Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing of a Proposed Rule Change To Add New MSRB Rule G-49, on Transactions Below the Minimum Denomination of an Issue, to the Rules of the MSRB, and To Rescind Paragraph (f), on Minimum Denominations, From MSRB Rule G-15, 10123-10130 [2017-02737]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 82, Number 26 (Thursday, February 9, 2017)]
[Notices]
[Pages 10123-10130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-02737]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79978; File No. SR-MSRB-2017-01]


Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of a Proposed Rule Change To Add New MSRB Rule 
G-49, on Transactions Below the Minimum Denomination of an Issue, to 
the Rules of the MSRB, and To Rescind Paragraph (f), on Minimum 
Denominations, From MSRB Rule G-15

February 6, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on January 24, 2017 the Municipal 
Securities Rulemaking Board (the ``MSRB'' or ``Board'') filed with the 
Securities and Exchange Commission (the ``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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB filed with the Commission a proposed rule change to add 
new MSRB Rule G-49, on transactions below the minimum denomination of 
an issue, to the rules of the MSRB, and, in MSRB Rule G-15, on 
confirmation, clearance, settlement and other uniform practice 
requirements with respect to transactions with customers, to rescind 
paragraph (f), on minimum denominations (the ``proposed rule change''). 
The MSRB requests that the proposed rule change be approved, with an 
effective date to be announced by the MSRB in a regulatory notice 
published no later than 60 days following the Commission's approval, 
which effective date shall be no sooner than six months following the 
Commission's approval.
    The text of the proposed rule change is available on the MSRB's Web 
site at www.msrb.org/Rules-and-Interpretations/SEC-Filings/2017-Filings.aspx, 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 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
Minimum Denomination Requirements
    The minimum denomination of an issue of municipal securities is the 
minimum amount that may be sold or otherwise transferred, and is 
determined by the issuer at issuance. Existing MSRB Rule G-15(f) 
generally prohibits a broker, dealer or a municipal securities dealer 
(``dealer'') from effecting a customer transaction in a municipal 
security in an amount lower than the minimum denomination of the issue 
(the ``prohibition''), and provides two exceptions to the prohibition. 
The policy underlying the prohibition is to protect investors from 
holding positions that are smaller than the limits established by the 
issuer.\3\
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    \3\ See Securities Exchange Act Release No. 45338 (January 25, 
2002), 67 FR 6960 (February 14, 2002) (SR-MSRB-2001-07).
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    The exceptions to the prohibition are provided to help preserve the 
liquidity of customers' below-minimum denomination positions, without 
creating an additional number of below-minimum denomination positions 
where there once was one.\4\ Under the first exception, Rule G-
15(f)(ii), a dealer is not prohibited from purchasing from a customer a 
municipal security in an amount below the minimum denomination of the 
issue, if the dealer determines, either by relying upon customer 
account information in its possession or upon a written statement by 
the customer as to its position in the issue, that the customer is 
selling its entire position in such issue. Under the second exception, 
Rule G-15(f)(iii), a dealer is not prohibited from selling to a 
customer a municipal security in an amount below the minimum 
denomination of the issue if the dealer determines that the position 
being sold is the result of a customer--either the dealer's customer or 
the customer of another dealer--fully liquidating its position in such 
issue that was below the minimum denomination of the issue. In such 
sales of a below-minimum denomination position to a customer, the 
dealer must provide written disclosure to the customer that the 
quantity of securities being sold is below the minimum denomination of 
the issue of municipal securities, which may, unless the customer has 
other securities from the issue that can be combined to reach the 
minimum denomination, adversely affect the liquidity of the position 
(the ``minimum denomination sale disclosure'').\5\
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    \4\ Id.
    \5\ The exceptions in the rule do not purport to displace 
contractual restrictions as to minimum denominations set forth in a 
bond indenture of an issue. In addition, the rule does not resolve 
whether transfers of securities positions that are below the minimum 
denomination pursuant to the exceptions to the prohibition are legal 
or contractually binding under the indenture or other bond 
documents, or comply with any applicable state or other laws or 
regulation. In this regard, the MSRB's description of a transaction 
as permitted or allowed in the proposed rule change is limited to 
mean those transactions that are not prohibited under existing Rule 
G-15(f) or proposed Rule G-49.

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[[Page 10124]]

Proposed Rule G-49, Transactions Below the Minimum Denomination of an 
Issue
    The MSRB proposes to transfer the prohibition regarding below-
minimum denomination transactions with customers, without substantive 
amendment, and the two exceptions to the prohibition and the minimum 
denomination sale disclosure, with certain amendments, from Rule G-
15(f) to proposed new Rule G-49. A third exception would be included in 
the proposed rule, which would permit a dealer to sell a below-minimum 
denomination position to one or more customers that have a position in 
the issue and any remainder to a maximum of one customer that does not 
have a position in the issue. Proposed Rule G-49 also would 
significantly amend, in the existing exception regarding dealer sales 
to customers, the requirement that a dealer determine, by receipt of a 
written statement provided by the party from which the dealer purchases 
the below-minimum denomination securities position, that the position 
acquired from such dealer and being sold to a customer is the result of 
a customer's liquidation of its entire below-minimum denomination 
position (the ``liquidation statement''). Regarding the liberalization 
of that requirement, proposed Rule G-49 would apply restrictions to 
inter-dealer transactions in below-minimum denomination positions. 
Proposed Rule G-49 would also eliminate, for a narrowly defined group 
of below-minimum denomination transactions, a dealer's obligation to 
provide the minimum denomination sale disclosure to its customer. Based 
on the organization of these related provisions in proposed Rule G-49, 
the existing minimum denomination provisions in Rule G-15(f) would be 
rescinded.
The Prohibition
    The MSRB proposes to relocate the prohibition applicable to dealer-
customer transactions below the minimum denomination of an issue of 
municipal securities from Rule G-15(f)(i) to proposed Rule G-49(a), 
subject only to technical changes, including amending the cross-
referenced provisions to reflect the renumbering of such provisions in 
proposed Rule G-49.
Exceptions to the Prohibition
    The MSRB proposes to transfer the two existing exceptions to the 
prohibition from existing Rule G-15(f) to proposed Rule G-49, establish 
an additional exception permitting certain additional dealer sales to 
customers consistent with the policies underlying the existing rule, 
and eliminate an informational requirement, the liquidation statement, 
applicable to dealers regarding another dealer's customer, which would 
liberalize the existing exception applicable to dealer sales to 
customers.
    Dealer Purchase from a Customer. The MSRB proposes to relocate, 
without substantive amendment, the exception under which a dealer may 
purchase a below-minimum denomination position from a customer, if the 
dealer determines that the customer's position in the issue already is 
below the minimum denomination and the customer's entire position will 
be liquidated by the transaction. The existing exception in Rule G-
15(f)(ii) would be renumbered as proposed Rule G-49(b)(i) (the ``dealer 
purchase exception''). In connection with the dealer purchase 
exception, existing Rule G-15(f)(ii) requires the dealer to determine 
that the customer is liquidating its entire below-minimum denomination 
position based upon the customer account information in the dealer's 
possession or a written statement by the customer of the customer's 
position in the issue. This requirement would be retained and 
transferred to proposed Rule G-49(b)(iii), a separate paragraph that 
would contain requirements of general applicability regarding dealer 
purchases from, and, as discussed below, dealer sales to, customers of 
below-minimum denomination positions in municipal securities.
Dealer Sales to Customers
    Dealer Sale Solely to One Customer. The MSRB also proposes to 
relocate the exception that permits a dealer to sell an entire below-
minimum denomination position solely to one customer from existing Rule 
G-15(f)(iii) to proposed Rule G-49(b)(ii)(A) (a ``dealer sale 
exception''). In connection with this dealer sale exception, existing 
Rule G-15(f)(iii) requires the dealer to make a determination that the 
below-minimum denomination position to be sold is the result of a 
customer fully liquidating a below-minimum denomination position, as 
described in existing Rule G-15(f)(ii), and in making this 
determination the dealer may rely upon customer account records in the 
dealer's possession or a liquidation statement that is provided by the 
party from which the securities were purchased. The MSRB proposes to 
retain the requirement that a dealer determine that the customer that 
sold the below-minimum denomination position fully liquidated its 
position, but only in those cases where the dealer buys a below-minimum 
denomination position from one of its own customers. Conversely, the 
MSRB does not propose to retain in proposed Rule G-49(b)(ii)(A) as 
reorganized, the existing requirement in Rule G-15(f) that a dealer 
determine that a customer of another dealer fully liquidated its 
position, in those cases where a dealer obtains the below-minimum 
denomination position from another dealer, as discussed below. (See, 
infra, ``Elimination of Liquidation Statement/Inter-Dealer 
Transactions'').
    Also, the existing exception for dealer sales, Rule G-15(f)(iii), 
requires a dealer to provide its customer, at or before the completion 
of the transaction, the minimum denomination sale disclosure. This 
disclosure requirement would be retained in proposed Rule G-49, but 
would be set forth in a separate paragraph that would be applicable to 
dealer sales to customers effected using either the dealer sale 
exception (i.e., the exception permitting a sale of a below-minimum 
denomination position to a single customer, which is renumbered as 
proposed G-49(b)(ii)(A)) or the additional dealer sale exception, in 
proposed Rule G-49(b)(ii)(B), discussed below.
    Dealer Sale to One or More Customers. The MSRB also proposes to 
establish an additional exception to the prohibition, which would 
permit a dealer to sell a below-minimum denomination position to one or 
more customers. The additional dealer sale provision, proposed Rule G-
49(b)(ii)(B), would not prohibit a dealer from selling an entire below-
minimum denomination position to one or more customers that have a 
position in the issue, and selling any remainder of such position to a 
maximum of one customer that does not have a position in the municipal 
securities issue, even if the transaction(s) would not result in a 
customer increasing its position to an amount at or above the minimum 
denomination of the issue. The additional proposed dealer sale 
exception is intended to provide dealers and customers additional 
flexibility to effect customer transactions involving below-minimum 
denomination positions in municipal securities, consistent with the 
policies underlying the existing rule. As similarly required in the 
existing dealer sale exception (renumbered as proposed Rule G-
49(b)(ii)(A)), in those cases where a dealer intends to use the 
additional dealer sale exception set forth as proposed Rule G-
49(b)(ii)(B), and buys a below-minimum denomination position from one 
of its own customers,

[[Page 10125]]

the dealer would be required to determine that the selling customer 
fully liquidated its below-minimum denomination position. Also 
consistent with the existing dealer sale exception, the additional 
proposed dealer sale exception would not include the liquidation 
statement requirement, as discussed in greater detail below. (See, 
infra, ``Elimination of Liquidation Statement/Inter-Dealer 
Transactions'').
Elimination of Liquidation Statement/Inter-Dealer Transactions
    The existing dealer sale exception in Rule G-15(f)(iii) requires a 
dealer to determine that the securities position to be sold to a 
customer is the result of another customer fully liquidating a below-
minimum denomination position. As noted above, in cases where the 
dealer acquires the below-minimum denomination position from another 
dealer, the acquiring dealer that desires to sell the position to its 
customer is required to obtain a written statement from the other 
dealer, referred to herein as a liquidation statement, verifying that 
the securities position to be sold is the result of another customer 
fully liquidating its below-minimum denomination position. This 
requirement, and, when a dealer buys securities from a customer, a 
similar requirement that the dealer determine that the customer fully 
liquidated its below-minimum denomination position in such sale, are 
designed to permit trading in such positions for the protection of 
investors that own below-minimum denomination positions without 
creating additional below-minimum denomination positions where there 
once was one. Without such limiting conditions, a single below-minimum 
denomination position may, as traded, be restructured as two or many 
more below-minimum denomination positions.
    Several commenters raised concerns regarding the adverse impact 
that the existing liquidation statement requirement has on dealers' 
willingness to provide liquidity for below-minimum denomination 
positions held by customers, and the difficulty of complying with the 
liquidation statement requirement in positioning such securities for 
sale using an alternative trading system (``ATS'') or through a 
brokers-broker. These and other comments are discussed in greater 
detail below. In response to such concerns, the MSRB proposes to 
eliminate the requirement to obtain the liquidation statement from the 
existing dealer sale exception (renumbered as proposed Rule G-
49(b)(ii)(A)), and would not apply the requirement as a condition of 
the additional dealer sale exception set forth in proposed Rule G-
49(b)(ii)(B).
    Prior to determining that proposed Rule G-49 would be so modified, 
however, the MSRB carefully considered the ramifications and benefits 
of such action. Without the restraint imposed by the requirement to 
obtain a liquidation statement, the MSRB is concerned that dealers, in 
inter-dealer transactions in below-minimum denomination positions, may 
create additional below-minimum denomination positions. Moreover, the 
MSRB is concerned that such positions may then be sold to customers. 
This result would be contrary to the policy underlying the existing 
rule, which is to protect investors from holding positions that are 
smaller than the limits established by the issuer, and to provide 
liquidity for investors holding such positions, without creating 
additional below-minimum denomination positions where there once was 
one. To deter the creation of additional and potentially smaller and 
less liquid below-minimum denomination positions in municipal 
securities for the protection of investors, the MSRB believes that the 
proposed elimination of the liquidation statement should be coupled 
with proposed Rule G-49(c). Proposed Rule G-49(c) would prohibit a 
dealer, in an inter-dealer transaction, from selling less than all of a 
below-minimum denomination position that such dealer acquired either 
from a customer making a total liquidation or from another dealer, and 
would provide an additional safeguard to counter the possible impact of 
the proposed elimination of the liquidation statement. Although some 
commenters that sought the elimination of the liquidation statement did 
not favor the inclusion of the inter-dealer limitation on trading, the 
MSRB believes that the proposed inter-dealer limitation on trading is 
necessary and appropriate for the protection of investors considering 
the proposed elimination of the liquidation statement. Although the 
proposed limitation on inter-dealer transactions may affect some 
transactions in below-minimum denomination positions in municipal 
securities, based on the commenters' views, the proposed elimination of 
the liquidation statement should result in significantly greater 
liquidity for such positions.
Disclosure
    The existing disclosure provision in Rule G-15(f) requires a dealer 
in every transaction in which the dealer sells a below-minimum 
denomination position to a customer to provide the customer a minimum 
denomination sale disclosure (i.e., a written statement that the sale 
is of a below-minimum denomination position and this may adversely 
affect the liquidity of the position unless the customer has other 
securities from the issue that could be combined to reach the minimum 
denomination). The minimum denomination sale disclosure must be made at 
or before the completion of the transaction, and may be included on the 
customer's confirmation or may be provided on a separate document.
    The MSRB proposes to relocate, with one amendment, the requirements 
in existing Rule G-15(f) regarding disclosure to proposed Rule G-
49(b)(iii), a paragraph that would contain requirements of general 
applicability regarding dealer purchases from, and sales to, customers 
of below-minimum denomination positions in municipal securities. The 
proposed amendment would narrow the scope of the provision, eliminating 
the requirement that a dealer make the minimum denomination sale 
disclosure in cases where the dealer would effect a sale of securities 
that would result in the customer having a position at or above the 
minimum denomination. The amendment would not adversely impact investor 
protection because the disclosure would be of limited relevance to 
customers holding such positions.
2. Statutory Basis
    Section 15B(b)(2) of the Exchange Act \6\ provides that
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    \6\ 15 U.S.C. 78o-4(b)(2).

[t]he Board shall propose and adopt rules to effect the purposes of 
this title with respect to transactions in municipal securities 
effected by brokers, dealers, and municipal securities dealers and 
advice provided to or on behalf of municipal entities or obligated 
persons by brokers, dealers, municipal securities dealers, and 
municipal advisors with respect to municipal financial products, the 
issuance of municipal securities, and solicitations of municipal 
entities or obligated persons undertaken by brokers, dealers, 
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municipal securities dealers, and municipal advisors.

    Section 15B(b)(2)(C) of the Exchange Act \7\ provides that the 
MSRB's rules shall

be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities and 
municipal financial products, to remove impediments to and perfect 
the

[[Page 10126]]

mechanism of a free and open market in municipal securities and 
municipal financial products, and, in general, to protect investors, 
municipal entities, obligated persons, and the public interest.
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    \7\ 15 U.S.C. 78o-4(b)(2)(C).

    The MSRB believes that the proposed rule change is consistent with 
the Act in that proposed new Rule G-49, regarding transactions below 
the minimum denomination of an issue, like its predecessor, Rule G-
15(f),\8\ is designed to protect investors and issuers of municipal 
securities, with respect to transactions in municipal securities 
effected by dealers, from fraudulent and manipulative acts and 
practices and to promote just and equitable principles of trade. 
Proposed Rule G-49 is intended to deter the creation of positions in 
issues of municipal securities that are inconsistent with the issuer's 
determination of the appropriate minimum denomination of such issue to 
be held by investors, and, in doing so, will aid in the prevention of 
fraudulent and manipulative acts and practices and transactions 
effected by dealers that are not consistent with the minimum 
denomination requirements of an issue of municipal securities. In 
addition, proposed Rule G-49 will facilitate just and equitable 
principles of trade, generally prohibiting dealers from effecting 
transactions involving below-minimum denomination positions with 
customers that may not fully understand that the position is below the 
minimum denomination or that such attribute may make the position less 
liquid if the customer subsequently desires to sell the position. Also, 
the exceptions, as amended, and an additional proposed exception, are 
designed to provide greater liquidity than under existing Rule G-15(f) 
for such positions if held by customers, for the protection of the 
public, with limitations on such exceptions and related limitations on 
inter-dealer transactions, that are necessary and appropriate to 
protect investors from the creation by dealers and acquisition by 
customers of additional below-minimum denomination positions that may 
be difficult to liquidate subsequently and are contrary to requirements 
established by issuers.
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    \8\ See Securities Exchange Act Release No. 45338 (January 25, 
2002), 67 FR 6960 (February 14, 2002) (SR-MSRB-2001-07).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Section 15B(b)(2)(C) of the Exchange Act \9\ requires that MSRB 
rules not be designed to impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Act. The MSRB has 
considered the economic impact associated with this proposed rule 
change, including in comparison to reasonable alternative regulatory 
approaches, relative to the baseline. As part of this process, in two 
notices requesting comment, the MSRB solicited comment on any potential 
burden on competition posed by the proposed rule change.\10\
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    \9\ 15 U.S.C. 78o-4(b)(2)(C).
    \10\ Request for Comment on Draft Amendments to MSRB Rule G-
15(f) on Minimum Denominations, MSRB Notice 2016-13, dated April 7, 
2016 (``First Request for Comment''). Second Request for Comment on 
Draft Provisions on Minimum Denominations, MSRB Notice 2016-23, 
dated September 27, 2016 (``Second Request for Comment''). The 
notices incorporated the MSRB's preliminary economic analysis. The 
comments and the MSRB's responses thereto are discussed in the next 
section of the proposed rule change.
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    The MSRB believes that the proposed rule has potential benefits 
including reducing the number of investor positions below minimum 
denominations, increasing the ability of investors currently holding 
positions below minimum denominations to exit those positions and/or 
reducing the burden on dealers associated with implementing the minimum 
denomination regulatory provisions in existing Rule G-15(f), renumbered 
as proposed Rule G-49. The MSRB recognizes that some dealers may incur 
costs should they utilize the proposed exceptions, but as the choice of 
whether and when to exercise these exceptions is wholly within a 
dealer's volition, the MSRB does not believe that the creation of 
exceptions per se would necessarily result in any new costs for 
dealers.
    The proposed rule does not impact the choices available to issuers 
in determining minimum denominations as part of the offering documents. 
Issuers would continue to select the denomination level that they 
believe to be optimal for purposes of suitability or for purposes of 
enhancing secondary market liquidity of traded issues. Therefore, the 
MSRB believes that competition in the primary issuer market would not 
be affected by the adoption of this proposed rule.
    The MSRB believes that larger dealers with larger inventories and 
larger numbers of customers may be better positioned to exercise the 
exceptions offered under the proposed rule, but does not believe that 
this significantly improves their competitive position or overly 
burdens those dealers that are less able to exercise the exceptions. 
Therefore, the MSRB does not believe that the proposed rule change will 
impose any additional burdens on competition in the dealer market, 
relative to the baseline, that are not necessary or appropriate in 
furtherance of the purposes of the Act.
    The MSRB does not believe that the proposed rule is likely to 
result in a net increase in the number of positions below the minimum-
denomination amounts. The MSRB also has no reason to believe that any 
new positions below minimum-denomination amounts associated with the 
proposed rule would be held by a significantly different or less 
sophisticated group of investors than the group currently holding such 
positions. Therefore, the MSRB does not believe that there are any 
additional costs for investors and the proposed rule may, as discussed 
above, reduce costs for investors holding such below-minimum 
denomination positions by generally improving liquidity for those 
investors.

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

    In 2016, the MSRB twice sought comment on proposed amendments to 
provisions relating to below-minimum denomination customer 
transactions, first as proposed amendments to Rule G-15(f) (the 
``initial draft rule'') and subsequently as draft Rule G-49.\11\ The 
MSRB received 10 comment letters in response to the First Request for 
Comment,\12\ and seven comment letters in response to the Second 
Request for Comment.\13\ The comment letters are

[[Page 10127]]

summarized below by topic and the MSRB's responses are provided.
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    \11\ See n.10, supra.
    \12\ The ten comment letters received in response to the First 
Request for Comment were from the following: American Municipal 
Securities, Inc. (``AMS''): Letter from Michael Petagna, President, 
dated May 25, 2016; Breena LLC (``Breena''): Email from G. Letti, 
dated April 19, 2016; Bond Dealers of America (``BDA''): Letter from 
Mike Nicholas, Chief Executive Officer, dated May 25, 2016; Center 
for Municipal Finance (``CMF''): Letter from Marc D. Joffe, 
President, dated April 7, 2016; Email from Thomas Kiernan 
(``Kiernan''), dated April 7, 2016; Neighborly.com (``Neighborly''): 
Email from Jase Wilson, dated May 25, 2016; Regional Brokers, Inc. 
(``Regional Brokers''): Letter from H. Deane Armstrong, CCO, not 
dated; Securities Industry and Financial Markets Association 
(``SIFMA''): Letter from Leslie M. Norwood, Managing Director and 
Associate General Counsel, dated May 25, 2016; Vista Securities 
(``Vista''): Email from Rick DeLong, dated May 9, 2016; and Wells 
Fargo Advisors, LLC (``Wells Fargo''): Letter from Robert J. 
McCarthy, Director of Regulatory Policy, dated May 25, 2016.
    \13\ The seven comment letters received in response to the 
Second Request for Comment were from the following: BDA: Letter from 
Mike Nicholas, Chief Executive Officer, dated October 18, 2016; 
Financial Services Institute (``FSI''): Letter from David T. 
Bellaire, Executive Vice President and General Counsel, dated 
October 11, 2016; Georgetown University McDonough School of Business 
(``Georgetown''): Letter from James J. Angel (``Angel''), Associate 
Professor of Finance, dated October 22, 2016; Email from G. Letti 
(``Letti''), dated September 27, 2016; National Association of Bond 
Lawyers (``NABL''): Letter from Clifford M. Gerber, President, dated 
December 23, 2016; Romano Brothers & Co. (``Romano''): Letter from 
Eric Bederman, Chief Operating & Compliance Officer, dated October 
18, 2016; and SIFMA: Letter from Leslie M. Norwood, Managing 
Director and Associate General Counsel, dated October 18, 2016.
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General Comments
    Several commenters, including BDA, SIFMA and Wells Fargo, 
responding to the initial draft rule in the First Request for Comment, 
expressed general support for the MSRB's proposal to create additional 
exceptions to the prohibition that would be consistent with the 
existing rule's original intent to protect investors that own below-
minimum denomination positions in municipal securities without creating 
an additional number of below-minimum denomination positions. 
Commenters generally noted that providing additional options for 
dealers to sell such securities to customers may increase liquidity and 
improve pricing. At the same time, commenters, including AMS, BDA, 
Vista and SIFMA, stated that the regulation of, and regulatory 
uncertainty regarding below-minimum denomination positions adversely 
affects the liquidity and value of these positions in the secondary 
market in that dealers are not willing to actively bid securities in 
amounts below the minimum denomination, and that legitimately created, 
high-credit quality but nonconforming customer positions are 
artificially devalued, leaving customers unable to liquidate at a 
reasonable bid.
    In response to the Second Request for Comment, three commenters, 
FSI, Letti, and Romano, indicated general support and approval of draft 
Rule G-49. Two of the three commenters, FSI and Romano, commented that 
the draft provisions would improve liquidity and make it easier for a 
customer holding a below-minimum denomination position to sell the 
securities. FSI stated that the stand-alone rule would make the 
provisions clearer and more accessible. In FSI's view, draft Rule G-49 
would strike the appropriate balance between enhancing liquidity and 
restricting creation of additional below-minimum denomination 
positions, and the draft rule, with the liquidation statement 
eliminated, should be adopted. Letti commented that draft Rule G-49 was 
simple, well-written and easy to understand.
    Two commenters, SIFMA and BDA, expressed appreciation that 
revisions to the minimum denomination provisions were being considered 
to provide greater flexibility for dealers and investors, noting that 
some of the changes would improve the rule. These commenters also 
requested the MSRB to make additional significant amendments to draft 
Rule G-49. In SIFMA's view, the proposed exceptions would not 
appropriately balance the interests of issuers, customers, dealers and 
the market, and some would create additional challenges for dealers and 
less liquidity for customers. BDA expressed concerns that the rule was 
extraordinarily complex, predicting that dealers would be confused, and 
differ over interpretations of permissible transactions under the rule, 
which would leave customers holding positions that they would not be 
able to trade, or would be able to trade but only at inferior prices.
    One commenter, Angel, did not support any aspect of draft Rule G-
49, stating that existing Rule G-15(f) should be rescinded instead of 
amended.
Existing and Additional Exceptions
    In response to the First Request for Comment, several commenters 
requested that additional exceptions to the prohibition be 
incorporated. BDA, AMS, Vista, SIFMA and Wells Fargo generally 
commented that, in their view, the circumstances of the creation of a 
below-minimum denomination account (e.g., by allocations of an 
investment advisor, the settlement of an estate or the division of 
marital assets, or call provisions that permit calls in amounts 
inconsistent with the minimum denomination) should be considered in the 
changes being considered, and in some cases, as a basis for an 
exception (without providing a specific structure for such exception), 
so that investors would not be penalized.\14\ BDA and Wells Fargo also 
suggested an exception to permit a customer to liquidate some but not 
all of its below-minimum denomination position. Kiernan requested that 
the MSRB consider adding an exception for refunded bonds subject to a 
high minimum denomination, because, in his view, the repayment risk is 
mitigated.
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    \14\ For example, SIFMA suggested that an exception should apply 
when the customer's position is a result of an allocation to the 
managed account by the customer's investment adviser. BDA requested 
a provision be included that would grant a dealer additional 
flexibility when such customer positions are created in 
circumstances beyond a dealer's control. In response to the Second 
Request for Comment, SIFMA repeated its concern for investors 
holding below-minimum denomination positions due to such 
circumstances or actions over which they have no control.
---------------------------------------------------------------------------

    In response to the Second Request for Comment, two commenters, BDA 
and SIFMA, stated that dealers should not be constrained in their 
transactions involving below-minimum denomination positions with 
customers under the additional dealer sale exception, proposed Rule G-
49(b)(ii)(B), and the exception should be liberalized to allow a dealer 
selling a portion of a below-minimum denomination position to a 
customer also to sell a portion of the position to one or more dealers. 
SIFMA commented that such sales (i.e., sales of a portion of a below-
minimum denomination position to one or more dealers) should be allowed 
at the same time as the sales to customers or thereafter. In SIFMA's 
view, this approach would not increase the number of below-minimum 
denomination positions, and if not adopted, liquidity would be hampered 
unnecessarily.
    The MSRB has carefully reviewed the changes suggested by the 
commenters. Some of the additional exceptions, or amendments to 
existing exceptions, suggested by commenters would not provide 
sufficient additional flexibility to benefit customers. In addition, 
such changes could result in the creation of additional below-minimum 
denomination positions, which likely would be transferred ultimately to 
customers. The creation of additional minimum denomination positions 
would be contrary to the original policies of existing Rule G-15(f) to 
protect investors that own below-minimum denomination positions but, at 
the same time, not allow or facilitate the creation of additional 
below-minimum denomination positions. The MSRB believes that the 
existing exceptions and the additional proposed exception are 
structured to provide customer protection and, at the same time, avoid 
increasing the number of below-minimum denomination positions held by 
customers, and the changes suggested above should not be incorporated 
in proposed Rule G-49.
    Liquidation Statement and Inter-Dealer Limitation. In response to 
the initial draft rule in the First Request for Comment, several 
commenters, including SIFMA, BDA and Regional Brokers, stated that, in 
facilitating the sale to a customer of a below-minimum denomination 
position using the existing dealer sale exception (renumbered as 
proposed Rule G-49(b)(ii)(A)) or the proposed additional dealer sale 
exception (renumbered as proposed Rule G-49(b)(ii)(B)), in any inter-
dealer trade occurring in connection with such sale, the dealer that is 
acquiring the securities from another dealer should not be required to 
obtain a liquidation statement. Vista commented that the

[[Page 10128]]

liquidation statement requirement has merit for securities having a 
minimum denomination of $100,000 (or more) to protect unsophisticated 
investors, but is unnecessary for securities not subject to such 
minimum denomination requirements. AMS suggested that the liquidation 
statement requirement should not apply to positions of less than $5,000 
to enhance their liquidity. SIFMA, BDA, Vista and Regional Brokers 
believed that the liquidation statement requirement discourages many 
traders from bidding on such positions and its elimination would 
improve liquidity. Commenters, including Vista and SIFMA, noted that 
below-minimum denomination positions often are transferred using 
alternative trading systems (``ATSs''), or, in some cases, brokers-
brokers, and, in their view, requiring the liquidation statement in 
such venues creates an unnecessary impediment to trading such 
positions. Also, commenters, including BDA and SIFMA, noted that the 
liquidation statement requirement raises concerns because dealers 
bidding to buy a below-minimum denomination position do not immediately 
know the counter-party's customer, and the provision requires dealers 
to ``look through'' to ascertain the account-level information and 
identity of the customer of its counterparty. Commenters expressed 
concern that a dealer's compliance with any dealer sale exception 
requiring a liquidation statement is reliant upon the selling dealer 
and the ATS (or the brokers-broker) providing the appropriate written 
verification, and a dealer may be penalized if it cannot prove the 
complete customer liquidation occurred.
    In response to the comments received, the draft rule published for 
comment in the Second Request for Comment eliminated the requirement 
that a dealer obtain a liquidation statement when a dealer obtains a 
below-minimum denomination position from another dealer. However, the 
elimination of the liquidation statement was coupled with a new 
requirement, draft Rule G-49(c), which would prohibit dealers from 
breaking up below-minimum denomination positions in sales to other 
dealers to deter the creation of additional below-minimum denomination 
positions.\15\
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    \15\ As noted, supra, the MSRB recognized that the two proposed 
amendments set forth in draft Rule G-49 should be considered 
together, in that without the restraint imposed by the liquidation 
statement, the MSRB was concerned that existing below-minimum 
denomination positions might fracture into additional below-minimum 
positions in inter-dealer trading, and come to rest with multiple 
customers.
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    In response to the Second Request for Comment, although several 
commenters, including FSI, SIFMA and BDA, commented favorably on the 
proposed elimination of the liquidation statement in proposed Rule G-
49, certain commenters, including SIFMA and BDA, commented unfavorably 
on proposed Rule G-49(c). SIFMA and BDA urged that proposed Rule G-
49(c) be deleted, commenting that it would result in a loss of dealer 
flexibility and impair the liquidity of below-minimum denomination 
positions. SIFMA also commented that the proposed inter-dealer 
provision is unwarranted and inconsistent with the protection of 
customers, stating that dealers should be permitted to accumulate 
below-minimum denomination positions without limitation, and sell such 
positions to a customer to add to a customer's existing below-minimum 
denomination position.\16\ In SIFMA's view, the proposed inter-dealer 
provision bears no relationship to the MSRB's proposal to eliminate the 
liquidation statement requirement. Finally, SIFMA opposes proposed Rule 
G-49(c) because SIFMA believes that the sole purpose of the existing 
rule provisions is to prohibit dealers from effecting below-minimum 
denomination transactions with customers. The MSRB has considered the 
comments carefully and concludes that proposed Rule G-49(c) should not 
be eliminated, for the same reasons that the MSRB believes that the 
dealer purchase and dealer sale exceptions should not be broadened. The 
elimination of the liquidation statement requirement in the proposed 
dealer sale exceptions in proposed Rule G-49, if not coupled with the 
incorporation of proposed Rule G-49(c), would permit a dealer to sell 
other dealers additional below-minimum denomination positions, which 
would likely be eventually transferred to customers, and would be 
inconsistent with the policy goals underlying the rule. The MSRB 
believes that, with the inclusion of proposed Rule G-49(c) and the 
elimination of the liquidation statement, proposed Rule G-49 will 
accomplish the policies underlying the existing rule and intended in 
the proposed rule change.
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    \16\ BDA similarly commented that, at least regarding a 
transaction to be effected pursuant to the additional dealer sale 
exception in proposed Rule G-49(b)(ii)(B), a dealer should not be 
subject to the prohibition in proposed Rule G-49(c) if a dealer 
desired to sell a portion of a below-minimum denomination position 
to another dealer, or if a dealer desired to purchase such a partial 
position. However, in the discussion, supra, the MSRB indicated that 
it does not believe it is appropriate to amend the relevant dealer 
sale exception (for sales to customers) in proposed Rule G-49 to 
permit the type of inter-dealer sales or purchases suggested by BDA 
and SIFMA.
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    Deletion of a Dealer Sale Exception. In response to the Second 
Request for Comment, SIFMA commented that the second additional dealer 
sale exception, then numbered as draft Rule G-49(b)(iii), was redundant 
and should be deleted.\17\ The MSRB agrees that most of the more common 
scenarios that arise would be covered by the dealer sale exceptions in 
proposed Rule G-49(b)(ii)(A) and (B). In response to the commenter's 
suggestion, the MSRB proposes to omit the second dealer sale exception 
referenced in draft Rule G-49. The omission also will clarify and 
simplify the rule, and thus, is responsive to a second commenter's 
concern regarding the complexity of the draft rule.
---------------------------------------------------------------------------

    \17\ The initial draft amendments included a third dealer sale 
exception (then numbered as initial draft Rule G-15(f)(iv)), which 
would have required a dealer that desired to sell a below-minimum 
denomination position to more than one customer: (i) To sell to one 
customer already having a position, the number of securities needed 
to bring the position of the customer up to or above the minimum 
denomination of the issue; and (ii) to sell, to one or more 
additional customers, each already having a position, the remaining 
portion of the below-minimum position. The draft third dealer sale 
exception, set forth in the Second Request for Comment as draft Rule 
G-49(b)(iii), did not require that one customer's position be 
brought up to or over the minimum denomination of the issue, and, 
with the elimination of that requirement, became substantially 
similar to the dealer sale exception set forth in draft Rule G-
49(b)(ii)(B).
---------------------------------------------------------------------------

Other Comments
    Contractual Requirements. In response to the Second Request for 
Comment, NABL stated that authorized denominations, including the 
minimum denomination, of an issue are determined by the issuer at 
issuance. Further, such requirements, which are typically included in 
the bond indenture, bond ordinance, or resolution, are part of the bond 
contract and may be modified only in accordance with the specific terms 
of the contract governing modifications. Noting that the MSRB is not a 
party to such contracts, the commenter stated that ``whether the MSRB 
permits sales of municipal securities in less than the minimum 
denomination, or in anything other than an authorized denomination, is 
ineffective to determine whether such transfers are legal or 
contractually binding under the bond documents.'' According to the 
commenter, such requirements are in the bond documents with the intent 
that sales and transfers of bonds will be made only in compliance with 
such requirements, including transfers effected by book

[[Page 10129]]

entry in The Depository Trust Company.\18\ Although NABL appreciated 
the desire to improve liquidity for investors, the commenter also 
stated that any effort to do so should be consistent with issuer 
requirements set forth in bond documents, suggesting that in its 
deliberations of proposed Rule G-49, the MSRB should strive, in its 
rule, to decrease rather than hold steady (or increase) the number of 
below-minimum denomination positions; consider whether the MSRB rule 
should actively discourage or prevent sales of below-minimum 
denomination positions to investors not already having an existing 
position in the security; and consider whether more could be done to 
facilitate compliance with bond documents (e.g., improvements to 
trading platforms, transaction mechanics, including minimum 
denominations in the data reported under Rule G-32), and ensure that 
investors are not trading in below-minimum denomination positions.
---------------------------------------------------------------------------

    \18\ According to the commenter, the book-entry system of 
registration, while facilitating securities transfers, also has 
removed the entities--the bond trustee and issuer's paying agent--
that police the denomination requirements in transfers.
---------------------------------------------------------------------------

    The MSRB has carefully considered the issues raised by the 
commenter relating to the requirements in the bond documents as 
established by the issuer. For the protection of investors, the MSRB 
believes that proposed Rule G-49 would balance the need for liquidity 
in such positions for the protection of customers holding such 
positions, while continuing a general and broad prohibition against 
trading in such positions for the protection of issuers establishing 
such requirements. In developing the proposed rule, the MSRB carefully 
crafted any exception to the prohibition so that the number of 
customers holding below-minimum denomination positions would not 
increase as a result of transactions effected using the rule. However, 
for purposes of protecting customers already holding such positions by 
providing additional liquidity for such customers, the proposed rule 
also would not require that a transaction effectively result in fewer 
persons holding such below-minimum denomination positions. The MSRB 
notes that it has not, in the past, nor in considering proposed Rule G-
49, represented that transactions effected pursuant to the rule(s) 
would remedy any contractual or other legal issues or deficiencies 
regarding such below-minimum denomination transfers. The exceptions to 
general prohibition are precisely that--exceptions to the prohibition--
and do not purport to impact any other legal rights or obligations. The 
MSRB also notes that certain issues and suggestions raised by the 
commenter exceed the jurisdiction of the MSRB (e.g., issues regarding 
book-entry transfers and the improvement of trading platforms). After 
considering all such issues, the MSRB continues to believe that 
proposed Rule G-49 represents the appropriate balance among the 
competing policies involved.
    Threshold. In response to the Second Request for Comment, BDA 
commented that the prohibition against trading below a minimum 
denomination of an issue in draft Rule G-49 should be limited in 
application to transactions in municipal securities having higher 
minimum denominations, such as $100,000 (or possibly $20,000 or 
$50,000) because, according to BDA, securities having higher minimum 
denominations are those that may raise heightened security concerns and 
the suggested change would focus the prohibition and the exceptions on 
such municipal securities. As previously discussed, the MSRB originally 
adopted the prohibition in existing Rule G-15(f) against trading with a 
customer in a below-minimum denomination position in part to respond to 
issuer concerns regarding below-minimum denomination positions being 
sold to retail customers, noting that in some cases issuers explicitly 
stated that higher minimum denominations had been established in light 
of the risks the issuer attributed to a particular issue.\19\ However, 
an issuer should be free to set the minimum denomination of a 
particular issue of municipal securities as it deems appropriate, 
weighing many factors, include risks, and the MSRB declines to adopt 
the commenter's suggestion to create a minimum denomination threshold, 
below which proposed Rule G-49 would not apply.
---------------------------------------------------------------------------

    \19\ See Second Request for Comment.
---------------------------------------------------------------------------

    Rescission. In response to the Second Request for Comment, one 
commenter, Angel, stated that existing Rule G-15(f) should be 
rescinded. In the commenter's view, the rule is no longer necessary, 
considering the amount of information about the municipal securities 
market currently available to investors, who have information about 
issuers on EMMA and from other sources. Also, in the commenter's view, 
the complexity of the exceptions would mean customer below-minimum 
positions would remain illiquid. The commenter stated that suitability 
regulations, and regulations such as the new Department of Labor 
regulation applicable to retirement accounts provide appropriate 
protections for municipal securities investors. After considering the 
comment, the MSRB believes the general prohibition in effect for many 
years continues to serve a beneficial investor protection function, and 
is not proposing rescission.
    Disclosure to SMMPs. In response to the First Request for Comment, 
BDA suggested that dealers should not be required to provide the 
minimum denomination sale disclosure to sophisticated municipal market 
professionals (SMMPs). BDA stated that SMMPs should not be protected by 
the rule, including the requirement to receive the minimum denomination 
sale disclosure, because in all transactions with SMMPs, a dealer must 
have a reasonable basis to believe that the SMMP can evaluate market 
risk and market value independently of the dealer. The MSRB believes 
that it would be appropriate to solicit specifically the comment of 
institutional investors before considering whether the disclosure 
should be eliminated and, therefore, at this time, does not believe it 
would be appropriate to eliminate the protection for such customers.
    Compliance. In response to the Second Request for Comment, SIFMA 
commented that the annual cost of compliance for existing Rule G-15(f) 
cannot be accurately quantified, but based on anecdotes, firms may be 
spending significant resources to comply with the rule. SIFMA suggested 
that this is, in part, because regulatory scrutiny regarding below-
minimum denomination transactions has increased, creating pressure on 
compliance. SIFMA believes that compliance costs are increasing and 
that this, coupled with regulatory scrutiny and enforcement, has 
decreased liquidity for below-minimum denomination positions. Although 
the MSRB does not believe it is appropriate to revise the proposed rule 
based on concerns that liquidity has been adversely impacted due to 
regulatory scrutiny and enforcement of the existing below-minimum 
denomination requirements, the MSRB notes that the proposed rule is 
intended to provide additional flexibility for dealers and their 
customers.
    EMMA. SIFMA suggested in the response to the First and Second 
Requests for Comment that the MSRB include additional information on 
issuers' minimum denomination requirements on EMMA. In the future, the 
MSRB may consider various proposals to increase information on EMMA, 
including the minimum denomination of municipal securities,

[[Page 10130]]

as part of its longer-term review of various issues arising regarding 
market transparency.
    Trade Reporting; Rescission of Transactions. BDA suggested that 
firms be allowed to rescind and correct a transaction in a below-
minimum denomination position within a reasonable time frame. Romano 
suggested that RTRS be enhanced to include a ``flag'' denoting any 
below-minimum denomination transaction, which would allow dealers to 
review such trades on T + 1 and cancel and correct such trades if not 
effected pursuant to the appropriate exception. The changes suggested 
by BDA and Romano involve exceptions to MSRB's trade reporting rules 
and are beyond the scope of the proposed provisions on which the MSRB 
requested comment. At this time, the MSRB does not propose to amend 
such rules to incorporate the commenters' suggestions.
    Comments not Related to Proposal. Finally, several comments were 
received in response to the First and Second Requests for Comment, that 
were generally beyond the scope of the MSRB's jurisdiction (e.g., 
generally, issuers should change their practices to reduce or eliminate 
below-minimum denomination positions or positions not meeting an 
issuer's increment requirements; issuers should be informed that there 
is no regulatory requirement to use $5,000 as a minimum increment; and 
an ``official'' minimum increment of $1,000 should be considered). As a 
result, the MSRB has not considered such comments in the proposed rule 
change.
Economic Analysis
    Although commenters expressed general concerns regarding the cost 
of the regulation on below-minimum denomination transactions, no 
commenters in response to the First or Second Request for Comment 
provided data to support these concerns. Issuers set a minimum 
denomination, presumably, at a level that is consistent with receiving 
the best possible price, or desired yield, in the primary market. Thus, 
doing away with the minimum denomination entirely is not a reasonable 
regulatory alternative since this would lead to suboptimal minimum 
denominations from the perspective of the issuer.
    From the perspective of dealers, proposed Rule G-49 does not 
require dealers to exercise the exceptions to transact in amounts below 
the minimum denomination. Therefore, the costs associated with 
complying with the requirements for transactions below minimum 
denominations are not forced upon dealers. Presumably, entities only 
incur these costs when they stand to reap benefits exceeding compliance 
costs. However, to the extent that compliance costs are incrementally 
higher because of the proposed rule, dealers can be expected to engage 
in fewer profitable transactions for positions below the minimum 
denomination.
    Although commenters raised concern over the potential costs 
associated with the enforcement of minimum denominations, no commenter 
provided data or quantitative estimates in connection with the 
preliminary Economic Analysis outlined in the First and Second Requests 
for Comment. Nevertheless, to reduce uncertainty regarding the 
exceptions to this proposed rule, and in response to comments, the text 
of the proposed rule has been simplified while an additional exception 
was still incorporated.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period of up to 90 days (i) as 
the Commission may designate 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 or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 email to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2017-01 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-MSRB-2017-01. This file 
number should be included on the subject line if email 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 Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal 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-2017-01 and should be 
submitted on or before March 2, 2017.

    For the Commission, pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-02737 Filed 2-8-17; 8:45 am]
BILLING CODE 8011-01-P