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SECURITIES AND EXCHANGE COMMISSION
File No.* SR - 2017 - * 01
WASHINGTON, D.C. 20549
Amendment No. (req. for Amendments *)
Form 19b-4
Page 1 of * 123
Filing by
Municipal Securities Rulemaking Board
Pursuant to Rule 19b-4 under the Securities Exchange Act of 1934
Initial *
Amendment *
Withdrawal
Section 19(b)(2) *
Section 19(b)(3)(A) *
Section 19(b)(3)(B) *
Rule
Extension of Time Period
for Commission Action *
Pilot
19b-4(f)(1)
Date Expires *
19b-4(f)(5)
19b-4(f)(3)
19b-4(f)(6)
Notice of proposed change pursuant to the Payment, Clearing, and Settlement Act of 2010
Section 806(e)(1) *
Security-Based Swap Submission pursuant
to the Securities Exchange Act of 1934
Section 806(e)(2) *
Exhibit 2 Sent As Paper Document
19b-4(f)(4)
19b-4(f)(2)
Section 3C(b)(2) *
Exhibit 3 Sent As Paper Document
Description
Provide a brief description of the action (limit 250 characters, required when Initial is checked *).
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
Contact Information
Provide the name, telephone number, and e-mail address of the person on the staff of the self-regulatory organization
prepared to respond to questions and comments on the action.
First Name * Sharon
Last Name * Zackula
Title *
Associate General Counsel
E-mail *
[email protected]
Telephone * (202) 838-1500
Fax
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
Municipal Securities Rulemaking Board
has duly caused this filing to be signed on its behalf by the undersigned thereunto duly authorized.
(Title *)
Corporate Secretary
Date 01/24/2017
By
Ronald W. Smith
(Name *)
NOTE: Clicking the button at right will digitally sign and lock
this form. A digital signature is as legally binding as a physical
signature, and once signed, this form cannot be changed.
[email protected], [email protected]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For complete Form 19b-4 instructions please refer to the EFFS website.
Form 19b-4 Information *
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Exhibit 1 - Notice of Proposed Rule Change *
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Exhibit 1A- Notice of Proposed Rule
Change, Security-Based Swap Submission,
or Advance Notice by Clearing Agencies *
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Exhibit 2 - Notices, Written Comments,
Transcripts, Other Communications
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The self-regulatory organization must provide all required information, presented in a
clear and comprehensible manner, to enable the public to provide meaningful
comment on the proposal and for the Commission to determine whether the proposal
is consistent with the Act and applicable rules and regulations under the Act.
The Notice section of this Form 19b-4 must comply with the guidelines for publication
in the Federal Register as well as any requirements for electronic filing as published
by the Commission (if applicable). The Office of the Federal Register (OFR) offers
guidance on Federal Register publication requirements in the Federal Register
Document Drafting Handbook, October 1998 Revision. For example, all references to
the federal securities laws must include the corresponding cite to the United States
Code in a footnote. All references to SEC rules must include the corresponding cite
to the Code of Federal Regulations in a footnote. All references to Securities
Exchange Act Releases must include the release number, release date, Federal
Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
-xx-xx). A material failure to comply with these guidelines will result in the proposed
rule change being deemed not properly filed. See also Rule 0-3 under the Act (17
CFR 240.0-3)
The Notice section of this Form 19b-4 must comply with the guidelines for publication
in the Federal Register as well as any requirements for electronic filing as published
by the Commission (if applicable). The Office of the Federal Register (OFR) offers
guidance on Federal Register publication requirements in the Federal Register
Document Drafting Handbook, October 1998 Revision. For example, all references to
the federal securities laws must include the corresponding cite to the United States
Code in a footnote. All references to SEC rules must include the corresponding cite
to the Code of Federal Regulations in a footnote. All references to Securities
Exchange Act Releases must include the release number, release date, Federal
Register cite, Federal Register date, and corresponding file number (e.g., SR-[SRO]
-xx-xx). A material failure to comply with these guidelines will result in the proposed
rule change, security-based swap submission, or advance notice being deemed not
properly filed. See also Rule 0-3 under the Act (17 CFR 240.0-3)
Copies of notices, written comments, transcripts, other communications. If such
documents cannot be filed electronically in accordance with Instruction F, they shall be
filed in accordance with Instruction G.
Exhibit Sent As Paper Document
Exhibit 3 - Form, Report, or Questionnaire
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Copies of any form, report, or questionnaire that the self-regulatory organization
proposes to use to help implement or operate the proposed rule change, or that is
referred to by the proposed rule change.
Exhibit Sent As Paper Document
Exhibit 4 - Marked Copies
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Exhibit 5 - Proposed Rule Text
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Partial Amendment
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The full text shall be marked, in any convenient manner, to indicate additions to and
deletions from the immediately preceding filing. The purpose of Exhibit 4 is to permit
the staff to identify immediately the changes made from the text of the rule with which
it has been working.
The self-regulatory organization may choose to attach as Exhibit 5 proposed changes
to rule text in place of providing it in Item I and which may otherwise be more easily
readable if provided separately from Form 19b-4. Exhibit 5 shall be considered part
of the proposed rule change.
If the self-regulatory organization is amending only part of the text of a lengthy
proposed rule change, it may, with the Commission's permission, file only those
portions of the text of the proposed rule change in which changes are being made if
the filing (i.e. partial amendment) is clearly understandable on its face. Such partial
amendment shall be clearly identified and marked to show deletions and additions.
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1.
Text of the Proposed Rule Change
Pursuant to the provisions of Section 19(b)(1) of the Securities Exchange Act of
1934 (the “Act” or “Exchange Act”),1 and Rule 19b-4 thereunder,2 the Municipal
Securities Rulemaking Board (the “MSRB” or “Board”) is filing with the Securities and
Exchange Commission (the “SEC” or “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 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.
(a)
The text of the proposed rule change is attached as Exhibit 5. Material
proposed to be added is underlined. Material proposed to be deleted is enclosed in
brackets.
2.
(b)
Not applicable.
(c)
Not applicable.
Procedures of the Self-Regulatory Organization
The proposed rule change was adopted by the MSRB at its November 18, 2016
meeting. Questions concerning this filing may be directed to Sharon Zackula, Associate
General Counsel, at 202-838-1500.
3.
Self-Regulatory Organization’s Statement of the Purpose of, and Statutory
Basis for, the Proposed Rule Change
(a)
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
1
15 U.S.C. 78s(b)(1).
2
17 CFR 240.19b-4.
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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
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
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
3
See Securities Exchange Act Release No. 45338 (January 25, 2002), 67 FR 6960
(February 14, 2002) (SR-MSRB-2001-07).
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 G15(f) or proposed Rule G-49.
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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 belowminimum 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
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dealer purchases from, and, as discussed below, dealer sales to, customers of belowminimum 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 G15(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 belowminimum 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 belowminimum 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
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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, 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-
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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.
(b)
Statutory Basis
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Section 15B(b)(2) of the Exchange Act6 provides that
[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, municipal securities dealers, and municipal advisors.
Section 15B(b)(2)(C) of the Exchange Act7 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 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.
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
6
15 U.S.C. 78o-4(b)(2).
7
15 U.S.C. 78o-4(b)(2)(C).
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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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.
4.
Self-Regulatory Organization’s Statement on Burden on Competition
Section 15B(b)(2)(C) of the Exchange Act9 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
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.
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 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 minimumdenomination 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.
5.
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
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.
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Comment.13 The comment letters are summarized below by topic and the MSRB’s
responses are provided.
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 belowminimum 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.
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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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.
In response to the Second Request for Comment, two commenters, BDA and SIFMA,
stated that dealers should not be constrained in their transactions involving belowminimum 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
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.
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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 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 belowminimum 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
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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
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
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.
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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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 belowminimum 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.
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.
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 entry in The
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 belowminimum 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).
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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.
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
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.
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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.
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 below19
See Second Request for Comment.
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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, 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,
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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.
6.
Extension of Time Period for Commission Action
The MSRB does not consent to an extension of the time period specified in
Section 19(b)(2)20 or Section 19(b)(7)(D)21 of the Act.
7.
Basis for Summary Effectiveness Pursuant to Section 19(b)(3) or for
Accelerated Effectiveness Pursuant to Section 19(b)(2) or Section 19(b)(7)(D)
Not applicable.
8.
Proposed Rule Change Based on Rules of Another Self-Regulatory
Organization or of the Commission
Not applicable.
9.
Security-Based Swap Submissions Filed Pursuant to Section 3C of the Act
Not applicable.
10.
Advance Notices Filed Pursuant to Section 806(e) of the Payment, Clearing
and Settlement Supervisions Act
Not applicable.
11.
Exhibits
Exhibit 1
Completed Notice of Proposed Rule Change for Publication in the
Federal Register
Exhibit 2a
MSRB Notice 2016-13 (April 7, 2016)
20
15 U.S.C. 78s(b)(2).
21
15 U.S.C. 78s(b)(7)(D).
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Exhibit 2b
List of comment letters received in response to MSRB Notice
2016-13
Exhibit 2c
Comments received in response to MSRB Notice 2016-13
Exhibit 2d
MSRB Notice 2016-23 (September 27, 2016)
Exhibit 2e
List of comment letters received in response to MSRB Notice
2016-23
Exhibit 2f
Comments received in response to MSRB Notice 2016-23
Exhibit 5
Text of Proposed Amendments to Rule G-15(f) and Proposed Rule
G-49
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EXHIBIT 1
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-___________; 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
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
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.
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.
1
15 U.S.C. 78s(b)(i).
2
17 CFR 240.19b-4.
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The text of the proposed rule change is available on the MSRB’s website 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
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
Proposed Rule G-49, Transactions Below the Minimum Denomination of an Issue
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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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 G15(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.
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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 G49(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 belowminimum 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
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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 G15(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.
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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 G49(b)(ii)(B), and buys a below-minimum denomination position from one of its own customers,
the dealer would be required to determine that the selling customer fully liquidated its belowminimum 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
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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 belowminimum 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
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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 interdealer 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
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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 Act6 provides that
[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
6
15 U.S.C. 78o-4(b)(2).
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solicitations of municipal entities or obligated persons undertaken by brokers, dealers,
municipal securities dealers, and municipal advisors.
Section 15B(b)(2)(C) of the Exchange Act7 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 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.
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
7
15 U.S.C. 78o-4(b)(2)(C).
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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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.
B.
Self-Regulatory Organization’s Statement on Burden on Competition
Section 15B(b)(2)(C) of the Exchange Act9 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
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
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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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
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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 summarized
below by topic and the MSRB’s responses are provided.
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
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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
& 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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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 belowminimum 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
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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.
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
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.
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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 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
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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 brokersbroker) 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 G49(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
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
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 interdealer trading, and come to rest with multiple customers.
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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)
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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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.
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 G49(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.
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
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).
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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 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.
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
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.
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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
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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.
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
19
See Second Request for Comment.
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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, 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
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time frame. Romano suggested that RTRS be enhanced to include a “flag” denoting any belowminimum 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.
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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 selfregulatory 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
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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 (http://www.sec.gov/rules/sro.shtml); or

Send an e-mail to [email protected]. Please include File Number SR-MSRB2017-01 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 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 website (http://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
website 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 am and 3:00 pm.
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-
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01 and should be submitted on or before [insert date 21 days from publication in the Federal
Register].
For the Commission, pursuant to delegated authority.20
Secretary
20
17 CFR 200.30-3(a)(12).
EXHIBIT 2a
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MSRB Regulatory Notice 2016-13
Regulatory Notice
0
2016-13
Publication Date
April 7, 2016
Stakeholders
Municipal Securities
Dealers, Issuers,
Investors, General
Public
Notice Type
Request for Comment
Comment Deadline
May 25, 2016
Category
Uniform Practice
Affected Rules
Rule G-15
Request for Comment on Draft
Amendments to MSRB Rule G-15(f) on
Minimum Denominations
Overview
The Municipal Securities Rulemaking Board (MSRB) is requesting comment
on proposed draft amendments to MSRB Rule G-15, on confirmation,
clearance, settlement and other uniform practice requirements with respect
to transactions with customers. Specifically, the MSRB is seeking comment
on whether Rule G-15(f), which generally prohibits brokers, dealers and
municipal securities dealers (collectively “dealers”) from effecting
transactions with customers below the minimum denominations specified in
bond documents, should be amended. The proposed draft amendments are
designed to support the practical implementation of Rule G-15(f) by
recognizing exceptions that are consistent with the rule’s original intent to
protect investors that own municipal securities in amounts below the
minimum denomination without creating an additional number of belowdenomination positions where there once was one.1
Comments should be submitted no later than May 25, 2016, and may be
submitted in electronic or paper form. Comments may be submitted
electronically by clicking here. Comments submitted in paper form should
be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities
Rulemaking Board, 1300 I Street NW, Suite 1000, Washington, DC 20005.
Generally, all comments will be made available for public inspection on the
MSRB’s website.2
1
Securities Exchange Act Release No. 45174 Notice of Filing of Proposed Rule Change by the
Municipal Securities Rulemaking Board Relating to Minimum Denominations (December 19,
2001), 66 FR 67342 (December 28, 2001).
2
Receive emails about MSRB
regulatory notices.
Comments generally are posted on the MSRB website without change. For example,
personal identifying information such as name, address, telephone number, or email address
will not be edited from submissions. Therefore, commenters should only submit information
that they wish to make available publicly.
© 2016 Municipal Securities Rulemaking Board. All rights reserved.
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Questions about this notice should be directed to Gail Marshall, Associate
General Counsel – Enforcement Coordination; David Saltiel, Chief Economist;
or Michael Cowart, Associate General Counsel, at 202-838-1500.
Summary of the Draft Amendments
The MSRB is charged by Congress to promote a fair and efficient municipal
securities market and to protect investors and the public interest.3 Under this
mandate, the MSRB has developed and adopted a detailed set of regulatory
requirements regarding customer transactions. In 2002, Rule G-15 was
amended to prohibit dealers in most cases from effecting transactions with
customers in amounts below the minimum denomination.4 An issuer may
state a “minimum denomination” larger than the typical $5,000 par value
(typically $100,000) in official documents for a bond issue.5
The 2002 amendment establishing Rule G-15(f) provided two exceptions to
the prohibition in order to help preserve liquidity for customers’ belowminimum denomination positions (Rule G-15(f)(ii) and (iii)).6 Rule G-15(f)(ii)
permits a dealer to purchase from a customer in an amount below the
minimum denomination 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. Rule G-15(f)(iii) permits a dealer to sell to a customer an
amount below the minimum denomination if the dealer determines that the
3
E.g., Securities Exchange Act of 1934 § 15B(b)(2)(C), 15 U.S.C. 78o-4(b)(2)(C).
4
Securities Exchange Act Release No. 45338 Order Granting Approval of Proposed Rule
Change Relating to Minimum Denominations (January 25, 2002), 67 FR 6960 (February 14,
2002); Securities Exchange Act Release No. 45174 Notice of Filing of Proposed Rule Change
by the Municipal Securities Rulemaking Board Relating to Minimum Denominations
(December 19, 2001), 66 FR 67342 (December 28, 2001).
5
For example, an issuer may opt to establish a high minimum denomination to qualify for
one of several exemptions from Securities Exchange Act Rule 15c2-12 or due to the bond
being non-investment grade, credit risk, or other reasons, often suggesting that the
securities may not be appropriate for those retail investors likely to purchase securities in
relatively small amounts. The proscriptions of Rule G-15(f) apply to all transactions with
customers regardless of whether the securities are suitable for the customer.
6
Customers may have positions below the minimum denomination due to, for example, as a
result of a death or divorce, a call provision that allows calls in amounts less than the
minimum denomination, investment advisors who may split positions they purchase among
several clients, or knowingly or unknowingly purchasing an amount below the minimum
denomination.
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position being sold is the result of a customer liquidating an entire position
below the minimum denomination, provided that the dealer provides written
disclosure to the customer that the quantity of securities being sold is below
the minimum denomination for the issue, 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 MSRB believes that certain other transactions that are not currently
contemplated under the rule would be consistent with the intent of the
exceptions provided under Rule G-15(f)(iii). The MSRB is seeking comment on
whether the following two additional trading scenarios should be excluded
from the prohibition on sales to customers below the minimum
denomination.
1. If the dealer determines that the below-minimum position being sold
is the result of a customer liquidating an entire position below the
minimum denomination, the dealer would be permitted to effect a
sale below the minimum denomination with one or more customers
that currently own the issue so long as the increment(s) being sold to
the customer(s) is consistent with any restrictions in the issuer’s
authorizing documents even if the transaction does not result in a
customer increasing its position to an amount at or above the
minimum denomination. Under this scenario, a dealer would still be
permitted to sell a portion of the below-minimum position to a
maximum of one customer that currently does not own a position in
the issue.7 For example, if a customer sells their entire 75,000
position, a dealer could sell 25,000 of that to a customer that does
not currently have a position; sell 35,000 to a customer that owns an
existing 10,000 position; and sell 15,000 to a customer that owns an
existing 85,000 position. A dealer could not, however, sell portions of
the 75,000 position to more than one customer that does not
currently have a position in the issue.
7
Consistent with the current rule, this proposed exemption would require a dealer effecting
a sale to a customer of an amount below the minimum denomination to provide, at or
before the completion of the transaction, a written statement informing the customer that
the quantity of securities being sold is below the minimum denomination for the issue and
that this may adversely affect the liquidity of the position unless the customer has other
securities from the issue that can be combined to reach the minimum denomination. This
disclosure would be required with respect to each sale to a customer of a position below the
minimum denomination, even if the customer maintains a position in the issue that is above
the minimum denomination.
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2. If a dealer has a position (whether below, at or above the minimum
denomination amount) the dealer would be permitted to effect a sale
below the minimum denomination with a customer that currently
owns a below-minimum position provided that effecting such
transaction results in the customer owning a position at or above the
minimum denomination amount; the dealer could then sell any
remaining below-minimum position to one or more customers that
currently own the issue so long as the increments sold were
consistent with any restrictions in the issuer’s authorizing documents
regarding incremental amounts.8 A dealer could not, however, sell
any portion to a customer that does not currently have a position in
the issue because the transaction would create a below-minimum
position where there once was none. For example, a dealer could sell
25,000 of a 100,000 position to a customer that has a position of
75,000 because that transaction would result in the customer owning
a position at the minimum denomination of 100,000. Thereafter, the
dealer could sell the remaining 75,000 to one or more customers that
had a position in the issue.
Consistent with the current rule, a dealer would be able to rely upon
customer account records in its possession or upon a written statement
provided by the customer to whom the securities are purchased or sold that
the customer owns a position in the issue in an amount at or below the
minimum denomination. In addition, at or before the completion of any sale
in an amount below the minimum denomination, a dealer would be required
to provide the customer, even if the customer already owns a position in the
securities, a statement informing the customer that the quantity of securities
being sold is below the minimum denomination for the issue and that this
may adversely affect the liquidity of the position unless the customer has
other securities from the issue that can be combined to reach the minimum
denomination.9
8
Consistent with the current rule, this proposed exemption would also require a dealer
effecting a sale to a customer of an amount below the minimum denomination to provide, at
or before the completion of the transaction, a written statement informing the customer
that the quantity of securities being sold is below the minimum denomination for the issue
and that this may adversely affect the liquidity of the position unless the customer has other
securities from the issue that can be combined to reach the minimum denomination.
Likewise, this disclosure would be required with respect to each sale to a customer of a
position below the minimum denomination, even if the customer maintains a position in the
issue that is above the minimum denomination.
9
If the MSRB were to proceed with draft amendments to Rule G-15(f), a housekeeping
amendment to MSRB Rule G-8(a)(ix), on books and records to be made by brokers, dealers
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The MSRB believes the above trading scenarios strike the appropriate
balance of enhancing liquidity for investors that hold positions in belowdenomination amounts while preventing the creation of an additional
number of below-denomination positions. The MSRB reminds dealers that
Rule G-18, on best execution; Rule G-19, on suitability of recommendations
and transactions; and Rule G-47, on time of trade disclosure, impose
regulatory requirements on dealers regarding customer transactions that
supplement the protections afforded by Rule G-15(f) with respect to
minimum denominations.10 For example, while selling a customer a position
below the minimum denomination of an issue may be permitted under Rule
G-15(f)(iii) or (iv), a dealer would have an obligation to have a reasonable
basis to believe that a recommended transaction or investment strategy
involving a municipal security or municipal securities is suitable for the
customer, bearing in mind that, among other things, the issue has a
minimum denomination and the customer’s liquidity needs and risk
tolerance. Moreover, whether unsolicited or recommended, a dealer has an
obligation under Rule G-47 to disclose to a customer, orally or in writing, at
or prior to the time of trade, all material information known about the
transaction, as well as material information about the security that is
reasonably accessible to the market, including the fact that a sale of a
quantity of municipal securities is below the minimum denomination
authorized by the bond documents and the potential adverse effect on
liquidity of a customer position below the minimum denomination.
Economic Analysis
1. The need for the draft amendments to Rule G-15(f) and how the
draft amendments to Rule G-15(f) will meet that need.
As noted above, the need for the draft amendments arises primarily from a
recognition that there are trading scenarios prohibited by the existing rule
that, if allowed, would likely not result in a net increase in the number of
below-denomination positions and may reduce the number of belowdenomination positions, increase the ability of investors currently holding
below-denomination positions to exit those positions and/or reduce the
burden on dealers associated with implementing Rule G-15(f).
and municipal securities dealers, would be required to correspond to the revised numbering
under Rule G-15(f).
10
The obligations of a dealer may differ if the dealer reasonably concludes the customer is a
Sophisticated Municipal Market Professional. See MSRB Rule G-48.
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While the existing rule does provide a mechanism for an investor with a
below-denomination position to either exit their position entirely or
purchase a portion of an issue below the minimum denomination so that
they own a position at or above the minimum denomination, in practice
those options may be unattractive to dealers that might, as a result of such
trades, be left with a below-denomination position themselves for which a
willing customer may be difficult to identify. As a result, investors with
below-denomination positions, including those that acquired those positions
as a result of divorce or inheritance, may find accessing liquidity difficult.
The draft amendments may provide additional exceptions that may make it
easier for these investors to access liquidity.
2. Relevant baselines against which the likely economic impact of
elements of the draft amendments should be considered.
The relevant baseline against which the likely economic impact of the draft
amendments should be considered is existing Rule G-15(f), which generally
prohibits dealers from effecting transactions with customers below the
minimum denominations specified in bond documents. In addition, as noted
above, MSRB Rules G-18, G-19 and G-47 impose regulatory requirements on
dealers regarding customer transactions that supplement the protections
afforded by Rule G-15(f) with respect to minimum denominations.
3. Identifying and evaluating reasonable alternative regulatory
approaches.
The MSRB recognizes that there are alternatives to the approach taken in the
draft amendments. For example, the MSRB could propose additional
exceptions and/or liberalize the existing exceptions. While the MSRB
recognizes that such alternatives might reduce the burden on dealers and
increase the liquidity of below-denomination positions, the MSRB believes
that they would also be likely to increase the number of below-denomination
positions that potentially put investors at risk.
4. Assessing the benefits and costs of the draft amendments.
The MSRB policy on economic analysis in rulemaking addresses consideration
of the likely costs and benefits of the rule with the draft amendments fully
implemented against the context of the economic baseline discussed above.
The MSRB is seeking, as part of this request for comment, data or studies
relevant to the determination of the number of existing below-denomination
positions, the relative difficulty of exiting or adding to these positions, the
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impact of these positions on investors, and the costs the existing rule
imposes on dealers.
Preliminarily, the MSRB has evaluated the benefits and costs associated with
the draft amendments as follows:
Benefits
The MSRB believes that the draft amendments may reduce the number of
below-denomination positions, increase the ability of investors currently
holding below-denomination positions to exit those positions and/or reduce
the burden on dealers associated with implementing Rule G-15(f).
Costs
Our analysis of the potential costs does not consider all of the costs
associated with the proposal, but instead focuses on the incremental costs
attributable to it that exceed the baseline state. The costs associated with
the baseline state are, in effect, subtracted from the costs associated with
the draft amendments to isolate the costs attributable to the incremental
requirements of the draft amendments.
The MSRB recognizes that some dealers may incur costs should they utilize
either the two additional 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 the exemptions per se would
result in any new costs for dealers.
The MSRB does not believe that the draft amendments are likely to result in
a net increase in the number of below-denomination positions. The MSRB
also has no reason to believe that any new below-denomination positions
associated with the draft amendments would be held by a significantly
different or less sophisticated group of investors than the group currently
holding below-denomination positions. Therefore, the MSRB does not
believe that there are any additional costs for investors and may, as
discussed above, actually reduce costs by increasing liquidity.
The MSRB is not aware of any available data that would support a
quantitative estimate of the overall impact of the draft amendments. The
MSRB specifically seeks comments that would inform a quantitative estimate
of the benefits and costs associated with the draft amendments.
Effect on Competition, Efficiency and Capital Formation
The MSRB believes that the draft amendments may improve capital
formation and efficiency to the extent they result in improved access to
liquidity for those investors holding below-denomination positions.
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The MSRB believes that larger dealers with larger inventories and larger
numbers of customers may be better positioned to exercise these
exceptions, but does not believe this significantly improves their competitive
position or significantly burdens those dealers less able to exercise the
exceptions.
Questions
The MSRB seeks public comment on all aspects of the proposal and
specifically requests comment concerning the following questions, as well as
any other comments on the subject of transactions in amounts below the
minimum denomination. The MSRB welcomes information regarding the
potential to quantify the likely benefits and costs of the draft amendments.
The MSRB requests comment on any competitive or anticompetitive effects,
as well as efficiency and capital formation effects of the draft amendments
on any market participants. The MSRB particularly welcomes statistical,
empirical and other data from commenters that may support their views
and/or support or refute the views or assumptions or issues raised in this
request for comment.
1. As designed, do the draft amendments serve to improve liquidity for
investors without increasing the number of customers maintaining
positions in municipal securities below the minimum denomination?
2. Would any or all exceptions continue to appropriately balance the
interests of issuers, investors, dealers and the market as a whole?
3. Are there other trading scenarios that would likewise enhance
liquidity for investors without increasing the number of customers
maintaining a position below the minimum denomination?
4. Should the exception permitting a dealer to purchase from a
customer a position below the minimum denomination apply when
that customer’s below-minimum position is a result of an allocation in
a managed account from a position purchased in an amount equal to
or above the minimum denomination?
5. Are there other scenarios not already identified that cause a
customer’s position to fall below the minimum denomination?
6. Should dealers have to provide the written statement informing the
customer that the quantity of securities being sold is below the
minimum denomination for the issue and that this may adversely
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affect the liquidity of the position if the dealer has already
determined that the sale to the customer below the minimum
denomination results in the customer being at or above the minimum
denomination?
7. Under what circumstances do customers seek positions below the
minimum denomination?
8. Do the alternatives identified above represent a comprehensive set of
reasonable regulatory alternatives or are there alternative methods
the MSRB should consider regarding permissible transactions below
the minimum denomination of an issue that would be more effective
and/or less burdensome?
9. To what extent have MSRB registrants found it difficult or costly to
comply with the existing rule? If possible, please quantify the impact
of these challenges.
10. What is the, per firm, annual cost of compliance with existing Rule G15(f)?
11. Are there other relevant baselines the MSRB should consider when
evaluating the economic impact of the proposal?
12. Are commenters aware of any studies assessing the impact of
investors holding below-denomination positions?
April 7, 2016
*****
Text of Draft Amendments
Rule G-15: Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect
to Transactions with Customers
(a) - (e) No change.
(f) Minimum Denominations.

Underlining indicates new language; strikethrough denotes deletions.
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(i) Except as provided in this section (f), a broker, dealer or municipal securities dealer shall not
effect a customer transaction in municipal securities issued after June 1, 2002 in an amount lower than the
minimum denomination of the issue.
(ii) The prohibition in subsection (f)(i) of this rule shall not apply to the purchase of securities from
a customer in an amount below the minimum denomination if the broker, dealer or municipal securities
dealer determines that the customer's position in the issue already is below the minimum denomination
and that the entire position would be liquidated by the transaction. In determining whether this is the
case, a broker, dealer or municipal securities dealer may rely either upon customer account information in
its possession or upon a written statement by the customer as to its position in an issue.
(iii) The prohibition in subsection (f)(i) of this rule shall not apply to the sale of securities to a
customer in an amount below the minimum denomination if the broker, dealer or municipal securities
dealer determines that the securities position being sold is the result of a customer liquidating a position
below the minimum denomination, as described in subsection (f)(ii) of this rule. In determining whether
this is the case, a broker, dealer or municipal securities dealer may rely upon customer account records in
its possession or upon a written statement provided by the party from which the securities are purchased.
A broker, dealer or municipal securities dealer effecting a sale to a customer under this subsection (iii)
shall at or before the completion of the transaction, give or send to the customer a written statement
informing the customer that the quantity of securities being sold is below the minimum denomination for
the issue and that this may adversely affect the liquidity of the position unless the customer has other
securities from the issue that can be combined to reach the minimum denomination. Such written
statement may be included on the customer's confirmation or may be provided on a document separate
from the confirmation. In effecting a sale with a customer in an amount below the minimum
denomination, the broker, dealer or municipal securities dealer may:
(A) Sell the entire below-minimum position to one customer; or
(B) Sell a portion of the below-minimum position to one or more customers that have a
position in the issue and the remainder of the below-minimum position to a maximum of one
customer that does not have a position in the issue, even if the transaction(s) do not result in a
customer increasing its position to an amount at or above the minimum denomination, provided
that the increment(s) being sold to the customer(s) is consistent with any restrictions in the issuer’s
authorizing documents regarding incremental amounts.
(iv) The prohibition in subsection (f)(i) of this rule shall not prohibit a broker, dealer or municipal
securities dealer from effecting a sale to a customer in an amount below the minimum denomination if the
broker, dealer or municipal securities dealer is effecting a sale with a customer that has a position in the
issue below the minimum denomination and the sale will result in that customer owning a position at or
above the minimum denomination. Provided that no portion is sold to a customer that does not currently
have a position in the issue, the broker, dealer or municipal securities dealer could then sell the remaining
below-minimum position to one or more customers so long as the amount sold is consistent with any
other restrictions in the issuer’s authorizing documents regarding incremental amounts.
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(v) A broker, dealer or municipal securities dealer effecting a purchase from or sale to a customer
under subsection (ii), (iii) or (iv) shall determine a customer’s position in the subject security based upon
account records in the broker’s, dealer’s or municipal securities dealer’s possession or upon a written
statement provided by the party from which the securities are purchased or party to whom the securities
are sold and, with respect to any sale in an amount below the minimum denomination, shall at or before
the completion of the transaction, give or send to the customer a written statement informing the
customer that the quantity of securities being sold is below the minimum denomination for the issue and
that this may adversely affect the liquidity of the position unless the customer has other securities from
the issue that can be combined to reach the minimum denomination. Such written statement may be
included on the customer's confirmation or may be provided on a document separate from the
confirmation.
(g) No change.
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EXHIBIT 2b
ALPHABETICAL LIST OF COMMENT LETTERS ON MSRB NOTICE 2016-13
(APRIL 7, 2016)
1. American Municipal Securities, Inc.: Letter from Michael Petagna, President, dated May 25,
2016
2. Bond Dealers of America: Letter from Mike Nicholas, Chief Executive Officer, dated May
25, 2016
3. Breena LLC: E-mail from G. Letti dated April 19, 2016
4. Center for Municipal Finance: Letter from Marc D. Joffe, President, dated April 7, 2016
5. Neighborly.com: E-mail from Jase Wilson dated May 25, 2016
6. Regional Brokers, Inc.: Letter from H. Deane Armstrong, CCO
7. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood,
Managing Director and Associate General Counsel, dated May 25, 2016
8. Thomas Kiernan: E-mail dated April 7, 2016
9. Vista Securities: E-mail from Rick DeLong dated May 9, 2016
10. Wells Fargo Advisors, LLC: Letter from Robert J. McCarthy, Director of Regulatory Policy,
dated May 25, 2016
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EXHIBIT 2c
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May 25, 2016
VIA ELECTRONIC MAIL
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1300 I Street NW, Suite 1000
Washington, DC 20005
RE: Request for Comment on Draft Amendments to MSRB Rule G-15(f) on Minimum
Denominations (Notice: 2016-13)
Dear Mr. Smith:
On behalf of the Bond Dealers of America (“BDA”), I am pleased to submit these comments
regarding MSRB Regulatory Notice 2016-13, draft amendments to MSRB Rule G-15(f) on minimum
denominations (“draft amendments”). The BDA is the only DC-based group representing the interests of
middle-market securities dealers and banks focused on the U.S. fixed-income markets and we welcome
this opportunity to present our comments.
The BDA appreciates MSRB’s intention to strike a balance between restrictions on buying and
selling positions in bonds lower than the minimum denomination, against modifications meant to assist
managing these positions generally. We believe that the industry needs a fair rule that protects investors,
while also providing dealers with solutions when dealing with customers who own positions in below
the minimum denominations. We believe the amendments proposed by the MSRB may result in
improved liquidity and could help to alleviate some of the regulatory burdens dealers face in managing
compliance with purchases and sales of certain securities below the minimum denomination. Below, we
outline our general support for the draft amendments and request additional modifications to clarify
some complexities in the market to further mitigate dealer struggles with minimum denominations.
The MSRB Should Permit Dealer Flexibility in Certain Instances
Below minimum-denomination bond positions are often created in the marketplace and the rule
needs to provide dealers with flexibility to manage these situations since a below minimumdenomination quantity of bonds is a hard-to-sell position with limited liquidity. Often, money managers
will buy a block of bonds above the minimum denomination level and then subsequently allocate below
minimum-denomination quantities to separately managed accounts. These separately managed accounts
may be transferred to a broker-dealer who may be called upon by the customer to liquidate a belowminimum denomination quantity of bonds. Similar instances arise when estate planners split up a block
of bonds into two accounts leaving a position that is extremely difficult for the dealer to liquidate. Often
those divisions result in customers holding below-minimum denomination quantities of bonds, which
realize few, if any, bids for the position. While there may have been multiple bids for the original
position, that is not the case for the remaining smaller-position, resulting in a depreciated value if a
dealer is able to find a buyer for that below minimum-denomination position. The BDA would therefore
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ask the MSRB to consider including language providing flexibility for certain circumstances, beyond the
dealer’s control, which created the below-minimum position.
The MSRB should not force liquidation of certain positions, given appropriate disclosures. BDA
dealer firms sometimes are forced to sell amounts of bonds below the minimum-denomination for a
variety of reasons including the need to liquidate and divide estates. Often those divisions result in
customers holding below-minimum positions resulting in few, if any, bids for the position. While there
may have been multiple bids for the original position, that is not the case for the remaining smallerposition, resulting in a depreciated value if a dealer is able to find a buyer for that below minimumdenomination position. For example, if a customer holds $9,000 par value of a 5 bond x 5-bond piece in
their account, they should be able to sell 5 bonds (the minimum denomination value) and continue to
hold 4 bonds. As things stand, firms would be required to sell the entire position, likely resulting in
insufficient demand or no bids at all in these situations. The BDA would therefore request that the
MSRB consider including language in the draft amendments to avoid the full liquidation of a bond
position if that sale would result in a customer’s account holding a below-minimum increment as long as
appropriate disclosures are made.
The MSRB Should Permit Sales to Customers of a Below-Minimum Increment if the
Customer Already Owns a Full Position in the Security
The BDA would like to request that the MSRB permit sales to customers of any below-minimum
position as long as that customer already owns a position at or above the minimum denomination
amount in that same security. For example, if a customer owns $5,000 par value of a 5-bond minimumdenomination position and the customer would like to continue building on that position it should be
permissible for the customer to buy bonds in below minimum-denomination increments. The customer
should be allowed to buy an additional 2 bonds to add to the 5-bond minimum-denomination position.
BDA believes customers should be permitted to buy the 2 as an add-on to the full position already held
by the customer since that customer already owns a position at the minimum-denomination level. We
believe the MSRB should permit this activity to occur as long as the customer is building on its position,
which already meets the original minimum denomination value.
The MSRB Should Consider Permitting Additions to Below Minimum Positions to Any
Customer as long as that Customer Continues to Build in its Below-Minimum Position
The BDA would like to request the MSRB further modify the amendments by eliminating the
requirement in (f)(iv) which prohibits a dealer from effecting a sale to a customer in an amount below
the minimum denomination, unless that dealer brings at least one customer’s position at or above the
minimum denomination. While the BDA recognizes it is the MSRB’s desire to reduce as many below
minimum positions as possible in the market, we believe that it should not be a requirement of a dealer
to have to “top-off” any one customer first. Instead, the BDA would ask that the MSRB consider
permitting a sale to any customer who has any below-minimum position of any amount in the same
position, even if that sale does not result in bringing that customer to a position at or above the minimum
denomination. From a customer-relations standpoint, it could be a challenge for firms who would have
to choose one customer over another, especially if both customers could be interested in the same below
minimum position. In addition, a customer may choose to add to their below-minimum position in
hopes of someday reaching the minimum through multiple purchases. Thus we believe the draft
amendments should be adjusted to permit add-on sales to any customer in any amount as long as they
already own a position in the security.
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Interdealer Trades Should be Addressed Under the Draft Amendments
Below minimum-denomination bond positions are often offered in the market and the bidding
dealer does not immediately know the end customer. This could result in traders being reluctant to bid
on the below-minimum amounts since they may ultimately be penalized if they cannot prove that a
counterparty is liquidating its entire below-minimum denomination quantity. Thus, when a firm is
bidding on a below-minimum denomination position, it should be the burden of the selling dealer to
ensure its responsibilities to liquidate an entire position under the rule is met, avoiding punishing the
bidding dealer purchasing the below-minimum position into inventory.
Furthermore, interdealer trades can sometimes prevent a dealer from knowing who the end
customer of its counterparty is. Thus, BDA believes that for interdealer transactions, dealers should be
relieved from the requirement to send a disclosure letter to its counterparty. BDA believes that dealers
should only have to send a disclosure letter to a customer in instances when the customer is “known”.
The rule should not require dealers to “look through” to ascertain the account-level information and
identity of the customer of its counterparty.
SMMPs Should be Exempt from the Rule
As the BDA has stated in recent letters to the MSRB, we believe that sophisticated municipal
market participants (SMMPs) should be excluded from the protections of this rule. MSRB guidance
provides that for a customer to be an SMMP, the dealer must have a reasonable basis to believe it is
capable of evaluating market risks and market value independently in evaluating the recommendations
of the dealer. We believe that for this rule, it is fair to say that those market participants who are truly
retail customers should be notified of the potential for illiquidity should they buy a below minimum
position into their account. However, SMMPs who have met the requirements to be given such SMMP
status have demonstrated that they are able to independently evaluate investment risk and market value
and thus should not require the protections this rule is aiming to provide, and should therefore be
exempt.
The MSRB Should Permit Firms to Rescind Sales in Certain Instances
The BDA acknowledges that the MSRB is working to make amendments to the minimum
denomination rules as a result of activities that they and other regulators have seen in the marketplace
which result in limitations that occur naturally from things like division of estate holdings, often creating
below-minimum amounts in various customer accounts. While acknowledging that BDA firms will
update and follow their policies and procedures to meet the new standards of the draft amendments
when finalized, we would still request a safe harbor for firms to be able to rescind and correct the
transaction as long as the firm makes an effort within a reasonable timeframe.
BDA members would welcome the opportunity to continue to productively engage with the
MSRB to ensure that the compliance expectations of regulators and market participants are as clear as
possible. We would also be pleased to discuss the unique role of the middle-market dealer in the U.S.
fixed income market and the potential unintended consequences that a broad interpretation of this rule
could have. Please do not hesitate to contact us to solicit the views and feedback of middle-market
dealers.
Sincerely,
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Mike Nicholas
Chief Executive Officer
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Comment on Notice 2016-13
from G. Letti, Breena Llc
on Tuesday, April 19, 2016
Comment:
We believe that the official minimum denomination should be the traditional 1000.
It is imperative to increase dealer and financial institution liquidity, so as to avoid the nail biting scenario of
trying to sell a lot of 1,000,000 to multiple dealers in odd lots, with say 47 leftover. Of course, the 47 should be
sold, but the amazingly small lot sizes of 5 or 10 or 47 etc. should be a rare occurrence.
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1655 N. California Blvd. Suite 223 Walnut Creek, CA 94596 ● http://www.munifinance.org
April 7, 2016
Municipal Securities Rulemaking Board
1300 I Street NW, Suite 1000
Washington, DC 20005
Re: Comments on Rule G-15
Dear Sir or Madam:
Thank you for providing the opportunity to comment on MSRB’s proposed rule change regarding
Minimum Authorized Denominations. I believe minimums should be eliminated and have presented my
case for this view in a blog post at https://learn.neighborly.com/featured/the-end-of-big-in-municipalbonds/.
The following is excerpted from that post:
In the years since the financial crisis, people saving small amounts of money have not received much love
from their banks. Interest rates on money market accounts and certificates of deposits at major banks
remain near record lows. For example, a recent rate sheet from JP Morgan Chase shows no alternative
yielding more than 0.9% annual interest for deposits below $10,000. Unfortunately, the situation is not
much different at Bank of America, Citibank and Wells Fargo.
Small savers wishing to get better returns should look towards municipal bonds. Ten year munis are
yielding more than 2% and interest is generally exempt from federal, state and local income taxes. But
today, small savers rarely buy municipal bonds. One reason is that most municipal bond offerings have a
high minimum denomination (of usually at least $5000).
What are Minimum Denominations?
The Municipal Securities Rulemaking Board (MSRB), which writes the rules for regulators of the US
municipal bond market in conjunction with the Securities and Exchange Commission (SEC), defines the
minimum denomination as the smallest amount of a bond issue that may be purchased at any one time.
Industry regulations forbid brokers from buying or selling smaller amounts. For example, it would be illegal
for a broker to split a $5000 bond in half, so that you and a friend could each invest $2500. In some cases,
the minimum denomination is even higher than $5000. In 2014, the Commonwealth of Puerto Rico sold
bonds with a $100,000 minimum and the SEC disciplined several brokers for accepting smaller orders.
It is possible to access the municipal bond market with a smaller investment by purchasing a mutual fund
or exchange traded fund that holds these securities, but these alternatives have management fees that
reduce your returns.
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Why are Minimums So High at the Moment?
High minimum denominations unnecessarily exclude small investors from the opportunity to finance
community facilities and earn higher rates of interest. High minimums appear to have two justifications:
minimizing paperwork and protecting small investors from supposedly complicated and dangerous
securities. Both reasons seem dubious.
Minimizing Paperwork
In the old days, bonds were sold in paper form. Each time an interest payment was due, investors clipped
a coupon from their bond certificates and presented it for payment. The more investors holding bond
certificates, the more payments that needed to be made. This could become a real headache for the
municipal finance department or its paying agent. But now, all records are kept in electronic form and
payments are made automatically – thus the processing hassle is no longer much of an issue.
Protecting Small Investors
More serious is the perception that municipal bonds are too complex and too risky for “average” people. A
major problem with this justification is that small investors are not protected from other types of risky
investments. While municipal bonds have aggressively enforced minimum denominations, no such
restrictions exist for penny stocks – shares in small companies that are often not listed on an exchange
and trade for less than $5 each. The SEC warns investors about the risk of these securities and imposes
various requirements on brokers selling them, but there are no minimum denominations. Thus, a small
saver can easily buy $500 of stock in an obscure Nevada gold mining company, but can’t buy the same
amount of Nevada State General Obligation bonds (general obligation bonds typically represent a first
claim on a government’s tax revenue).
Another very risky investment available to small savers is stock options, which give the owner the right to
buy or sell stocks at a certain price on or before the expiration date. Options are highly leveraged, so they
can provide enormous returns, but, research shows that over three quarters of option contracts expire
worthless. Yet, according to NerdWallet, several brokerage firms allow investors to open option trading
accounts with initial balances of $2000 or less.
While penny stocks and stock options are very risky, many types of municipal bonds have strong track
records, suggesting a high degree of safety. For example, no state has defaulted on general obligation
bonds since 1933 – during the height of the Depression. Further, the two states that defaulted in 1933
ultimately paid back all the overdue principal. You have to go back to the 19th Century to find cases in
which states completely failed to redeem their bonds in full.
Bonds issued by cities and counties have had a less perfect track record, but the number of defaults is very
low compared to the number of local governments that issue bonds. We have seen a lot of news about
the Detroit, Stockton, San Bernardino and Jefferson County bankruptcies but the vast majority of cities
and counties make their payments on time, in full and without fanfare. Municipal Market Analytics
estimates the annual default rate on general obligation bonds is 0.03%. Also, since Detroit’s bankruptcy
filing in July 2013, no US city or county has initiated a Chapter 9 bankruptcy process.
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Returning to Nevada for a moment, it seems especially strange that any adult can walk into a Las Vegas
gambling casino and wager as little as $5 on a game of blackjack or roulette while the option to buy small
quantities of municipal bonds is restricted.
Risk vs. Regulation
Regulations that prevent small investors from taking certain risks are hard to justify, but small investors
may need protection from discriminatory financial practices. Research has shown that investors buying or
selling relatively small amounts of municipal bonds incur proportionately higher brokerage costs than
those making bigger trades. But rather than bar small investors from the market, regulators can address
this concern by limiting transaction costs (which typically take the form of bid/ask spreads) or by
encouraging more competition among brokers.
High Minimums Prevent People from Investing in Their Community
Amidst widespread warnings of a national infrastructure crisis, many Americans would undoubtedly
welcome the option to invest in their communities by purchasing municipal bonds. While residents may
wish to invest in better parks, playgrounds, bridges, roads and mass transit in their communities, they may
have less than $5000 to support neighborhood facilities. High minimum authorized denominations provide
little meaningful protection, while excluding a large group of investors from the socially important
municipal bond market. For example, Denver has shown an innovative way forward by offering “mini
bonds” – with $500 minimum denominations.
Sincerely,
Marc D. Joffe
President
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Comment on Notice 2016-13
from Jase Wilson, Neighborly.com
on Wednesday, May 25, 2016
Comment:
Hello friends at MSRB,
Thank you for taking a look at minimum denomination.
We appreciate your willingness to look at ways regulation can bring new investors, better pricing and greater
liquidity to the market.
While this amendment draft only contemplates the two trading scenarios outlined in the regulatory notice, in
which dealers transact below an already-defined minimum denomination, we ask that you please also consider
this amendment an opportunity to include further definition that might make lower minimum denominations a
tool to bring greater fairness, efficiency, pricing and liquidity to the market.
In our research, involving conversations with hundreds of market participants ranging from issuers to bond
counsel to underwriters to municipal advisors, one common observation we're struck by is how little is
collectively known about who determines the minimum denomination, and how. Many issuers, even many of
their advisors, believe that $5,000 is the default denomination because of a regulatory requirement. Since a
minimum-minimum denomination doesn't seem to be explicitly defined anywhere, it might help to clarify who
is in charge of this aspect of an issuance, and how it can be set at any value.
For years, Vermont has found buy & hold investors local to the borrowing community, through its $1,000denominated Citizen Bonds program. The City of Denver enjoyed great success issuing $500 "mini-bonds" in
2013. We learned of several other examples of low-denomination issuances bringing great value to borrowing
communities and investors alike. But such examples are extreme outliers in the current era of the market. We
believe this is in part due to lack of clarity around how minimum denomination can be set, and by whom.
We wrote a blog post about it with additional thinking and examples if you are interested. In either case, thank
you for making the market better for all and for considering this amendment a chance to bring greater fairness,
efficiency, pricing and liquidity to the market.
https://medium.com/@jase/minimum-denomination-5ede12d0c934#.c486czkrk
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To: MSRB
From: H. Deane Armstrong
CCO, Regional Brokers, Inc.
Re: Minimum Denomination Bonds
Currently, MSRB rules require that if Dealer A acquires a bond of below minimum
denomination from Dealer B, that the Dealer B must receive a letter from Dealer A asserting that
the position was a “takeout” position from their customer.
Regional Brokers, Inc., as a Municipal Securities Broker’s Broker (MSBB) is asking for
guidance as to its responsibilities regarding trades of this type that may occur with RBI acting as
the intermediary party.
While RBI has been willing to write a letter to Dealer B, upon receipt of a letter from Dealer A,
it is difficult for RBI to depend on the compliance of the selling firm, as it may be difficult for
the buying firm to depend on the compliance of RBI.
Would the MSRB be willing to extend a waiver of the letter requirement for MSBBs, as this
seems to be where most of the small pieces are ending up; as Bid Wanted items.
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May 25, 2016
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1300 I Street NW
Suite 1000
Washington, DC 20005
Re: MSRB Notice 2016-13: Request for Comment on Draft
Amendments to MSRB Rule G-15(f) on Minimum Denominations
Dear Mr. Smith:
The Securities Industry and Financial Markets Association (“SIFMA”)1
appreciates this opportunity to respond to Notice 2016-0132 (the “Notice”) issued
by the Municipal Securities Rulemaking Board (the “MSRB”) in which the MSRB
is requesting comment on draft amendments to MSRB Rule G-15(f) on minimum
denominations. The rules governing minimum denominations have not been
updated in 15 years, and SIFMA and its members are pleased that the MSRB is
undertaking this review. As rounds lots are more liquid than odd lots, SIFMA
supports the intent of the original rule, which is stated in the Notice as seeking to
protect investors that own municipal securities in amounts below the minimum
denomination. SIFMA and its members believe that the draft amendments as set
forth in the Notice are largely reasonable, however, we would appreciate the
MSRB’s consideration of the three suggestions and alternatives we have detailed
below.
1
SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset
managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for
businesses and municipalities in the U.S., serving clients with over $20 trillion in assets and managing more than
$67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA,
with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets
Association (GFMA). For more information, visit http://www.sifma.org.
2
MSRB Notice 2016-13 (April 7, 2016).
New York | Washington
120 Broadway, 35th Floor | New York, NY 10271-0080 | P: 212.313.1200 | F: 212.313.1301
www.sifma.org | www.investedinamerica.org
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Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 2 of 5
I.
Minimum Denominations Rules Generally
SIFMA and its municipal securities broker, dealer and municipal securities
dealer (“dealer”) members agree that, as designed, the draft amendments largely
serve to improve liquidity for investors without increasing the number of customers
maintaining positions in municipal securities below the minimum denomination.
We also agree that, in the aggregate, the exceptions generally continue to
appropriately balance the interests of issuers, investors, dealers and the market as a
whole. There are no other trading scenarios that we believe would enhance
liquidity for investors without increasing the number of customers maintaining a
position below the minimum denomination.
SIFMA and it members are not in agreement with the MSRB’s
characterization of current law. We believe that this change narrows the current
second exception to the rule. For example, if the seller is liquidating the entire
position, it is believed by dealers that under current law the dealer could break up
the position even further, regardless of whether those buyers currently owned any
position in the securities. It is important for the MSRB to recognize that this draft
change alters current law in order to guide dealer examination and enforcement
efforts. With respect to the first scenario proposed, despite being a change in current
law, SIFMA and its members believe that this would be a positive change to the
rule going forward.
The exception permitting a dealer to purchase from a customer a position
below the minimum denomination, should apply when that customer’s below
minimum position is a result of an allocation in a managed account, from a position
purchased in an amount equal to or above the minimum denomination. There are
many reasons the dealer should not be prevented from using this exception. The
dealer should not be held responsible for other market participants’ allocation
decisions. Investment advisors are not governed by the MSRB rules, and making
rules to attempt to influence their behavior by penalizing dealers will be unfair and
fruitless. Also, prohibiting use of this exception potentially leaves the customer in
an untenable position – with a position in securities they cannot liquidate. For
example, if a client has a $5,000 position in a security where the minimum
denomination is $100,000 per the indenture, the customer needs to be permitted to
liquidate the entire $5,000 position, regardless of how that position was created.
Prohibiting the dealer from using this exception would essentially make the position
untradeable (without adding to it, which may not be economically feasible) and
would be unfair to the customer.
There are many scenarios that cause a customer’s position to fall below the
minimum denomination. As noted in the notice of filing on the prior rule change, a
below-minimum denomination position may be created, for example, by call
provisions that allow calls in amounts less than the minimum denomination,
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Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 3 of 5
investment advisors who may split positions they purchase among several clients,
the division of an estate as a result of a death or divorce, or as a result of a gift.3
These are some of the reasons positions exist below the minimum denomination.
There are a number of circumstances whereby customers seek positions
below the minimum denomination. These include customers adding to an existing
position, at that firm or another firm, and opportunistic buyers.
Dealers should not have to provide the written statement informing the
customer that the quantity of securities being sold is below the minimum
denomination for the issuer, and that this may adversely affect the liquidity of the
position, if the dealer has already determined that the sale to the customer below the
minimum denomination results in the customer being at or above the minimum
denomination. In this scenario, there are no adverse consequences, as after the trade
is completed, the customer has a position in their account that is at or above the
minimum denomination.
SIFMA and its members would like to note that MSRB registrants have
found that sometimes it can be difficult or costly to identify existing holders of
securities to which to sell below minimum denomination positions.
II.
Alternatives and Suggestions
The alternatives identified in the Notice largely represent a reasonable set of
regulatory alternatives regarding permissible transactions below the minimum
denomination of an issue. SIFMA and its members, however, have three
suggestions and alternatives for consideration by the MSRB.
a. Eliminating Barriers to Trading on ATS Platforms
SIFMA and its members believe that Rule G-15(f) should be limited to
customer trades, and not apply to inter-dealer transactions between sophisticated
parties. At a time when dealers believe that the SEC and other regulators are trying
to encourage the use of alternative trading system (“ATS”) platforms, this rule
creates significant compliance challenges for those dealers using an ATS platform
that anonymizes the counterparties. We understand that FINRA examiners are
looking through interdealer trades to the end customer. In the draft changes to
Rule G-15(f)(ii), the language permitting the dealer to rely on customer account
3
Securities Exchange Act Release No. 45174 Notice of Filing of Proposed Rule Change by the Municipal
Securities Rulemaking Board Relating to Minimum Denominations (December 19, 2001), 66 FR 67342 (December
28, 2001), at fn 3.
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Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 4 of 5
information has been deleted and moved to section Rule G-15(f)(v). To that end,
particularly in the case of a dealer trading on an ATS, it would be helpful for the
MSRB to waive the requirement that a dealer must determine if their dealer
counterparty’s selling customer is selling their entire position that is below the
minimum denomination, based on their account records or a written statement.
Requiring this documentation is an unnecessary impediment to trading on an ATS
platform.
b. Improve Information on EMMA
Another issue that has become evident is that some private placement
memorandum (“PPM”) documents are not on the MSRB’s Electronic Municipal
Market Access (“EMMA”) website, so there is no way for the dealer to check for
the minimum denomination and increment information on that particular
transaction. To remedy this issue, we suggest that MSRB Rule G-32 be amended to
require the filing of minimum denomination and increment information on EMMA.
Additionally, many information service providers have blank or incorrect
information in the minimum denomination and increment fields. Underwriting
dealers are already required to send to the Depository Trust and Clearing
Corporation (“DTCC”) minimum denomination and increment information though
the New Issue Information Dissemination System (“NIIDS”) by mandate of Rule
G-34. MSRB could take this information from the DTCC’s NIIDS feed and display
the information on EMMA. If a security is not NIIDS eligible, then the dealer
should be able to send the information directly to the MSRB for transparency
purposes on EMMA.
c. Increments
It is important to note that heretofore, the prohibitions and disclosures in
Rule G-15(f) were limited to positions below the minimum denomination, with no
reference to increments. Increment amounts are not uniform in bond documents
across the industry. As described above, information from the commonly used
information service providers regarding permissible increments is not always
available or reliable. All the other changes as detailed in the Notice can be
implemented without delay; the inclusion of the verbiage pertaining to incremental
amounts, however, would potentially require additional implementation time. If
permissible increments are to be incorporated into Rule G-15 and subject to
regulatory review and enforcement, dealers would want to reconfirm the presence
and validity of the data available through the information service providers. This
process may include additional systems development and connectivity testing of
these systems between vendors and dealers. As a result, SIFMA and its members
believe that if the language referencing incremental amounts remains in the
proposed change to Rule G-15(f), additional implementation time would be
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Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 5 of 5
required. Prohibiting trading in amounts that do not conform to the stated
increments also potentially leaves the customer in an untenable position – with a
position in securities they cannot liquidate. For example, if a client has $22,000
position in a security where the minimum denomination and increment
requirements are both $5,000 per the indenture, the customer needs to be permitted
to liquidate the entire $22,000 position, either in whole or in part, regardless of how
that position was created. Any limitation on trading that would make the entire
$22,000 position or the $2,000 tail piece untradeable would be unfair to the
customer.
III.
Conclusion
Again, SIFMA and its members largely support the proposal as stated in the
notice. SIFMA would appreciate, however, if the MSRB would clarify that the
changes in the Notice narrow a current exception to the rule. Also, SIFMA and its
members would appreciate the MSRB’s consideration of our alternatives and
suggestions, as detailed above. We would be pleased to discuss any of these
comments in greater detail, or to provide any other assistance that would be helpful.
If you have any questions, please do not hesitate to contact the undersigned at (212)
313-1130.
Sincerely yours,
Leslie M. Norwood
Managing Director and
Associate General Counsel
cc:
Municipal Securities Rulemaking Board
Lynnette Kelly, Executive Director
Robert Fippinger, Chief Legal Officer
David Saltiel, Chief Economist
Gail Marshall, Associate General Counsel – Enforcement Coordination
Michael B. Cowart, Assistant General Counsel
Barbara Vouté, Municipal Operations Advisor
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Comment on Notice 2016-13
from Thomas Kiernan,
on Thursday, April 7, 2016
Comment:
I would like to see an exception provided to a bond that has been refunded with securities that would mitigate
risk (such as Treasuries or Agencies). A bond that is pre-refunded or escrowed to maturity no longer carries the
characteristics that brought them under the minimum denomination rule.
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Comment on Notice 2016-13
from Rick DeLong, Vista Securities
on Monday, May 9, 2016
Comment:
As market makers in odd-lot municipal securities, we are often asked to bid on amounts of bonds that were
initially issued in five thousand minimum denominations (5m), but through some actions, for example, those
necessary to divide and liquidate estates, the amounts to be bid upon include a “tail”. For example, an owner of
25m bonds has an estate divided between two heirs, with each heir entitled to half of the position, or 12.5m
bonds. While there might be 10 or more bids for a 25m bond piece, there are typically few if any bids for 12.5m.
The resulting difference in the price received by each heir versus the value of the original position could be
hundreds or even thousands of dollars.
To protect investors, either the ability to split denominations below 5m should be prohibited or the trading
restrictions should be removed. We believe there should be no restrictions on trading in these situations, except
an acknowledgement by the customer who ends up with the “tail” that the market for amounts below the issue’s
minimum denomination may be illiquid. This could be accomplished by a letter or e-mail but should not require
a change to the confirmation.
These odd amounts are often liquidated through brokers-brokers or automated trading platforms. The existing
requirements to satisfy the current exemptions discourage many traders from bidding on the bonds, since they
would be relying on the selling dealer and the brokers-broker/platform to provide verification from the selling
client that the sale is a take-out of their entire position. While this has merit in $100m denominated securities
put in place to protect unsophisticated investors, it is unnecessary for unrestricted securities. Existing suitability
rules are sufficient to protect retail investors in these situations. No other notification or verification of
liquidating positions should apply. We believe this would significantly increase the demand for these odd
amounts and reduce the regulatory burden on the dealer community and possibly introduce municipal bonds to
small savers.
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Wells Fargo Advisors, LLC
Regulatory Policy
One North Jefferson Avenue
St. Louis, MO 63103
HO004-095
314-242-3193 (t)
314-875-7805 (f)
Member FINRA/SIPC
May 25, 2016
Mr. Ronald W. Smith, Corporate Secretary
Municipal Securities Rulemaking Board
1900 Duke Street, Suite 600
Alexandria, VA 22314
Via online at http://www.msrb.org/CommentForm.aspx
RE:
Regulatory Notice 2016-13: Request for Comment on Draft Amendments to
MSRB Rule G-15(f) on Minimum Denominations
Dear Mr. Smith:
Wells Fargo Advisors, LLC (“WFA”) appreciates the opportunity to comment on the
Municipal Securities Rulemaking Board (“MSRB” or the “Board”) Regulatory Notice 201613: Request for Comment on Draft Amendments to MSRB Rule G-15(f) on Minimum
Denominations (“Proposed Rule”). 1 We are generally supportive of the Proposed Rule,
however, we believe that the efficacy of the proposed provisions hinge largely on the
definition of “entire position.”
WFA is a dually registered broker-dealer and investment adviser that administers
approximately $1.4 trillion in client assets. We employ approximately 14,988 full-service
financial advisors in branch offices in all 50 states and 3,838 licensed financial specialists in
retail bank branches across the country. 2 WFA and its affiliates help millions of customers of
1
MSRB Regulatory Notice 2016-013: Request for Comment on Draft Amendments to MSRB Rule G-15(f) on
Minimum Denominations, available at: http://www.msrb.org/~/media/Files/Regulatory-Notices/RFCs/201613.ashx?n=1.
2
WFA is a non-bank affiliate of Wells Fargo & Company (“Wells Fargo”), a diversified financial services
company providing banking, insurance, investments, mortgage, and consumer and commercial finance across the
United States of America and internationally. Wells Fargo’s retail brokerage affiliates also include Wells Fargo
Advisors Financial Network LLC (“WFAFN”) and First Clearing LLC, which provides clearing services to 73
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Ronald W. Smith
May 25, 2016
Page 2
varying means and investment needs obtain the advice and guidance they need to achieve
financial goals. Furthermore, WFA offers access to a full range of investment products and
services that retail investors need to pursue these goals.
DISCUSSION
MSRB Rule G-15 generally requires brokers, dealers and municipal securities dealers
from effecting transactions with customers below the minimum denominations specified in
bond documents, with exceptions consistent with the rule’s original intent to protect investors
that own municipal securities in amounts below the minimum denomination without creating
an additional number of below-denominations positions. In support of the protections
afforded by Rule G-15, broker-dealers are obligated to seek best execution pursuant to Rule
G-18, ensure suitability of recommendations and transactions under Rule G-19 and provide
time of trade disclosures imposed by Rule G-47. Pursuant to such obligations, a dealer must
disclose to a customer at or prior to the time of trade all material information known about the
transaction and/or security. This includes a circumstance where a transaction or position
owned by the customer is below the minimum denomination.
WFA believes the existing exceptions to Rule G-15 generally provide necessary
protections to clients without adversely affecting the liquidity of the positions. The proposed
exceptions align with the intent of Rule G-15 and are beneficial to both clients and dealers.
Under the Rule G-15(f)(ii) exception, dealers are permitted to buy an amount below the
minimum denomination from a customer if the dealer determines that the customer’s position
in the issue is already below the minimum denomination and that the entire position would be
liquidated by the transaction. Under Rule G-15(f)(iii) dealers are also permitted to sell an
amount below the minimum denomination to a customer if the dealer determines that the
position being sold is the result of a customer liquidating an entire position below the
minimum denomination, as described in subsection (f)(ii), provided the necessary disclosures
are made.
WFA suggests that additional guidance be provided in defining “entire position.” We
look to the following example to illustrate the implications: A client owns $23,000 par
amount of a municipal bond that has a minimum denomination and minimum increment of
$5,000. Under the proposed language, the “entire position” must be liquidated. Is the entire
position the total client holding ($23,000), or is the entire position the amount above the
minimum denomination multiple ($3,000)?
The primary benefit in establishing the “entire position” as the amount above the
minimum denomination multiple is increased liquidity for the client. The client would be able
to liquidate the portion of their holding that does not conform to the rule without selling the
entire bond position. In addition to re-selling the below denomination to one client, WFA
believes firms should have the ability to sell any amount to holders that result in clients
correspondent clients, WFA and WFAFN. For the ease of discussion, this letter will use WFA to refer to all of
those brokerage operations.
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Ronald W. Smith
May 25, 2016
Page 3
holding a position that conforms to both minimum denominations and minimum increments.
Thus, using the example above, if a client sold the $3,000 bond position, those bonds could be
sold to three different holders that each held a $9,000 position resulting in three separate
positons that now meet the proper minimum and multiple denomination.
Firms also need guidance related to minimum increments. Using the example above, if
the client wanted to sell $13,000 of their $23,000 bond holding, the firm should have the same
flexibility to re-sell the $3,000 position which represents the amount below the minimum
increment of $5,000.
In many cases, clients that hold positions that do not meet either the minimum
denomination or minimum increment are the result of an operational limitation such as an
estate or family settlement. We believe that increased flexibility related to how these positions
are traded will result in increased liquidity and pricing for clients.
CONCLUSION
WFA prides itself in our continued efforts in providing exceptional service to our
clients, including situations affected by Rule G-15 where liquidity may become a concern.
Accordingly, we would appreciate additional clarification from the Board in regards to the
definition of “entire position” to enhance our clients access to market liquidity.
WFA appreciates the opportunity to respond to the Proposed Rule and commends the
Board in its continuing efforts to recognize exceptions that help clients overcome some
potential and unnecessary negative implications of the rule. We also request the above noted
clarification. If you would like to further discuss this issue, please contact me at (314)2423193 or [email protected].
Sincerely,
Robert J. McCarthy
Director of Regulatory Policy
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EXHIBIT 2d
MSRB Regulatory Notice 2016-23
Regulatory Notice
0
2016-23
Publication Date
September 27, 2016
Stakeholders
Municipal Securities
Dealers, Issuers,
Investors, General
Public
Notice Type
Request for Comment
Comment Deadline
October 18, 2016
Category
Uniform Practice
Affected Rules
Rule G-15
Second Request for Comment on
Draft Provisions on Minimum
Denominations
Overview
The minimum denomination of an issue of municipal securities is the
minimum principal amount of the municipal security that may be sold or
otherwise transferred and is a restriction that is set forth in the bond
offering documents. The Municipal Securities Rulemaking Board (MSRB) is
making a second request for comment on draft provisions on minimum
denominations. The MSRB first sought comment on draft amendments
regarding below-minimum denomination customer transactions to be
included in existing MSRB Rule G-15(f), which were intended to provide
additional exceptions relating to such customer transactions.1 The MSRB
now seeks comment on new MSRB Rule G-49, regarding transactions below
the minimum denomination of an issue of municipal securities. Draft Rule G49 would apply to below-minimum denomination customer and inter-dealer
transactions.
Draft Rule G-49 incorporates the prohibition against trading with a customer
below the minimum denomination of an issue of municipal securities and
two exceptions thereto from existing Rule G-15, on confirmation, clearance,
settlement and other uniform practice requirements with respect to
transactions with customers. Draft Rule G-49 also includes additional
exceptions to the prohibition, revisions to eliminate, in existing and draft
exceptions, the requirement that a dealer obtain a written “liquidation”
statement confirming that a customer of another dealer fully liquidated the
customer’s position, other changes that liberalize certain conditions in
existing and draft exceptions, and a provision that limits below-minimum
denomination transactions in municipal securities among dealers. Draft Rule
G-49, with the additional exceptions and provisions, effectuates the current
MSRB policy to support the practical application of the below-minimum
1
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”).
Receive emails about MSRB
regulatory notices.
© 2016 Municipal Securities Rulemaking Board. All rights reserved.
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1
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denomination prohibition against trading by providing exceptions that are
consistent with the rule’s original intent to protect investors that own belowminimum denomination positions without creating additional belowminimum denomination positions where there once was one.2
Comments should be submitted no later than October 18, 2016, and may be
submitted in electronic or paper form. Comments may be submitted
electronically by clicking here. Comments submitted in paper form should be
sent to Ronald W. Smith, Corporate Secretary, Municipal Securities
Rulemaking Board, 1300 I Street NW, Suite 1000, Washington, DC 20005.
Generally, all comments will be made available for public inspection on the
MSRB’s website.3
Questions about this notice should be directed to Sharon Zackula, Associate
General Counsel, at 202-838-1500.
Summary of Draft Rule G-49
The minimum denomination of an issue of municipal securities is determined
by the issuer at issuance.4 Rule G-15(f), renumbered, with additional draft
provisions and revisions, as draft Rule G-49, prohibits a dealer from effecting
a customer transaction in a municipal security in an amount lower than the
minimum denomination of the issue, provides exceptions to the prohibition,
and also limits inter-dealer below-minimum denomination transactions. The
draft minimum denomination provisions are set forth as new draft Rule G-49
because the MSRB believes that the regulatory framework applicable to
below-minimum denomination transactions will be easier to locate and
2
Securities Exchange Act Release No. 45174, Notice of Filing of Proposed Rule Change by the
Municipal Securities Rulemaking Board Relating to Minimum Denominations (December 19,
2001), 66 FR 67342 (December 28, 2001).
3
Comments generally are posted on the MSRB website without change. For example,
personal identifying information such as name, address, telephone number, or email address
will not be edited from submissions. Therefore, commenters should only submit information
that they wish to make available publicly.
4
An issuer may require that its municipal securities be issued in denominations greater than
$1,000 or the customary $5,000 (e.g., an issuer may seek to restrict sales of its bonds to
sophisticated institutional investors due to concerns regarding the risks of the issuer’s
project, and establish a high minimum denomination, such as $100,000). There may be other
reasons an issuer establishes a high minimum denomination (e.g., for the convenience of
dealing with a limited number of investors or, with respect to the specific issue of municipal
securities, to be exempted from certain provisions of SEC Rule 15c2-12 under section (d) of
the rule).
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better understood if the provisions applicable to customer and inter-dealer
transactions are combined in a stand-alone rule.
Background
In 2002, the MSRB amended Rule G-15, adding paragraph (f), to prohibit
dealers from effecting a transaction with a customer in an amount below the
minimum denomination of the municipal security, and included two
exceptions to the prohibition. The exceptions were provided in order to help
preserve liquidity for below-minimum denomination positions in municipal
securities held by customers.
Existing Rule G-15(f) Exceptions
The first exception, in existing Rule G-15(f)(ii), permits a dealer to purchase
from a customer in an amount below the minimum denomination 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. Rule G-15(f)(iii),
the second existing exception, permits a dealer to sell to a customer an
amount below the minimum denomination if the dealer determines that the
position being sold is the result of a customer liquidating an entire position
below the minimum denomination. The dealer must determine, based on
account records in the dealer’s possession or upon a written statement
provided by the party from which the securities were purchased (i.e., the
liquidating customer or another dealer) that the below-minimum
denomination position is from a customer that fully and completely
liquidated its below-minimum denomination position. When the dealer’s
determination is made based upon a written statement provided by a party
other than the dealer’s own customer, from which the securities were
purchased, commenters and the MSRB have referred to the determination as
the “liquidation statement” requirement. The purpose of this determination
(that the prior customer transaction constituted a complete liquidation) is to
prevent the creation of additional below-minimum denomination positions
held by customers, by preventing multiple dealers, in inter-dealer
transactions, from creating additional below-minimum denomination
positions that are then placed with customers. In addition, under this existing
exception, the dealer must provide written disclosure to the customer that
the quantity of securities being sold is below the minimum denomination for
the issue, 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.
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Additional Exceptions Proposed in First Request for Comment
In April 2016, the MSRB requested comment on two additional exceptions
for dealer sales to customers, explained in greater detail in the First Request
for Comment. Both exceptions were intended to strike an appropriate
balance between the policy objectives of allowing dealers additional
flexibility in customer transactions involving below-minimum denomination
positions to enhance liquidity for customers holding such positions, and not
creating any additional outstanding below-minimum denomination positions
in such securities.
Under the first previously published additional exception, draft Rule G15(f)(iii)(B), if a dealer determines that a below-minimum denomination
position being sold is the result of a customer liquidating an entire position
below the minimum denomination (whether the liquidating customer is a
customer of the dealer or of another dealer from whom the dealer obtains
such securities), the dealer would be permitted to effect a sale below the
minimum denomination with one or more customers that currently own the
issue so long as the increment(s) being sold to the customer(s) is consistent
with any restrictions in the issuer’s authorizing documents, even if the
transaction does not result in a customer increasing its position to an amount
at or above the minimum denomination. Under this draft exception, a dealer
would still be permitted to sell a portion of the below-minimum
denomination position to a maximum of one customer that currently does
not own a position in the issue, consistent with the exception currently
available to dealers in existing Rule G-15(f)(iii).5
Under the second previously published additional exception, draft Rule G15(f)(iv), if a dealer has a position, whether received from a customer or
otherwise, that is below, at or above the minimum denomination, the dealer
would be permitted to effect a sale below the minimum denomination to a
customer that currently owns a below-minimum denomination position,
provided that effecting such transaction results in the customer owning a
position at or above the minimum denomination; and the dealer could then
sell any remaining below-minimum denomination position to one or more
5
Consistent with existing Rule G-15(f), this draft exemption would require a dealer effecting
a sale to a customer of an amount below the minimum denomination to provide, at or
before the completion of the transaction, a written statement informing the customer that
the quantity of securities being sold is below the minimum denomination for the issue and
that this may adversely affect the liquidity of the position unless the customer has other
securities from the issue that can be combined to reach the minimum denomination. This
disclosure would be required with respect to each sale to a customer of a position below the
minimum denomination, even if the customer maintains a position in the issue that is above
the minimum denomination.
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customers that currently own positions in the issue, so long as the
increments sold are consistent with any restrictions in the issuer’s
authorizing documents regarding incremental amounts. A dealer could not,
however, sell any portion to a customer that does not currently have a
position in the issue because the transaction would create a below-minimum
position where there previously was none.
Draft Rule G-49
Minimum Increments. Both draft additional exceptions described above and
published in the First Request for Comment include a condition that a
dealer’s sale to a customer(s) must be consistent with any restrictions in the
issuer’s authorizing documents regarding increment amounts (“minimum
increment condition”). Several commenters were opposed to the inclusion of
the minimum increment condition in the two draft exceptions,6 raising
concerns that the condition would unnecessarily limit the transfer of
positions held by customers rather than provide additional flexibility for such
customers, the condition would potentially reduce liquidity, and the industry
would need additional time to determine the availability and accuracy of
minimum increment data, if the minimum increment condition were
incorporated in the exceptions. The MSRB originally adopted the prohibition
in 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. In
some cases, issuers explicitly stated that higher minimum denominations had
been established in light of the risks the issuers attributed to a particular
issue, and given their views, such issuers intended that the issuances so
identified and subject to a high minimum denomination be placed with
institutional investors. Upon considering the concerns raised by commenters
in response to the First Request for Comment and the policy originally
underlying the prohibition in Rule G-15(f), the MSRB proposes that the
minimum increment conditions be removed. To focus on the concerns
previously raised by issuers, the MSRB seeks comment on the elimination of
the minimum increment conditions in the draft exceptions described above,
renumbered as draft Rule G-49(b)(ii)(B) and (b)(iii).
Liquidation Statement. The MSRB also is proposing to revise two exceptions,
an existing exception and a draft exception previously published, regarding
dealer sales to customers of below-minimum denomination positions. The
revision would eliminate the requirement that a dealer, prior to effecting a
6
The minimum increment condition was included in the First Request for Comment as part
of the draft exceptions under Rule G-15(f)(iii)(B) and (f)(iv). Both exceptions are modified
and included in draft Rule G-49 as draft Rule G-49(b)(ii)(B) and (b)(iii).
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sale to a customer in a below-minimum denomination position, confirm by
obtaining a liquidation statement from a person other than the dealer’s
customer, such as another dealer, from which the below-minimum
denomination position was purchased, that the position is from a customer
that fully and completely liquidated its below-minimum denomination
position. The MSRB is proposing to eliminate the liquidation statement
requirement in response to numerous concerns raised by commenters.
Commenters noted that dealers may desire to sell below-minimum
denomination positions using alternative trading systems (“ATSs”), or, in
some cases, broker’s brokers, and requiring the liquidation statement
becomes an unnecessary impediment to using such trading venues for the
transfer of below-minimum denomination positions. Commenters also noted
the compliance issues that may arise when a dealer seeking to sell a
customer a below-minimum denomination position in securities under either
the existing exception or the draft exception, must rely upon another dealer,
or an ATS or a broker’s broker, to provide a liquidation statement to verify
that the position the dealer intends to sell represents the complete
liquidation of a below-minimum denomination position by a prior selling
customer. Commenters stated that a dealer may be subject to disciplinary
action, including penalties for non-compliance, if a dealer cannot prove the
liquidation occurred. Given these concerns, commenters believed that the
requirement to verify the prior customer’s complete liquidation of its
position discourages many traders from bidding on below-minimum
denomination positions. In light of the views that the liquidation statement
requirement, which was incorporated in two of the three existing or draft
exceptions providing for sales to customers, reduces the utility of any such
exception, and does not enhance liquidity and trading options for dealers
and their customers, the MSRB is proposing in draft Rule G-49 to revise the
existing exception and the draft exception to delete the liquidation
statement requirement. The MSRB believes, however, that the requirement
that a dealer confirm that a selling customer fully liquidated its position
should continue to apply to a dealer that buys from its customer and then
sells to another of its customers. In such cases, the dealer is in a position to
know or make inquiry of its customer to determine that its customer has fully
liquidated its position. Specifically, the MSRB seeks comment on the
elimination of the liquidation statement requirement in draft Rule G49(b)(ii)(A)7 and draft Rule G-49(b)(ii)(B), and also seeks comment on the
retention in the same provisions of the requirement that a dealer confirm,
before selling a below-minimum denomination position to its customer, that
7
The exception in draft Rule G-49(b)(ii)(A) is the exception set forth in existing Rule G15(f)(iii).
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the selling customer has fully liquidated its position when the dealer buys
from its customer and then sells to another of its customers.
Limitations Applicable to Inter-Dealer Transactions. The MSRB believes that if
the liquidation statement requirement is eliminated as proposed, a new
safeguard would be needed to substitute for the liquidation statement in
order to avoid, in inter-dealer transactions, the creation of additional belowminimum denomination positions that subsequently may be placed with
customers. To address this issue, the MSRB also seeks comment on draft
Rule G-49(c), a provision which prohibits a dealer, in an inter-dealer trade,
from selling less than all of a below-minimum denomination position that
such dealer acquired either from a customer that fully liquidated its belowminimum denomination position or from another dealer.
Customer Account Records; Disclosure. Draft Rule G-49(b)(iv) provides that a
dealer effecting a purchase from or a sale to a customer under section (b) of
the draft rule must determine its customer’s position in the subject security
based upon the account records in the dealer’s possession or upon a written
statement provided to the dealer by its customer. In addition, in sales to
customers in compliance with the exceptions set forth in draft subsection
(b)(ii) or (b)(iii), the dealer is required to give or send to the customer a
written statement informing the customer that the quantity of securities
being sold is below the minimum denomination for the issue and this may
adversely affect the liquidity of the customer’s position unless the customer
has other securities from the issue that can be combined to reach the
minimum denomination of the issue. The draft rule also provides that the
written statement may be included in the customer’s confirmation or
provided on a separate document.
Draft Rule G-49(b)(iv) differs from existing Rule G-15(f) and the draft rule text
previously proposed in two material respects. Draft Rule G-49(b)(iv) omits
the requirement regarding the provision or receipt of a liquidation statement
among dealers. Instead, the dealer is required to determine the position only
of the dealer’s own customer in a subject security. Like the existing provision
and the draft rule text previously proposed, the dealer’s determination
would be made based upon the account records in the dealer’s possession or
upon a written statement provided to the dealer by its customer. In addition,
in connection with the disclosure requirements incorporated in draft Rule G49(b)(iv), commenters noted that if a customer is brought up to or over the
minimum denomination of an issue under the draft exception in Rule G49(b)(iii), the disclosures designed to inform a customer holding a belowminimum denomination position that liquidity may be adversely impacted
may not be necessary. The MSRB agrees at this juncture and requests
comment on omitting this disclosure requirement as to a specific customer
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brought up to or over the minimum denomination pursuant to a dealer sale
to such customer under draft Rule G-49(b)(iii).
The MSRB believes that draft Rule G-49, which addresses additional trading
scenarios and eliminates the liquidation statement requirement, which
commenters believe inhibited trading by dealers in below-minimum
denomination positions to the detriment of customers, strikes an
appropriate balance. The draft rule is intended to provide enhanced liquidity
for customers that hold below-minimum denomination positions in
municipal securities, while restricting the creation of additional belowminimum positions.
The MSRB also again reminds dealers that other rules apply to belowminimum denomination transactions with customers, including (but not
limited to) MSRB Rule G-18, on best execution; MSRB Rule G-19, on
suitability of recommendations and transactions; and MSRB Rule G-47, on
time of trade disclosure, supplementing the protections afforded by existing
Rule G-15(f).8 Readers should refer to the First Request for Comment, and
the applicable MSRB rules, for additional information regarding dealer’s
obligations to customers under these rules.
Economic Analysis
1. The need for draft Rule G-49 and how it will meet that need.
As noted previously, the need for draft Rule G-49 (previously, draft
amendments to existing Rule G-15(f)) arises primarily from a recognition that
there are trading scenarios prohibited by the existing rule that, if allowed,
would likely increase the ability of investors currently holding belowminimum denomination positions to exit those positions and/or reduce the
burden on dealers associated with implementing existing Rule G-15(f) while
not increasing the net number of below-minimum denomination positions.
While existing Rule G-15(f) provides a mechanism for a customer with a
below-minimum denomination position to either exit his or her position
entirely or purchase a portion of a municipal securities issue below the
minimum denomination so that the customer may own, as a result of the
purchase, a position at or above the minimum denomination of the issue, in
practice the existing options may be unattractive to dealers under some
scenarios.
8
The obligations of a dealer differ if the conditions are met for treating the customer as a
Sophisticated Municipal Market Professional (SMMP). See MSRB Rule G-48.
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Dealers may be dissuaded from utilizing the existing exceptions in Rule G15(f) to effect a transaction in a security subject to a minimum denomination
given the likely difficulty of identifying a buyer willing and able to purchase a
below-minimum denomination position. As a result, customers with belowminimum denomination positions, including those that acquired the
positions as a result of divorce or inheritance, may find it more difficult to
access liquidity.
Dealers may also be dissuaded from utilizing the existing or the previously
proposed exceptions to Rule G-15(f) if they plan to utilize an alternative
trading system or brokers-broker to trade bonds acquired under the
exceptions given the view that other dealers are less willing to bid on belowminimum denomination positions given the requirement of the bidding
dealer to obtain a liquidation statement from the selling dealer. This
impediment to the use of inter-dealer trading platforms may further impair
liquidity and harm investors.
Draft Rule G-49 seeks to provide additional exceptions and to reduce
burdens on dealers that may make it easier for investors with belowminimum denomination positions to access liquidity.
2. Relevant baselines against which the likely economic impact of
elements of draft Rule G-49 should be considered.
The relevant baseline against which the likely economic impact of draft Rule
G-49 should be considered is existing Rule G-15(f), which generally prohibits
a dealer from effecting a transaction with a customer below the minimum
denomination specified in an issuer’s bond documents and requires dealers
purchasing below-minimum denomination positions from other dealers to
obtain a liquidation statement. In addition, as noted above, Rules G-18, G-19
and G-47 impose regulatory requirements on dealers regarding customer
transactions that supplement the protections afforded by Rule G-15(f) with
respect to minimum denominations.
3. Identifying and evaluating reasonable alternative regulatory
approaches.
The MSRB recognizes that there are alternatives to the approach taken in
draft Rule G-49. The MSRB could propose additional exceptions and/or
further liberalize one or more of the existing exceptions. While the MSRB
recognizes that such alternatives might reduce the burden on dealers and
increase the liquidity of below-minimum denomination positions, the MSRB
believes that they would also be likely to increase the number of below-
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minimum denomination positions that potentially put customers at risk. The
MSRB could also eliminate all exceptions. While the MSRB believes that,
given the current market, below-minimum denomination positions are
generally unfavorable, the MSRB recognizes that completely eliminating the
ability of investors to exit these positions would likely result in greater harm.
4. Assessing the benefits and costs of draft Rule G-49.
The MSRB policy on economic analysis in rulemaking addresses consideration
of the likely costs and benefits of draft Rule G-49 fully implemented against
the context of the economic baseline discussed above. The MSRB is seeking,
as part of this request for comment, data or studies relevant to the
determination of the number of existing below-minimum denomination
positions, the relative difficulty of exiting or adding to these positions, the
impact of these positions on customers, and the costs the existing rule
imposes on dealers.
Preliminarily, the MSRB has evaluated the benefits and costs associated with
draft Rule G-49 as follows:
Benefits
The MSRB believes that draft Rule G-49 may reduce the number of belowminimum denomination positions, increase the ability of customers currently
holding below-denomination positions to exit those positions and/or reduce
the burden on dealers associated with implementing the applicable MSRB
below-minimum denomination regulations.
Costs
The MSRB’s analysis of the potential costs does not consider all of the costs
associated with the proposal, but instead focuses on the incremental costs
attributable to it that exceed the baseline state. The costs associated with
the baseline state are, in effect, subtracted from the costs associated with
draft Rule G-49 to isolate the costs attributable to the incremental
requirements of the draft rule.
The MSRB recognizes that some dealers may incur costs should they utilize
either of the two additional proposed exceptions, but as the choice of
whether and when to exercise these exceptions is wholly within a dealer’s
discretion, the MSRB does not believe that the creation of the exceptions per
se would result in any new costs for dealers.
The MSRB also recognizes that some dealers may incur costs associated with
the proposed new requirement in draft Rule G-49 regarding inter-dealer
transactions, but based on prior comments, the MSRB believes that the
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benefit of eliminating the liquidation statement, which is facilitated by the
proposed addition of the provision regarding inter-dealer transactions, will
outweigh any costs.
The MSRB does not believe that draft Rule G-49 is likely to result in a net
increase in the number of below-minimum denomination positions. The
MSRB also has no reason to believe that any new below-minimum
denomination positions associated with draft Rule G-49 would be held by a
significantly different or less sophisticated group of customers than the
group currently holding below-minimum denomination positions. Therefore,
the MSRB does not believe that there are any additional costs for customers
and the draft rule may, as discussed above, actually reduce costs by
increasing liquidity.
The MSRB is not aware of any available data that would support a
quantitative estimate of the overall impact of draft Rule G-49. The MSRB
specifically seeks comments that would inform a quantitative estimate of the
benefits and costs associated with the draft rule.
Effect on Competition, Efficiency and Capital Formation
The MSRB believes that draft Rule G-49 may improve capital formation and
efficiency to the extent it results in improved access to liquidity for those
customers holding below-minimum denomination positions.
The MSRB believes that larger dealers with larger inventories and larger
numbers of customers may be better positioned to make use of these
exceptions, but does not believe this significantly improves their competitive
position or significantly burdens dealers that may be less able to effect
transactions pursuant to the exceptions.
Questions
The MSRB seeks public comment on all aspects of the proposal and
specifically requests comment concerning the following questions, as well as
any other comments on the subject of transactions in amounts below the
minimum denomination. The MSRB welcomes information regarding the
potential to quantify the likely benefits and costs of draft Rule G-49. The
MSRB requests comment on any competitive or anticompetitive effects, as
well as efficiency and capital formation effects of draft Rule G-49 on any
market participants. The MSRB particularly welcomes statistical, empirical
and other data from commenters that may support their views and/or
support or refute the views or assumptions in this request for comment.
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1. As designed, does draft Rule G-49 serve to improve liquidity for
investors without increasing the number of customers maintaining
positions in municipal securities below the minimum denomination?
2. Is there quantitative or qualitative data available that would allow the
MSRB to estimate the number of investors holding below-minimum
denomination positions?
3. Would any or all exceptions continue to appropriately balance the
interests of issuers, customers, dealers and the market as a whole?
4. Are there other trading scenarios that would likewise enhance
liquidity for customers without increasing the number of customers
holding a position below the minimum denomination?
5. Should the exception permitting a dealer to purchase from a
customer a position below the minimum denomination apply when
that customer’s below-minimum denomination position is a result of
an allocation in a managed account from a position purchased in an
amount equal to or above the minimum denomination?
6. Are there other scenarios not already identified that cause a
customer position to be below the minimum denomination?
7. Should dealers have to provide the written statement informing the
customer that the quantity of securities being sold is below the
minimum denomination for the issue and that this may adversely
affect the liquidity of the position if the dealer has already
determined that the sale to the customer below the minimum
denomination results in the customer being at or above the minimum
denomination?
8. Is there quantitative or qualitative information available that would
allow the MSRB to estimate the economic impact of the limited
liquidity of below-minimum denomination positions and/or the
potential effect of the draft amendments?
9. Do the alternatives identified above represent a comprehensive set of
reasonable regulatory alternatives or are there alternative methods
the MSRB should consider regarding permissible transactions below
the minimum denomination of an issue that would be more effective
and/or less burdensome?
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10. To what extent have MSRB registrants found it difficult or costly to
comply with the existing rule? If possible, please quantify the impact
of these challenges.
11. What is, per firm, the annual cost of compliance with existing Rule G15(f)?
12. Is there a reasonable basis or framework upon which the MSRB might
evaluate the extent to which draft Rule G-49 would impact the
burden of compliance on dealers?
13. Are there other relevant baselines that the MSRB should consider
when evaluating the economic impact of the proposal?
14. Are commenters aware of any studies assessing the impact of
investors holding below-minimum denomination positions?
September 27, 2016
*****
Text of Draft Amendments
Rule G-15: Confirmation, Clearance, Settlement and Other Uniform Practice Requirements with Respect
to Transactions with Customers
(a) – (e) No change.
(f) Reserved. Minimum Denominations.
(i) Except as provided in this section (f), a broker, dealer or municipal securities dealer shall not
effect a customer transaction in municipal securities issued after June 1, 2002 in an amount lower than the
minimum denomination of the issue.
(ii) The prohibition in subsection (f)(i) of this rule shall not apply to the purchase of securities from
a customer in an amount below the minimum denomination if the broker, dealer or municipal securities
dealer determines that the customer’s position in the issue already is below the minimum denomination
and that the entire position would be liquidated by the transaction. In determining whether this is the
case, a broker, dealer or municipal securities dealer may rely either upon customer account information in
its possession or upon a written statement by the customer as to its position in an issue.
(iii) The prohibition in subsection (f)(i) of this rule shall not apply to the sale of securities to a
customer in an amount below the minimum denomination if the broker, dealer or municipal securities

Underlining indicates new language; strikethrough denotes deletions.
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dealer determines that the securities position being sold is the result of a customer liquidating a position
below the minimum denomination, as described in subsection (f)(ii) of this rule. In determining whether
this is the case, a broker, dealer or municipal securities dealer may rely upon customer account records in
its possession or upon a written statement provided by the party from which the securities are purchased.
A broker, dealer or municipal securities dealer effecting a sale to a customer under this subsection (iii)
shall at or before the completion of the transaction, give or send to the customer a written statement
informing the customer that the quantity of securities being sold is below the minimum denomination for
the issue and that this may adversely affect the liquidity of the position unless the customer has other
securities from the issue that can be combined to reach the minimum denomination. Such written
statement may be included on the customer’s confirmation or may be provided on a document separate
from the confirmation.
(g) No change.
*****
Rule G-49: Transactions Below the Minimum Denomination of an Issue
(a) Prohibition Applicable to a Customer Transaction
Except as provided in section (b), a broker, dealer or municipal securities dealer (“dealer”) shall not
effect a customer transaction in municipal securities issued after June 1, 2002 in an amount lower than the
minimum denomination of the issue.
(b) Exceptions to Prohibition Applicable to a Customer Transaction
(i) The prohibition in section (a) of this rule shall not apply to the purchase of securities from a
customer in an amount below the minimum denomination if the dealer determines that the customer’s
position in the issue already is below the minimum denomination and the entire position of the customer
would be liquidated by the transaction.
(ii) The prohibition in section (a) of this rule shall not apply to the sale of securities to a customer in
an amount below the minimum denomination, provided that the below-minimum denomination position
being sold is the same amount as the below-minimum denomination position that the dealer acquired
from a customer in a transaction where such customer fully liquidated its position in the security, as
described in section (b)(i) of this rule; or, the below-minimum denomination position being sold was
acquired by the dealer in an inter-dealer transaction and the amount being sold under paragraph (A) or, in
the aggregate, under paragraph (B), of this subsection is the same amount as the below-minimum
denomination position that the dealer acquired in the inter-dealer transaction. In effecting such a sale to a
customer in an amount below the minimum denomination, the dealer may:
(A) Sell the entire below-minimum denomination position to one customer; or
(B) Sell the entire, or a portion of, the 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, even if the transaction(s) do not result in a
customer increasing its position to an amount at or above the minimum denomination.
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(iii) The prohibition in section (a) of this rule shall not apply to a sale of securities to a customer in
an amount below the minimum denomination if the customer already has a position in the issue below the
minimum denomination and the sale will result in the customer having a position at or above the
minimum denomination. The dealer may then sell any remaining portion of the below-minimum
denomination position to one or more customers that already have a position in the issue.
(iv) A dealer effecting a purchase from or sale to a customer under this section (b) shall determine
its customer’s position in the subject security based upon the account records in the dealer’s possession or
upon a written statement provided to the dealer by its customer. A dealer effecting a sale to a customer
under subsection (ii) or (iii), shall at or before the completion of the transaction, give or send to the
customer a written statement informing the customer that the quantity of securities being sold is below
the minimum denomination for the issue and this may adversely affect the liquidity of the position unless
the customer has other securities from the issue that can be combined to reach the minimum
denomination of the issue. A dealer shall not be required to give or send a customer such written
statement if, pursuant to subsection (b)(iii) of this rule, the dealer effects the sale of securities to the
customer and the sale results in the customer having a position at or above the minimum denomination.
Such written statement may be included on the customer’s confirmation or may be provided on a
document separate from the confirmation.
(c) Limitations Applicable to a Transaction Between Dealers
A dealer shall not sell municipal securities issued after June 1, 2002 to another dealer in an amount
below the minimum denomination of the issue, unless the dealer acquired the below-minimum
denomination position from a customer in compliance with section (b)(i) of this rule or acquired the
below-minimum denomination position from another dealer, and sells such securities to a dealer in a
transaction at an amount that is equal to or greater than the amount of the below-minimum
denomination position acquired.
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EXHIBIT 2e
ALPHABETICAL LIST OF COMMENT LETTERS ON MSRB NOTICE 2016-23
(SEPTEMBER 27, 2016)
1. Bond Dealers of America: Letter from Mike Nicholas, Chief Executive Officer, dated
October 18, 2016
2. Darcy Versions I and II: E-mail from G. Letti dated September 27, 2016
3. Financial Services Institute: Letter from David T. Bellaire, Executive Vice President &
General Counsel, dated October 11, 2016
4. James J. Angel: Letter dated October 22, 2016
5. National Association of Bond Lawyers: Letter from Clifford M. Gerber, President, dated
December 23, 2016
6. Romano Brothers & Co.: Letter from Eric Bederman, Chief Operating and Compliance
Officer, dated October 18, 2016
7. Securities Industry and Financial Markets Association: Letter from Leslie M. Norwood,
Managing Director and Associate General Counsel, dated October 18, 2016
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EXHIBIT 2f
October 18, 2016
Submitted Electronically
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1300 I Street NW
Washington, DC 20005
RE: Second Request for Comment on Draft Provisions on Minimum Denominations
(MSRB 2016-23)
Dear Mr. Smith:
On behalf of the Bond Dealers of America (“BDA”), I am pleased to submit this
letter in response to the MSRB’s second request for comment, which includes the newly
proposed MSRB Rule G-49. BDA members appreciate the efforts that the MSRB has
taken to propose a rule that allows for greater flexibility for investors and dealers when
transacting in municipal security issuances below the minimum denomination. As
drafted, the proposed rule is extraordinarily complex and dealers have serious concerns
with confusion arising regarding different interpretations of what is a permissible
transaction under the rule. From a practical standpoint, the result of this complexity is
that customers will be left with positions in municipal securities that they will not be able
to trade or will only be able to trade at inferior prices. This is especially frustrating for
municipal securities issuances without heightened suitability concerns that were issued
with the standard market convention of a $5,000 minimum denomination. BDA members
believe that the proposed Rule G-49 should recognize the fundamental difference
between a minimum denomination established by an issuer in order to restrict sales to
sophisticated institutional investors and the standard minimum increments that are the
long-time, and frankly antiquated, convention in the municipal securities market. BDA
believes that the proposed rule should be more narrowly focused on the issuances for
which issuers have intentionally established higher minimum denominations in order to
restrict the sales of bonds to only sophisticated investors.
BDA believes that proposed MSRB Rule G-49 should be focused on issuances
with ‘minimum authorized denominations’ of $100,000 and above.
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BDA believes that draft MSRB Rule G-49 should apply to issuances with
‘minimum authorized denominations’ of $100,000 or greater. BDA shares the MSRB’s
concerns related to investor suitability associated with issuances for which the issuer has
intentionally established a ‘minimum authorized denomination’ in order to ensure the
securities are sold to sophisticated investors. However, the proposed rule does not
differentiate between intentional issuer-driven decisions to limit the sale of the securities
to sophisticated investors (suitability concerns) with the practical reality that municipal
securities are sold with ‘minimum authorized denominations’ (market convention).
BDA believes G-15 and proposed G-49 derive their complexity from the lack of
clear delineation between minimum denominations set due to suitability concerns and
minimum denominations established due to long-time market convention—unrelated to
heightened investor protection concerns. For example, the rule would apply the same
complex set rules for transacting in $4,000 of AAA-rated General Obligation bonds
issued by Anne Arundel County, Maryland ($5,000 minimum increment) to a transaction
in a bond issued with a minimum denomination of $100,000 sold to no more than 35
sophisticated investors under an exemption from SEC Rule 15c2-12.
The practical impact of approaching the $5,000 minimum increment in the Anne
Arundel County GOs as a suitability issue is that liquidity in the investment is harmed by
the complexity of existing Rule G-15 or proposed rule G-49 with no tangible benefit to
investor protection. An investor that holds $14,000 Anne Arundel GOs (or 14 par-value
bonds) is harmed by G-15 because if they were to sell $10,000 in par-value bonds the
value of their $4,000 bond position is priced to reflect the inherent illiquidity that is a
consequence of the rule. Therefore, the rule impacts the pricing and liquidity of that
$4,000 bond position. Therefore, BDA believes the structure to allow for the permissible
trade in the Anne Arundel GOs, which is predicated on an investor protection concern,
actually harms the investor. That is, the rule would protect investors from the problem
that these positions may lack liquidity, but that liquidity problem itself was only
artificially created by the rule.
BDA urges the MSRB to re-focus the proposed rule on issuances with higher
minimum denominations, such as $25,000, $50,000, or $100,000 that have been set due
to explicit suitability concerns. BDA recommends a rule focused on minimum authorized
dominations of $100,000 or more to harmonize with the exemption from 15c2-12 so that
the marketplace has one understanding of what the issues with heightened investor
protection concerns are.
BDA believes that dealers should be granted greater flexibility to sell positions
acquired in a transaction with a customer to another dealer.
Under proposed Rule G-49 the following transaction scenario is not permissible:
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Consider an issuance with a minimum denomination of 100 bonds. Customer A
owns 75 bonds and liquidates that entire position in a transaction with a dealer. The
dealer owns 75 bonds and subsequently sells 50 bonds out of the 75 bond position to
Customer B in a transaction that brings Customer B’s holdings to 100 bonds or greater—
above the minimum denomination. Under the proposed rule, the dealer would only be
allowed to sell the remaining 25 bonds to one or more customers that have an existing
position in the issue. It would be impermissible to sell the remaining position to another
dealer under both section (b)(ii)(B) and section (c). BDA members believe that, in this
instance, inter-dealer sales should be given the same treatment as customer sales. The
practical result of denying dealers with this flexibility is that dealers will be left with
positions that will not trade and, therefore, dealers will not provide liquidity in certain
situations.
**
In conclusion, BDA agrees with the MSRB that there needs to be a structure that
allows for greater flexibility to execute permissible transactions in below minimum
denomination quantities. However, BDA urges MSRB to acknowledge that most
minimum authorized denominations are not established with suitability concerns in mind.
Therefore, BDA urges the MSRB to focus the rule on the issuances that have higher
minimum denominations for the express purpose of restricting the sale of bonds to
sophisticated investors. This change will allow bonds with minimum denominations set
due to normal market convention to freely trade without a detrimental impact on
liquidity, pricing, or investor protection.
Sincerely,
Mike Nicholas
Chief Executive Officer
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Comment on Notice 2016-23
from G. Letti, DARCY VERSIONS I and II
on Tuesday, September 27, 2016
Comment:
We believe the Rule is exceptionally well-written , covers all exceptions beautifully, is simple and easy to
understand by any experienced broker, dealer, trader and investor.
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VIA ELECTRONIC MAIL
October 11, 2016
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1300 I Street NW, Suite 1000
Washington, DC 20005
Re:
Second Request for Comment on Draft Provisions on Minimum Denominations
Dear Mr. Smith:
On September 27, 2016, the Municipal Securities Rulemaking Board (MSRB) published its
second request for public comment on draft provisions on minimum denominations (Draft
Provisions).1 The Draft Provisions would create new MSRB Rule G-49, expanding exceptions to
the prohibition on below-minimum denomination transactions in a stand-alone rule to make them
easier to locate and understand.
The Financial Services Institute2 (FSI) appreciates the opportunity to comment on this
important proposal. FSI and its members support the MSRB’s efforts to create more flexibility in
how firms and customers may reconcile below-minimum denomination transactions. FSI believes
the Draft Provisions remove requirements that unnecessarily inhibit trading by dealers in such
positions in municipal securities, often to the detriment of customers. We also believe the Draft
Provisions strike an appropriate balance between enhancing liquidity and restricting the creation
of additional below-minimum positions.
Background on FSI Members
The independent financial services community has been an important and active part of
the lives of American investors for more than 40 years. In the U.S., there are approximately
167,000 independent financial advisors, which account for approximately 64.5% percent of all
producing registered representatives3. These financial advisors are self-employed independent
contractors, rather than employees of Independent Broker-Dealers (IBD).
Second Request for Comment on Draft Provisions on Minimum Denominations, MSRB Notice 2016-23, September 27,
2016.
2 The Financial Services Institute (FSI) is an advocacy association comprised of members from the independent
financial services industry, and is the only organization advocating solely on behalf of independent financial advisors
and independent financial services firms. Since 2004, through advocacy, education and public awareness, FSI has
been working to create a healthier regulatory environment for these members so they can provide affordable,
objective financial advice to hard-working Main Street Americans.
3 The use of the term “financial advisor” or “advisor” in this letter is a reference to an individual who is a registered
representative of a broker-dealer, an investment adviser representative of a registered investment adviser firm, or a
1
th
888 373-1840 | 607 14 Street NW | Suite 750 | Washington, D.C. 20005 | financialservices.org
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Ronald W. Smith
October 18, 2016
Page 2 of 3
FSI member firms provide business support to financial advisors in addition to supervising
their business practices and arranging for the execution and clearing of customer transactions.
Independent financial advisors are small-business owners who typically have strong ties to their
communities and know their clients personally. These financial advisors provide comprehensive
and affordable financial services that help millions of individuals, families, small businesses,
associations, organizations and retirement plans with financial education, planning,
implementation, and investment monitoring. Due to their unique business model, FSI member firms
and their affiliated financial advisors are especially well positioned to provide middle-class
Americans with the financial advice, products, and services necessary to achieve their investment
goals.
Discussion
FSI appreciates the opportunity to comment on the Draft Provisions. FSI applauds the MSRB’s
efforts to reduce the regulatory burden on dealers while facilitating access to liquidity for those
investors with below-minimum denomination positions. We also applaud the MSRB’s efforts to
make the exceptions and guidance into a stand-alone rule so it is easily accessible and the
requirements more clearly outlined for firms. We offer additional supportive comments below.
Existing Rule G-15(f) prohibits dealers from trading in amounts below the minimum
denomination of a municipal security, but contains two exceptions in order to preserve liquidity for
such positions already held by customers. FSI agrees with the MSRB that there are trading
scenarios currently prohibited that, if allowed, would likely increase the ability of customers
holding below-minimum denomination positions to exit those positions. As a result, the Draft
Provisions will reduce the burden on dealers of implementing the existing prohibitions and benefit
customers.
In April 2016, the MSRB requested comment on two additional proposed exceptions 4, which
would not allow sales that would create a below-minimum position where there previously was
none (Minimum Increment Condition). At that time, several commenters expressed concern that this
Minimum Increment Condition would unnecessarily limit the transfer of positions, resulting in
reduced liquidity.5 FSI agrees that eliminating the Minimum Increment Condition from draft Rule
G-49 will allow dealers additional flexibility in transactions involving below-minimum
denomination positions, and will enhance liquidity for customers holding such positions without
creating additional outstanding positions.
The Draft Provisions would eliminate the requirement that a dealer obtain a written statement
from someone other than the customer that the customer’s position was fully liquidated prior to
making a sale. Previous commenters observed that this requirement would prevent dealers from
using alternative trading systems or broker’s brokers. 6 FSI supports eliminating the liquidation
statement requirement from the Draft Provisions as including it would result in less flexibility for
dual registrant. The use of the term “investment adviser” or “adviser” in this letter is a reference to a firm or
individual registered with the SEC or state securities division as an investment adviser.
4 Request for Comment on Draft Amendments to MSRB Rule G-15(f) on Minimum Denominations, MSRB Notice 2016-13,
April 7, 2016.
5
MSRB Notice 2016-23 supra. at 5.
6
Id. at 6.
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Ronald W. Smith
October 18, 2016
Page 3 of 3
dealers and would not enhance liquidity for customers holding below-minimum denomination
positions.
For the above reasons FSI’s members encourage the adoption of the Draft Positions as
modified from the original proposal. The Draft Provisions will result in enhanced liquidity for
customers and the new rule G-49 would provide important clarification for firms in complying with
the requirements. We applaud the MSRB for making these changes.
Conclusion
We are committed to constructive engagement in the regulatory process and welcome the
opportunity to work with the MSRB on this and other important regulatory efforts
Thank you for considering FSI’s comments. Should you have any questions, please contact
me at (202) 803-6061.
Respectfully submitted,
David T. Bellaire, Esq.
Executive Vice President & General Counsel
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James J. Angel, Ph.D., CFA
Associate Professor of Finance
Georgetown University1
McDonough School of Business
Washington DC 20057
[email protected]
1 (202) 687-3765
Twitter: @GuFinProf
Ronald W. Smith, Corporate Secretary
Municipal Securities Rulemaking Board
1300 I Street NW, Suite 1000
Washington, DC 20005
Re: Draft Rule G-49
October 22, 2016
Dear Mr. Smith:
I am a finance professor at Georgetown University and an individual investor. The courses I teach
include Fixed Income Securities to both undergraduates and MBAs. Here are my comments on the
proposed Rule G-49, which refines the no longer needed prohibition on transactions in less than the
minimum denomination of a municipal security.
Background
In the bad old days of paper certificates, bonds were physical items, each with a particular par value. It
was impractical to issue or trade a bond in anything other than a round lot. Typical physical bonds had a
face or par value of $1,000. Rule 15(f) was passed in 2002 that prohibited dealers from selling bonds in
less than the minimum denomination or trading them in less than the minimum increment. The purported
1
All opinions are strictly my own and do not necessarily represent those of Georgetown University or anyone else
for that matter
1
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purpose of the prohibition was to prevent retail investors from investing in bonds that were too complex
or too risky. The proposed changes add two minor exceptions to the prohibition. The proposal, however,
fails to consider an alternative much better than merely adding two minor exceptions. The board should
seriously consider the alternative of scrapping this obsolete rule entirely.
The Board has requested comment on “all aspects of the proposal.” This is a good time to re-examine
whether the prohibition has met its objectives and whether it is still needed given the changes that have
occurred in our financial markets since the rule was first adopted in 2002.
The prohibition is no longer needed since other advances help achieve the objective of consumer
protection. The prohibition should be scrapped.
Our financial markets have changed significantly since 2002. Our markets are now more automated, and
investors now have much more information available than they did many years ago. MSRB’s EMMA
was launched in 2008 and provides much needed access to information about municipal securities to
investors. Investors now have much better access to important documents, trade prices, and continuing
disclosure. Indeed, the average retail investor now has instant free access to more information than even a
professional could obtain at any price only a few short years ago. The MSRB is to be commended for the
improvements it has fostered in the municipal markets.
The prohibition on trading in smaller increments was a crude attempt to protect investors in an era when
information about municipal issues and municipal issuers was much harder to obtain. As information is
much more easily available now, this limitation has outlived its usefulness. Indeed, the prohibition has
serious adverse consequences that would be eliminated if this obsolete rule were scrapped.
The DOL’s new fiduciary rule increases protections for retail investors.
Not only do investors now have much better information than a few years ago, but there has been a
general upward shift in the standards of care applicable to retail investors. The Department of Labor’s
new rules applicable to retirement accounts generally requires brokers to act in the best interest of their
retirement account customers. The SEC is allegedly working on similar rules for other brokerage and
advisory accounts. These new rules provide additional protections for investors from the risk that careless
or unscrupulous brokers will stuff unsuitable risky municipal bonds into the portfolios of unsophisticated
investors.
Brokers still have a suitability obligation.
Whether the SEC ever exercises its Dodd-Frank authority to promulgate a version of the “fiduciary rule”
remains to be seen. In the meantime, brokers still have an obligation to recommend only suitable
securities to investors. If an issuer believes that a particular issue is too complex or risky for retail
investors, it can put a “black box” suitability warning on the term sheet or the cover page of the official
2
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statement. Any broker who recommends such a black-boxed security to an investor would be a sitting
duck in a FINRA arbitration if anything went wrong.
The prohibition increases, not decreases, risks to some investors.
One of the tenets of modern finance is diversification. Investors should diversify their investments to
spread the risk around. Thus, even risk-averse investors may suitably desire to invest in a small part of a
risky investment if the expected return were high enough.
Although the prohibition was designed to protect investors, the prohibition can actually increase the harm
to investors by forcing them to hold more of the bond than they would otherwise hold. Suppose that a
particular bond has a minimum denomination of $5,000 and the investor would ordinarily wish to
purchase $4,000 worth. However, because of the minimum the investor is induced to purchase $5,000
and now holds a less diversified portfolio that is more exposed to a particular security.
The prohibition forestalls the use of technology to diversify municipal portfolios.
Technology has dramatically reduced transactions costs in our financial markets. Technology will
continue to evolve in ways that make new financial products possible at ever lower cost. While it may be
impractical at the present for a small retail investor to hold very large number of different municipal
securities, it could easily become practical in the not-so-distant future.
As an example of financial technology, note how firms like Folio Investing have made it very easy and
inexpensive for individual investors to hold portfolios of large numbers of equity securities. Alas, the
prohibition at issue here prevents firms like Folio Investing from offering similar innovative products in
municipal securities. This will make it harder for individual retail investors to hold well diversified
portfolios of municipal securities.
Currently used denominations are unrealistically high for many municipal issues.
Although Treasuries trade with a minimum denomination of $100, many plain vanilla municipal
obligations have much higher minimum denominations. For example, the following shows part of the
official statement for a recent offering of general obligation bonds by the Borough of Baden, a small
municipal issuer in Beaver County, Pennsylvania that happens to be my hometown. There is nothing
excessively risky or complex about the offered bonds, and indeed the bonds are insured by Municipal
Assurance Corporation and carry a AA rating. The offering consists of a series of bonds maturing from
2016 through 2032. There is no particular reason why retail investors should not consider these bonds.
Indeed, the bonds might be particularly attractive for a Pennsylvania investor who desired a ladder of
bonds maturing in different years. Yet the denomination is set at $5,000.00 for each bond.
3
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There is no logical reason for punishing a broker who would facilitate a $1,000 investment in such bonds.
While one could argue that it is inefficient to trade bonds in smaller quantities, if investors are willing to
pay the price to trade in smaller lots they should be permitted to.
Past enforcement actions have punished reasonable behavior.
I note that Interactive Brokers was recently fined for permitting trades in some Puerto Rico bonds in
increments below their minimums.2 Interactive Brokers is a self-service firm that does not recommend
securities to clients. Indeed, their clients are generally highly sophisticated investors who engage in a
plethora of trading strategies. Their customers can and do trade highly risky common stocks (including
OTC and foreign securities), options, and futures in addition to bonds. It is highly likely that the
Interactive Broker customers who traded in the Puerto Rico bonds were short-term speculators rather than
long-term buy-and-hold investors. The risk level that Interactive Brokers’ customers willingly assumed
from their speculations in Puerto Rico bonds was far lower than they could have undertaken in other licit
investment products also available through Interactive Brokers. Furthermore, the investors’ losses, if any,
on those positions is far less than they would have been had they been forced to trade in larger amounts.
The prohibition is a crude form of merit regulation.
The fundamental theme of U.S. securities regulation is based on disclosure, not merit. The overall thrust
of U.S. regulatory policy has been to make sure that there is appropriate disclosure so that investors can
know what they are buying. Investors generally have the freedom to invest in any securities for which
2
https://www.sec.gov/News/PressRelease/Detail/PressRelease/1370543350368
4
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there is appropriate disclosure. Banning the trading of some instruments in small sizes is a crude and
clumsy way of imposing merit regulation on investors. The only securities that should be off limits to
smaller investors are those that lack disclosures that appropriate communicate their risks.
The prohibition makes it more difficult to strip coupons.
Security holders generally have the right to do whatever they want with their securities. A bondholder,
for example, can strip coupons from a bond and trade them separately from the corpus of the bond. This
can create more demand for strippable bonds and lower issuance costs. Alas, as some coupons may be
smaller than the minimum denomination, this prohibition would prevent coupon stripping on many
municipal bonds. Although such stripping might not be practical at the present, further technological
innovation could make it practical and useful in the future as raw material for municipal structured or
other products.
The prohibition wastes inspection, enforcement, and compliance resources.
Having a useless rule on the books is not without costs to society. Companies need to have policies and
procedures in place to comply with the rule. Personnel need to be trained. Compliance officers need to
monitor and document that training and compliance. Regulators need to inspect firms to monitor
compliance, and commence investigations when they suspect a lack of compliance. The regulatory
resources wasted on maintaining and enforcing a useless rule should be spent on other more productive
regulatory activities.
The prohibition is inconsistent with standard safe practices in the equity market.
Even though the round lot for trading equity shares in the U.S. is generally 100 shares, investors can trade
odd-lots if they so desire. Indeed, firms such as Folio Investing and Charles Schwab make it possible for
investors to hold fractional shares. In a world where paper certificates have almost entirely disappeared,
minimum denominations no longer make sense.
For all of these reasons, the prohibition on selling municipal securities in amounts less than their
minimum denomination or increment should be scrapped. If regulators are so inclined as to keep this
useless and obsolete rule, then it should apply only to securities that are lacking in suitable disclosures.
Respectfully submitted,
James J. Angel, Ph.D., CFA
Georgetown University
5
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PHONE 202-503-3300 601 Thirteenth Street, NW
FAX 202-637-0217 Suite 800 South
www.nabl.org Washington, D.C. 20005
December 23, 2016
President
CLIFFORD M. GERBER
SAN FRANCISCO, CA
President-Elect
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1300 I St NW
Washington DC 20005
ALEXANDRA M.
MACLENNAN
TAMPA, FL
RE: NABL Comments on Draft Rule G-49 in MSRB Regulatory Notice 2016-23 Regarding
Minimum Denominations in Municipal Securities
Treasurer
Dear Mr. Smith:
Secretary
The National Association of Bond Lawyers appreciates the opportunity to comment on
Draft Rule G-49 concerning transactions below the minimum denomination of an issue of
municipal securities.
DEE P. WISOR
DENVER, CO
RICHARD J. MOORE
SAN FRANCISCO, CA
Immediate Past President
KENNETH R. ARTIN
ORLANDO, FL
Directors:
ANN D. FILLINGHAM
LANSING, MI
TERI M. GUARNACCIA
BALTIMORE, MD
PERRY E. ISRAEL
SACRAMENTO, CA
CAROL J. MCCOOG
PORTLAND, OR
KATHLEEN J. ORLANDI
NEW YORK, NY
JOSEPH E. SMITH
BIRMINGHAM, AL
LORRAINE M. TYSON
CHICAGO, IL
Chief Operating Officer
LINDA H. WYMAN
WASHINGTON, DC
Director of Governmental
Affairs
WILLIAM J. DALY
WASHINGTON, DC
Existing Municipal Security Rulemaking Board (“MSRB”) Rule G-15(f) generally prohibits
dealers from purchasing or selling municipal securities in amounts less than the minimum
denomination. Rule G-15(f) includes two exceptions designed to provide liquidity for
below-minimum denomination positions that arise from time to time.1 The MSRB has
proposed a new Rule G-49 as a stand-alone rule for below-minimum denomination
transactions. New Rule G-49 would liberalize, in some aspects, the existing exceptions,
including allowing dealers to sell a below-minimum denomination security in certain
circumstances “to a customer that does not have a position in the issue, even if the
transaction does not result in a customer increasing its position to an amount at or above
the minimum denomination.”
As noted in Regulatory Notice 2016-23, authorized denominations, including minimum
denominations, are determined by the issuer at issuance. They are part of the bond
contract and are typically contained in a bond indenture or bond ordinance or resolution.
These are contracts that can only be modified in accordance with such contracts’ specific
terms governing modifications. As the MSRB is not a party to the contract, 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.
The MSRB recognizes the contractual nature of bond denominations in its online glossary.
“Authorized Denomination” is defined by the MSRB as the “par value at which a municipal
security can be purchased as authorized by the bond contract.” (emphasis added)
Similarly, “Minimum Denomination” is defined by the MSRB as the “lowest denomination
of an issue that can be purchased as authorized by the bond documents.” (emphasis
added) Authorized and minimum denominations of an issue of municipal securities are
_________________________________
One exception permits a dealer to purchase from a customer an amount below the minimum
denomination if the dealer determines that the customer is liquidating its entire position. The
other exception permits a dealer to sell to a customer an amount below the minimum
denomination if the dealer determines that the position being sold is the result of a customer
liquidating an entire position below the minimum denomination.
1
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established for a variety of reasons, including, among others, (1) state law requirements, (2) an issuer’s
desire to limit distribution of its securities for suitability or other reasons, or (3) an issuer’s intention to
meet the exemption requirements for SEC Rule 15c2-12. Authorized and minimum denominations are
set forth in the bond documents with the intent that sales and transfers of bonds will be made only in
compliance with minimum denomination requirements, including transfers effected through book
entries of participants in The Depository Trust Company.
While we acknowledge that the book-entry system of registration has greatly facilitated securities
transfers, it has also removed the bond trustee and issuer’s paying agent from the transfer process,
thereby removing the entities that could police the denomination requirements on the issuer’s behalf.
As bond lawyers, we are concerned about reports of improper sales of municipal securities below
minimum denominations that do not appear to comply with the bond documents. For this reason, we
express caution regarding adopting a rule that would expand or liberalize the exceptions beyond
transactions to liquidate existing positions that are below the minimum denomination.
Although we appreciate the desire to improve liquidity for investors, any such efforts should be
consistent with issuer requirements set forth in bond documents. The fact that the MSRB promulgated
existing Rule G-15(f) and is considering new Rule G-49 is an indication that the current system fails to
effectively implement the authorized and minimum denomination provisions of the bond documents. In
its deliberations concerning Rule G-49, we specifically suggest the MSRB consider the following:
-
Whether the MSRB Rule should strive to decrease rather than hold steady (or increase) the
number of below minimum denomination positions;
-
Whether the MSRB Rule should actively discourage or prevent the sale of below-minimum
denomination securities to investors that do not have an existing position in the security,
such sale being in contravention of bond documents;
-
Whether more can be done (through improvements to trading platforms, transaction
mechanics, including minimum denominations in the data reported under Rule G-32, or
otherwise) to facilitate compliance with bond documents, and to ensure that investors are
not purchasing or disposing of an amount below minimum denominations.
The National Association of Bond Lawyers exists to promote the integrity of the municipal market by
advancing the understanding of and compliance with the laws affecting public finance. We offer these
comments in furtherance of that mission.
As it has in the past, NABL welcomes the opportunity to participate in any of these MSRB efforts. If
NABL can provide further assistance, please do not hesitate to contact Bill Daly in our Washington, D.C.,
office at (202) 503-3300.
Thank you in advance for your consideration of these comments.
Sincerely,
Clifford M. Gerber
cc:
Lynnette Kelly, Executive Director, MSRB
Robert Fippinger, Chief Legal Officer, MSRB
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P 847 866 7700 F 847 866 7054
WWW.ROMANOWEALTH.COM
1560 SHERMAN AVENUE, SUITE 1300
EVANSTON, IL 60201
Submitted Electronically
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1300 I Street NW
Suite 1000
Washington, DC 20005
October 18, 2016
Re: Regulatory Notice 2016-23
Dear Mr. Smith:
Romano Brothers & Co. is a 54 year old Broker-Dealer and Registered Investment Advisor
located in Evanston, Illinois. We specialize in comprehensive portfolio management and
financial planning. When consistent with a client’s investment needs, we often recommend
municipal bonds for tax efficient fixed-income exposure.
We have reviewed the above reference regulatory notice and feel that the provisions of draft
Rule G-49 will assist in providing liquidity for customers who hold positions in municipal bonds
that were issued with a minimum denomination. For a variety of reasons, a customer may hold a
position below the minimum denomination and may also wish to sell the position. The proposed
rules will make this transaction easier based upon the two new exceptions.
We have an additional recommendation for the MSRB’s consideration. While we strive to
ensure that we follow the issuer’s minimum denomination for investment, human error can occur
in the allocation of bond purchases. Currently FINRA provides a monthly recap of all purchases
below the minimum denomination. It is our understanding that FINRA receives this information
from the MSRB’s Real Time Reporting System (RTRS).
The RTRS system does not flag a trade that is executed below the minimum denomination.
These trades are marked as “satisfactory.” It would be very helpful if these trades could be
marked as “questionable” or flagged in some other way. This would allow us to know of them
much sooner than the FINRA report. On a T+1 basis dealers can more easily cancel and correct
any trades potentially below a minimum denomination.
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Romano Brothers & Co. appreciates the opportunity to provide comments on the above
referenced draft rule. We look forward to providing additional feedback that can help the MSRB
and the greater municipal bond marketplace.
Sincerely yours,
Eric Bederman
Chief Operating & Compliance Officer
PROTECTING YOUR PROSPERITY. SECURING YOUR FUTURE. SINCE 1962.
.
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October 18, 2016
Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
1300 I Street NW
Suite 1000
Washington, DC 20005
Re: MSRB Notice 2016-23: Second Request for Comment on Draft
Provisions on Minimum Denominations
Dear Mr. Smith:
The Securities Industry and Financial Markets Association (“SIFMA”)1
appreciates this opportunity to respond to Notice 2016-23 2 (the “Notice”) issued by
the Municipal Securities Rulemaking Board (the “MSRB”) in which the MSRB is
making a second request for comment to draft provisions on minimum
denominations. In the MSRB’s first request for comment on draft amendments on
minimum denominations in Notice 2016-133 (the “Prior Notice”), the MSRB
requested comment on draft amendments to MSRB Rule G-15(f).
As stated in our response to the Prior Notice,4 SIFMA and its members are
pleased that the MSRB is undertaking this review as the rules governing minimum
denominations have not been updated in 15 years. Again, as round lots are more
liquid than odd lots, SIFMA supports the intent of the original rule, which is stated
1
SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset
managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for
businesses and municipalities in the U.S., serving clients with over $20 trillion in assets and managing more than
$67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA,
with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets
Association (GFMA). For more information, visit http://www.sifma.org.
2
MSRB Notice 2016-23 (September 27, 2016).
3
MSRB Notice 2016-13 (April 7, 2016).
4
See Letter from Leslie M. Norwood, SIFMA, to Ronald W. Smith, MSRB (May 25, 2016), available at
http://www.sifma.org/issues/item.aspx?id=8589960617 (the “Prior Letter”).
New York | Washington
120 Broadway, 35th Floor | New York, NY 10271-0080 | P: 212.313.1200 | F: 212.313.1301
www.sifma.org | www.investedinamerica.org
118 of 123
Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 2 of 5
in the Notice as seeking to protect investors that own municipal securities in
amounts below the minimum denomination. SIFMA and its members believe that
some of the proposed changes in the Notice are improvements over the Prior
Notice, such as the elimination of the reference to increments and the elimination of
the liquidation statement in the case of securities purchased from other dealers.
However, some of the changes in the Notice result in less liquidity for customers
and create additional and unnecessary challenges for dealers. We have concerns
that the new exceptions do not appropriately balance the interests of issuers,
customers, dealers and the market as a whole. Therefore, we would appreciate the
MSRB’s consideration of the suggestions we have detailed below.
I.
A Dealer’s Ability to Sell Securities Under the Exemption Should
Not Vary According to Source of Bonds
SIFMA and its members feel strongly that the exceptions in new Rule G-49
(b)(ii) should apply regardless of whether the dealer acquired the bonds from a
customer or in an inter-dealer transaction. We note that the exception for sales of
securities in amounts below the minimum denomination has been narrowed from
the Prior Notice. It seems inappropriate that a dealer is able to sell a belowminimum denomination position to a customer that does not have a position in the
issue (even if the transaction(s) do not result in a customer increasing its position to
an amount at or above the minimum denomination) where a dealer acquires the
below-minimum denomination position in an inter-dealer transaction but may not
sell under this exception where a dealer acquires the position from a customer.
By limiting this exception to positions acquired from dealers, the MSRB is
effectively limiting liquidity for customers that have below-minimum denomination
positions. SIFMA and its members see no reason why there should be a prohibition
on dealers selling the below-minimum denomination position to more than one
customer if the position is acquired from a customer. We believe that Rule G49(b)(ii)(A) and (B) should both be available to dealers, regardless of whether the
bonds were purchased from a customer or a dealer. Again, the source of the bonds
should not matter in this instance, as that fact has no impact on whether additional
below-minimum denomination pieces are being created.
Further, we feel that if Rule G-49(b)(ii) is amended, pursuant to our request
above, Rule G-49(b)(iii) should be removed as it would be redundant. In Rule G49(b)(ii)(B), a dealer can sell to a customer who owns some of the security without
having to bring that customer’s position up to the minimum denomination. In Rule
G-49(b)(iii), a dealer must bring the customer’s position up to the minimum
denomination. SIFMA and its members feel the rule would be more clear if Rule
G-49(b)(iii) was deleted and Rule G-49(b)(ii)(B) was applied without regard to the
source of the securities.
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Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 3 of 5
II.
Timing of Sales
The exceptions in Rules G-49 (b)(ii)(B) and (b)(iii) create timing concerns.
Under both exceptions a dealer is permitted to break up a below-minimum
denomination block to sell to a customer that already has a below-minimum
denomination block. The dealer may then sell any remaining portion of the belowminimum denomination position to one or more customers that already have a
position in the issue. But what if the dealer doesn’t have any other customers at the
time that are interested and valid purchasers of such below-minimum denomination
positions? If the dealer doesn’t sell the remaining position to one or more
customers at the time of the sale to the first customer, the dealer then is prohibited
from selling the bonds to another dealer pursuant to Rule G-49(c). SIFMA
members feel that this prohibition unnecessarily hampers the liquidity as it will not
increase below-minimum denomination positions.
III.
Interdealer Exception
SIFMA and its members feel that Rule G-49(c), which limits interdealer
transactions, should be deleted. SIFMA and its members agree that [retail]
customer transactions should be subject to the exceptions. Again, the purpose of
the rule is to prohibit dealers from effecting transactions with customers in amounts
below the minimum denomination – with certain exceptions without creating an
additional number of below-denomination positions. With that in mind, Rule G49(c) which limits interdealer transactions is unwarranted, harms liquidity and is
inconsistent with the original purpose of the rule of customer protection. Dealers
should be permitted to accumulate below-minimum denomination positions and sell
such a position to a customer to add to a customer’s existing below-minimum
denomination position. Although we welcome the elimination of the liquidation
statement, particularly in the case of alternative trading system transactions,
limiting interdealer transactions is unrelated and unwarranted.
IV.
Compliance Costs
It is in the best interest of the regulators and regulated parties alike to ensure
the rule is clear, workable, and doesn’t negatively impact liquidity. The annual cost
of compliance for existing Rule G-15(f) cannot be accurately quantified across the
industry. Anecdotally, dealer firms do report spending significant resources on
compliance with the Rule. Some firms report spending well into six figures per
annum on compliance relating to the Rule. Enforcement regulators have been
focused on this issue for some time, and the increased regulatory scrutiny has
increased liquidity issues for these positions due to their heightened regulatory risk,
and made compliance relatively costly.
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Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 4 of 5
V.
Causes of Below-Minimum Denomination Positions
As stated in our Prior Letter, there are many scenarios that cause a
customer’s position to fall below the minimum denomination. As noted in the
notice of filing on the prior rule change, a below-minimum denomination position
may be created, for example, by redemption provisions that allow calls in amounts
less than the minimum denomination, investment advisors who may split positions
they purchase among several clients, the division of an estate as a result of a death
or divorce, by court order or as a result of a gift.5 These are some of the reasons
positions exist below the minimum denomination, and the investor should not be
penalized for the creation of a below-minimum denomination position that is out of
their control. SIFMA is concerned about the liquidity impacts of the proposal
because when the liquidity of below-minimum denomination positions is hampered,
the end investor is the one penalized.
VI.
Access to Accurate Information
The accuracy and validity of minimum denomination data available
continues to be a significant compliance issue. Many information service providers
have blank or incorrect information in the minimum denomination field.
Additionally, some private placement memorandum (“PPM”) documents are not on
the MSRB’s Electronic Municipal Market Access (“EMMA”) website, so there is
no way for the dealer to check for the minimum denomination information on that
particular transaction. To remedy this issue, we reiterate our request for MSRB
Rule G-32 be amended to require the filing of minimum denomination information
on EMMA on all transactions.
Further, expecting traders to look up minimum denomination information in
an Official Statement or PPM prior to making a trade is not efficient or realistic.
Underwriting dealers are already required to send to the Depository Trust and
Clearing Corporation (“DTCC”) minimum denomination and increment
information though the New Issue Information Dissemination System (“NIIDS”) by
mandate of Rule G-34. However, information service providers are not necessarily
picking up this information from NIIDS. The MSRB could take the minimum
denomination information from the DTCC’s NIIDS feed and display the
information on EMMA. If a security is not NIIDS eligible, then the dealer should be
able to send the information directly to the MSRB for transparency purposes on
EMMA. These modest improvements to EMMA to increase the transparency of
5
Securities Exchange Act Release No. 45174 Notice of Filing of Proposed Rule Change by the Municipal
Securities Rulemaking Board Relating to Minimum Denominations (December 19, 2001), 66 FR 67342 (December
28, 2001), at fn 3.
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Mr. Ronald W. Smith
Corporate Secretary
Municipal Securities Rulemaking Board
Page 5 of 5
minimum denomination information would greatly assist investors and regulated
dealers alike.
VII.
Conclusion
Again, SIFMA and its members largely support updating the rules regarding
minimum denominations, but have some concerns regarding certain provisions in
new Rule G-49. SIFMA and its members would appreciate the MSRB’s
consideration of our suggestions, as detailed above. We would be pleased to
discuss any of these comments in greater detail, or to provide any other assistance
that would be helpful. If you have any questions, please do not hesitate to contact
the undersigned at (212) 313-1130.
Sincerely yours,
Leslie M. Norwood
Managing Director and
Associate General Counsel
cc:
Municipal Securities Rulemaking Board
Lynnette Kelly, Executive Director
Robert Fippinger, Chief Legal Officer
Gail Marshall, Associate General Counsel – Enforcement Coordination
Michael B. Cowart, Assistant General Counsel
Barbara Vouté, Municipal Operations Advisor
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EXHIBIT 5
Rule G-15: Confirmation, Clearance, Settlement and Other Uniform Practice
Requirements with Respect to Transactions with Customers
(a) – (e) No change.
(f) Reserved. [Minimum Denominations.]
[(i) Except as provided in this section (f), a broker, dealer or municipal securities dealer
shall not effect a customer transaction in municipal securities issued after June 1, 2002 in an
amount lower than the minimum denomination of the issue.]
[(ii) The prohibition in subsection (f)(i) of this rule shall not apply to the purchase of
securities from a customer in an amount below the minimum denomination if the broker, dealer
or municipal securities dealer determines that the customer’s position in the issue already is
below the minimum denomination and that the entire position would be liquidated by the
transaction. In determining whether this is the case, a broker, dealer or municipal securities
dealer may rely either upon customer account information in its possession or upon a written
statement by the customer as to its position in an issue.]
[(iii) The prohibition in subsection (f)(i) of this rule shall not apply to the sale of
securities to a customer in an amount below the minimum denomination if the broker, dealer or
municipal securities dealer determines that the securities position being sold is the result of a
customer liquidating a position below the minimum denomination, as described in subsection
(f)(ii) of this rule. In determining whether this is the case, a broker, dealer or municipal
securities dealer may rely upon customer account records in its possession or upon a written
statement provided by the party from which the securities are purchased. A broker, dealer or
municipal securities dealer effecting a sale to a customer under this subsection (iii) shall at or
before the completion of the transaction, give or send to the customer a written statement
informing the customer that the quantity of securities being sold is below the minimum
denomination for the issue and that this may adversely affect the liquidity of the position unless
the customer has other securities from the issue that can be combined to reach the minimum
denomination. Such written statement may be included on the customer’s confirmation or may
be provided on a document separate from the confirmation.]
(g) No change.
*****
Rule G-49: Transactions Below the Minimum Denomination of an Issue
(a) Prohibition Applicable to a Customer Transaction. Except as provided in section (b), a
broker, dealer or municipal securities dealer (“dealer”) shall not effect a customer transaction in
municipal securities issued after June 1, 2002 in an amount lower than the minimum
denomination of the issue.
(b) Exceptions to Prohibition Applicable to a Customer Transaction.
(i) The prohibition in section (a) of this rule shall not apply to the purchase of securities
from a customer in an amount below the minimum denomination if the dealer determines that the
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customer’s position in the issue already is below the minimum denomination and the entire
position of the customer would be liquidated by the transaction.
(ii) The prohibition in section (a) of this rule shall not apply to the sale of securities to a
customer in an amount below the minimum denomination, provided that the below-minimum
denomination position being sold is the same amount as the below-minimum denomination
position that the dealer acquired from a customer in a transaction where such customer fully
liquidated its position in the security, as described in section (b)(i) of this rule; or, the belowminimum denomination position being sold was acquired by the dealer in an inter-dealer
transaction and the amount being sold under paragraph (A) or, in the aggregate, under paragraph
(B), of this subsection is the same amount as the below-minimum denomination position that the
dealer acquired in the inter-dealer transaction. In effecting such a sale to a customer in an amount
below the minimum denomination, the dealer may:
(A) Sell the entire below-minimum denomination position to one customer; or
(B) Sell the entire, or a portion of, the 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, even if the transaction(s) do
not result in a customer increasing its position to an amount at or above the minimum
denomination.
(iii) A dealer effecting a purchase from or sale to a customer under this section (b) shall
determine its customer’s position in the subject security based upon the account records in the
dealer’s possession or upon a written statement provided to the dealer by its customer. A dealer
effecting a sale to a customer under subsection (ii), shall at or before the completion of the
transaction, give or send to the customer a written statement informing the customer that the
quantity of securities being sold is below the minimum denomination for the issue and this may
adversely affect the liquidity of the position unless the customer has other securities from the
issue that can be combined to reach the minimum denomination of the issue. A dealer shall not
be required to give or send a customer such written statement if, pursuant to subsection (b)(ii) of
this rule, the dealer effects the sale of securities to the customer and the sale results in the
customer having a position at or above the minimum denomination. Such written statement may
be included on the customer’s confirmation or may be provided on a document separate from the
confirmation.
(c) Limitations Applicable to a Transaction Between Dealers. A dealer shall not sell municipal
securities issued after June 1, 2002 to another dealer in an amount below the minimum
denomination of the issue, unless the dealer acquired the below-minimum denomination position
from a customer in compliance with section (b)(i) of this rule or acquired the below-minimum
denomination position from another dealer, and sells such securities to a dealer in a transaction at
an amount that is equal to or greater than the amount of the below-minimum denomination
position acquired.