
(f) requires dealers to designate and identify one or more principals
charged with establishing, maintaining and enforcing a system of
``supervisory control policies and procedures'' that:
Test and verify that a dealer's supervisory procedures are
reasonably designed to achieve compliance with the federal securities
laws and MSRB rules; and
Create additional or amended supervisory procedures where
a need for such procedures is identified by such testing.
Annual Submission of Report to Senior Management. At least once
annually, the principal(s) designated under section (f) must submit a
report to senior management that details the dealer's supervisory
control policies and procedures, summarizes the results of testing and
identifies significant weaknesses, and discusses additional or amended
procedures implemented in response to such testing.
The Board recognizes that situations may arise where a dealer is
required under the rules of another self-regulatory organization to
produce a similar report. The Board does not intend for a dealer to
produce duplicative reports in such situations. Instead, for purposes
of this section (f), a dealer may prepare a single report so long as
there is coordination in the preparation and submission of such report
between any principal(s) designated by the dealer pursuant to the rules
of another self-regulatory organization and the principal designated
under Rule G-27(b)(ii)(C) or (f)(i). The dealer should adequately
document such coordination between or among the various principals.
Supervision of Producing Manager's Customer Account Activity.
Section (f) requires dealers to adopt procedures to review and
supervise daily customer account activities of each branch office
manager, sales manager, regional or district sales manager, or any
person performing similar supervisory functions (``producing
managers''). These policies and procedures must include ``a means of
customer confirmation, notification, or follow-up that can be
documented.'' Specifically, the provision requires that policies and
procedures must be reasonably designed to review and monitor the
following activities:
All transmittals of funds and securities to and from
customer accounts;
Changes of customer's address, including procedures to
validate change of address; and
Changes in customer investment objectives, including
validation of such changes.\12\
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\12\ If a dealer does not engage in any of these activities,
then the dealer's supervisory control policies and procedures must
note that the dealer is not engaged in these activities and that the
supervisory control policies and procedures must be amended before
the dealer may engage in such activities.
---------------------------------------------------------------------------
Independent Review of Producing Manager. Section (f) requires an
independent review of the producing manager. This review must be
conducted by a person or persons who are senior to, or ``otherwise
independent'' of, the producing manager. To be considered ``otherwise
independent'' of the producing manager, the person performing the
review:
Must not report, either directly or indirectly, to the
producing manager he or she is reviewing;
Must be located at a different office than the producing
manager;
Must not have supervisory authority over any of the
activity under review, including not being directly compensated in
whole or in part as a result of such activity; and
Must alternate such review responsibility with another
person at least once every two years.
Section (f) also requires dealers to adopt, under certain
circumstances, heightened supervisory procedures designed to avoid
conflicts of interest arising from economic, commercial or financial
interests that the supervisor holds in the person or activities being
supervised. Such heightened supervisory procedures are required with
respect to producing managers who are responsible for generating at
least 20% of the revenue of the business which is supervised by the
producing manager's supervisor.\13\ As noted above, the relevant
provisions of Rule G-27 would apply if any portion of the 20% threshold
is attributable to revenue generated through municipal securities
transactions. However, the heightened supervision requirement does not
apply where an otherwise independent person conducts the producing
manager's reviews.
---------------------------------------------------------------------------
\13\ The 2004 NTM provides examples of such heightened
supervisory procedures under NASD Rule 3012, including, without
limitation, unannounced supervisory reviews; increasing the
frequency of supervisory reviews by different reviewers within a
certain time period; broadening the scope of activities reviewed;
and/or having one or more principals approve the supervisory review
of such producing manager. The MSRB would view these examples as
equally applicable to the heightened supervisory procedures required
under Rule G-27(f)(ii)(C).
---------------------------------------------------------------------------
Finally, section (f) provides an exception from the independent
review requirement if a dealer is so limited in size and resources that
it is unable to identify anyone who is senior to or otherwise
independent of the producing manager to conduct the review (the
``limited size and resource'' exception).
* * * * *
The MSRB intends generally that the provisions of Rule G-27 be read
consistently with the analogous NASD provisions, unless the MSRB
specifically indicates otherwise. Thus, relevant NASD interpretations
would be presumed to apply to the comparable MSRB provision, subject to
the MSRB's right to make distinctions when necessary and appropriate.
The MSRB recommends that dealers, including bank dealers, regularly
visit or link to the relevant portions of the NASD Web site on
supervision for current NASD interpretations of such analogous
provisions.\14\ Furthermore, the MSRB intends to continue coordinating
its requirements relating to supervision with those of the other
relevant self-regulatory organizations in the securities markets
whenever appropriate for dealers engaging in municipal securities
transactions.
---------------------------------------------------------------------------
\14\ NASD's Web site on supervision is located at https://
www.nasd.com/RulesRegulation/IssueCenter/SupervisoryControl/
index.htm.
---------------------------------------------------------------------------
Finally, NASD Rule 3012 (Supervisory Control System) provides that
``Any member in compliance with substantially similar requirements of
the New York Stock Exchange, Inc. shall be deemed to be in compliance
with the provisions of this Rule.'' We note that the amendments to Rule
G-27 incorporate substantially all of NASD Rule 3012. Therefore, the
MSRB believes that any dealer in compliance with similar NASD or NYSE
requirements would be deemed in compliance with the comparable
requirements of Rule G-27(f), on supervisory control system, so long as
there is coordination between or among any principal(s) designated by
the dealer pursuant to the rules of NASD or the NYSE and the
appropriate principal designated pursuant to Rule G-27(b)(ii)(C).
2. Statutory Basis
The MSRB believes that the proposed rule change is consistent with
Section 15B(b)(2)(C) of the Act,\15\ which provides that the MSRB's
rules shall:
---------------------------------------------------------------------------
\15\ 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
[[Page 76404]]
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 believes that by conforming Rule G-27 to the relevant NASD
rules on supervision and thereby making such requirements specifically
applicable to the municipal securities activities of securities firms
and bank dealers, the proposed rule change will promote regulatory
consistency by facilitating dealer compliance with such requirements,
as well as by facilitating the inspection and enforcement thereof.
B. Self-Regulatory Organization's Statement on Burden on Competition
The MSRB does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
In April 2006 the MSRB published for comment draft amendments to
Rule G-27 which incorporated most of the NASD requirements contained in
Rules 3010 and 3012 in order to promote regulatory consistency and make
these requirements specifically applicable to the municipal securities
activities of securities firms and bank dealers. In response to its
notice, the Board received two comment letters, both of which expressed
support for the draft amendments. The Investment Company Institute
(``ICI'') noted that conforming MSRB requirements to those of the NASD
``will strengthen the current supervisory systems of municipal
securities dealers because NASD rules require a more structured and
formalized supervisory system than Rule G-27 in its current form.'' ICI
further stated that the proposal will ``facilitate compliance by those
dealers that are dually registered with the MSRB and the NASD * * *
[and that this] conformity should also enable the NASD to more
efficiently inspect those dealers that are subject to rules of both
self-regulatory organizations.''
The other commentator--BSC Securities--was supportive of the draft
amendments but was concerned about ``unintended consequences of
rulemaking.'' BSC noted that, as a small firm, it is particularly
concerned with costs of compliance and therefore urged the Board to
adopt provisions that are ``identical (not `substantially similar') to
other SRO's rules to ensure the coordination of regulatory
approaches.'' While the Board is sensitive to the costs of compliance,
particularly in the case of smaller dealers, we believe that the
amendments are appropriate and will result, as ICI stated, in ``no
substantive difference in the supervisory systems imposed by the rules
of the MSRB and the NASD.''
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
A. By order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
The MSRB has proposed that the amendments become effective six
months after Commission approval of the proposed rule change.
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 rule-comments@sec.gov. Please include
File Number SR-MSRB-2006-10 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-MSRB-2006-10. 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 MSRB's
offices. 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-2006-10 and should be submitted on or before January 10, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-21779 Filed 12-19-06; 8:45 am]
BILLING CODE 8011-01-P
