Approval of Amendments Concerning Official Communications

On March 18, 2002, the Securities and Exchange Commission approved rule changes concerning official communications filed by the Municipal Securities Rulemaking Board (“MSRB”). [1]   The rule changes consist of an amendment to Rule G-15, on confirmation, clearance, settlement and other uniform practice requirements with respect to transactions with customers, and an amendment to Rule G-8, on books and records to be made by brokers, dealers and municipal securities dealers.  The rule changes became effective upon approval by the SEC.  

The Rule G-15 amendment requires brokers, dealers and municipal securities dealers (collectively “dealers”) who serve as safekeeping agents to undertake “reasonable efforts” to retransmit “official communications” to their safekeeping clients when requested to do so.  This amendment allows dealers in certain circumstances to send to the party requesting an official communication retransmittal a list of beneficial owners who do not object to the disclosure of their name, contact information and security positions (“non-objecting beneficial owners”) in lieu of retransmitting documents.  The amendment to Rule G-8 requires dealers to retain as an official record a customer’s written authorization, if any, as to the customer’s status as a non-objecting beneficial owner.  

The MSRB realizes that some dealers today retransmit documents to their customers voluntarily, or under specific terms of their safekeeping agreements, and in many cases do so without compensation from the party requesting retransmission.  It is not the intent of the rule change to discourage retransmissions of official communications in these cases.  Rather, the purpose of the rule change is to help ensure that parties needing to transmit official communications to beneficial owners would be able to depend on dealers undertaking reasonable efforts, under the explicit terms of the Rule G-15 amendment, to retransmit such official communications to the parties for whom those dealers safekeep municipal securities.  

Official Communications

The rule change defines an “official communication” as a document or collection of documents addressed to beneficial owners that was prepared or authorized by an issuer of municipal securities, a trustee for an issue of municipal securities, a state or federal tax authority or a custody agent for a stripped coupon municipal securities program in its capacity as custody agent.  These official communications may include notices of technical default or default as to payment of interest or principal, requests for votes by bondholders, update memoranda from the trustee of a defaulted issue, as well as other official communications to owners of municipal securities that are not in default. [2]  

Reasonable Efforts

The Rule G-15 amendment addresses six topics to help clarify what would constitute “reasonable efforts” to be made by a dealer in retransmitting an official communication in specific situations.  These provisions are discussed below. 

Compensation.  The Rule G-15 amendment requires dealers to retransmit official communications only if compensation is offered.  This is the same principle used in the regulations governing retransmittal of notices of proxy and other material in NASD Conduct Rule 2260 on Forwarding of Proxy and Other Materials. [3] Since the types of communications a dealer may receive and the amount of work a dealer may have to perform to retransmit notices probably will vary greatly from case to case, there is no attempt in the Rule G-15 amendment to specify exactly what adequate compensation would be in each possible case.  However, to give some guidance on this issue, the Rule G-15 amendment references the rates of compensation for transmittal of documents detailed in NASD interpretation IM-2260, on Suggested Rates of Reimbursement, relating to forwarding of proxy and other materials.  Dealers may reference this interpretation in determining reasonable clerical expenses and other expenses incurred in retransmitting an official communication. [4]   

The Rule G-15 amendment also includes a “compensation threshold.”  It states that, for retransmittals where the total compensation sought will be less than $500, the dealer should begin retransmitting immediately and ask for the calculated compensation concurrently.  For retransmittals where compensation sought will be greater than $500, the dealer either follows the general rule, or may instead promptly contact the party offering compensation, inform it of the amount of compensation required, obtain specific agreement on the amount of compensation and wait for receipt of such compensation prior to proceeding with the retransmission.  

CUSIP numbers.  An official communication may relate to many different issues of municipal securities and it may be unclear from the document exactly which issues are involved.  If CUSIP numbers are included with the official communication, the dealer can use these issue identifiers to determine which of its safekeeping clients should receive the document.  However, official communications may in some cases be disseminated without CUSIP numbers and, in these cases, it may be difficult to determine exactly which CUSIP numbers are involved.  The Rule G-15 amendment states that, if CUSIP numbers are not included with the document, the dealer must use reasonable efforts to determine the CUSIP numbers so that the appropriate safekeeping clients can be identified.  However, if these efforts do not result in a correct identification of CUSIP numbers, the failure to retransmit to those safekeeping clients who were not identified would not be considered a violation of the rule.  

Sufficient copies of official communications.  The Rule G-15 amendment does not require dealers to provide duplication services for official communications.  If a dealer does not receive enough copies of official communications for the investors for whom it safekeeps securities, the dealer may elect to provide duplication services or else must request the sufficient number of copies from the party requesting the official communications retransmittal.            

Non-objecting beneficial owners.  A non-objecting beneficial owner is a beneficial owner of municipal securities that does not object to the disclosure of its name, contact information and security positions and that has provided this notice to the dealer in writing.  For safekeeping clients who are non-objecting beneficial owners, dealers have the option of sending to the party requesting an official communication retransmittal a list of non-objecting beneficial owners along with these owners’ contact information in lieu of retransmitting documents.  The Rule G-15 amendment requires that dealers obtain an investor’s non-objecting status in writing.  The Rule G-8 amendment requires that dealers maintain such record as customer account information, which must be retained for a period of at least six years following the closing of an account pursuant to Rule G-9. 

Beneficial owners residing outside of the United States.  The Rule G-15 amendment does not require dealers to retransmit official communications to investors residing outside of the United States.

Investment advisors.  Some investors designate investment advisors to act on their behalf in submission of orders and other investment-related decisions.  In these cases, it would be important for the investment advisor to receive the official communication.  Consequently, the Rule G-15 amendment states that dealers shall send official communications to the investment advisor for a beneficial owner, rather than to the beneficial owner, when the dealer has on file a written authorization for such documents to be sent to the investment advisor in lieu of the beneficial owner.

March 25, 2002

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TEXT OF AMENDMENTS [5]

Rule G-15. Confirmation, Clearance, and Settlement of and Other Uniform Practice Requirements With Respect to Transactions with Customers

(a) through (e) No change.

(f) *Reserved for future use*

(g) Forwarding Official Communications

(i) If a broker, dealer or municipal securities dealer receives an official communication to beneficial owners applicable to an issue of municipal securities that the broker, dealer or municipal securities dealer has in safekeeping along with a request to forward such official communication to the applicable beneficial owners, the broker, dealer or municipal securities dealer shall use reasonable efforts to promptly retransmit the official communication to the parties for whom it is safekeeping the issue.

(ii) In determining whether reasonable efforts have been made to retransmit official communications, the following considerations are relevant:

(A) CUSIP Numbers. If CUSIP numbers are included on or with the official communication to beneficial owners, the broker, dealer or municipal securities dealer shall use such CUSIP numbers in determining the issue(s) to which the official communication applies. If CUSIP numbers are not included on or with the official communication, the broker, dealer or municipal securities dealer shall use reasonable efforts to determine the issue(s) to which the official communication applies; provided however, that it shall not be a violation of this rule if, after reasonable efforts are made, the issue(s) to which the official communication applies are not correctly identified by the broker, dealer or municipal securities dealer.

(B) Compensation. A broker, dealer or municipal securities dealer shall not be required by this rule to retransmit official communications without an offer of adequate compensation. If compensation is explicitly offered in or with the official communication, the broker, dealer or municipal securities dealer shall effect the retransmission and seek compensation concurrently; provided, however, that if total compensation would be more than $500.00, the broker, dealer or municipal securities dealer may, in lieu of this procedure, promptly contact the party offering compensation, inform it of the amount of compensation required, obtain specific agreement on the amount of compensation and wait for receipt of such compensation prior to proceeding with the retransmission. In determining whether compensation is adequate, the broker, dealer or municipal securities dealer shall make reference to the suggested rates for similar document transmission services found in “Suggested Rates of Reimbursement” for expenses incurred in forwarding proxy material, annual reports, information statements and other material referenced in NASD Conduct Rule 2260(g), taking into account revisions or amendments to such suggested rates as may be made from time to time.

(C) Sufficient Copies of Official Communications. A broker, dealer or municipal securities dealer is not required to provide duplication services for official communications but may elect to do so. If sufficient copies of official communications are not received, and the broker, dealer or municipal securities dealer elects not to offer duplication services, the broker, dealer or municipal securities dealer shall promptly request from the party requesting the forwarding of the official communication the correct number of copies of the official communication.

(D) Non-Objecting Beneficial Owners. In lieu of retransmitting official communications to beneficial owners who have indicated in writing that they do not object to the disclosure of their names and security positions, a broker, dealer or municipal securities dealer may instead promptly provide a list of such non-objecting beneficial owners and their addresses.

(E) Beneficial Owners Residing Outside of the United States. A broker, dealer or municipal securities dealer shall not be required to send official communications to persons outside of the United States of America, although brokers, dealers and municipal securities dealers may voluntarily do so.

(F) Investment Advisors. A broker, dealer or municipal securities dealer shall send official communications to the investment advisor for a beneficial owner, rather than to the beneficial owner, when the broker, dealer or municipal securities dealer has on file a written authorization for such documents to be sent to the investment advisor in lieu of the beneficial owner.

(iii) Definitions

(A) The terms “official communication to beneficial owners” and “official communication,” as used in this section (g), mean any document or collection of documents pertaining to a specific issue or issues of municipal securities that both:

(1) is addressed to beneficial owners and was prepared or authorized by: (a) an issuer of municipal securities; (b) a trustee for an issue of municipal securities in its capacity as trustee; (c) a state or federal tax authority; or (d) a custody agent for a stripped coupon municipal securities program in its capacity as custody agent; and

(2) contains official information about such issue or issues including, but not limited to, notices concerning monetary or technical defaults, financial reports, material event notices, information statements, or status or review of status as to taxability.

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Rule G-8.  Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a) Description of Books and Records Required to be Made.

(i) through (x) No change.

(xi) Customer Account Information.  A record for each customer, other than an institutional account, setting forth the following information to the extent applicable to such customer:

(A) through (K) No change.

(L) with respect to official communications, customer’s written authorization, if any, that the customer does not object to the disclosure of its name, security position(s) and contact information to a party identified in G-15(g)(iii)(A)(1) for purposes of transmitting official communications under G-15(g).

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