WASHINGTON - The Municipal Securities Rulemaking Board proposed a rule yesterday designed to strengthen the disclosure of call provisions and other key information that appears on municipal bond confirmations.
The board also signaled that it is eyeing broad changes in the future to its confirmation rules by requesting comments on such issues as whether the board should require dealers to provide customers with summaries of bond features and copies of preliminary official statements.
The proposed rules and request for comments appear in a seven-page notice sent to bond dealers that questions whether the board should broaden its customer confirmation Rule G-15(a). Comments on the notice, which appears in MSRB Reports, the board's quarterly bulletin to dealers, are due Sept. 15. MSRB Reports should reach dealers later this week.
"The board believes that the effectiveness of disclosure [on confirmations] of call features to customers can be improved," the board's notice says. "For example, the existing legend draws little notice from customers because it is generally preprinted on the back of a confirmation form."
In addition, confirmations give notice that there are specific call features but often offer little description and often do not mention that other call features also exist, the MSRB said.
The draft amendment would delete the legend that generally is preprinted on the back of the confirmation. Instead, it would require that if there are any call features on top of the first refunding call, then the front of the confirmation must say that "special call features exist."
Among proposed changes, the MSRB amendments also would require that the revenue source for revenue bonds always be disclosed.
The notice also signals that the board is eyeing a variety of additional amendments to its confirmation rules and seeks broad comment on the issues.
"Should dealers provide customers with a summary sheet of the features of municipal securities? If so, what items should be included and when should this document be provided to customers?" the notice asked.
The board's notice also asks dealers whether they should be required to deliver official statements to customers in secondary market transactions. Currently, firms only have to make final official statements available to potential investors in the primary market.
And the notice asks whether dealers should have to deliver preliminary official statements to customers in new-issue transactions if such documents are prepared by the issues.
The board notes that the Securities and Exchange Commission wants it to consider developing a customer brochure that describes typical trade terms and security features that dealers would be required to deliver to customers. "The board requests comments on whether such a brochure would be helpful, what particular information should be included, [and] when it should be sent to customers," the board said in its notice.
The notice says that many dealers now use a standardized, 9-by-5-inch confirmation form. "Should the written disclosure provided to customers continue to be effectively limited by the size of the standardized form?" the board asks. Christopher Taylor, MSRB executive director, said one option would be to expand the form to an 8 1/2-by-11-inch form.
The MSRB's rule currently does not specify when the confirmation should be mailed, only that it shall be given or sent to the customer at or before the completion of a transaction. The board asks whether confirmations should be required to be mailed no later than one day after trade date, or T plus 1.
The board notes that the SEC recently urged the board to consider requiring dealers to send confirmations to customers by overnight mail or by fax. "Do dealers currently do this? If so, under what circumstances: Would the benefits of such a requirement exceed its cost?" the board asks.
The board's draft amendment would require that confirmations say if a municipal security was issued without a legal opinion. "Should any legal opinion suffice? Should this requirement be limited to a legal opinion regarding the validity of issuance or also indicate the absence of a legal opinion regarding tax status?" the board asks.
