regulatory organizations; proposed rule changes: Municipal Securities Rulemaking Board,

[Federal Register: October 25, 1999 (Volume 64, Number 205)]

[Notices]

[Page 57505-57506]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr25oc99-111]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42019; File No. SR-MSRB-99-7]

Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Order Granting Approval to Proposed Rule Change Relating to an Amendment to Rule G-16 on Periodic Compliance Examinations

October 15, 1999.

1. Introduction

   On August 13, 1999, the Municipal Securities Rulemaking Board (``Board'' or ``MSRB'') submitted to the Securities and Exchange Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change relating to Rule G-16 on periodic compliance examinations. The proposed rule change was published for comment in the Federal Register on August 20, 1999.\3\ No comments were received on the proposed rule change. This order approves the proposed rule change.

   \1\ 15 U.S.C. 78s(b)(1).

   \2\ 17 CFR 240.19b-4.

   \3\ See Exchange Act Release No. 41773 (Aug. 20, 1999), 64 FR 47209 (Aug. 30, 1999).

2. Description of the Proposal

   Section 15B(c)(7)(A) \4\ of the Act provides that periodic examinations of dealers for compliance with MSRB rules are to be conducted by the National Association of Securities Dealers, Inc. (``NASD'') with respect to securities firms and by the appropriate federal bank regulatory agencies with respect to bank dealers. Rule G- 16 permits periodic examinations of dealers for compliance with MSRB rules to be combined with other periodic examinations of securities firms and bank dealers to avoid unnecessary regulatory duplication and undue regulatory burdens for such firms and bank dealers. Rule G-16 currently requires that compliance examinations for dealers be conducted at least once every 24 months.

   \4\ 15 U.S.C. 78o-4(c)(7)(A).

   By letter dated April 28, 1999, NASD Regulation, Inc. (``NASDR'') requested that the Board revise Rule G-16. The letter stated that because of NASDR's efforts to coordinate examination schedules, NASDR believes that the Board should change the 24-month requirement in Rule G-16 to a two calendar year requirement.

   NASDR stated that the requirement in Rule G-16 that municipal securities examinations commence within 24 months of the previous examination takes precedence over all examinations when coordinating examination schedules. NASDR uses the ``field work start date'' of a firm's prior municipal securities examination to calculate the 24-month period for the purposes of Rule G-16. Applying this methodology, NASDR identifies all municipal securities examinations required in a given calendar year. A determination is then made as to whether the identified firms are also scheduled for a routine cycle examination during the same year.

   If a routine cycle examination is required of a firm that is subject to a municipal inspection, the routine and municipal examinations are combined. If a routine cycle examination is not required, a separate ``off-cycle'' municipal examination may have to be conducted on-site. Whenever a municipal securities examination is accelerated, the due date for commencement of a subsequent examination is moved to an earlier period; increasingly the first quarter. NASDR stated that this hampers both current and future examination planning and coordination. NASDR stated that without the rule change it may be necessary to remove municipal securities examinations from the coordinated examination programs.

   The proposed rule change alters Rule G-16's requirement that compliance examinations be conducted once every 24 months to once every two calendar years. The rule change is intended to facilitate coordination of on-site examinations to eliminate unnecessary regulatory duplication without negatively affecting investor protection. A formal Memorandum of Understanding among the North American Securities Administrators Association, Inc., Commission, NASDR and other securities industry self-regulatory organizations reflect the joint commitment to coordinated examinations.

3. Discussion

   The Commission believes that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder.\5\ In particular, the Commission finds that the proposed rule change is consistent

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   with Section 15B(b)(2(C) \6\ of the Act. Section 15B(b)(2)(C) of the Act requires, among other things, that the rules of the Board be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and, in general, to protect investors and the public interest. Specifically, the Commission believes that the proposed rule change will prevent fraudulent and manipulative acts and practices and promote just and equitable principles of trade by enabling the NASD to better coordinate periodic examination schedules.

   \5\ In reviewing this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. The proposed rule change should improve efficiency and competition because it permits flexibility for scheduling periodic compliance examinations. 15 U.S.C. 78c(f).

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

   The rule change will extend the maximum period between compliance examinations to three years. For example, if a dealer is examined in January, the two calendar year clock would not start running for the next compliance examination under Rule G-16 until the following January. While this could lengthen the time between compliance examinations, the Commission believes that enhancing the NASD's ability to coordinate examinations should reduce unnecessary regulatory duplication and regulatory burdens for dealers as well as permit the NASD to better allocate its examination resources. The Commission believes that the proposed rule change will ease the burdens for both the examiners and the dealers. By permitted more flexibility in arranging examination schedules, the change to Rule G-16 should result in scheduling examinations based on efficiency and methodology rather than the calendar.

4. Conclusion

   It is therefore ordered, pursuant to Section 19(b)(2) \7\ of the Act, that the proposed rule change (SR-MSRB-99-7) is approved.

   \7\ 15 U.S.C. 78s(b)(2).

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\8\

   \8\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 99-27717Filed10-22-99; 8:45 am]

   BILLING CODE 8010-01-M