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

[Federal Register Volume 64, Number 205 (Monday, October 25, 1999)]
[Notices]
[Pages 57505-57506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27717]


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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.

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

III. 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

[[Page 57506]]

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.
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    \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).
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    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.

IV. 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).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27717 Filed 10-22-99; 8:45 am]
BILLING CODE 8010-01-M