[Federal Register Volume 75, Number 111 (Thursday, June 10, 2010)]
[Rules and Regulations]
[Pages 33100-33157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-13165]
[[Page 33099]]
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Part III
Securities and Exchange Commission
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17 CFR Parts 240 and 241
Amendment to Municipal Securities Disclosure; Final Rule
Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules
and Regulations
[[Page 33100]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 241
[Release No. 34-62184A; File No. S7-15-09]
RIN 3235-AJ66
Amendment to Municipal Securities Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Final rule and interpretation.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is adopting amendments to Rule 15c2-12 (``Rule 15c2-12'' or
``Rule'') under the Securities Exchange Act of 1934 (``Exchange Act'')
relating to municipal securities disclosure. The amendments revise
certain requirements regarding the information that a broker, dealer,
or municipal securities dealer acting as an underwriter in a primary
offering of municipal securities must reasonably determine that an
issuer of municipal securities or an obligated person has undertaken,
in a written agreement or contract for the benefit of holders of the
issuer's municipal securities, to provide to the Municipal Securities
Rulemaking Board (``MSRB''). Specifically, the amendments require a
broker, dealer, or municipal securities dealer to reasonably determine
that the issuer or obligated person has agreed to provide notice of
specified events in a timely manner not in excess of ten business days
after the event's occurrence; amend the list of events for which a
notice is to be provided; and modify the events that are subject to a
materiality determination before triggering a requirement to provide
notice to the MSRB. In addition, the amendments revise an exemption
from the Rule for certain offerings of municipal securities with put
features (defined below as ``demand securities''). The Commission also
is providing interpretive guidance intended to assist municipal
securities brokers, dealers, and municipal securities dealers in
meeting their obligations under the antifraud provisions of the federal
securities laws.
DATES: Effective Date: August 9, 2010, except Part 241 will be
effective June 10, 2010.
Compliance Date: December 1, 2010 with respect to Sec. 240.15c2-
12.
FOR FURTHER INFORMATION CONTACT: Martha Mahan Haines, Assistant
Director and Chief, Office of Municipal Securities, at (202) 551-5681;
Nancy J. Burke-Sanow, Assistant Director, Office of Market Supervision,
at (202) 551-5620; Mary N. Simpkins, Senior Special Counsel, Office of
Municipal Securities, at (202) 551-5683; Molly M. Kim, Special Counsel,
Office of Market Supervision, at (202) 551-5644; Rahman J. Harrison,
Special Counsel, Office of Market Supervision, at (202) 551-5663; and
Steven Varholik, Special Counsel, Office of Market Supervision, at
(202) 551-5615, Division of Trading and Markets, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-6628.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
Rule 15c2-12 under the Exchange Act.\1\
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\1\ 17 CFR 240.15c2-12.
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I. Executive Summary
On July 24, 2009, the Commission published for comment amendments
to Rule 15c2-12 to improve the quality and timeliness of information
about municipal securities that are outstanding in the secondary
market.\2\ The proposed amendments would have required a broker,
dealer, or municipal securities dealer to reasonably determine that the
issuer or obligated person has undertaken, in a written agreement or
contract for the benefit of holders of the issuer's municipal
securities (``continuing disclosure agreement''), to provide notice to
the MSRB of specified events in a timely manner not in excess of ten
business days after the event's occurrence. The proposal also would
have amended the list of events for which a notice is to be provided
and would have modified the events that are subject to a materiality
determination before triggering the obligation to submit a notice to
the MSRB. In addition, the amendments would have revised an exemption
from the Rule for certain offerings of demand securities.
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\2\ See Securities Exchange Act Release No. 60332 (July 17,
2009), 74 FR 36831 (July 24, 2009) (``Proposing Release''). The
comment period for the proposed amendments expired on September 8,
2009.
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The Commission received twenty-nine comment letters in response to
the proposed amendments from a wide range of commenters.\3\ The
respondents included the MSRB; state and local governments; mutual
funds; trade organizations representing broker-dealers, government
financial officials, and bond lawyers; and individual investors. Of the
comment letters received, four expressed support for the proposed
amendments; ten expressed support, but suggested modifications to
certain provisions of the proposed amendments; three supported some of
the proposed amendments and objected to others; and eight opposed the
proposed amendments. In addition, four comment letters neither
expressed support for nor opposed the proposed amendments.
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\3\ Copies of all comments received on the proposed amendments
are available on the Commission's Internet Web site, located at
http://www.sec.gov/comments/s7-15-09/s71509.shtml. Comments are also
available for Web site 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 a.m. and 3 p.m.
Exhibit A, which is attached to this release, contains a citation
key to the comment letters received by the Commission on the
proposed amendments.
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Some of the main concerns raised in the comment letters include:
(i) The burden and costs associated with the proposed maximum ten
business day time frame for submission of event notices; (ii)
application of the proposed amendments to remarketings of demand
securities; \4\ and (iii) the proposed removal of the materiality
condition from various disclosure events that trigger submission of an
event notice to the MSRB. A number of commenters offered alternative
approaches to the proposal to address their concerns and made
suggestions regarding implementation of the proposed amendments. Also,
some commenters addressed two proposals submitted by the MSRB relating
to modifications to its Electronic Municipal Market Access (``EMMA'')
system.\5\
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\4\ See infra note 28 and accompanying text for a description of
demand securities.
\5\ See Securities Exchange Act Release Nos. 60314 (July 15,
2009), 74 FR 36300 (July 22, 2009); 61238 (December 23, 2009), 75 FR
492 (January 5, 2010); 60315 (July 15, 2009), 74 FR 36294 (July 22,
2009); and 61237 (December 23, 2009), 75 FR 485 (January 5, 2010).
The EMMA system is a component of the MSRB's central municipal
securities document repository for the collection and availability
of continuing disclosure documents over the Internet. See http://emma.msrb.org.
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This release describes and addresses only those portions of the
comment letters that are relevant to the proposed amendments. The
portions of the comment letters that discuss the MSRB proposals
relating to the EMMA system are being considered separately in the
Commission's orders approving the MSRB proposals.\6\
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\6\ See Securities Exchange Act Release Nos. 62182 (May 26,
2010) (SR-MSRB-2010-09) and 62183 (May 26, 2010) (SR-MSRB-2010-10)
(pursuant to delegated authority).
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The Commission has carefully considered all the comments it
received regarding the proposed amendments and, as discussed below, is
adopting the amendments substantially as proposed, with some
modifications in response to comments. The amendments are intended to
enhance the quality and availability of information about outstanding
municipal securities. For
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the reasons discussed in this release,\7\ the Commission believes that
the amendments are consistent with the Commission's mandate to, among
other things, adopt rules reasonably designed to prevent fraudulent,
deceptive, or manipulative acts or practices in the market for
municipal securities. In addition, the Commission is issuing
interpretive guidance that is substantially the same as the guidance
set forth in the Proposing Release and that is intended to assist
municipal securities brokers, dealers, and municipal securities dealers
in meeting their obligations under the antifraud provisions of the
federal securities laws.
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\7\ See also Proposing Release, supra note 2, 74 FR 36831.
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II. Background
Rule 15c2-12 is intended to enhance disclosure, and thereby reduce
fraud, in the municipal securities market by establishing standards for
obtaining, reviewing, and disseminating information about municipal
securities by their underwriters.\8\ In 1989, the Commission adopted
paragraphs (a) and (b)(1)-(4) of Rule 15c2-12\9\ to require brokers,
dealers, and municipal securities dealers (``Participating
Underwriters'') acting as underwriters in primary offerings of
municipal securities of $1,000,000 or more (subject to certain
exemptions set forth in paragraph (d) of the Rule) to obtain, review,
and distribute to potential customers copies of the issuer's official
statement.\10\ In 1994, the Commission adopted paragraph (b)(5) of the
Rule (``1994 Amendments''),\11\ which became effective in 1995 and was
amended in 2008.\12\ Paragraph (b)(5) prohibits Participating
Underwriters from purchasing or selling municipal securities covered by
the Rule in a primary offering, unless the Participating Underwriter
has reasonably determined that an issuer or an obligated person \13\ of
municipal securities has undertaken in a continuing disclosure
agreement to provide specified information to the MSRB in an electronic
format as prescribed by the MSRB.\14\ The information to be provided
consists of: (1) Certain annual financial and operating information and
audited financial statements (``annual filings''); \15\ (2) notices of
the occurrence of any of eleven specific events (``event notices'');
\16\ and (3) notices of the failure of an issuer or obligated person to
make a submission required by a continuing disclosure agreement
(``failure to file notices'').\17\
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\8\ See Securities Exchange Act Release No. 26985 (June 28,
1989), 54 FR 28799 (July 10, 1989) (``1989 Adopting Release''). For
additional information relating to the history of the Rule, see
Securities Exchange Act Release Nos. 34961 (November 10, 1994), 59
FR 59590 (November 17, 1994) (``1994 Amendments Adopting Release'')
and 59062 (December 5, 2008), 73 FR 76104 (December 15, 2008)
(``2008 Amendments Adopting Release'').
\9\ See 1989 Adopting Release, supra note 8.
\10\ 17 CFR 240.15c2-12(a).
\11\ 17 CFR 240.15c2-12(b)(5).
\12\ See 1994 Amendments Adopting Release and 2008 Amendments
Adopting Release, supra note 8.
\13\ The term ``obligated person'' means ``any person, including
an issuer of municipal securities, who is either generally or
through an enterprise, fund, or account of such person committed by
contract or other arrangement to support payment of all, or part of
the obligations of the municipal securities to be sold in the
Offering (other than providers of municipal bond insurance, letters
of credit, or other liquidity facilities).'' See 17 CFR 240.15c2-
12(f)(10).
\14\ On December 5, 2008, the Commission adopted amendments to
Rule 15c2-12 (``2008 Amendments'') to provide for a single
centralized repository, the MSRB, for the electronic collection and
availability of information about outstanding municipal securities
in the secondary market. Specifically, the 2008 Amendments require a
Participating Underwriter to reasonably determine that the issuer or
obligated person has undertaken in its continuing disclosure
agreement to provide the continuing disclosure documents: (1) Solely
to the MSRB; and (2) in an electronic format and accompanied by
identifying information, as prescribed by the MSRB. See 2008
Amendments Adopting Release, supra note 8. See also Securities
Exchange Act Release No. 58255 (July 30, 2008), 73 FR 46138 (August
7, 2008) (``2008 Proposing Release''). The 2008 Amendments became
effective on July 1, 2009.
\15\ 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).
\16\ 17 CFR 240.15c2-12(b)(5)(i)(C). Currently, the following
events, if material, require notice: (1) Principal and interest
payment delinquencies; (2) non-payment related defaults; (3)
unscheduled draws on debt service reserves reflecting financial
difficulties; (4) unscheduled draws on credit enhancements
reflecting financial difficulties; (5) substitution of credit or
liquidity providers, or their failure to perform; (6) adverse tax
opinions or events affecting the tax-exempt status of the security;
(7) modifications to rights of security holders; (8) bond calls; (9)
defeasances; (10) release, substitution, or sale of property
securing repayment of the securities; and (11) rating changes. In
addition, Rule 15c2-12(d)(2) provides an exemption from the
application of paragraph (b)(5) of the Rule with respect to certain
primary offerings if, among other things, the issuer or obligated
person has agreed to a limited disclosure obligation. See 17 CFR
240.15c2-12(d)(2). As discussed in detail in Section III.C. below,
the Commission is adopting amendments to the Rule to eliminate the
materiality determination for certain of these events.
\17\ 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event
notices, and failure to file notices are referred to collectively
herein as ``continuing disclosure documents.''
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Since the adoption of the 1994 Amendments, the amount of
outstanding municipal securities has more than doubled to $2.8
trillion.\18\ Notably, despite this large increase in the amount of
outstanding municipal securities, direct investment in municipal
securities by individuals remained relatively steady from 1996 to 2009,
ranging from approximately 35% to 39% of outstanding municipal
securities.\19\ At the end of 2009, individual investors held
approximately 35% of outstanding municipal securities directly and up
to another 34% indirectly through money market funds, mutual funds, and
closed end funds.\20\ There is also substantial trading volume in the
municipal securities market. According to the MSRB, almost $3.8
trillion of long and short term municipal securities were traded in
2009 in over 10 million transactions.\21\ Further, there are
approximately 51,000 state and local issuers of municipal securities,
ranging from villages, towns, townships, cities, counties, and states,
as well as special districts, such as school districts and water and
sewer authorities.\22\
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\18\ According to statistics assembled by the Securities
Industry and Financial Markets Association (``SIFMA''), the amount
of outstanding municipal securities grew from approximately $1.26
trillion in 1996 to $2.81 trillion at the end of 2009. See SIFMA
Holders of U.S. Municipal Securities (available at http://www.sifma.org/uploadedFiles/Research/Statistics/SIFMA_USMunicipalSecuritiesHolders.pdf) (``SIFMA Report''). As noted in
the Proposing Release, the amount of outstanding municipal
securities was $2.69 trillion at the end of 2008, according to
statistics assembled by SIFMA. See Proposing Release, supra note 2,
74 FR at 36834, n. 16 and accompanying text.
\19\ See SIFMA Report, supra note 18. As noted in the Proposing
Release, direct investment in municipal securities by individuals
from 1996 to 2008 ranged from approximately 35% to 39% of
outstanding municipal securities, according to statistics assembled
by SIFMA. See Proposing Release, supra note 2, 74 FR at 36834, n. 17
and accompanying text.
\20\ See SIFMA Report, supra note 18. As noted in the Proposing
Release, at the end of 2008, individual investors held approximately
36% of outstanding municipal securities directly and up to another
36% indirectly through money market funds, mutual funds, and closed
end funds, according to statistics assembled by SIFMA. See Proposing
Release, supra note 2, 74 FR at 36834, n. 18 and accompanying text.
\21\ See MSRB, Real-Time Transaction Reporting, Statistical
Patterns in the Municipal Market, Monthly Summaries 2009 (available
at http://www.msrb.org/msrb1/TRSweb/MarketStats/statistical_patterns_in_the_muni.htm). As noted in the Proposing Release, in
2008, almost $5.5 trillion of long and short term municipal
securities were traded in 2008 in nearly 11 million transactions.
See Proposing Release, supra note 2, 74 FR at 36834, n. 19 and
accompanying text.
\22\ See, e.g., Report on Transactions in Municipal Securities
prepared by Office of Economic Analysis and Office of Municipal
Securities, the Division of Market Regulation, Commission, (July 1,
2004) (available at http://www.sec.gov/news/studies/munireport2004.pdf).
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In addition, municipal bonds can and do default. In fact, at least
917 municipal bond issues went into monetary default during the 1990s,
with a defaulted principal amount of over $9.8 billion.\23\ Bonds for
healthcare,
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multifamily housing, and industrial development, together with land-
backed debt, accounted for more than 80% of defaulted dollar
amounts.\24\ In 2007, a total of $226 million in municipal bonds
defaulted (including both monetary and covenant defaults).\25\ In 2008,
140 issuers defaulted on $7.6 billion in municipal bonds.\26\ There are
reports that approximately $5 billion in municipal bonds are in default
today.\27\
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\23\ See Standard and Poor's, A Complete Look at Monetary
Defaults in the 1990s (June, 2000) (available at http://www.kennyweb.com/kwnext/mip/paydefault.pdf) (``Standard and Poor's
Report''). See also Moody's Investors Service, The U.S. Municipal
Bond Rating Scale: Mapping to the Global Rating Scale And Assigning
Global Scale Ratings to Municipal Obligations (March, 2008)
(available at http://www.moodys.com/cust/content/content.ashx?source=StaticContent/Free%20pages/Credit%20Policy%20Research/documents/current/102249_RM.pdf)
(regarding municipal defaults of Moody's rated municipal
securities).
\24\ See Standard and Poor's Report, supra note 23. See also
Proposing Release, supra note 2, 74 FR at 36834.
\25\ See Joe Mysak, Subprime Finds New Victim as Muni Defaults
Triple, Bloomberg News, May 30, 2008.
\26\ See Joe Mysak, Municipal Defaults Don't Reflect Tough
Times: Chart of Day, Bloomberg News, May 28, 2009 (also noting that
since 1999, issuers have defaulted on $24.13 billion in municipal
bonds).
\27\ See, e.g., Mary Williams Walsh, State Debt Woes Grow Too
Big to Camouflage, The New York Times, March 30, 2010.
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The Commission's experience with the operation of the Rule over the
past 20 years, changes in the municipal market since the adoption of
the 1994 Amendments, and recent market events have suggested the need
for the Commission to reconsider certain aspects of the Rule. In
particular, the Commission proposed amendments to the Rule's exemption
for primary offerings of municipal securities in authorized
denominations of $100,000 or more which, at the option of the holder
thereof, may be tendered to the issuer or its designated agent for
redemption or purchase at par value or more at least as frequently as
every nine months until maturity, earlier redemption, or purchase by
the issuer or its designated agent (``demand securities'').\28\
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\28\ 17 CFR 240.15c2-12(d)(1)(iii).
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As the Commission discussed in the Proposing Release, at the time
the Rule was adopted in 1989, demand securities were relatively new to
the municipal market.\29\ Approximately $13 billion of variable rate
demand obligations (``VRDOs'') \30\ were issued in 1989.\31\ However,
by 2009, it has been reported that approximately $32 billion of VRDOs
were issued,\32\ with trading in VRDOs representing approximately 34%
of trading volume of all municipal securities.\33\ Further, it has been
reported that as of early 2009, the outstanding amount of VRDOs was
estimated at approximately $400 billion.\34\ During the fall of 2008,
the VRDO market experienced significant volatility.\35\ As the size,
volatility, and complexity of the VRDO market and the number of
investors have grown, so have the risks associated with less complete
disclosure. Moreover, representatives of the primary purchasers of
VRDOs--money market funds--have expressed concerns suggesting that the
exemption in Rule 15c2-12 for these securities may no longer be
justified.\36\ These developments highlight the need for the Commission
to improve the availability to investors of important information
regarding demand securities.
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\29\ See Proposing Release, supra note 2, 74 FR at 36834-5.
\30\ The Commission is not currently aware of any demand
securities that were not issued as VRDOs. The MSRB describes VRDOs
as ``[f]loating rate obligations that have a nominal long-term
maturity but have a coupon rate that is reset periodically (e.g.,
daily or weekly). The investor has the option to put the issue back
to the trustee or tender agent at any time with specified (e.g.,
seven days') notice. The put price is par plus accrued interest.''
See http://www.msrb.org/MSRB1/glossary/view_def.asp?vID=4310.
\31\ See Two Decades of Bond Finance: 1989-2008, The Bond Buyer/
Thomson Reuters 2009 Yearbook 4 (Matthew Kreps ed., Source Media,
Inc.) (2009).
\32\ See Thomson Reuters, ``A Decade of Municipal Bond Finance''
(available at http://www.bondbuyer.com/marketstatistics/decade_1).
\33\ According to the MSRB, trading volume in VRDOs in 2009 was
approximately $1.3 trillion. Total trading volume in 2009 for all
municipal securities was approximately $3.8 trillion. See E-mail
between Martha M. Haines, Assistant Director and Chief, Office of
Municipal Securities, Division, Commission, and Marcelo Vieira,
Director of Research, MSRB, January 26, 2010. As noted in the
Proposing Release, in 2008, approximately $115 billion of VRDOs were
issued, with trading in VRDOs representing approximately 38% of
trading volume of all municipal securities. See Proposing Release,
supra note 2, 74 FR at 36834, n. 27 and accompanying text.
\34\ See Andrew Ackerman, Regulation: MSRB Files Disclosure
Proposals; Board Offers Four New Rules to SEC, The Bond Buyer, July
15, 2009. See also Proposing Release, supra note 2, 74 FR at 36834
and n. 27.
\35\ See Diya Gullapalli, Crisis On Wall Street: Muni Money-Fund
Yields Surge--Departing Investors Send 7-Day Returns Over 5%, Wall
Street Journal, September 27, 2008; Andrew Ackerman, Short-Term
Market Dries Up: Illiquidity Leads to Lack of Bank LOCs, The Bond
Buyer, October 7, 2008. (``The reluctance of financial firms to
carry VRDOs is evident in the spike in the weekly [SIFMA] municipal
swap index, which is based on VRDO yields and spiked from 1.79% on
Sept. 10 to 7.96% during the last week of the month. It has since
declined somewhat to 5.74%.''). See also Proposing Release, supra
note 2, 74 FR at 36834, n. 33.
\36\ See, e.g., Letter from Karrie McMillan, General Counsel,
Investment Company Institute (``ICI''), to Florence E. Harmon,
Secretary, Commission (July 25, 2008) (available at http://www.sec.gov/comments/s7-13-08/s71308-44.pdf); comments of
participants in the 2001 SEC Municipal Market Roundtable--
``Secondary Market Disclosure for the 21st Century,'' (available at
http://www.sec.gov/info/municipal/roundtables/thirdmuniround.htm)
(Leslie Richards-Yellen, Principal, The Vanguard Group: `` * * *
what I'd like to see change the most is the inclusion of securities
that have been carved out of Rule 15c2-12. I would like securities
such as money market securities to be within the ambit of Rule 15c2-
12. In addition, I'd like to see the eleven material events be
expanded. The first eleven were very helpful. The ICI drafted a
letter and we've added another twelve for the industry to think
about and cogitate on * * *'', and Dianne McNabb, Managing Director,
A.G. Edwards & Sons, Inc: ``I think that in summary, we could use
more specificity as far as what needs to be disclosed, the
timeliness of that disclosure, such as the financial statements,
more events, I think that we would agree that there are more events
* * *''); and National Federation of Municipal Analysts, Recommended
Best Practices in Disclosure for Variable Rate and Short-Term
Securities, February, 2003 (recommendations for continuing
disclosures of specified information) (available at http://www.nfma.org/publications/short_term_030207.pdf); see Proposing
Release, supra note 2, 74 FR at 36834, n. 15. See also ICI Letter at
5 (``We support the proposed amendment to improve VRDO disclosure *
* *. Specifically, the availability of continuing disclosure
information regarding VRDOs would greatly benefit investors by
enhancing their ability to make and monitor their investment
decisions and protect themselves from misrepresentations and
questionable conduct in this segment of the municipal securities
market.''), and Fidelity Letter at 2. Fidelity indicated in its
letter that it assisted in the preparation of the ICI Letter and
expressed support for all of the statements made in the ICI Letter.
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The Commission believes that investors and other municipal market
participants today should be able to obtain continuing disclosure
information regarding demand securities so that they can make more
knowledgeable investment decisions and effectively manage and monitor
their investments so as to reduce the likelihood of fraud facilitated
by inadequate disclosure. Accordingly, the Commission is modifying the
exemption in the Rule, as discussed below, for demand securities \37\
by requiring
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Participating Underwriters to reasonably determine that the issuer of
demand securities, or any obligated person, has undertaken in a written
agreement to provide continuing disclosure documents to the MSRB.
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\37\ See 17 CFR 240.15c2-12(d)(1)(iii). Specifically, the
Commission is eliminating the exemption for primary offerings of
demand securities contained in paragraph (d)(1)(iii) of the Rule and
adding new paragraph (d)(5) to the Rule. Paragraph (d)(5) of the
Rule, as revised, exempts primary offerings of demand securities
from all of the provisions of the Rule except those relating to a
Participating Underwriter's obligations pursuant to paragraph (b)(5)
of the Rule and relating to recommendations by brokers, dealers, and
municipal securities dealers pursuant to paragraph (c) of the Rule.
As discussed in Section III.A. below, the Commission is adopting a
modified version of its initial proposal to cover demand securities
issued on or after the amendments' compliance date. As a result of
these changes, Participating Underwriters, in connection with a
primary offering of demand securities, will need to reasonably
determine that the issuer or obligated person has entered into a
continuing disclosure agreement with respect to the submission of
continuing disclosure documents to the MSRB. In addition, brokers,
dealers, and municipal securities dealers recommending the purchase
or sale of demand securities will need to have procedures in place
that provide reasonable assurance that they would receive prompt
notice of event notices and failure to file notices. See 17 CFR
240.15c2-12(c).
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As discussed in detail below, the Commission is adopting,
substantially as proposed, the amendments to Rule 15c2-12. In sum, the
Commission is modifying, substantially as proposed, the Rule's
exemption for demand securities by deleting current paragraph
(d)(1)(iii) and adding new paragraph (d)(5) to the Rule, thereby
applying the continuing disclosure requirements of paragraphs (b)(5)
and (c) of the Rule \38\ to a primary offering of demand securities.
The amendments also modify, as proposed, paragraph (b)(5)(i)(C) of the
Rule, thereby requiring all Participating Underwriters to reasonably
determine that the issuer or obligated person has undertaken in a
continuing disclosure agreement to provide event notices to the MSRB in
a timely manner not in excess of ten business days, rather than merely
in ``a timely manner.''
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\38\ See supra notes 11 through 16 and accompanying text for a
description of paragraph (b)(5) of the Rule. Paragraph (c) of the
Rule requires a broker, dealer, or municipal securities dealer that
recommends the purchase or sale of a municipal security to have
procedures in place that provide reasonable assurance that it will
receive prompt notification regarding any event notice and any
failure to file notice related to the municipal security. See 17 CFR
240.15c2-12(c).
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In addition, the Commission is adopting, with a few revisions from
the proposal in the Proposing Release, an amendment to paragraph
(b)(5)(i)(C) of the Rule relating to adverse tax events. Under the
amendment, as revised from the proposal in the Proposing Release, this
event item includes ``the issuance by the IRS of proposed or final
determinations of taxability, Notices of Proposed Issue (IRS Form 5701-
TEB) or other material notices or determinations with respect to the
tax status of the security or other material events affecting the tax
status of the security.'' The amendments also add, as proposed, the
following events to paragraph (b)(5)(i)(C) of the Rule: (1) Tender
offers; (2) bankruptcy, insolvency, receivership or similar event of
the issuer or obligated person; (3) the consummation of a merger,
consolidation, or acquisition involving an obligated person or the sale
of all or substantially all of the assets of the obligated person,
other than in the ordinary course of business, the entry into a
definitive agreement to undertake such an action or the termination of
a definitive agreement relating to any such actions, other than
pursuant to its terms, if material; and (4) appointment of a successor
or additional trustee, or the change of name of a trustee, if material.
Finally, the amendments delete the general materiality condition
from paragraph (b)(5)(i)(C) of the Rule. In connection with the
deletion of the general materiality condition from paragraph
(b)(5)(i)(C) of the Rule, the amendments also add a materiality
condition to select events contained in paragraph (b)(5)(i)(C) of the
Rule. For those events in paragraph (b)(5)(i)(C) of the Rule that do
not contain a materiality condition, Participating Underwriters will
now need to reasonably determine that an issuer or obligated person has
undertaken in a written agreement to provide notice of such events in
all circumstances. These events include: (1) Principal and interest
payment delinquencies with respect to the securities being offered; (2)
unscheduled draws on debt service reserves reflecting financial
difficulties; (3) unscheduled draws on credit enhancements reflecting
financial difficulties; (4) substitution of credit or liquidity
providers, or their failure to perform; (5) defeasances; and (6) rating
changes.
III. Discussion of Amendments and Comments Received
A. Modification of the Exemption for Demand Securities
As discussed in the Proposing Release, generally there are no
continuing disclosure agreements for demand securities today because
primary offerings of these securities are currently exempt from the
Rule.\39\ When the Rule was adopted in 1989, the Commission exempted
demand securities from its coverage in response to concerns that the
Rule ``might unnecessarily hinder the operation of the market'' \40\
for VRDOs, or similar securities. Paragraphs (b)(1) through (b)(4) of
the Rule require a Participating Underwriter to review an official
statement that the issuer ``deems final'' before it may bid for,
purchase, offer, or sell municipal securities in an offering, deliver
preliminary and final official statements to any potential customer, on
request, and contract with the issuer to receive an adequate number of
the final official statements to fulfill its regulatory
responsibilities. Although remarketings of VRDOs may be primary
offerings,\41\ the Commission did not impose the requirements of
paragraphs (b)(1) through (b)(4) of the Rule on Participating
Underwriters of each remarketing--which could occur as frequently as
weekly, and sometimes even daily, for each outstanding demand
security--in part because of the burden this could impose on
Participating Underwriters to comply with the Rule's provisions.\42\
The Commission, in the 1994 Amendments Adopting Release, did not
specifically address the application of paragraph (b)(5) of the Rule,
which currently requires Participating Underwriters to reasonably
determine that an issuer of municipal securities or an obligated person
\43\ has undertaken in a continuing disclosure agreement to provide
specified information to the MSRB, to remarketings of demand
securities.\44\
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\39\ See Proposing Release, supra note 2, 74 FR at 36836.
\40\ See 1989 Adopting Release, supra note 8, 54 FR at 28808, n.
68. See also Proposing Release, supra note 2, 74 FR at 36836.
\41\ See Rule 15c2-12(f)(7) for the definition of ``primary
offering.'' 17 CFR 240.15c2-12(f)(7). Making a determination
concerning whether a particular remarketing of demand securities is
a primary offering by the issuer of the securities requires an
evaluation of relevant provisions of the governing documents, the
relationship of the issuer to the other parties involved in the
remarketing transaction, and other facts and circumstances
pertaining to such remarketing, particularly with respect to the
extent of issuer involvement.
\42\ See 1989 Adopting Release, supra note 8, 54 FR at 28808 and
n. 68. See also Proposing Release, supra note 2, 74 FR at 36836.
\43\ The term ``obligated person'' means ``any person, including
an issuer of municipal securities, who is either generally or
through an enterprise, fund, or account of such person committed by
contract or other arrangement to support payment of all, or part of
the obligations of the municipal securities to be sold in the
Offering (other than providers of municipal bond insurance, letters
of credit, or other liquidity facilities).'' See 17 CFR 240.15c2-
12(f)(10).
\44\ See 1994 Amendments Adopting Release, supra note 8.
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As discussed above, the Commission today is modifying the Rule's
exemption for demand securities because its experience with the
operation of the Rule and market changes since the adoption of the 1994
Amendments have suggested a need to reconsider its scope. The increased
issuance, trading volume, and outstanding dollar amount of VRDOs
indicate that many more investors currently own such securities than
when the Rule was adopted in 1989.\45\ Further, despite the periodic
[[Page 33104]]
ability to tender VRDOs to issuers for repurchase, some investors, such
as mutual funds, appear to hold VRDOs for long periods of time and
therefore have a need for continuing disclosure information about the
issuer or obligated person.\46\
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\45\ As stated in the Proposing Release, the increased
investment interest and activity in VRDOs during 2008 may be
attributable, in part, to the turmoil in the market for auction rate
securities (``ARS'') that began in February 2008. See Proposing
Release, supra note 2, 74 FR at 36834 and 36835, n. 48.
\46\ See Proposing Release, supra note 2, 74 FR at 36835, n. 45.
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Accordingly, the Commission believes that developments since 1989
warrant narrowing the Rule's provision exempting demand securities from
continuing disclosure obligations in order to improve the availability
of information to investors. Indeed, representatives of money market
funds, the primary purchasers of demand securities, have expressed
difficulty or, on some occasions, the inability to obtain information
that they believe is necessary to oversee their investments in demand
securities.\47\ By narrowing the exemption for demand securities, the
Commission intends to improve the availability of continuing
disclosures, not only to institutional investors, such as mutual funds,
that acquire these securities for their portfolios, but also to
individual investors who own, or who may be interested in owning,
demand securities. The availability of information regarding demand
securities, in turn, should help institutional and individual investors
make more informed decisions with respect to investments in those
securities and should reduce the likelihood that such investors will be
subject to fraud facilitated by inadequate disclosure. The Commission
believes that broader requirements for consistent and accurate
disclosure of important information should enhance the efficiency of
the relevant capital market segments by better allocating capital at
appropriate prices.
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\47\ See Proposing Release, supra note 2, 74 FR at 36836.
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Consequently, the Commission is deleting the exemption for demand
securities \48\ set forth in paragraph (d)(1)(iii) of the Rule and
adding new paragraph (d)(5) to the Rule, thereby making the continuing
disclosure provisions of paragraphs (b)(5) \49\ and (c) \50\ of the
Rule apply to a primary offering \51\ of demand securities.\52\ This
change applies to any primary offering of demand securities (including
a remarketing that is a primary offering) occurring on or after the
compliance date of the amendments.\53\ However, as more fully discussed
below,\54\ the Commission is revising the amendment from that proposed
to include a ``limited grandfather provision'' (as defined below) for
remarketings of currently outstanding demand securities.\55\
Specifically, the continuing disclosure provisions will not apply to
remarketings of demand securities that are outstanding in the form of
demand securities on the day preceding the compliance date of the
amendments and that continuously have remained outstanding \56\ in the
form of demand securities.
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\48\ See supra note 28 and accompanying text.
\49\ See supra note 14 and accompanying text.
\50\ See supra note 38 for a description of Rule 15c2-12(c).
\51\ See Rule 15c2-12(f)(7) for the definition of primary
offering. 17 CFR 240.15c2-12(f)(7).
\52\ See supra note 41.
\53\ As noted in Section III.G., the compliance date of the
amendments to the Rule adopted herein is December 1, 2010.
\54\ See infra notes 111 and 112 and accompanying text, as well
as the paragraph following the accompanying text.
\55\ See infra note 112 and accompanying text for discussion of
comments related to the limited grandfather provision.
\56\ ``Outstanding'' generally means bonds that have been issued
but have not yet matured or been otherwise redeemed. See, e.g, MSRB
Glossary of Municipal Security Terms at http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=o.
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Thus, as amended, paragraph (d)(2)(B)(5) of the Rule states that
``[w]ith the exception of paragraphs (b)(1) through (b)(4), this
section shall apply to a primary offering of municipal securities in
authorized denominations of $100,000 or more if such securities may, at
the option of the holder thereof, be tendered to an issuer of such
securities or its designated agent for redemption or purchase at par
value or more at least as frequently as every nine months until
maturity, earlier redemption, or purchase by an issuer or its
designated agent; provided, however, that paragraphs (b)(5) and (c)
shall not apply to such securities outstanding as of November 30, 2010
for so long as they continuously remain in authorized denominations of
$100,000 or more and may, at the option of the holder thereof, be
tendered to an issuer of such securities or its designated agent for
redemption or purchase at par value or more at least as frequently as
every nine months until maturity, earlier redemption, or purchase by an
issuer or its designated agent'' (emphasis added to indicate revised
language) (``limited grandfather provision'').\57\
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\57\ The Commission also is slightly modifying the text of
paragraph (d)(2)(B)(5) of the Rule from the version in the Proposing
Release to clarify that demand securities remain exempt from
paragraphs (b)(1)-(4) of the Rule, consistent with the Commission's
description and discussion of the amendment in the Proposing
Release.
---------------------------------------------------------------------------
In the Proposing Release, the Commission requested comment on
whether it is appropriate to revise the Rule's exemption for demand
securities. The Commission specifically requested comment regarding
investors' and other municipal market participants' need for continuing
disclosure information relating to demand securities and the extent to
which the amendment would provide benefits to these individuals. The
Commission also requested comment regarding the effect of the amendment
on Participating Underwriters, issuers, obligated persons, and others.
Commenters were generally supportive of applying the continuing
disclosure provisions of paragraph (b)(5) of the Rule to demand
securities, so that a Participating Underwriter of these securities
will be required to reasonably determine that the issuer or obligated
person has entered into a continuing disclosure agreement to submit
continuing disclosure documents to the MSRB.\58\ A number of commenters
agreed that applying continuing disclosure obligations to demand
securities is ``critical'' to assist investors in making informed
investment decisions.\59\ One commenter noted that the market for VRDOs
was among the sectors most affected by the recent market turmoil and,
consequently, there is good reason to increase the availability of
information about these securities to investors.\60\ Similarly, another
commenter stated that, during the recent market downturn, investors in
VRDOs were well served by those issuers or obligated persons who
voluntarily provided continuing
[[Page 33105]]
disclosure documents, despite the Rule's exemption.\61\
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\58\ See California Letter at 1, CHEFA Letter at 2, Connecticut
Letter at 1, DAC Letter at 3, e-certus Letter I at 11, Fidelity
Letter at 3, Folts Letter at 1, ICI Letter at 2, NFMA Letter at 1,
RBDA Letter at 2, and SIFMA Letter at 2.
Although the Commission is eliminating certain exemptions,
demand securities will continue to be exempt from paragraphs (b)(1)-
(4) of the Rule. In other words, a Participating Underwriter of a
demand security will continue to be exempt from the obligation to
review an official statement that the issuer ``deems final'' before
it may bid for, purchase, offer, or sell municipal securities. Some
commenters urged the Commission to eliminate the exemption for
demand securities from these provisions. See Fidelity Letter at 3
and RBDA Letter at 2, and SIFMA Letter at 2. One commenter expressed
concern that not requiring Participating Underwriters to comply with
these provisions with regard to demand securities suggests that the
information required in the continuing disclosure documents may not
be material for investors at the initial issuance of the demand
securities. See SIFMA Letter at 2. The Commission believes that it
is important for investors to have adequate information in order to
make informed investment decisions. The Commission also notes that
many official statements are prepared for demand securities. See
http://www.emma.msrb.org.
\59\ See ICI Letter at 5. See also SIFMA Letter at 2 and RBDA
Letter at 2.
\60\ See RBDA Letter at 2. See also Fidelity Letter at 2.
\61\ See CHEFA Letter at 2.
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Further, two commenters noted that application of paragraph (b)(5)
of the Rule to demand securities might not significantly increase the
disclosure burdens for many issuers and obligated persons.\62\ One
commenter noted that, because many VRDO issuers are already subject to
continuing disclosure undertakings for their fixed rate debt, extending
these obligations to VRDOs would impose minimal additional burdens,
while enhancing disclosure to a much broader segment of investors.\63\
Two commenters also noted that, as issuers of VRDOs, they have for a
number of years voluntarily entered into continuing disclosure
undertakings for those securities.\64\
---------------------------------------------------------------------------
\62\ See Connecticut Letter at 1 and NFMA Letter at 1.
\63\ See NFMA Letter at 1.
\64\ See California Letter at 1 and Connecticut Letter at 1.
---------------------------------------------------------------------------
Two commenters, however, disputed the assessment that extending
paragraph (b)(5) to demand securities would not significantly increase
the disclosure burdens for issuers and obligated persons.\65\ These
commenters focused particularly on the impact the amendment would have
on borrowers who access tax-exempt debt markets through demand
securities that are fully backed by direct-pay letters of credit
(``LOC-backed demand securities''). One of the commenters noted that
many of these are non-governmental conduit borrowers \66\ who have no
previous undertakings to provide continuing disclosure information and,
for such entities, complying with paragraph (b)(5) of the Rule would
not merely be an extension of preexisting obligations but a new and
significant burden.\67\ Moreover, the two commenters opposing the
proposed change stated that many obligated persons with respect to LOC-
backed demand securities do not prepare annual filings, such as audited
financial statements, in the ordinary course of their business.\68\
They therefore believed that eliminating the exemption from paragraph
(b)(5) would impose costs and burdens that could potentially force some
conduit borrowers using LOC-backed demand securities to withdraw from
the tax-exempt bond market.\69\
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\65\ See CRRC Letter at 3-5 and NABL Letter at A-10.
\66\ A ``conduit borrower'' is an obligated person for whose
benefit a state, political subdivision, municipality, or
governmental agency or authority may issue tax-exempt municipal
bonds. The security for this type of issue is customarily the credit
of the conduit borrower or pledged revenues from the project
financed, rather than the credit of the issuer. See, e.g.,
definitions of ``conduit financing,'' ``conduit borrower,'' and
``issuer'' in Glossary of Municipal Securities Terms (Second
Edition--January 2004) of the MSRB, available at http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=c.
\67\ See NABL Letter at A-2, n. 1.
\68\ See CRRC Letter at 5 and NABL Letter at A-2.
\69\ See CRRC Letter at 5 and NABL Letter at A-10. Two
commenters also expressed concern that, in complying with the
revised Rule, smaller and not-for-profit obligated persons could
encounter similar costs and burdens. See NABL Letter at A-2 (noting
that many small businesses and non-profit organizations utilize LOC-
backed demand securities in accessing the tax-exempt debt markets)
and SIFMA Letter at 2-3. See also Section VI.B.2(c).
---------------------------------------------------------------------------
As the Commission stated in the Proposing Release, it does not
anticipate a significant increase in disclosure burdens with respect to
demand securities.\70\ Those issuers with outstanding demand
securities--including LOC-backed demand securities--will have the
limited grandfather provision available to them, and thus likely will
not be subject to an undertaking to provide continuing disclosures for
those securities. The Commission acknowledges that, if issuers of
demand obligations, or obligated persons, have not previously issued
securities that were subject to the Rule (i.e., municipal securities
other than demand securities), they will be entering into a continuing
disclosure agreement for the first time and thereby will incur some
costs and burdens to provide continuing disclosure documents to the
MSRB.\71\ However, as the Commission noted in proposing these
amendments, a number of issuers of VRDOs, and obligated persons,
already have outstanding fixed rate municipal securities, and some of
these securities likely are subject to continuing disclosure agreements
under the Rule.\72\ Because any existing continuing disclosure
agreement obligates an issuer or an obligated person to provide annual
filings, event notices, and failure to file notices with respect to
these fixed rate securities, providing disclosures by such issuers or
obligated persons with respect to VRDOs is not expected to be a
significant additional burden.\73\ As the Commission stated in
proposing these amendments,\74\ it believes that any additional burden
on issuers and obligated persons \75\ with respect to demand securities
is, on balance, justified by the enhancements to investor protection
that should result from the improved availability of information with
respect to these securities as a result of the amendments.\76\ As noted
above, a number of commenters supported this view.\77\
---------------------------------------------------------------------------
\70\ See Proposing Release, supra note 2, 74 FR at 36837.
\71\ Id.
\72\ See Proposing Release, supra note 2, 74 FR at 36837.
\73\ See infra Section V.D. for a discussion regarding burden on
issuers and obligated persons that do not currently provide annual
filings, event notices, or failure to file notices.
\74\ See Proposing Release, supra note 2, 74 FR at 36837.
\75\ The Commission estimates that the amendment to modify the
exemption from the Rule for a primary offering of demand securities
would increase the number of issuers with municipal securities
offerings that are subject to the Rule annually by 20%. See infra
Section V.D.
\76\ For discussion of the burdens associated with the
modification of the Rule as it relates to demand securities, see
supra Section V.D.
\77\ See, e.g., CHEFA Letter at 2, Connecticut Letter at 1, e-
certus Letter I at 11, Folts Letter at 1, ICI Letter at 5, NFMA
Letter at 1, RBDA Letter at 2, and SIFMA Letter at 2.
---------------------------------------------------------------------------
Regarding the concern that any new disclosure burdens may induce
some obligated persons to withdraw from the tax-exempt municipal market
because they do not prepare annual filings in the ordinary course of
their business, the Commission notes that, for purposes of the Rule,
annual filings are required only to the extent provided in the final
official statements. Specifically, annual filings are composed of: (1)
Audited financial statements, when and if available; and (2) other
financial and operating data of the type included in the official
statement. Pursuant to the undertaking contemplated by the Rule, annual
financial information must be submitted for ``each obligated person for
whom financial information or operating data is presented in the final
official statement. * * * '' \78\ Annual financial information is
defined as ``financial information or operating data * * * of the type
included in the final official statement with respect to an obligated
person. * * * '' \79\ As the Commission previously stated, the
definition of annual financial information specifies both the timing of
the information--that is, once a year--and, by referring to the final
official statement, the type of financial information and operating
data that is to be provided.\80\ If financial information or operating
data concerning an obligated person is included in the final official
statement, then annual financial information would consist of the same
type of financial information or operating data.\81\
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\78\ 17 CFR 240.15c2-12(b)(5)(i)(A).
\79\ 17 CFR 240.15c2-12(f)(9).
\80\ See 1994 Amendments Adopting Release, supra note 8, 59 FR
at 59598.
\81\ Id. See paragraph (f)(3) of the Rule for the definition of
``final official statement.'' 17 CFR 240.15c2-12(f)(3).
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[[Page 33106]]
Further, pursuant to paragraph (b)(5)(i)(B) of the Rule, audited
financial statements need to be submitted, pursuant to the issuer's and
obligated person's undertaking in a continuing disclosure agreement,
only ``when and if available.'' \82\ This limitation, which is
consistent with the Commission's position in the 1994 Amendments
Adopting Release, should mitigate some concerns of those obligated
persons that do not prepare audited financial statements in the
ordinary course of their business.\83\ Further, although not all
issuers or obligated persons, in the ordinary course of their business,
prepare audited financial statements or other financial and operating
information of the type included in annual filings, a number of issuers
and obligated persons do.\84\
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\82\ 17 CFR 240.15c2-12(b)(5)(i)(B).
\83\ As discussed in the 1994 Amendments Adopting Release, the
1994 Amendments ``[do] not adopt the proposal to mandate audited
financial statements on an annual basis with respect to each issuer
and significant obligor. Instead, the amendments require annual
financial information, which may be unaudited, and may, where
appropriate and consistent with the presentation in the final
official statement, be other than full financial statements. * * *
However, if audited financial statements are prepared, then when and
if available, such audited financial statements will be subject to
the undertaking and must be submitted to the repositories. Thus * *
* the undertaking must include audited financial statements only in
those cases where they otherwise are prepared.'' See 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
\84\ See http://www.emma.msrb.org for audited financial
statements or other financial and operating information submitted to
EMMA.
---------------------------------------------------------------------------
The Commission acknowledges that issuers or obligated persons of
demand obligations that assemble financial and operating data for the
first time in response to their undertakings in a continuing disclosure
agreement may incur incremental costs beyond those costs incurred by
those issuers or obligated persons that already assemble this
information. Also, smaller issuers or obligated persons may have
relatively greater burdens than larger issuers or obligated persons.
However, the overall burdens for these demand securities issuers or
obligated persons in preparing financial information are expected to be
commensurate with those of issuers or obligated persons that already
are preparing financial information as part of their continuing
disclosure undertakings.\85\ The Commission believes that the burdens
that will be incurred in the aggregate by issuers or obligated persons,
as a result of the amendments with respect to demand securities, may
not be significant and, in any event, are justified by the benefits to
investors of enhanced disclosure.\86\ The Commission further believes
that the operations of an issuer or obligated person generally entail
the preparation and maintenance of at least some financial and
operating data.
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\85\ Further, issuers or obligated persons that assemble
financial and operating data for the first time may face a greater
burden than those issuers or obligated persons that already assemble
this information. The amendments therefore initially may have a
disparate impact on those issuers or obligated persons, including
small entities, entering into a continuing disclosure agreement for
the first time, as compared with those that already have outstanding
continuing disclosure agreements.
\86\ See infra Section V.D. As discussed therein, some
commenters believed that the amendment could force some small
entities to withdraw from the tax-exempt market because: (1)
Disclosure of small issuers' or obligated persons' financial
information would provide their large, national competitors with
information about these small issuers or obligated persons, which
they believed could result in a competitive disadvantage to them;
and (2) small issuers or obligated persons would have to prepare
costly audited financial statements. See, e.g., CRRC Letter at 3-4
and WCRRC Letter at 1. As discussed above, the undertakings
contemplated by the amendments (and Rule 15c2-12 in general) require
annual financial information only to the extent provided in the
final official statement, and audited financial statements only when
and if available.
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The Commission also stated in the Proposing Release, and reiterates
herein, its belief that the application of paragraph (b)(5) to demand
securities will not significantly burden Participating Underwriters in
connection with the initial issuance and remarketing of demand
securities. Any primary offering, including a remarketing of demand
securities that is a primary offering (other than those subject to the
limited grandfather provision), that occurs on or after the compliance
date of the Rule will require a Participating Underwriter (including a
Participating Underwriter serving as a remarketing agent) \87\ to make
a determination that an issuer or an obligated person has entered into
a continuing disclosure agreement. Subsequent determinations for
remarketings of the same issue of demand securities should not be
burdensome because, once the Participating Underwriter has made such a
determination for a particular issue of demand securities, at the time
of a subsequent remarketing, the Participating Underwriter will be
aware of the existence of the continuing disclosure agreement.
Furthermore, remarketing agents that did not previously participate in
an offering of such securities could confirm that an issuer or an
obligated person has entered into an undertaking by obtaining an
official statement from the issuer, the MSRB,\88\ or from a variety of
vendors. Such an official statement by definition must include a
description of the issuer's undertakings.\89\ In addition, a
remarketing agent could obtain a copy of the actual continuing
disclosure agreement from the issuer or obligated person at the time
that it enters into a contract to act as a remarketing agent.\90\
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\87\ A remarketing agent is a broker-dealer responsible for
reselling to new investors securities (such as VRDOs) that have been
tendered for purchase by their owner. The remarketing agent also
typically is responsible for resetting the interest rate for a
variable rate issue and also may act as tender agent. See Proposing
Release, supra note 2, 74 FR at 36836, n. 53. Further, a remarketing
agent often serves as the Participating Underwriter in the initial
issuance of the demand security.
\88\ The MSRB makes official statements for public offerings of
municipal securities available on the Internet through its EMMA
system for free. See Securities Exchange Act Release No. 59061
(December 5, 2008), 73 FR 75778 (December 12, 2008) (File No. SR-
MSRB-2008-05) (order approving the MSRB's proposed rule change to
make permanent a pilot program for an Internet-based public access
portal for the consolidated availability of primary offering
information about municipal securities). See also supra note 5 and
MSRB Rule G-32.
\89\ 17 CFR 240.15c2-12(f)(3).
\90\ One commenter believed the elimination of the exemption for
LOC-backed demand securities would substantially increase a
Participating Underwriter's burden in offering and remarketing these
securities because the Participating Underwriter must: (1) Determine
whether information concerning the obligated person is material and
(2) if material, review the offering document to assure that it
includes financial or operating data about the obligated person. In
addition, this commenter stated that a Participating Underwriter
would be required by the antifraud provisions of the Securities Act
of 1933 and the Exchange Act to reasonably investigate key
representations about the obligated person in the offering document
before passing the securities along to investors and periodically
repeat its ``due diligence'' of the obligated person before acting
as a remarketing agent for primary offerings of such demand
securities. See NABL Letter at A-11. However, such obligations of a
Participating Underwriter already exist under the antifraud
provisions of the federal securities laws.
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Some commenters argued that the amendment is too broad.\91\
Specifically, these commenters stated that the amendment should not
apply to conduit borrowers of LOC-backed demand securities, but rather
to the letter of credit providers.\92\ They stated that, for
[[Page 33107]]
these securities, a bond trustee draws on the letters of credit issued
by banks or financial institutions, rather than the underlying
borrowers, for all payments of interest and principal, and to
repurchase the securities if and when they are tendered.\93\
Consequently, information in disclosure documents for some LOC-backed
demand securities relates to the entities issuing the letters of
credit, and not the conduit borrowers.\94\ These commenters argued
that, if the Commission applies paragraph (b)(5) of the Rule to LOC-
backed demand securities,\95\ the obligation to provide continuing
disclosures should be imposed on the banks and financial institutions
that provide credit enhancements, and not on the conduit borrowers.\96\
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\91\ See CRRC Letter at 2, NABL Letter at 2, and WCRRC Letter at
1 (endorsing CRRC Letter in its entirety). One of these commenters
maintained that the Commission should not adopt the amendment
relating to demand securities without Congressional authority. The
commenter stated that the Commission does not have the ``statutory
authority to regulate the content of prospectuses used to offer
exempt securities, except possibly under the authority of the
antifraud provisions of the federal securities laws.'' See NABL
Letter at A-7. The Commission notes that the amendments do not
address the contents of prospectuses used to offer exempt securities
and, instead, are being adopted, among other things, pursuant to its
authority under Section 15(c)(2)(D) of the Exchange Act, 15 U.S.C.
78o(c)(2)(D), which grants the Commission authority to define, and
to prescribe means reasonably designed to prevent, such acts and
practices as are fraudulent, deceptive or manipulative.
\92\ See CRRC Letter at 2 and NABL Letter at 2.
Separately, another commenter remarked about the
responsibilities of an issuer with respect to the underlying obligor
of a demand security. The commenter stated that, ``if it is the
SEC's intention to have issuers disclose information either in the
official statement or on a continuing basis regarding the underlying
obligor,'' issuers would be significantly burdened because they do
not have such information first-hand. See GFOA Letter at 2. The
Commission notes that its rulemaking does not amend provisions of
Rule 15c2-12 relating to official statements. The Commission notes
that, as with other conduit borrowings, issuers may require an
obligated person of demand obligations to execute a continuing
disclosure agreement as a condition of issuance, such that the
underlying obligor bears the responsibility of providing continuing
disclosures to the MSRB.
\93\ Id. See also NABL Letter at A-1.
\94\ See CRRC Letter at 2 and NABL Letter at A-2 and A-6.
\95\ See CRRC Letter at 2-3 and NABL Letter at 1-2.
\96\ See CRRC Letter at 3.
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As noted in the Proposing Release, the Commission believes that
information regarding conduit borrowers is material to investors in
credit enhanced offerings and therefore should be included in the
official statements.\97\ As the Commission has stated before in the
context of municipal securities offerings as well as other types of
securities offerings, the existence of credit enhancement is not a
substitute for information about the underlying obligor or other
obligated entity.\98\ For example, Regulation AB, relating to
disclosures in offerings of asset-backed securities, requires
disclosure about the underlying pool of assets in addition to
disclosures about credit enhancement and credit enhancement
providers.\99\ Furthermore, for VRDOs, as well as fixed rate
securities, many governmental issuers and conduit borrowers routinely
provide full disclosure about themselves in official statements,
suggesting that they consider this information to be useful to
investors.\100\ The Commission also notes that it is possible for the
issuers of credit enhancements, including letters of credit providers,
to default on their obligations\101\ or to have their ratings
downgraded.\102\ The possibility of such occurrences supports the
likelihood that investors would consider information concerning the
underlying obligor important to making investment decisions.
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\97\ See Proposing Release, supra note 2, 74 FR at 36844, n.
113, citing 1989 Adopting Release, supra note 8, 54 FR at 28812.
\98\ See 1989 Adopting Release, supra note 8, 54 FR at 28812
(``The presence of credit enhancements generally would not be a
substitute for material disclosure concerning the primary obligor on
municipal bonds.'')
\99\ 17 CFR 229.1100-1123.
\100\ For example, governmental obligors, non-profit health care
facilities, colleges, and universities routinely provide disclosures
about themselves in official statements. See, e.g., Connecticut
Letter at 1; Official Statement dated November 4, 2009 for VRDOs
issued by the Arizona Health Facilities Authority for the benefit of
Catholic Healthcare West (available at http://emma.msrb.org/EP346945-EP47480-EP669523.pdf); Official Statement dated August 22,
2008 for VRDOs issued by the Health and Educational Authority of the
State of Missouri for the benefit of Saint Louis University
(available at http://emma.msrb.org/OSPreview/OSPreview.aspx?documentId=MS271933&transactionId=MS274477); Official
Statement dated October 12, 1994 for VRDOs of the City of Akron Ohio
for its Sanitary Sewer System (available at http://emma.msrb.org/OSPreview/OSPreview.aspx?documentId=MS80311&transactionId=MS105003);
and Official Statement dated April 15, 2005 for VRDOs of the
Redevelopment Agency of the City and County of San Francisco
Community Facilities District No. 7 for Hunters Point Shipyard Phase
One Improvements (available at http://emma.msrb.org/MS233193-MS208501-MD405363.pdf).
\101\ Since 1995, the Federal Deposit Insurance Corporation
(``FDIC'') has taken the position that it may not honor unsecured
letters of credit issued by financial institutions that are placed
in FDIC receivership. See FDIC Statement of Policy regarding
Treatment of Collateralized Letters of Credit after Appointment of
the FDIC as Conservator or Receiver, 60 FR 27976, May 26, 1995,
effective May 19, 1995.
\102\ See Proposing Release, supra note 2, 74 FR at 36839. In
addition to the ratings downgrades of almost all issuers of
municipal bond insurance over the past two years, the ratings of
many issuers of letters of credit on municipal bonds were downgraded
by one or more credit rating agencies. See, e.g., Jack Herman, S&P
Downgrades Ratings or Revises Outlooks on 22 Banks, The Bond Buyer,
June 19, 2009 (``Standard & Poor's Wednesday downgraded its ratings
or revised its outlooks on 22 U.S. banks--more than half of which
have provided letters of credit on municipal securities--to reflect
the ongoing change in the banking industry.''); Dan Seymour, 1st-
Half Credit Enhancers See a Topsy-Turvy World, The Bond Buyer, July
16, 2009.
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With respect to demand securities, one commenter stated that the
Rule should not be amended to apply continuing disclosure requirements
to demand securities, because owners of demand securities can choose to
terminate their investment by exercising the option to put such
securities for repurchase at face value or more, at least as frequently
as every nine months.\103\ The commenter argued that these investors
can therefore sufficiently protect their investments.\104\ Further, the
commenter noted that when investors need financial and operating data
to evaluate their investments, they are able to get such information
from conduit borrowers, who typically provide the information
voluntarily in order to support pricing and remarketing.\105\ The
commenter also questioned the need for the amendment when investors, as
a condition to purchasing or maintaining an investment in demand
securities, are free to demand undertakings to provide notices of
certain events.\106\
---------------------------------------------------------------------------
\103\ See NABL Letter at A-4--A-6.
\104\ Id.
\105\ See NABL Letter at A-8.
\106\ See NABL Letter at A-8 and A-9.
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The Commission does not believe that an investor's ability to
tender a demand security for repurchase obviates the need for
continuing disclosures. While a holder of demand obligations, such as
VRDOs, may tender these securities for repurchase at par value,\107\
when the investor is unable to obtain necessary information to make an
informed decision as to whether to continue to hold demand securities,
the investor may have no other option but to tender. However, the
Commission does not believe that such outcome is in the interest of the
investing public or the municipal securities market. Without adequate
information about the issuer or obligated person, including annual
financial information and audited annual financial statements, it would
be difficult for an investor to evaluate whether to buy, hold, sell, or
put the security. Moreover, most holders of VRDOs are money market
funds\108\ subject to the requirements of Rule 2a-7 under Investment
Company Act of 1940 (``Investment Company Act''),\109\ with an
obligation to monitor the securities in their funds.\110\ The
availability of continuing disclosure information should facilitate the
fulfillment of these obligations. The Commission also notes that one
commenter, whose membership includes many money market funds, stated
that ``the availability of continuing disclosure information regarding
VRDOs would greatly benefit investors by enhancing their ability to
make and monitor their investment decisions and protect themselves from
misrepresentations and questionable
[[Page 33108]]
conduct in this segment of the municipal securities market.'' \111\
---------------------------------------------------------------------------
\107\ See 17 CFR 240.15c2-12(d)(1)(iii).
\108\ See, e.g., Standard & Poor's, Variable Rate Demand
Obligations--A Primer: A Short Guide to Variable Rate Demand
Obligations and the S&P National AMT-Free Municipal VRDO Index,
November 1, 2009 (available at http://www2.standardandpoors.com/spf/pdf/index/VRDO_Primer.pdf).
\109\ 17 CFR 270.2a-7.
\110\ 17 CFR 270.2a-7(c)(3)(iv).
\111\ See ICI Letter at 6. See also Fidelity Letter at 2.
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Some commenters sought clarification with respect to the proposed
amendment relating to demand securities. Specifically, some commenters
asked the Commission to clarify the meaning of ``primary offering''
with respect demand securities \112\ and asked for guidance to
distinguish remarketings that are primary offerings requiring
continuing disclosure agreements from those that are not primary
offerings.\113\ These comments appear to be based upon the concern that
the amendments could require a broker, dealer, or municipal securities
dealer to obtain continuing disclosure documents for demand securities
that were issued prior to the compliance date of the amendments.
---------------------------------------------------------------------------
\112\ See Kutak Letter at 2, NABL Letter at 4-5 and A-11, and
SIFMA Letter at 2.
\113\ Id.
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The Commission acknowledges that, although there may be beneficial
effects from subjecting outstanding demand obligations to paragraphs
(b)(5) and (c) of the Rule, regardless of their date of initial
issuance, doing so may be unduly burdensome and costly for certain
market participants. For example, if all outstanding issuances of
demand securities, such as VRDOs which generally are long-term
securities,\114\ became subject to paragraph (b)(5)(i)(C) of the Rule,
it would be necessary for a Participating Underwriter, in the first
remarketing of each issue of demand securities following the compliance
date of the amendments, to reasonably determine that an issuer or
obligated person has executed a continuing disclosure agreement. For
such an agreement to be consistent with the Rule, a Participating
Underwriter must reasonably determine that the issuer or obligated
person has agreed to provide ``[a]nnual financial information for each
obligated person for whom financial information or operating data is
presented in the final official statement, or, for each obligated
person meeting the objective criteria specified in the undertaking and
used to select the obligated persons for whom financial information or
operating data is presented in the final official statement.'' \115\
However, for outstanding issues of demand securities, referring back to
information included in the final official statement may be problematic
because that document may be many years old. Without the limited
grandfather provision, issuers and obligated persons would be required
under continuing disclosure agreements to update annual financial
information that may no longer be prepared or available. In addition,
application of the amendments to remarketings of demand securities
occurring on or after the compliance date could necessitate a large
number of issuers and obligated persons of demand securities to enter
into continuing disclosure agreements in a very short time period,
which could delay remarketings and temporarily negatively impact the
market for demand securities.
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\114\ See supra Section II. for statistics on the amount of
outstanding VRDOs.
\115\ 17 CFR 240.15c2-12(b)(5)(i)(A).
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The Commission has considered the potentially significant
difficulties and costs associated with implementing the amendment with
respect to outstanding demand securities and the potential negative
implications this may have on the demand securities market and
investors.\116\ As a result, the Commission has revised its original
proposal to include a limited grandfather provision so that paragraphs
(b)(5) and (c) of the Rule are not applicable to demand obligations
outstanding in the form of demand securities immediately prior to the
compliance date of these amendments, and that have remained
continuously outstanding in the form of demand securities.\117\ The
Commission believes that the adoption of the limited grandfather
provision strikes an appropriate balance between the need to improve
disclosure available to investors and the recognition that the
practical effects of applying paragraphs (b)(5) and (c) of the Rule to
outstanding issues of demand securities could unduly burden certain
issuers and obligated persons and thus may adversely impact the market.
Although the Commission recognizes that the amendment to demand
securities now is narrower than what was originally proposed, the
Commission does not believe that the change detracts from the benefits
of greater information about new issuances of demand obligations that
the amendment will foster. The Commission believes that the burdens of
continuing disclosure obligations, noted above, with respect to these
securities justify the benefits, and the grandfather provision is
consistent with other amendments that have been applied on a
prospective basis.\118\ Further, the Commission notes that some issuers
and obligated persons of demand securities also have issued fixed rate
municipal securities, and thus are subject to existing continuing
disclosure obligations.
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\116\ See infra Section VI.B. for a detailed description of
costs associated with implementing this change.
\117\ Two commenters also expressed confusion regarding the
application of paragraph (b)(5)(i)(A) of the Rule to demand
securities. Paragraph (b)(5)(i)(A) requires that continuing
disclosure agreements include annual financial information for each
obligated person for whom financial information or operating data is
presented in the final official statement. These commenters
specifically questioned how Participating Underwriters would comply
with the requirement in the limited instances where no final
official statement was or is produced with respect to a demand
security or when the final official statement that is produced
contains no information regarding the underlying obligor. See NABL
Letter at 2-3 and A-9 and SIFMA Letter at 2. The Commission believes
that demand securities are purchased primarily by tax-exempt money
market funds and that money market funds typically require official
statements. See, e.g., Kutak Letter at 2 (commenting that VRDOs are
typically targeted to money market funds) and NABL Letter at A-1
(acknowledging that demand securities are an important part of the
investment portfolio of most tax-exempt money market funds).
\118\ See also infra Section VI.B.4.
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In conclusion, the Commission continues to believe that any
additional burden imposed on Participating Underwriters, issuers,
obligated persons, the MSRB, or others as a result of the amendment to
the Rule relating to demand securities is justified by the benefits to
investors of enhanced disclosure with respect to this important and
widely-held type of security. Eliminating the exemption for demand
securities, subject to the limited grandfather provision regarding
demand securities outstanding as of the day prior to the amendments'
compliance date, will improve the availability of information about
these securities and should reduce the likelihood that investors will
be subject to fraud facilitated by inadequate disclosure. Further,
access to more information will assist money market funds \119\ in
complying with their obligations under Rule 2a-7 of the Investment
Company Act.\120\ The Commission also believes that the amendment will
assist a broker, dealer, or municipal securities dealer in fulfilling
its responsibilities to its customers,\121\ specifically by
facilitating the disclosure of important facts and complying with
suitability and other sales practice obligations.\122\
---------------------------------------------------------------------------
\119\ See supra note 47.
\120\ 17 CFR 270.2a-7.
\121\ For example, a broker, dealer, or municipal securities
dealer with access to annual filings and event notices submitted to
the MSRB will be able to use information disclosed in these filings
and notices when deciding to recommend the purchase or sale of a
particular demand security. See, e.g., MSRB Rule G-17.
\122\ See, e.g., the MSRB, Reminder of Customer Protection
Obligations in Connection with Sales of Municipal Securities,
Interpretative Notice of Rule G-17, dated May 30, 2007 (available at
http://www.msrb.org/msrb1/rules/notg17.htm).
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[[Page 33109]]
B. Time Frame for Submitting Event Notices Under a Continuing
Disclosure Agreement
The Commission is adopting the amendment to paragraph (b)(5)(i)(C)
of the Rule \123\ to require a Participating Underwriter to reasonably
determine that the issuer or obligated person has agreed in its
continuing disclosure agreement to submit event notices to the MSRB
``in a timely manner not in excess of ten business days after the
occurrence of the event,'' rather than ``in a timely manner'' as the
Rule currently provides. The Commission also is adopting a
substantially similar revision to the limited undertaking in paragraph
(d)(2)(ii)(B) of the Rule.\124\
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\123\ 17 CFR 240.15c2-12(b)(5)(i)(C).
\124\ 17 CFR 240.15c2-12(d)(2)(ii)(B). See supra note 16 for a
description of Rule 15c2-12(d)(2).
---------------------------------------------------------------------------
Eighteen commenters provided their views on the proposed ten
business day time period for the submission of event notices pursuant
to a continuing disclosure agreement.\125\ The majority of commenters
opposed the proposal. Some commenters opposed establishing any outside
time frame,\126\ while others specifically objected to the proposed ten
business day time period, particularly in the context of certain
events.\127\ One commenter cited the 1994 Amendments Adopting Release,
in which the Commission stated that, at that time, it had not
established a specific time frame with respect to submission of event
notices because of the wide variety of events and circumstances the
issuer could face.\128\ This commenter believed that this rationale
``was sound logic in 1994, and that it should still apply in 2009.''
\129\ Another commenter stated that it disagreed ``with the SEC that
there is systemic abuse with material events not being filed in a
timely manner'' \130\ and argued that the Commission ``should not
mandate a specific time frame for submissions.'' \131\
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\125\ See Halgren Letter, Los Angeles Letter, Portland Letter,
CRRC Letter, WCRRC Letter, NFMA Letter, CHEFA Letter, NAHEFFA
Letter, SIFMA Letter, Connecticut Letter, Kutak Letter, ICI Letter,
Fidelity Letter, California Letter, San Diego Letter, NABL Letter,
GFOA Letter, and Metro Water Letter. See also 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59601.
\126\ See NABL Letter at 5-6, GFOA Letter at 2-3, and Metro
Water Letter at 1-2.
\127\ See Halgren Letter, Los Angeles Letter, Portland Letter,
CRRC Letter, WCRRC Letter, NFMA Letter, CHEFA Letter, NAHEFFA
Letter, SIFMA Letter, Connecticut Letter, Kutak Letter, California
Letter, and San Diego Letter. See also the discussion below in this
section regarding commenters' concerns about becoming aware of and
submitting notices for events such as rating changes and trustee
changes.
\128\ See NABL Letter at 5-6.
\129\ Id.
\130\ See GFOA Letter at 2.
\131\ Id.
---------------------------------------------------------------------------
Four commenters expressed support for the ten business day time
frame.\132\ Two of these commenters stated that the proposal ``would
replace the imprecise `timely manner' language in the current Rule.''
\133\ These commenters also noted that ``the absence of a specific time
period with respect to `timely' has resulted in event notices being
submitted months after the events have occurred,'' \134\ which has been
detrimental ``to investors who need this information to make informed
investment decisions about when, and which, municipal securities to buy
and sell.'' \135\ Further, they emphasized that they ``strongly support
the establishment of a definitive timeframe by which event notices must
be filed, and have repeatedly called for improvements to the timeliness
of municipal securities disclosure.'' \136\
---------------------------------------------------------------------------
\132\ See NFMA Letter at 1-2, SIFMA Letter at 3, ICI Letter at
6-7, and Fidelity Letter at 2. Fidelity indicated in its letter that
it assisted in the preparation of the ICI Letter II and expressed
support for all of the statements made in the ICI Letter. See
Fidelity Letter at 2.
\133\ See ICI Letter at 6 and Fidelity Letter at 2.
\134\ Id.
\135\ Id.
\136\ Id.
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These commenters noted that timely submission of event notices
directly impacts the pricing of a municipal bond. They posited that
``reducing the time between the event and the required notice better
informs the market that an event occurred, which is essential to
evaluating a bond's credit quality and pricing.'' \137\ They further
noted that a definitive time frame provides more timely information to
pricing evaluation services and relieves them of dependence on
bondholders to disclose the required information to them.\138\ These
commenters asserted that ``without the proper notification, bonds could
be priced incorrectly until the disclosure had been made.'' \139\
---------------------------------------------------------------------------
\137\ Id.
\138\ Id.
\139\ Id.
---------------------------------------------------------------------------
As discussed in detail below, the Commission has considered the
commenters' views and suggestions on this issue and continues to
believe that the benefits of enabling investors to receive promptly
information about important events affecting the issuer justify the
incremental costs imposed on issuers and obligated persons as a result
of the amendments. It has come to the Commission's attention,\140\ as
supported by some commenters,\141\ that some event notices currently
are not submitted until months after the events have occurred. Market
participants, on the other hand, have emphasized the importance of the
prompt availability of such information.\142\
---------------------------------------------------------------------------
\140\ See Proposing Release, supra note 2, 74 FR at 36837, n.
69. See, e.g., Elizabeth Carvlin, Trustee for Vigo County, Ind.,
Agency Taps Reserve Fund for Debt Service, The Bond Buyer, April 2,
2004, at 3 (reporting the filing of a material event notice
regarding a draw on debt service reserve fund that occurred in
February); Alison L. McConnell, Two More Deals Under Audit By TEB
Office, The Bond Buyer, April 5, 2006 (event notice of tax audit
filed nine months after audit was opened); Susanna Duff Barnett, IRS
Answers Toxic Query; Post 1986 Radioactive Waste Debt Not Exempt,
The Bond Buyer, November 2, 2004 (material event notice filed
October 29, 2004 regarding IRS technical advice memorandum dated
August 27, 2004 that bonds issued to finance certain radioactive
solid waste facilities were taxable; related preliminary adverse
determination letter was issued in January, 2002); and Michael
Stanton, IRS: Utah Pool Bonds Taxable; Issuer Disputes Facts of
Case, The Bond Buyer, December 8, 1997 (issuer's receipt of August,
1997 IRS technical advice memorandum concluding certain bonds were
taxable was disclosed on December 5, 1997). See also Peter J.
Schmitt, Estimating Municipal Securities Continuing Disclosure
Compliance: A Litmus Test Approach (available at http://www.dpcdata.com/html/about-researchpapers.html).
\141\ See supra note 134 and accompanying text.
\142\ See Proposing Release, supra note 2, 74 FR 36838, n. 70.
See, e.g., National Federation of Municipal Analysts, Recommended
Best Practices in Disclosure for General Obligation and Tax-
Supported Debt (December 2001) (``Any material event notices,
including those required under SEC Rule 15c2-12, should be released
as soon as practicable after the information becomes available.'')
(available at http://www.nfma.org/disclosure.php); Peter J. Schmitt,
Letter to the Editor, To the Editor: MuniFilings.com: The Once and
Future Edgar?, The Bond Buyer, October 9, 2007, Commentary, Vol.
362, No. 32732, at 36 (``[F]iling issues are the sole cause of lack
of transparency and disclosure availability in the industry. These
filing issues include * * * late filing. * * *'').
---------------------------------------------------------------------------
The Commission believes that delays in providing notice of the
events set forth in paragraph (b)(5)(i)(C) of the Rule undermine the
effectiveness of the Rule. Delays can, among other things, deny
investors important information that they need to make informed
decisions regarding whether to buy, sell or hold municipal securities.
As noted above, two commenters echoed this sentiment by noting the
importance of having timely submission of event notices to maintain the
transparency of a municipal security's credit quality and pricing.\143\
The Commission anticipates that, in providing for a maximum time frame,
the amendments should foster the availability of more current
information about municipal securities, and thereby help promote
greater transparency and further enhance investor confidence in the
municipal securities market. Furthermore, more up-to-date information
about municipal securities is likely to improve the transparency in the
market, should increase the efficiency of markets in allocating capital
at appropriate prices
[[Page 33110]]
that reflect the creditworthiness of issuers, which benefits issuers
and investors alike, and should reduce the likelihood that investors
will be subject to fraud facilitated by inadequate disclosure.
---------------------------------------------------------------------------
\143\ See ICI Letter at 6 and Fidelity Letter at 2.
---------------------------------------------------------------------------
The Commission further believes that more timely information will
aid brokers, dealers, and municipal securities dealers in satisfying
their obligation to have a reasonable basis to recommend the purchase
or sale of municipal securities. The Commission notes that the
amendment requires Participating Underwriters to reasonably determine
that issuers and obligated persons have contractually agreed to submit
event notices in timely manner no later than ``ten business days after
the occurrence of the event,'' rather than simply in a ``timely
manner.'' On the other hand, there will be a significant benefit to
investors and municipal market participants, because they will have a
greater assurance that information about municipal securities will be
available within a specific time frame of an event's occurrence.
Indeed, while issuers and obligated persons under continuing disclosure
agreements entered into prior to the compliance date of these
amendments would have committed to submit event notices in a timely
manner, this amendment will help to make the timing of such submissions
more certain in the case of issuers and obligated persons that enter
into continuing disclosure agreements on or after the compliance date
of these amendments.\144\
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\144\ The Commission notes that the ten business day time frame
will not apply to continuing disclosure agreements entered into with
respect to primary offerings that occurred prior to the compliance
date of these amendments or to remarketings of demand securities
that qualify for the limited grandfather provision. See infra
Section III.G.
---------------------------------------------------------------------------
One commenter suggested that the Commission leave the current
``timely'' language in the Rule but provide examples of instances that
it considers to be ``timely.'' \145\ The Commission believes that the
suggestion solely to provide guidance would not effectively accomplish
the Commission's goal of improving the timeliness of submissions.
Moreover, as the Commission noted in the Proposing Release, there have
been significant delays in the submission of event notices.\146\ As
expressed by two commenters, ``the absence of a specific time period''
with respect to what constitutes timely submission of event notices has
been a contributing factor to delays in submitting notices.\147\ While
one commenter cautioned the Commission against ``trying to create a
uniform standard for various events that are very different from each
other,''\148\ it is the Commission's view that providing a specified
time frame will provide clarity regarding the standard to be included
in continuing disclosure agreements for timely submission of event
notices in all circumstances. In some cases, however, particularly when
issuers or obligated persons know about events well in advance,
investors may view timely disclosure as occurring within a day or a few
days of the event.
---------------------------------------------------------------------------
\145\ See NABL Letter at 6.
\146\ See supra note 140.
\147\ See ICI Letter at 6 and Fidelity Letter at 3.
\148\ See GFOA Letter at 2.
---------------------------------------------------------------------------
Although a number of commenters did not oppose a specified time
frame for submission of event notices, they also did not support the
ten business day proposal. Some of their concerns were: (i) The
impracticability of meeting the time frame because of limited staff and
resources, especially for smaller issuers;\149\ (ii) the increased
burdens and costs in connection with the additional monitoring and
compliance necessary to submit notices within ten business days;\150\
(iii) the difficulty in reporting events within ten business days when
the issuer does not control the information (e.g., rating changes,
changes to the trustee, and changes to the tax status of bonds as a
result of an IRS audit);\151\ and (iv) the use of the ``occurrence of
the event'' as the trigger for the obligation to submit a notice.\152\
---------------------------------------------------------------------------
\149\ See CRRC Letter, WCRRC Letter, Portland Letter at 2,
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2,
and NABL Letter at 5-6.
\150\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter,
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, and NABL
Letter at 5-6.
\151\ See Connecticut Letter at 1-2, California Letter at 1-2,
San Diego Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA Letter at 2,
Kutak Letter at 2, and GFOA Letter at 2-3.
\152\ See California Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA
Letter at 2, San Diego Letter at 1-2, GFOA Letter at 3, Kutak Letter
at 2, and NABL Letter at 5-6.
---------------------------------------------------------------------------
Many of these commenters focused their comments on their concerns
about the difficulties associated with providing notice of specified
events, particularly rating changes and trustee changes, within ten
business days of their occurrence.\153\ These commenters noted that
rating changes and trustee changes are not within the issuer's control
and that, with respect to rating changes, rating organizations do not
directly notify issuers of rating changes.\154\ As a result, these
commenters believed that it would be difficult for most issuers to
submit an event notice for a rating change within ten business days of
its occurrence without incurring substantial costs associated with
monitoring for rating changes.
---------------------------------------------------------------------------
\153\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA
Letter at 2-4, San Diego Letter at 1-2, CHEFA Letter at 2, Kutak
Letter at 2, California Letter at 1-2, NABL Letter at 8, and GFOA
Letter at 3-4.
\154\ Id.
---------------------------------------------------------------------------
Some commenters, who expressed concern about the ability of an
issuer to learn of the event and then submit an event notice within the
ten business day time frame, proposed alternative time periods ranging
from 30 to 45 days from the event's occurrence.\155\ Others, however,
recommended that the Commission reduce the time frame.\156\ Two of
these commenters advocated a time frame of five business days from the
occurrence of the event, which they noted is the amount of time
permitted for submitting similar notices in the taxable debt
market.\157\ Another commenter recommended a time frame of four
business days from the occurrence of the event.'' \158\
---------------------------------------------------------------------------
\155\ See Halgren Letter, Portland Letter at 2, NAHEFFA Letter
at 4, and CHEFA Letter at 2.
\156\ See ICI Letter at 7, Fidelity Letter at 2, and e-certus
Letter at 8.
\157\ See ICI Letter at 7 and Fidelity Letter at 3.
\158\ See e-certus Letter I at 8.
---------------------------------------------------------------------------
Several commenters who opposed the ten business day time frame
suggested a number of modifications. Some of these commenters proposed
changing the trigger for submission of an event notice from the
occurrence of the event to the issuer's actual knowledge of the
event.\159\ A number of commenters recommended removing ``rating
changes'' from the list of disclosure events and requiring rating
organizations to submit their rating changes directly to the MSRB's
EMMA system.\160\ Finally, one commenter suggested that, instead of
specifying a time period, the Commission should modify the Rule to: (1)
State that ``issuers should disclose material events in a timely manner
which in the normal course of business would be 10 business days;'' (2)
allow the ten business days to run from the time the issuer learned of
the event, or 30 calendar days from the event itself; and (3) ensure
that in the instances where issuers do not have control of the
information (e.g., a rating change due to the rating change of the
credit enhancer), the issuer should not be responsible for submitting
the information.\161\
---------------------------------------------------------------------------
\159\ See Kutak Letter at 2, California Letter at 1-2, San Diego
Letter at 1-2, and CHEFA Letter at 2.
\160\ See Halgren Letter, Portland Letter at 2, Los Angeles
Letter at 1-2, California Letter at 3, CHEFA Letter at 2, GFOA
Letter at 3-4, and NABL Letter at 8.
\161\ See GFOA Letter at 3.
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[[Page 33111]]
The Commission has considered commenters' concerns about the
potential costs and burdens associated with the ten business day time
period for submission of event notices. The Commission also has
considered commenters' suggestion that the triggering event should be
actual knowledge of the event rather than the event's occurrence. As
the Commission noted in the Proposing Release, however, the events
currently specified in paragraph (b)(5)(i)(C) of the Rule, and the
additional event items included in the amendments, are significant and
should become known to the issuer or obligated person
expeditiously.\162\ For example, events such as payment defaults,
tender offers, and bankruptcy filings generally involve the issuer's or
obligated person's participation.\163\ Other events (e.g., failure of a
credit or liquidity provider to perform) are of such importance that an
issuer or obligated person likely will become aware of such
events,\164\ or will expect an indenture trustee, paying agent, or
other transaction participant to bring them to the issuer's or
obligated person's attention, within a very short period of time.\165\
Indeed, issuers and obligated persons could seek to obtain contractual
agreements to be advised of the occurrence of such events by those
persons or entities that may be expected to have direct knowledge of
the occurrence.
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\162\ See supra note 16 for a description of events currently
contained in Rule 15c2-12(b)(5)(i)(C). See infra Section III.E. for
a description of events added to the Rule by these amendments.
\163\ In addition, as the Commission noted in the Proposing
Release, involvement of the issuer or obligated person is often
required for substitution of credit or liquidity providers;
modifications to rights of security holders; release, substitution,
or sale of property securing repayment of the securities; and
optional redemptions. See Proposing Release, supra note 2, 74 FR at
36838, n. 73. The Commission received no comments on this statement.
See also Form Indenture and Commentary, National Association of Bond
Lawyers, 2000.
\164\ For example, as the Commission noted in the Proposing
Release, issuers or obligated persons should have direct knowledge
of principal and interest payment delinquencies, determinations of
taxability from the IRS, tender offers that they initiate, and
bankruptcy petitions that they file. The Commission received no
comments on this statement.
\165\ The Commission believes, as noted in the Proposing
Release, that indenture trustees generally would be aware of
principal and interest payment delinquencies; material non-payment
related defaults; unscheduled draws on credit enhancements
reflecting financial difficulties; the failure of credit or
liquidity providers to perform; and adverse tax opinions. The
Commission received no comments on this statement. The Commission
notes that issuers and obligated persons may wish to consider
negotiating a provision to include in indentures to which they are a
party to require a trustee promptly to notify the issuer or
obligated person in the event the trustee knows or has reason to
believe that an event specified in paragraph (b)(5) of the Rule has
or may have occurred.
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Consistent with the Commission's discussion in the Proposing
Release, rating changes may affect the market price of the security,
and thus bondholders and prospective investors should have access to
this information.\166\ While the Commission recognizes that an event
such as a rating change is not directly within the issuer's control,
Participating Underwriters today must reasonably determine that the
issuer or obligated person has undertaken in a continuing disclosure
agreement to provide notice of rating changes, if material.\167\ While
the Commission notes that the obligation to provide notice of rating
changes is not new for those issuers that have issued municipal
securities subject to a continuing disclosure agreement, the ten
business day time frame may cause some issuers to monitor more actively
for rating changes than they do today. The amendments revise the Rule
to require the Participating Underwriter to reasonably determine that
the continuing disclosure agreement provide for submission of event
notices, including rating changes and trustee changes (if material),
within ten business days after the event's occurrence.
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\166\ See Proposing Release, supra note 2, 74 FR at 36840.
\167\ See infra Section IV., discussing the obligations of
underwriters of municipal securities under the antifraud provisions
of the federal securities laws.
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Several commenters raised concerns about meeting the ten business
day time frame because of limited resources and staff, particularly
with respect to smaller issuers,\168\ and the increased burdens and
costs associated with monitoring such events within the specified time
frame. The Commission recognizes that some issuers, particularly
smaller issuers, may require a greater effort initially to comply with
their undertakings in continuing disclosure agreements that reflect the
revised Rule.\169\ The Commission notes that information about rating
changes by organizations that rate municipal securities is readily
accessible by issuers through the rating agencies' Internet Web sites.
In addition, issuers may be able to subscribe to a service that
provides them with prompt rating updates for their securities. For
other events that may be outside of the issuer's control, such as a
trustee change, issuers can contractually arrange to be notified of
such an event immediately.\170\ Accordingly, the Commission continues
to expect that issuers and obligated persons generally will become
aware of the Rule's disclosure events (or can make arrangements to
ensure that they become aware) within ten business days after the
event's occurrence and accordingly should be able to comply with their
undertakings to submit event notices to the MSRB within the ten
business day time frame.\171\
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\168\ See CRRC Letter, WCRRC Letter, Portland Letter at 2,
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2,
and NABL Letter at 5-6.
\169\ The Commission recognizes that issuers that enter into
continuing disclosure agreements for the first time, particularly
smaller issuers, initially may need to become familiar with the
steps necessary to ascertain whether there has been a rating change,
and that there are burdens associated with this.
\170\ For example, under a trust indenture, the trustee may be
obligated to notify an issuer before the trustee changes its name.
See infra Section IV., discussing the obligations of underwriters of
municipal securities under the antifraud provisions of the federal
securities laws.
\171\ As noted in the Proposing Release, those issuers or
obligated persons required by Section 13(a) or Section 15(d) of the
Exchange Act to report certain events on Form 8-K (17 CFR 249.308)
would already make such information public in a Form 8-K. See
Proposing Release, supra note 2, 74 FR at 36838, n. 76. The
Commission believes that such persons should be able to file
material event notices, pursuant to the issuer's or obligated
person's undertakings, within a short time after the Form 8-K
filing. See 15 U.S.C. 78m and 78o(d). The Commission received no
comments on these statements.
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The Commission believes that, on balance, the ten business day time
frame is appropriate. By specifying a ten business day time frame, the
Commission intends to strike a balance between the need for event
notices to be disseminated promptly and the need to allow adequate time
for an issuer or obligated person to become aware of the event and to
prepare and file the notice. The Commission believes that the ten
business day time frame provides a reasonable amount of time for
issuers to comply with their undertakings, while also allowing event
notices to be made available to investors, underwriters, and other
market participants in a timely manner.
C. Materiality Determinations Regarding Event Notices
1. Deletion of the Materiality Condition Generally
The Commission proposed to delete in certain instances the
materiality condition found in paragraph (b)(5)(i)(C) of the Rule.
Based on the Commission's experience with paragraph (b)(5)(i)(C), the
Commission believes that notice of certain events currently listed
therein need not be preceded by a materiality determination. These
events include: (1) Principal and interest payment delinquencies with
respect to the
[[Page 33112]]
securities being offered; (2) unscheduled draws on debt service
reserves reflecting financial difficulties; (3) unscheduled draws on
credit enhancements reflecting financial difficulties; (4) substitution
of credit or liquidity providers, or their failure to perform; (5)
defeasances; and (6) rating changes.
A number of commenters expressed support for deletion of the
materiality condition.\172\ Two of these commenters stated that ``these
disclosure events are of such high consequence and relevance to
investors in informing their investment decisions that they should be
disclosed as a matter of course.'' \173\ Another commenter noted that
``these events should always be provided to investors because their
occurrence is always important to investors and other market
participants.'' \174\ One commenter stated that the proposal ``to
delete a materiality qualifier is not useful, but also would not unduly
burden issuers or obligated persons except in three circumstances.\175\
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\172\ See NFMA Letter at 2, SIFMA Letter at 3, e-certus Letter
at 8, ICI Letter at 7-8, and Fidelity Letter at 3. See also
California Letter at 2 and San Diego Letter at 2 (each of these
commenters support elimination of the materiality qualifier for each
of the six events set forth in the Proposing Release except for the
event relating to rating changes); see infra Section III.C.2.e. for
a discussion of rating changes.
\173\ See ICI Letter at 7-8 and Fidelity Letter at 3.
\174\ See SIFMA Letter at 8.
\175\ See NABL Letter at 6-7. The three circumstances for which
this commenter suggested retaining a materiality condition are: (i)
Unscheduled draws of debt service reserves that reflect financial
difficulties for LOC-backed demand securities; (ii) failed
remarketings of LOC-backed demand securities; and (iii) defeasances.
The Commission addresses each of these three circumstances later in
this release. See infra Section III.C.2.
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Three commenters opposed the proposed change.\176\ One commenter
stated that the elimination of the materiality condition for all the
events included in paragraph (b)(5)(i)(C) of the Rule would ``increase
issuers' administrative burden for monitoring the possible occurrence
of these events.'' \177\ This commenter also believed that removal of
the general materiality provision may result in the disclosure of non-
material events.\178\ Another commenter, while acknowledging the
importance of these six events, argued that the materiality condition
should be retained because ``there is a risk that dividing event
notices into two categories may introduce confusion where none now
exists.''\179\ Further, one commenter remarked that ``establishing
materiality is important in order to ensure that relevant information
is passed to investors'' and is ``best made on a case by case basis,
along with advice of counsel.'' \180\
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\176\ See Metro Water Letter at 2, Connecticut Letter at 2, and
GFOA Letter at 4.
\177\ See Metro Water Letter at 2.
\178\ Id.
\179\ See Connecticut Letter at 2.
\180\ See GFOA Letter at 4.
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The Commission believes that a materiality determination remains
appropriate for specific events, as discussed below.\181\ However,
under the amendments, for each event that no longer is subject to a
materiality condition, a Participating Underwriter must reasonably
determine that the issuer or obligated person has agreed to submit a
notice to the MSRB within ten business days of the event's occurrence,
without regard to its materiality. The Commission believes that each of
these events by its nature is of such importance to investors that it
should always be disclosed. In particular, these events are likely to
have a significant impact on the value of the underlying securities.
Moreover, the Commission believes that notice of these events should
reduce the likelihood that investors will be subject to fraud
facilitated by inadequate disclosure.\182\
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\181\ The discussion in this section pertains to materiality
determinations for events currently specified in paragraph
(b)(5)(i)(C) of the Rule. For events to be added to the Rule by
these amendments, the Commission discusses in Section III.E. below
whether the materiality determination has been included for each
such event.
\182\ The Commission applied the same rationale discussed in
this paragraph to determine which of the new event items that are
being added to the Rule by these amendments should contain a
materiality condition.
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Further, the Commission continues to believe that the removal of
the materiality condition for the aforementioned events is not expected
to significantly increase the burden on issuers and obligated persons.
Because of the significant nature of these events and their importance
to investors in the marketplace, the Commission believes that issuers
and obligated persons generally are already providing notice of most of
these events pursuant to existing continuing disclosure agreements. It
is the Commission's view that removing the materiality condition for
these six disclosure events will help ensure that important information
about significant events regarding municipal securities is promptly
provided to investors and other market participants in all instances.
The availability of this information to investors will enable them to
make informed investment decisions and should reduce the likelihood
that investors will be subject to fraud facilitated by inadequate
disclosure. Furthermore, this information will assist brokers, dealers
and municipal securities dealers in satisfying their obligation to have
a reasonable basis to recommend municipal securities to investors.
Deletion of the materiality condition also could simplify a
determination by an issuer or obligated person with respect to whether
a notice must be filed and facilitate their providing such notice
promptly. Accordingly, the Commission is adopting the amendment as
proposed.
2. Deletion of Materiality Condition for Specific Events
As noted above, some commenters generally supported the proposed
revision to the Rule eliminating the general materiality condition from
all events, but expressed concerns regarding its elimination for
specific events. The Commission discusses these comments below but, for
the reasons discussed, is adopting the amendment, as proposed.
a. Principal and Interest Payment Delinquencies
One commenter suggested that, in light of the Commission's proposed
amendment to delete the materiality condition from specified events,
the definition of ``principal and interest payment delinquency'' should
be clarified to take into account contractual grace periods and similar
operational considerations, so that ``minor operational variances''
would not require event disclosure.\183\ Other commenters opposed the
deletion of the materiality condition from the principal and interest
payment delinquency event because otherwise it may include reporting of
certain delays in payment that are the result of circumstances outside
of the issuer's control or are very limited in time (e.g.,
technological glitches; a short-term disruption of the Federal Reserve
Wire system; an error or lapse by the trustee or paying agent that is
quickly corrected; or clerical error at the Depository Trust Company
that is quickly corrected).\184\ Two of these commenters noted that
these circumstances may result in a ``very short-term delay in
crediting payments to bondholders'' and that ``in the past [they] would
have treated such an event as not material.''\185\ Further, these two
commenters argued that requiring submission of notices in these
circumstances ``would create an
[[Page 33113]]
unwarranted implication that the issuer has suffered financial
adversity.'' \186\
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\183\ See Kutak Letter at 3.
\184\ See California Letter at 2, San Diego Letter at 2, and
GFOA Letter at 4.
\185\ See California Letter at 2 and San Diego Letter at 2.
\186\ Id.
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The Commission notes that a payment default often negatively
affects the market value of a municipal security and may have adverse
consequences for an investor who has an immediate need for such funds.
The Commission therefore believes that notice of any payment default
with respect to securities covered by the Rule, including those
defaults that are quickly remedied or that result from a technological
glitch or similar error, is important information for investors. The
Commission notes that issuers and obligated persons may include the
reason for a payment default in the event notice submitted to the MSRB.
Delayed payment--even for a short period of time--may impact investors'
investment decisions by inhibiting their ability to promptly reinvest
such payment or by leaving them unsure whether to buy, hold, or sell
municipal securities. Accordingly, the Commission believes that notice
of principal and interest payment delinquencies on municipal securities
should always be provided to aid investors in making investment
decisions and help protect them from fraud, as well as to assist
brokers, dealers, and municipal securities dealers in satisfying their
obligation to have a reasonable basis to recommend a municipal
security.
b. Unscheduled Draws on Debt Service Reserves or Credit Enhancements
Reflecting Financial Difficulties
Unscheduled draws on debt service reserves and credit enhancements
often adversely impact the market value of a municipal security and, in
the Commission's view, should always be made available to investors and
other market participants.\187\ These events likely indicate that the
financial condition of a municipal securities issuer or obligated
person has deteriorated and that there is, potentially, an increased
risk of a payment default or, in some cases, premature redemption.
Bondholders and other market participants also would be concerned with
the sufficiency of the amount of debt service and other reserves
available to support an issuer or obligor through a period of temporary
difficulty, as well as the present financial condition of the provider
of any credit enhancement.
---------------------------------------------------------------------------
\187\ See Proposing Release, supra note 2, 74 FR at 36839.
---------------------------------------------------------------------------
One commenter suggested that a materiality condition should be
retained for unscheduled draws on debt-service reserves for LOC-backed
demand securities.\188\ This commenter argued that materiality is
necessary in this limited instance because the proposed amendment
``would require notice of unscheduled draws on debt service reserves
that reflect financial difficulties of the obligated person, even when
not material to an investment in the securities because they are traded
on the strength of a bank letter of credit.'' \189\
---------------------------------------------------------------------------
\188\ See NABL Letter at 6-7.
\189\ Id.
---------------------------------------------------------------------------
The Commission notes that notice is needed only when an unscheduled
draw on debt-service reserves or credit enhancement indicates financial
difficulties ``with respect to the securities.'' Thus, an issuer or
obligor must consider, under the facts and circumstances of a
particular municipal security and its relevant governing documents,
whether or not such unscheduled draw reflects financial difficulties
with respect to that security--a limitation that should help address
some concerns about removal of the materiality condition.
The same commenter also suggested retaining the ``if material''
condition for LOC-backed demand securities because the deletion of this
condition, coupled with the modification to the exemption for demand
securities, ``would require notice of each failure to remarket
securities when they are put, even though not material to an investor
due to the existence of a letter of credit or other liquidity
facility.'' \190\
---------------------------------------------------------------------------
\190\ Id.
---------------------------------------------------------------------------
The Commission does not agree with this commenter's conclusion. One
purpose of a letter of credit or other liquidity facility for demand
securities is to provide liquidity in the event that a new investor is
not found at the time the securities are tendered for repurchase. A
draw in such a situation does not necessarily reflect financial
difficulties ``with respect to the securities'' of the credit
enhancement provider or the obligated person, but may reflect
underlying market conditions, as evidenced by failed remarketings
during 2008 and 2009.\191\ In the event of a draw that does not reflect
financial difficulties with respect to the securities, a notice would
not be provided. A determination regarding the existence of financial
difficulties must be made on a case-by-case basis, depending on the
facts and circumstances surrounding such draws and failed remarketings.
---------------------------------------------------------------------------
\191\ See, e.g., Richard Williamson, HOUSING: HFAs Still Facing
VR Debt Woes; No Relief Till 2011 Even With U.S. Aid, The Bond
Buyer, October 7, 2009; Frank Sulzberger and Andrew Flynn, Lessons
From Tough Times: Understanding VRDO Failures, The Bond Buyer, July
21, 2008 (``Until the recent credit crisis, few bonds had ever
experienced a remarketing failure and when they did, liquidity
providers were able to step in with little risk to their balance
sheet. * * * In a normal market, the remarketing agent might step in
and buy the tendered bonds, in order to prevent an actual draw on an
LOC or credit facility. But this time around, the volume of the
tenders and restrictions on their own liquidity made this choice
difficult, if not impossible, for many remarketing agents.'')
---------------------------------------------------------------------------
Finally, one commenter, who supported the deletion of the
materiality condition, recommended deleting the phrase ``reflecting
financial difficulties'' for events relating to unscheduled draws on
debt-service reserves or credit enhancements.\192\ This commenter
suggested that, even with the removal of the materiality condition from
these event items, the phrase ``reflecting financial difficulties'' may
allow an issuer, in certain circumstances, to make a judgment regarding
whether the occurrence of such an event would require disclosure.\193\
---------------------------------------------------------------------------
\192\ See Fidelity Letter at 2.
\193\ See Fidelity Letter at 2.
---------------------------------------------------------------------------
Although the Commission continues to believe that the disclosure of
unscheduled draws is important to investors and other market
participants, the Commission also recognizes that, in some
circumstances, such draws are not the result of financial difficulties
that would impact the creditworthiness of an issuer or obligated
person, or the price of a municipal security. Accordingly, the
Commission believes that the phrase ``reflecting financial
difficulties'' should be retained in the Rule at this time.
c. Substitution of Credit or Liquidity Providers, or Their Failure to
Perform
One commenter opposed eliminating the materiality condition from
this event, in light of the proposed ten business day frame for
submitting event notices to the MSRB.\194\ This commenter acknowledged
the importance of disclosing this information, but believed that as a
result of the recent market turmoil, determining whether the occurrence
of this event is material as a condition to providing notice remains
important.\195\
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\194\ See GFOA Letter at 4. The commenter expressed concern
about the removal of materiality condition in the context of the ten
business day time frame. As the Commission noted earlier in this
release, the events contained in paragraph (b)(5)(i)(C) of the Rule,
which includes the substitution of credit or liquidity providers, or
their failure to perform, are significant events that an issuer
should become aware of within a very short period of time. See supra
Section III.B.
\195\ See GFOA Letter at 4.
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The Commission believes that the identity of credit or liquidity
providers and their ability to perform is important
[[Page 33114]]
information for investors.\196\ The Commission understands that credit
ratings of municipal securities are typically based on the higher of
the obligor's rating or the rating of the credit provider \197\ and
that, with occasional exceptions, credit enhancement is obtained from a
credit provider with a higher rating than that of the obligor. When a
credit enhancer such as a bond insurer is downgraded, the market value
and the liquidity of the securities that it has enhanced generally
decline.\198\ Similarly, the identity and ability of a liquidity
provider to perform typically is critical to investors. Investors in
demand securities, for example, depend on liquidity providers to
satisfy holders' right to tender their securities for repurchase in a
timely manner. Furthermore, substitution of credit or liquidity
providers requires direct involvement of an issuer or obligated
person.\199\ Thus, an issuer or obligated person would be aware of the
impending occurrence of such an event and should be able to provide
notice of the event within the ten business day time frame. As a
result, the Commission believes that notice of substitution of credit
or liquidity providers, or their failure to perform, should always be
provided to aid investors in making investment decisions and protecting
themselves from fraud and to assist brokers, dealers and municipal
securities dealers in satisfying their obligation to have a reasonable
basis to recommend municipal securities.
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\196\ Two commenters recommended that the event notice
pertaining to substitution of credit or liquidity providers or their
failure to perform should be expanded to include any renewal, or
modification, of any credit or liquidity facility or other
agreements supporting or otherwise material to a municipal security.
See ICI Letter at 8 and Fidelity Letter at 3. These commenters noted
that changes to, or violations of, any of the credit or liquidity
agreements pertaining to a municipal security can modify the
security, thereby causing a mandatory tender event or impacting the
prospects for its remarketing. In their view, these events can have
significant implications for investors. The Commission, in this
rulemaking, is taking a targeted approach at this time. The
Commission will take these comments into account should it consider
further improvements that could be made to the Rule.
\197\ See, e.g., Proposing Release, supra note 2, 74 FR at
36839, n. 80.
\198\ See, e.g., Proposing Release, supra note 2, 74 FR at
36839, n. 81.
\199\ See, e.g., Richard Williamson, Houston Metro Seeks LOC for
Light Rail, The Bond Buyer, April 16, 2008; and Elizabeth Carvlin,
Trends in the Region: Bond Contracts Stand at Center of Detroit
Airport Dispute, The Bond Buyer, September 11, 2002.
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d. Defeasances
One commenter expressly favored maintaining the materiality
condition for notice of defeasances.\200\ This commenter believed that
removal of the materiality condition ``would require notice of
defeasances of securities regardless of how short the remaining term of
the securities, and therefore would require an issuer to give notice
whenever it creates a thirty-day or shorter escrow for refunded bonds
in order to avoid giving notice of redemption before an issue of
refunding bonds is closed.'' \201\
---------------------------------------------------------------------------
\200\ See NABL Letter at 7. A defeasance typically is understood
as the termination of the rights and interests of the bondholders
and of their lien on the pledged revenues or other security in
accordance with the terms of the bond contract for an issue of
securities. See, e.g., the MSRB's definition of defeasance at http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=d.
\201\ See NABL Letter at 7.
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Typically, because defeased municipal securities are secured by
escrows of cash, or Treasury securities, sufficient to pay principal
and interest to maturity or the appropriate call date, the value of
municipal securities increases significantly when they are defeased.
Information about such changes in the value of municipal securities--
positive as well as negative--is important to investors in making
investment decisions, such as whether to sell their securities prior to
the defeasance date and, if so, whether the sale price is appropriate.
Also, notice of a defeasance should reduce the likelihood that
investors will be subject to fraud facilitated by inadequate
disclosure, by providing them with information concerning the
defeasance so that they can better assess the value of their defeased
municipal securities. Further, the Commission is of the view that,
regardless of the length of the escrow period, notice of defeasance is
justified, because of the significance of the event and because
investors should be provided sufficient time to plan the re-investment
of their funds. Consequently, the Commission believes that notice of
defeasance should not be subject to a materiality condition and should
be provided to the MSRB in each instance.
e. Rating Changes \202\
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\202\ See also supra Section III.B. for a discussion of rating
changes in the context of the ten business day time frame.
---------------------------------------------------------------------------
One commenter recommended that the term ``rating change'' should be
defined if the materiality condition is removed from this event
item.\203\ The commenter suggested that the Rule should be limited to
those changes, for which the issuer or obligated person has actual
knowledge, in the highest published rating relating to a given
security, whether the underlying rating or the credit-enhanced
rating.\204\ The commenter also stated that the term ``rating change''
should exclude changes in outlook, as well as changes in credit ratings
of parties other than the issuer or obligated person, unless the issuer
or obligated person has received specific notice of the change in such
other party's rating.\205\ Some commenters argued that the proposed
deletion of the materiality condition for this event item, together
with the ten business day time frame to submit event notices to the
MSRB, would create a substantially larger burden for issuers.\206\ The
same commenters believed that rating changes should be removed from the
list of disclosure events in the Rule entirely, and that rating
organizations should be responsible for providing this information
directly to the MSRB.\207\
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\203\ See Kutak Letter at 3-4.
\204\ Id.
\205\ Id.
\206\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA
Letter at 2-4, San Diego Letter at 1-2, California Letter at 1-2,
NABL Letter at 8, and GFOA Letter at 3-4.
\207\ See supra note 153 and accompanying text.
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The Commission notes that, as a practical matter, changes in credit
ratings today are likely to impact the price of municipal securities,
and thus investors in these securities, as well as market
professionals, analysts, and others, should have access to this
information.\208\ As discussed earlier, the continuing disclosure
agreements that issuers have entered into pursuant to Participating
Underwriters' obligations under the Rule already require them to submit
event notices to the MSRB for rating changes, if material. The
Commission acknowledges that removal of the materiality condition may
increase the number of event notices submitted in connection with
rating changes.\209\ However, the removal of the materiality condition
from this event item will simplify the submission of event notices for
ratings changes by removing the burden on issuers to make a
determination as to whether or not such a change is material and thus
requires submission of a event notice. The Commission notes that rating
agencies typically indicate a rating change by changing the widely
understood symbols used to indicate
[[Page 33115]]
rating categories, which should make a determination of the occurrence
of a rating change very straightforward.\210\ Under the amendments, a
notice of a rating change by any rating agency would be included even
if another rating agency has not revised its rating of the municipal
security.
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\208\ The Commision recently adopted amendments to its rules and
forms, and is considering other amendments, to remove certain
references to credit ratings by nationally recognized statistical
rating organizations, in order to discourage undue investor reliance
on them. See, e.g., Securities Exchange Act Release Nos. 58070 (July
1, 2008), 73 FR 40088 (July 11, 2008), and 60789 (October 5, 2009),
74 FR 52358 (October 9, 2009).
\209\ See infra Section V.D. for discussion of the paperwork
burden in connection with deletion of materiality condition.
\210\ Ratings are expressed as letter grades that range, for
example, from `AAA' to `D', and may include modifiers such as +, -,
or numbers (e.g., 1, 2, 3) to communicate the agency's opinion of
relative level of credit risk. See, e.g., http://www.moodys.com/,
http://www.standardandpoors.com/ and http://www.fitchratings.com/.
For purposes of Rule 15c2-12, ``ratings change'' does not include
indicators of an increased likelihood of an impending ratings
change, such as ``negative credit watch.''
---------------------------------------------------------------------------
Three commenters argued that information about rating changes is
already accessible to investors through the media or Internet.\211\ In
the Commission's view, investors would benefit from being able to
access a central source to determine whether there has been a rating
change with respect to a particular municipal security, rather than
relying on the media or accessing each rating organization's Internet
Web site. Two of these commenters suggested a limited exemption from
the Rule for rating changes involving municipal securities that are the
result of rating changes involving the bond insurer or credit
enhancer.\212\ The Commission does not believe that an exemption for
bond insurers and credit enhancers from the Rule is appropriate. As
discussed above, ratings for particular securities generally reflect
the rating of the provider of credit enhancement, if any, in addition
to the obligated person (or other source of payment).\213\ If a credit-
enhanced municipal bond is downgraded because of a rating change
involving the bond insurer or credit enhancer, that is likely to impact
the price of the security and is important information that should be
disclosed to investors.
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\211\ See Portland Letter at 2, San Diego Letter at 2, and
California Letter at 3.
\212\ See Portland Letter at 2 and California Letter at 3.
\213\ See supra Section III.C.2.b.
---------------------------------------------------------------------------
3. Retention of Materiality Condition for Specified Events
Finally, the Commission is adopting, as proposed, amendments to
paragraph (b)(5)(i)(C) and subparagraphs (2), (7), (8), and (10)
thereunder with regard to the Participating Underwriter's obligations
by specifying that a materiality determination is retained for event
notices regarding (1) non-payment related defaults; (2) modifications
to rights of security holders; (3) bond calls; and (4) the release,
substitution, or sale of property securing repayment of the securities.
Two commenters opposed retaining the materiality condition for
notice of non-payment related defaults and for bond calls, which
currently are set forth in paragraphs (b)(5)(i)(C)(2) and (8) of the
Rule, respectively.\214\ These commenters remarked that violation of a
legal covenant is an important component of an investor's analysis of a
bond; disclosure of such events should not be discretionary; and bond
calls are always material to investors.\215\
---------------------------------------------------------------------------
\214\ See ICI Letter at 8 and Fidelity Letter at 3.
\215\ Id.
---------------------------------------------------------------------------
The Commission believes that a materiality condition should be
retained for notice of non-payment related defaults and bond calls,
respectively. Regularly scheduled sinking fund redemptions (a type of
bond call) that occur when scheduled, for example, are ordinary course
events that typically are known to bondholders.\216\ For such
redemptions, the specific amounts to be redeemed and dates for such
redemptions generally are included in official statements and usually
this information will not be material to investors as they are already
apprised of the occurrence of such redemptions in advance. The
occurrence of other kinds of calls, such as optional calls and
extraordinary calls, however, generally is not known to bondholders in
advance. These typically are important events for investors because
they may directly affect the value of the municipal security. Thus,
such calls may be material and would need to be disclosed.
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\216\ The fact that a security may be redeemed prior to maturity
in whole, in part, or in extraordinary circumstances is essential to
an investor's investment decision about the security and is one of
the facts a broker-dealer must disclose at the time of trade. See
MSRB Interpretative Notice Concerning Disclosure of Call Information
to Customers of Municipal Securities, MSRB, March 4, 1986.
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With respect to non-payment related defaults, under some
circumstances, the occurrence of such defaults may not rise to the
level of importance that they would need always to be disclosed to
investors. For example, failure to comply with loan covenants to
deliver updated insurance binders to the trustee or to take other
ministerial actions by an annual deadline, if not cured within the
period provided for in the loan documents, may constitute events of
default, but such defaults may not be material to investors. On the
other hand, failure to comply with covenants to maintain certain
financial ratios or cash on hand, for example, may be of great
importance to investors as they may be early warnings of a decline in
the operations or financial condition of the issuer or obligated
person. The Commission believes that this materiality determination is
similarly appropriate in the context of modifications of rights of
security holders and the release, substitution, or sale of property
securing repayment of the securities. Accordingly, the Commission
continues to believe that information about the four events for which
the materiality conditions are retained is not necessarily important to
investors and other market participants in all instances, and thus the
Commission is retaining the materiality condition for these events.
D. Amendment Relating to Event Notices Regarding Adverse Tax Events
Under a Continuing Disclosure Agreement
Currently, paragraph (b)(5)(i)(C)(6) of the Rule pertains to
``adverse tax opinions or events affecting the tax-exempt status of the
security.'' The Commission is adopting, with certain modifications from
that proposed, an amendment to paragraph (b)(5)(i)(C)(6) of the Rule to
require that Participating Underwriters reasonably determine that the
issuer or obligated person has entered into a continuing disclosure
agreement to submit a notice for ``[a]dverse tax opinions, the issuance
by the Internal Revenue Service of proposed or final determinations of
taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other
material notices or determinations with respect to the tax status of
the security, or other material events affecting the tax status of the
security.'' As discussed below, in adopting this amendment, the
Commission is making certain changes to the text of the amendment from
that which was proposed \217\ to clarify the use of the word
``material'' in this event item and to replace the phrase ``tax-exempt
status'' with ``tax status'' to focus the disclosure on information
relevant to investors, whether the municipal security is taxable or
tax-exempt.
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\217\ In the Proposing Release, the Commission proposed
modifying paragraph (b)(5)(i)(C)(6) of the Rule so that continuing
disclosure agreements would provide for the submission of a notice
for ``[a]dverse tax opinions, the issuance by the Internal Revenue
Service of proposed or final determinations of taxability, Notices
of Proposed Issue (IRS Form 5701-TEB) or other material notices or
determinations with respect to the tax-exempt status of the
securities, or other events affecting the tax-exempt status of the
security.'' See Proposing Release, supra note 2, 74 FR at 36868.
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Four commenters expressed support for the proposed modifications to
the list of adverse tax events included in the
[[Page 33116]]
Proposing Release.\218\ One of these commenters noted that investors
have a strong interest in being informed of actions taken by the IRS
that present a material risk to the tax-exempt status of their
holdings.\219\ Several other commenters expressed concerns regarding
the proposed items to be added to the disclosure for adverse tax
events, particularly in light of the proposed removal of the
materiality condition from this provision.\220\ One commenter
recommended that the materiality condition be retained for all items in
paragraph (b)(5)(i)(C)(6) of the Rule, other than a final determination
of taxability.\221\ Other commenters, however, stated that the
materiality condition should be retained for notice of all tax-related
events.\222\ One commenter noted that the municipal market may be
flooded with notices due to the generality and vagueness of the
proposed tax disclosure items.\223\ This commenter further remarked
that this provision will result in a ``flood of notices'' that could
confuse and mislead investors, result in liquidations of municipal
securities by multiple sellers simultaneously, or desensitize the
market to such notices.\224\
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\218\ See SIFMA Letter at 3, NFMA Letter at 2, San Diego Letter
at 2, and California Letter at 2.
\219\ See SIFMA Letter at 3.
\220\ See NABL Letter, Metro Water Letter, Connecticut Letter,
Kutak Letter, and GFOA Letter.
\221\ See NABL Letter at 7.
\222\ See Metro Water Letter at 3, Connecticut Letter at 2,
Kutak Letter at 4-7, and GFOA Letter at 4.
\223\ See Kutak Letter at 4-7.
\224\ Id.
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In addition, three commenters expressed concerns about the impact
of the disclosure of event notices during the IRS's audit process.\225\
One commenter believed that an issuer's disclosure of event notices
during the audit process could cause its bonds to be viewed unfavorably
in the market and thus could result in higher borrowing costs for the
issuer.\226\ Another commenter noted that disclosure of a pending audit
``would have adverse consequences to the issuer long before the IRS
finally determines whether any tax code violations actually have
occurred,'' \227\ while a third commenter indicated that disclosure of
an audit would ``confuse investors who may not be well versed in the
IRS audit process.'' \228\
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\225\ See Kutak Letter at 5, GFOA Letter at 4, and Metro Water
Letter at 3.
\226\ See Kutak Letter at 5.
\227\ See Metro Water Letter at 3.
\228\ See GFOA Letter at 4.
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The Commission previously has noted that ``an `event' affecting the
tax-exempt status of a security may include the commencement of
litigation and other legal proceedings, including an audit by the
Internal Revenue Service * * * .'' \229\ While the Commission continues
to believe that ``an event affecting the tax-exempt status of the
security'' can include an audit (and thus an audit should be the
subject of an event notice when it is material), it agrees with the
comment that not all audits indicate a risk to the security's tax
status. At times, IRS staff conducts audits as part of project
initiatives where it is not examining a specific problem or bond
issue.\230\ On the other hand, some audits are targeted to examining
specific bonds when, for example, IRS staff has received information
from the public that has raised IRS staff concern.\231\ Thus, a
determination by the issuer or obligated person in possession of the
facts concerning the audit of a particular bond issue regarding whether
a particular audit is material (and, thus, is an ``other material event
affecting the tax status of the security'') is appropriate. In
contrast, proposed and final determinations of taxability and Notices
of Proposed Issue, which are determinations by the IRS that the IRS
believes that a security is or may be taxable and has begun a formal
administrative process in that regard, suggests that there could be a
significant risk to the tax status of that security.\232\ Accordingly,
the Commission believes that proposed and final determinations of
taxability and Notices of Proposed Issue are of such importance to
investors that they always should be disclosed pursuant to a continuing
disclosure agreement.
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\229\ See 1994 Amendments Adopting Release, supra note 8, 59 FR
at 59600. See also Proposing Release, supra note 2 74 FR at 36840.
\230\ See, e.g., IRS FY 2010 Tax-Exempt Bonds Work Plan, IRS
(available at https://www.irs.gov/pub/irs-tege/fy_2010_teb_workplan.pdf).
\231\ Id.
\232\ See Proposing Release, supra note 2, 74 FR at 36841.
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Retail and institutional investors consider the tax status of a
municipal security, specifically the issuance of IRS notices, to be of
great importance when making the decision to invest in tax-exempt bonds
as opposed to other fixed-income securities.\233\ This is a view
supported by several commenters.\234\ The financial significance of the
municipal security's tax-exempt status is reflected directly in the
interest rate on a tax-exempt municipal bond, which generally is
significantly lower than the interest rate on a comparable taxable
bond.\235\ Accordingly, investors are particularly sensitive to factors
that could affect the tax-exempt status of interest earned on their
municipal securities, because that status goes directly to the value of
their investment.\236\ Further, a determination by the IRS staff that
interest on a security purchased as tax-exempt may, in fact, be taxable
may not only reduce the security's market value, but also may adversely
affect each investor's federal and, in some cases, state income tax
liability.\237\ A security's tax-exempt status is also important to
many mutual funds whose governing documents, with certain exceptions,
limit their investment to tax-exempt municipal securities.\238\ Mutual
funds may liquidate securities that become taxable, which could have
adverse consequences for the fund and its holders and could cause
adverse effects if many holders attempt at the same time to liquidate
similar securities, which at times could be illiquid. Therefore, retail
and institutional investors alike are very interested in events that
could adversely affect the tax status of the bonds that they own or may
wish to purchase.
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\233\ See Proposing Release, supra note 2, 74 FR at 36841, n.
89.
\234\ See NFMA Letter at 2 and SIFMA Letter at 3. See also
California Letter at 2, and San Diego Letter at 2.
\235\ See, e.g., SIFMA, ``About Municipal Bonds--The Advantages
of Tax Exemption,'' available at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcatid=53&id=233; Morgan Stanley Smith
Barney, ``Tax-Free Municipal Bonds--Frequently Asked Questions,''
(question 4. Why is it better for me to own municipals when
municipal bond rates are lower than taxable bond (Treasury bonds,
corporate bonds) rates?), available at: http://www.morganstanleyindividual.com/markets/bondcenter/school/faq/default.asp#4.
\236\ See Proposing Release, supra note 2, 74 FR at 36841, n.
90.
\237\ For example, investors in such a circumstance may have to
include interest on such a security as income when computing their
federal income taxes for current and future tax years and may have
to pay additional taxes for prior tax years. See Proposing Release,
supra note 2, 74 FR at 36841.
\238\ See Proposing Release, supra note 2, 74 FR at 36841, n.
92.
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Moreover, as the Commission noted in the Proposing Release, despite
the possibility that the issuance of proposed and final determinations
of taxability and Notices of Proposed Issue could adversely affect the
tax-exempt status of a bond and thus could significantly affect the
pricing of such municipal security,\239\ it has been reported that
notices regarding such tax events are not always submitted.\240\ The
Commission
[[Page 33117]]
believes that the issuance of proposed and final determinations of
taxability and Notices of Proposed Issue by the IRS are important
information that should be made available to investors and,
accordingly, should be part of the continuing disclosure agreement
obtained by a Participating Underwriter. The Commission believes that
the IRS has issued a relatively small number of such determinations
with respect to municipal securities when considered in light of the
size of this market sector.\241\ As a result, few issuers or obligated
persons should be affected by adding proposed and final determinations
of taxability and Notices of Proposed Issue to this event item. One
commenter noted that disclosure of the issuance of proposed or final
determinations of taxability and of material audits often results in a
higher interest rate for VRDOs, resulting in an increased cost to the
issuer.\242\ That change in the interest rate supports the view that
investors place a high degree of importance on events that may impact
the tax status of their bonds. Thus, the Commission believes that
disclosure in all instances of proposed and final determinations of
taxability, Notices of Proposed Issue, and other material events
affecting the tax status of a security, such as material audits, would
help apprise investors of important information with respect to these
securities.
---------------------------------------------------------------------------
\239\ See Proposing Release, supra note 2, 74 FR at 36842, n.
100.
\240\ See Proposing Release, supra note 2, 74 FR at 36842, n.
101. See, e.g., Susanna Duff Barnett, IRS Answers Toxic Query; Post
1986 Radioactive Waste Debt Not Exempt, The Bond Buyer, November 2,
2004 (material event notice filed October 29, 2004 regarding IRS
technical advice memorandum dated August 27, 2004 that bonds issued
to finance certain radioactive solid waste facilities were taxable;
related preliminary adverse determination letter was issued in
January, 2002). See also supra note 140.
\241\ See Proposing Release, supra note 2, 74 FR at 36853, which
notes that for Paperwork Reduction Act purposes, 130 event notices
relating adverse tax events, including IRS determinations, are
estimated to be submitted to the MSRB.
\242\ See Kutak Letter at 5.
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Two commenters expressed specific concerns regarding the deletion
of the materiality condition for submission of notices relating to
adverse tax events.\243\ One commenter believed that submitting a
notice for all proposed tax determinations could limit the issuer's
ability to negotiate with the IRS.\244\ Another commenter remarked that
without a materiality condition, disclosure of adverse tax events may
mislead and confuse investors and could affect perceptions with respect
to all of the issuer's securities, imposing interest and other costs
that could limit future market access.\245\ Other commenters, however,
supported the proposed deletion of the materiality condition.\246\
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\243\ See Metro Water Letter at 3 and Kutak Letter at 4-7.
\244\ See Metro Water Letter at 3.
\245\ See Kutak Rock Letter at 4-7.
\246\ See ICI Letter at 2, NFMA Letter at 2 and SIFMA Letter at
3.
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As noted above, the Commission disagrees that disclosure of adverse
tax events would ``unnecessarily alarm investors,'' as one commenter
argued.\247\ Because investors place a high degree of importance on the
tax status of their municipal securities, and the tax status of a
security significantly affects the market price of a security, the
Commission believes that disclosing a potential threat to that status
is necessary and that investors have a keen interest in being informed
of such events. Furthermore, the Commission believes that the failure
to disclose adverse tax events potentially could mislead investors who
would have no reason to know or other means to discover that the tax
status of their bonds may be in doubt and the market value of those
securities may be at risk.
---------------------------------------------------------------------------
\247\ See Connecticut Letter at 2.
---------------------------------------------------------------------------
One commenter noted that the text of the amendment in the Proposing
Release included a materiality condition for one provision that
impliedly applies to other provisions of paragraph (b)(5)(i)(C)(6) of
the Rule.\248\ This commenter suggested that the Commission clarify
that the materiality condition applies to all tax events, except for a
final determination of taxability.\249\ As discussed above, the
Commission does not believe that it is appropriate to provide for a
materiality condition in the case of proposed or final IRS
determinations of taxability. In the Commission's view, these IRS
determinations are of such importance to investors that they always
should be disclosed. However, in response to this commenter's
recommendation, the Commission is revising the amendment to paragraph
(b)(5)(i)(C)(6) from that proposed to clarify its original intention
that the event item pertains to ``other material events affecting the
tax status of the security'' (emphasis added). The Commission agrees
with the commenter that it would be appropriate to clarify this phrase
so that notices of events not specified in the Rule that affect the tax
status of a security are required only if these events are material to
investors.
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\248\ See SIFMA Letter at 3.
\249\ Id.
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Finally, in February 2009, Congress enacted the American Recovery
and Reinvestment Act of 2009 (``ARRA''),\250\ which authorized the
issuance of Build America Bonds and other taxable municipal bonds with
associated tax credits or direct federal payments to the issuer
(collectively, ``ARRA Bonds'').\251\ Because ARRA Bonds are municipal
securities, Participating Underwriters would need to comply with the
Rule's provisions, including paragraph (b)(5)(i)(C), when these bonds
are the subject of a primary offering. Thus, a Participating
Underwriter will be required to reasonably determine that an issuer or
an obligated person has entered into a continuing disclosure agreement
to submit continuing disclosure documents to the MSRB. ARRA Bonds are
required to comply with many of the same provisions of the Internal
Revenue Code as are tax-exempt bonds, such as restrictions on
arbitrage.\252\ The benefits granted to ARRA Bonds (e.g., tax credits
and related federal payments to issuers) are only authorized for bonds
that comply with the provisions of the Internal Revenue Code that grant
these benefits.\253\ Furthermore, like tax-exempt municipal bonds,
adverse tax opinions, proposed or final determinations of taxability,
Notices of Proposed Issue, or other material notices or determinations
by the IRS with respect to the tax status of the securities, or other
material events affecting the tax status of the security, may be
applicable to ARRA Bonds. To clarify the applicability of paragraph
(b)(5)(i)(C)(6) of the Rule, as amended, to ARRA Bonds, the Commission
is adopting, for purposes of this paragraph, the phrase ``tax status,''
rather than ``tax-exempt status,'' of the security. The Commission
believes that this limited change will clarify that Participating
Underwriters
[[Page 33118]]
of ARRA Bonds are required to reasonably determine that issuers or
obligated persons of such bonds have entered into a continuing
disclosure agreement to submit to the MSRB, among other things, the
tax-related disclosure events included in paragraph (b)(5)(i)(C)(6) of
the Rule. For investors who hold ARRA Bonds with associated tax
credits, the consequence of an issuer's failure to comply with the
applicable requirements of the Internal Revenue Code is the loss of the
benefit of a tax credit.\254\ For investors who hold tax-exempt
municipal securities, the consequence of an issuer's failure to comply
with federal tax provisions is the loss of the benefit of tax-exempt
interest income. In the Commission's view, the consequences to
investors who hold either ARRA bonds or tax-exempt municipal securities
are comparable. Therefore, the Commission believes that this minor
revision to this disclosure event will allow investors in ARRA Bonds,
like investors in tax-exempt bonds, to have timely access to important
information concerning risks that may affect the tax status of their
securities.
---------------------------------------------------------------------------
\250\ Public Law 111-5, 123 Stat. 115 (2009).
\251\ The American Recovery and Reinvestment Act of 2009
introduced three new categories of tax-advantaged taxable bonds--
Build America Bonds (I.R.C. Sec. 54AA), Qualified School
Construction Bonds (I.R.C. Sec. 54F), and Recovery Zone Economic
Development Bonds (I.R.C. Sec. Sec. 1400U-2). In addition, the ARRA
expanded the authority to issue taxable New Clean Renewable Energy
Bonds (I.R.C. Sec. 54C), Qualified Energy Conservation Bonds
(I.R.C. Sec. 54D) and Qualified Zone Academy Bonds (I.R.C. Sec.
54E). This followed the introduction of taxable Qualified Forestry
Conservation Bonds (I.R.C. Sec. 54B) in the Heartland, Habitat,
Harvest, and Horticulture Act of 2008. Taxpayers who hold such bonds
on a ``credit allowance date'' generally are allowed a specified
credit against their federal income tax liability (with the notable
exceptions being Build America Bonds for which the issuer has
elected to receive payments from the U.S. Treasury under I.R.C.
Sec. 54AA(g)(1), referred to herein as ``Direct-Pay BABs,'' and
Recovery Zone Economic Development Bonds). In addition, the tax
credits may be ``stripped'' from the underlying taxable bonds (see
I.R.C. Sec. Sec. 54A(i), 54AA(f)(2)), either by the issuer or by a
holder in the secondary market, and sold to different investors
pursuant to Treasury Department regulations to be issued.
\252\ See, e.g., Section 54AA of ARRA (Build America Bonds);
I.R.C. Sec. 1400U-2(b) (Recovery Zone Economic Development Bonds);
I.R.C. Sec. Sec. 54A and 54C (New Clean Renewable Energy Bonds);
IRC sections 54A and 54C (Qualified Energy Conservation Bonds);
I.R.C. Sec. Sec. 54A and 54E (Qualified Zone Academy Bonds); I.R.C.
Sec. Sec. 54A and 54F (Qualified School Construction Bonds). See
also, IRS Notice 2009-26--Build America Bonds and Direct Payment
Subsidy Implementation.
\253\ See Public Law 111-5, 123 Stat. 115 (2009).
\254\ See, e.g., I.R.C. Sec. Sec. 54A and 54AA.
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E. Addition of Events To Be Disclosed Under a Continuing Disclosure
Agreement
The Commission is adopting, as proposed, the amendments adding four
new events to paragraph (b)(5)(i)(C) of the Rule. These additional
events are: (1) Tender offers; (2) bankruptcy, insolvency,
receivership, or similar proceeding of the obligated person; (3) the
consummation of a merger, consolidation, or acquisition involving an
obligated person or the sale of all or substantially all of the assets
of the obligated person, other than in the ordinary course of business,
the entry into a definitive agreement to undertake such an action or
the termination of a definitive agreement relating to any such actions,
other than pursuant to its terms, if material; and (4) appointment of a
successor or additional trustee, or the change of name of a trustee, if
material. The Commission believes that the amendments relating to
submission of events that are added to the Rule are justified by the
transparency benefits that will result to investors, broker-dealers,
analysts, and others.
1. Tender Offers
The Commission is adopting, as proposed, the amendment to add
tender offers to the list of events in paragraph (b)(5)(i)(C)(8) of the
Rule.\255\ Under the amendment, a Participating Underwriter must
reasonably determine that the issuer or obligated person has agreed in
its continuing disclosure agreement to provide notice of tender offers
to the MSRB. A number of commenters supported the addition of this
event item.\256\ Two commenters stated that notice of a tender offer
will provide meaningful information regarding a particular bond.\257\
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\255\ In passing the Williams Act, Public Law 90-439, in 1968,
Congress recognized that regulation of tender offers was necessary
for the purposes of disclosure of material information and
substantive protection to investors. See Rep. No. 550, 90th Cong.,
1st Sess. 3 (1967) at 1. Municipal securities, however, generally
are not subject to Commission rules governing tender offers,
including rules that set forth disclosure, time periods, and other
requirements governing tender offers by issuers.
\256\ See ICI Letter at 8, Fidelity Letter at 2, NFMA Letter at
2, and SIFMA Letter at 4.
\257\ See ICI Letter at 8 and Fidelity Letter at 2.
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Some commenters, while supporting the amendment to add tender
offers, recommended modifying this disclosure event. One commenter
noted that it is not uncommon for tender offers to be made only to
select municipal security holders.\258\ This commenter stated that, in
this instance, there is no reason to inform other security holders of a
limited tender offer, unless the offer would have a material impact on
those holders.\259\ Accordingly, the commenter recommended restricting
notice to only those tender offers made to all holders.\260\ Further,
this commenter and three other commenters suggested that the Commission
add a materiality qualifier to the provision.\261\
---------------------------------------------------------------------------
\258\ See NABL Letter at 7.
\259\ Id.
\260\ Id.
\261\ See Connecticut Letter at 2, GFOA Letter at 4, Metro Water
Letter at 2, and NABL Letter at 7.
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The Commission continues to believe that notice of the occurrence
of any tender offer should be made available to all bondholders because
this information is important to an investor's ability to make an
informed and timely decision regarding the security that is the subject
of the tender offer. Even when tender offers are made to a limited
number of bondholders, they may be material to other bondholders'
evaluation of their investment. For example, a tender offer may be made
to fewer than all bondholders by an obligated person facing financial
difficulties. In such instance, those holders who are not invited to
participate in the tender offer would have the option to consider and
react (i.e., buying, selling, or holding such securities) to the
information contained in the notice about such a tender offer.\262\
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\262\ In addition, two commenters recommended that the
Commission provide a definition of ``tender offer'' for purposes of
the Rule. See Kutak Letter at 4 and GFOA Letter at 4. Although the
term ``tender offer'' has not been defined, the Commission notes
that the meaning of ``tender offer'' for municipal securities
purposes is no different from the meaning of ``tender offer'' for
other securities subject to the tender offer provisions of the
Exchange Act and related rules. See generally Rule 14d-1(g) under
the Exchange Act. 17 CFR 240.14d-1(g). One of these commenters also
suggested that the tender agent, rather than issuer, should submit
the notice to the MSRB. See GFOA Letter at 4. The Commission notes,
however, that an issuer already may negotiate to designate a tender
agent to submit a tender offer notice to the MSRB on its behalf. See
17 CFR 240.15c2-12(b)(5)(i).
---------------------------------------------------------------------------
Further, during a tender offer, some investors presently may be
left in doubt as to whether their securities are subject to the offer
because information about the tender offer is not readily available to
them.\263\ To determine the facts about a tender offer, it often is
necessary for investors to seek pertinent information directly from the
issuer or other obligated person. Currently, some investors may not be
able to learn of the existence of a tender offer in a timely fashion,
which may impair such investors' ability to react to the offer (i.e.,
buying, selling, holding, and if the offer is available to them,
tendering securities).\264\ Consequently, the Commission believes that
notice of the existence of a tender offer in a timely manner and in any
event within ten business days of its occurrence would help to improve
the timely availability of tender offer information so that investors
would be offered the opportunity to make informed, timely decisions
about whether to buy, sell, hold or tender their securities.\265\
Furthermore, the Commission believes that such communication provides
market participants with relevant
[[Page 33119]]
information about the offer and should reduce the likelihood that
investors will be subject to fraud facilitated by inadequate
disclosure.\266\
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\263\ See Proposing Release, supra note 2, 74 FR at 36843.
\264\ Tender offers typically require an investor to respond
within a limited time frame. See Proposing Release, supra note 2, 74
FR at 36843, n. 104.
\265\ The amendment retains in Rule 15c2-12(b)(5)(i)(C)(8) the
requirement that Participating Underwriters reasonably determine
that the issuer or obligated person has agreed in a continuing
disclosure agreement to provide to the MSRB notice of bond calls, if
material. See supra Section III.C.3. Thus, unlike with respect to
tender offers, the issuer will be able to make a materiality
determination with respect to submitting a notice regarding a bond
call. The Commission believes that this distinction is appropriate
in light of the various types of bond calls (e.g., sinking fund
redemptions, extraordinary redemptions, and optional redemptions)
that can occur. In addition, the specific amounts to be redeemed and
dates for some redemptions (e.g., sinking fund redemptions) are
generally included in official statements. Therefore, information
about such events should already be available to investors. Similar
information regarding tender offers is not currently as readily
available to investors.
\266\ The recent events in the market for ARS illustrate the
need to provide timely notice (i.e., within ten business days) of
the occurrence of a tender offer. Since approximately mid-February
of 2008, the market for ARS has experienced severe illiquidity, with
adverse consequences to investors who purchased what they may have
believed to be liquid, cash equivalent investments. In response,
some issuers and obligated persons offered to purchase some or all
of their outstanding ARS from investors. See Proposing Release,
supra note 2, 74 FR at 36843, n. 107. Notices about these tender
offers, however, may not always be widely disseminated. See
Proposing Release, supra note 2, 74 FR at 36843, n. 107.
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2. The Occurrence of Bankruptcy, Insolvency, Receivership, or Similar
Events Regarding an Issuer or an Obligated Person
The Commission is adopting, as proposed, the amendment to add new
paragraph (b)(5)(i)(C)(12) to the Rule, which requires a Participating
Underwriter to reasonably determine that an issuer or obligated person
has agreed in its continuing disclosure agreement to provide notice
about bankruptcy, insolvency, receivership or a similar event with
respect to the issuer or an obligated person. The Commission also is
adopting, as proposed,\267\ the Note to new paragraph (b)(5)(i)(C)(12),
which explains that such an event will be considered to have occurred
in the following instances: the appointment of a receiver, fiscal agent
or similar officer for an obligated person in a proceeding under the
U.S. Bankruptcy Code or in any other proceeding under state or federal
law in which a court or governmental authority has assumed jurisdiction
over substantially all of the assets or business of the issuer or
obligated person, or if such jurisdiction has been assumed by leaving
the existing governing body and officials or officers in possession but
subject to the supervision and orders of a court or governmental
authority, or the entry of an order confirming a plan of
reorganization, arrangement or liquidation by a court or governmental
authority having supervision or jurisdiction over substantially all of
the assets or business of the obligated person.\268\ Most commenters
supported the addition of bankruptcy to the list of disclosure
events.\269\
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\267\ The Commission is correcting a typographical error in the
Note to state ``plan of reorganization'' rather than ``plan or
reorganization.''
\268\ See Form 8-K, Item 1.03 for provisions relating to
bankruptcy or receivership that are applicable to entities subject
to Exchange Act reporting requirements. 17 CFR 249.308. Item 1.03 of
Form 8-K requires the registrant to provide specified items of
disclosure on Form 8-K if a receiver, fiscal agent, or similar
officer has been appointed for a registrant or its parent, in a
proceeding under the U.S. Bankruptcy Code or in any other proceeding
under state and federal law in which a court or governmental
authority has assumed jurisdiction over substantially all of the
assets or business of the registrant or its parent, or if such
jurisdiction has been assumed by leaving the existing directors and
officers in possession but subject to the supervision and orders of
a court or governmental authority. The proposed Rule 15c2-12 event
item is intended to be consistent with the Form 8-K, Item 1.03
provisions applicable to entities subject to the reporting
requirements of the Exchange Act. See also Proposing Release, supra
note 2, 74 FR at 36844.
\269\ See GFOA Letter at 4, NFMA Letter at 2, Connecticut Letter
at 2, ICI Letter at 8, Fidelity Letter at 2, NABL Letter at 8,
California Letter at 2, and San Diego Letter at 2.
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As the Commission noted in the Proposing Release, although
municipal issuers and obligated persons are rarely involved in
bankruptcy, insolvency, receivership, or similar events, the occurrence
of these events can significantly impact the value of the municipal
securities.\270\ Thus, information about these events is important to
investors and other market participants.\271\ Being informed about the
occurrence of these events will allow investors to make informed
decisions about whether to buy, sell, or hold the municipal
security.\272\
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\270\ See Proposing Release, supra note 2, 74 FR at 36844. Under
paragraph (b)(5)(i)(C)(2) of the Rule, notice of a material ``non-
payment related default'' is to be provided to the MSRB pursuant to
a continuing disclosure agreement. The Commission understands that
the governing documents for some municipal securities include
bankruptcy, insolvency, receivership, or similar events involving an
issuer or obligated person as a ``non-payment related default.'' See
National Association of Bond Lawyers (``NABL'') Form Indenture,
dated June 1, 2002 (``NABL Form Indenture''). However, this may not
uniformly be the case. This amendment, therefore, will help improve
the availability of notice of these events to all investors and
market participants.
\271\ See Proposing Release, supra note 2, 74 FR at 36844, n.
112.
\272\ As the Commission noted in the Proposing Release, it is
aware that bonds are often secured by letters of credit, bond
insurance, and other forms of credit enhancement that some have
argued could reduce the importance of the creditworthiness of an
issuer or obligated person. However, the Commission has long been of
the view that information regarding obligated persons generally is
material to investors in credit-enhanced offerings. See 1989
Adopting Release, supra note 8, 54 FR at 28812 (``The presence of
credit enhancements generally would not be a substitute for material
disclosure concerning the primary obligor on municipal bonds.'').
See also Regulation AB, 17 CFR 229.1100 et seq. The Commission
received no comments on these statements.
---------------------------------------------------------------------------
Some commenters, however, opposed the addition of bankruptcy to the
list of disclosure events if it was not limited by a materiality
condition.\273\ One of these commenters also stated that the bankruptcy
provision should apply only to those obligated persons covered by
paragraph (b)(5)(i)(A) of the Rule (i.e., those obligated persons for
whom annual financial information or operating data is presented in the
final official statement).\274\ This commenter believed that, without
such a revision, this disclosure event could result in an obligation to
provide a notice with respect to events that are largely irrelevant to
the decision to buy, hold, or sell a particular issue of municipal
securities.\275\ In addition, this commenter believed that issuers or
other obligated persons may be required to undertake perpetual due
diligence of all obligated persons to determine whether any such events
have occurred, including those obligated persons for whom financial or
operating data is not included in the final official statement.\276\
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\273\ See Connecticut Letter at 2, GFOA Letter at 4, Metro Water
Letter at 2, and NABL Letter at 8.
\274\ See NABL Letter at 8-9.
\275\ Id.
\276\ Id.
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The Commission believes that it is unnecessary to include a
materiality condition for this event item. Bankruptcies and similar
events involving municipal issuers or obligated persons are significant
occurrences that are likely to affect the value of a particular
security. Investors should be informed about such events so that they
can make their own evaluation about the event's importance under the
particular facts and circumstances. Moreover, since such bankruptcies
and similar events are relatively rare,\277\ the Commission believes
that the burden on issuers or obligated persons to provide notice will
be modest and is justified by the potential significance of these
events to investors.
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\277\ To illustrate, it has been reported that there were 183
municipal bankruptcies from 1980 to early 2007. See Sylvan G.
Feldstein, The Handbook of Municipal Bonds, April 25, 2008 (Wiley).
---------------------------------------------------------------------------
The Commission also does not believe that it is necessary to limit
paragraph (b)(5)(i)(C)(12) to obligated persons for whom annual
financial information and operating data is included in the final
official statement. The Commission believes that there are a variety of
methods by which issuers or obligated persons could avoid having to
monitor directly the activities of other obligated persons, such as
obtaining, at the time of a primary offering, an agreement from
obligated persons for whom annual financial information and operating
data are not included in the final official statement that they will
provide information pertaining to a bankruptcy, insolvency,
receivership or similar event to the party responsible for filing event
notices.
[[Page 33120]]
3. Merger, Consolidation, Acquisition, and Sale of All or Substantially
All Assets
The Commission is adopting, as proposed, the amendment to add new
paragraph (b)(5)(i)(C)(13) to the Rule, which requires a Participating
Underwriter to reasonably determine that the continuing disclosure
agreement provides for the submission of notice of any of the following
events with respect to the securities being offered: The consummation
of a merger, consolidation, or acquisition involving an obligated
person or the sale of all or substantially all of the assets of the
obligated person, other than in the ordinary course of business, the
entry into a definitive agreement to undertake such an action or the
termination of a definitive agreement relating to any such actions,
other than pursuant to its terms, if material.\278\
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\278\ The Commission also notes that reporting companies are
required to make disclosures upon the occurrence of similar events.
See Items 1.01 and 2.01 of Form 8-K relating to entry into a
material definitive agreement and completion of the acquisition or
disposition of assets, respectively, which require entities subject
to Exchange Act reporting requirements to disclose specified
information within four business days of the occurrence of such
events. 17 CFR 249.308. Item 1.01 of Form 8-K requires the
registrant to provide specified items of disclosure on Form 8-K if
the registrant has entered into a material definitive agreement not
made in the ordinary course of business of the registrant, or into
any amendment of such agreement that is material to the registrant.
For purposes of Item 1.01, a ``material definitive agreement'' means
an agreement that provides for obligations that are material to and
enforceable against the registrant, or rights that are material to
the registrant and enforceable by the registrant against one or more
parties to the agreement, in each case whether or not subject to
conditions. Item 2.01 of Form 8-K requires the registrant to provide
specified items of disclosure on Form 8-K if the registrant or any
of its majority-owned subsidiaries has completed the acquisition or
disposition of a significant amount of assets, other than in the
ordinary course of business.
---------------------------------------------------------------------------
A number of commenters supported adding mergers, consolidations,
acquisitions and substantial asset sales to the list of disclosure
events in paragraph (b)(5)(i)(C) of the Rule.\279\ In addition, one of
these commenters recommended deleting the ``ordinary course'' and ``if
material'' qualifiers from the proposed rule text, because these
transactions ``are rarely, if ever, in the ``ordinary course of
business'' or ``immaterial.'' \280\
---------------------------------------------------------------------------
\279\ See Kutak Letter at 4, NFMA Letter at 2, SIFMA Letter at
4, Connecticut Letter, GFOA Letter at 4, ICI Letter at 8-9, and
Fidelity Letter at 3. Two of these commenters recommended that this
provision also provide for the submission of additional information
pertaining to such transactions, including offer prices, changes in
offer prices, withdrawal rights, identity of the offeror, the
ability of the offeror to finance the offer, conditions of the
offer, time frame of the transaction, and manner of tendering
securities and method of acceptance. See ICI Letter at 8-9 and
Fidelity Letter at 3. The Commission is taking a targeted approach
at this time. These suggested modifications would require more
detailed disclosures than the Commission intended for purposes of
this rulemaking. Nevertheless, some issuers may voluntarily decide
to incorporate some or all of this information in an event notice
that is submitted pursuant to a continuing disclosure agreement.
\280\ See Fidelity Letter at 2.
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The Commission believes that notice of the events specified in this
new Rule provision is important information for investors and market
participants.\281\ While these corporate-type events are believed to be
rare among governmental issuers,\282\ they are not uncommon for
obligated persons, such as health care institutions, other non-profit
entities, and for-profit businesses.\283\ As the Commission noted in
the Proposing Release, these events may signal that a significant
change in the obligated person's corporate structure could occur or has
occurred.\284\ In such cases, investors reasonably expect to be
informed about the identity and financial condition of the obligated
person who would be responsible, following the event, for the payment
of the subject security.
---------------------------------------------------------------------------
\281\ See supra note 271 (suggesting that disclosure information
should include information relating to material acquisitions and
dispositions).
\282\ See Proposing Release, supra note 2, 74 FR at 36845, n.
117.
\283\ See Proposing Release, supra note 2, 74 FR at 36845, n.
118.
\284\ See Proposing Release, supra note 2, 74 FR at 36845.
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In addition, the Commission believes that it is appropriate to
retain the ``ordinary course'' and ``if material'' conditions because
some events, such as small acquisitions, may occur occasionally, but
have little or no effect on the value of the municipal security or on
an investor's decision whether to buy, sell or hold the security.
Similarly, some obligated persons, such as large health care or senior
living organizations may be permitted under their loan documents to
sell small parcels of real estate that are not necessary to their
operations or to change the legal structure of one or more of their
component entities (such as a single nursing home), if certain
covenants are met. Requiring notices to be filed in the case of all
such actions or events that occur would impose a burden on such
obligated persons, while providing little useful information to
investors.
Two commenters opposed adding mergers and acquisitions to the list
of disclosure events.\285\ They argued that providing notice of a
merger or acquisition, particularly for closely-held companies, upon
signing of the relevant agreement would be ``anti-competitive,''
because such agreements often are signed prior to public announcement
and are contingent on approval of the municipality and the lender. In
their view, such notice could allow competitors to interfere with the
transaction's consummation prior to its closing.\286\ However, the
Commission believes that competition in the market for corporate
control could be enhanced, not reduced, by the possibility of
disclosure, creating more open conditions for the sale of privately-
held companies. The Commission further notes that parties to mergers
and acquisition agreements generally may, subject to legal obligations,
include remedies in such agreements that are designed to balance the
conflicting interests of the buyer and the seller. As noted in the
Proposing Release, the Commission believes that notice of such mergers,
consolidations, acquisitions and substantial asset sales, if material,
is important to investors in assessing the value of their
investments.\287\ These transactions may have an impact on the issuer's
or obligated person's financial condition, which, in turn, would have
an impact on the price of the municipal securities issued by such
parties and could change the identity of the obligor itself.
Accordingly, the Commission believes that these disclosures are
justified in light of the importance of this information to investors.
---------------------------------------------------------------------------
\285\ See CRRC Letter at 5 and WCRRC Letter.
\286\ Id.
\287\ See also Proposing Release, supra note 2, 74 FR at 36845.
---------------------------------------------------------------------------
One commenter noted that the disclosure item pertaining to mergers,
consolidations, acquisitions and substantial asset sales should be
revised so that it only applies with respect to those obligated persons
covered by paragraph (b)(5)(i)(A) of the Rule (i.e., those obligated
persons for whom annual financial information or operating data is
presented in the final official statement).\288\ This commenter
[[Page 33121]]
believed that issuers or other obligated persons may be required to
undertake perpetual due diligence on all obligated persons to determine
whether any such events occurred, including those for whom financial or
operating data is not included in the final official statement.\289\
---------------------------------------------------------------------------
\288\ See NABL Letter at 8. This commenter and several other
commenters suggested that the Commission add the ``if material''
qualifier to this event item. See Connecticut Letter at 2, GFOA
Letter at 4, Metro Water Letter at 2, and NABL Letter at 7. The
Commission points out, however, that new paragraph (b)(5)(i)(C)(13)
contains a materiality condition. As the Commission noted in the
Proposing Release, it does not believe that all mergers,
consolidations, acquisitions, and substantial asset sales are
necessarily of sufficient importance that information pertaining to
them needs to be made available in every instance. For example, a
merger could involve the combination of a shell corporation or a
small entity into a very large health care organization that is a
conduit borrower. Such mergers generally would not have a
significant impact on the business or financial condition of the
larger corporation and, under all of the applicable facts and
circumstances, generally would not be important to investors. See
Proposing Release, supra note 2, 74 FR at 36845. The Commission
received no comments on this statement.
\289\ See NABL Letter at 8.
---------------------------------------------------------------------------
Similar to the Commission's discussion in the context of the
bankruptcy and insolvency disclosure event, the Commission does not
believe that it is appropriate to limit paragraph (b)(5)(i)(C)(13) to
obligated persons for whom annual financial information and operating
data is presented in the final official statement. The Commission
believes that there are a variety of methods by which issuers or
obligated persons could avoid having to monitor directly the activities
of other obligated persons, such as obtaining, at the time of a primary
offering, an agreement from obligated persons for whom annual financial
information and operating data are not included in the final official
statement that they will provide information pertaining to a merger,
consolidation, acquisition or substantial asset sale to the party
responsible for filing event notices. The Commission also notes that a
merger, consolidation, acquisition or substantial asset sale involving
an obligated person would not trigger an event notice if such
transaction by an obligated person does not meet the materiality
standard.
4. Successor, Additional, or Change in Trustee
Finally, the Commission is adopting, as proposed, the amendment to
add new paragraph (b)(5)(i)(C)(14) to the Rule, which requires that a
Participating Underwriter must reasonably determine that the continuing
disclosure agreement provides for the submission of notice of an
appointment of a successor or additional trustee, or a change of name
of a trustee, if material. Most commenters expressed general support
for the addition of this event item to the Rule.\290\
---------------------------------------------------------------------------
\290\ See Connecticut Letter at 2, NFMA Letter at 2, SIFMA
Letter at 4, ICI Letter at 8, Fidelity Letter at 3, and GFOA Letter
at 4.
---------------------------------------------------------------------------
Two commenters, however, expressed concern regarding the increased
costs and burdens that some issuers would incur to report changes
pertaining to trustees within the Rule's ten business day time
frame.\291\ One of these commenters noted that, ``in the case of the
small less sophisticated borrower * * * obligors do not have the
resources available to track and report on changes in the trustee on a
timely basis or to determine the materiality of a name change.'' \292\
The other commenter noted that ``turmoil in the banking sector has
meant frequent cha[n]ges in trustees,'' and that ``many issuers and
obligated persons are not informed of these changes within the proposed
ten-day time frame, much less in sufficient time to identify the need
to file a notice and prepare the relevant notice within such time
period.'' \293\ These commenters recommended either that knowledge of
the event rather than the occurrence of the event trigger the time
period to disclose the event, or that the trustee disclose the changes
directly to the MSRB.\294\
---------------------------------------------------------------------------
\291\ See CHEFA Letter at 3 and NAHEFFA Letter at 4.
\292\ See CHEFA Letter at 3.
\293\ See NAHEFFA Letter at 4.
\294\ Id.
---------------------------------------------------------------------------
The Commission continues to believe in the importance of an
investor's ability to be informed about material changes in a trustee's
identity, given the significance of trustees for bondholders.\295\ A
trustee makes critical decisions that impact investors and is under a
duty to represent the interests of bondholders. For example, a trustee
often must determine whether: Proposed amendments to the governing
documents of the municipal security are permissible without bondholder
consent; parity obligations may be issued; security may be released; or
a default event has occurred.\296\ In addition, a trustee is
responsible for sending payments to investors and computing applicable
interest rates. In some cases, a trustee may be responsible for taking
certain actions at the direction of a designated percentage of
bondholders.\297\ A trustee also may be responsible for providing
information requested by investors. Often, the trustee serves as the
issuer's dissemination agent for continuing disclosures. Although under
normal circumstances the identity of the trustee may have little or no
influence on a decision to buy or sell a security, bondholders would
need to know who to contact, particularly when an issuer or other
obligated person may be experiencing financial difficulty. The
Commission is currently unaware of any method by which investors,
particularly individual investors, have a consistent means of obtaining
up-to-date information about changes to the identity of the trustee. In
the Commission's view, these factors support the need for investors to
know the identity of the trustee.
---------------------------------------------------------------------------
\295\ See Proposing Release, supra note 2, 74 FR at 36845-46.
\296\ See NABL Form Indenture, supra note 270.
\297\ Id.
---------------------------------------------------------------------------
The Commission believes that issuers and other obligated persons
could take steps to become aware promptly of any change of trustee or
in the name of a trustee by obtaining an agreement from the trustee to
provide advance notice of such an event to them, e.g., by having the
indenture specify that the trustee will immediately provide this
information to the issuer or obligated person.\298\ Furthermore, the
addition of a substitute or additional trustee generally involves the
participation of the issuer.\299\ In such an event, the issuer would
likely have adequate time to comply with its undertaking to submit
notice of a change in trustee event within the requisite ten business
day time frame in order for investors to become aware of the identity
of the new trustee. Finally, an issuer or other obligated person could
elect to designate the trustee as its agent to provide notice of such
an event directly to the MSRB.\300\
---------------------------------------------------------------------------
\298\ See infra Section IV., discussing the obligations of
underwriters of municipal securities under the antifraud provisions
of the federal securities laws, and note 351.
\299\ See, e.g., NABL Form Indenture, supra note 270.
\300\ Rule 15c2-12(b)(5)(i) permits an issuer or obligated
person to provide documents to the MSRB either directly or
indirectly through an indenture trustee or a designated agent. See
17 CFR 240.15c2-12(b)(5)(i).
---------------------------------------------------------------------------
A few commenters expressed concerns about the inclusion of a
materiality condition in this provision.\301\ Two commenters noted that
small or less sophisticated issuers may have difficulty determining the
materiality of a trustee's name change.\302\ Another commenter
suggested not including the materiality condition because it believed
that all trustee changes are material and ``it is critical that
investors are informed of such changes as their rights are generally
exercised through the actions of the trustee.'' \303\ One commenter
suggested that the Commission also should require that the event notice
include the trustee's new contact information.\304\
---------------------------------------------------------------------------
\301\ See CHEFA Letter at 3, NAHEFFA Letter at 4, and Fidelity
Letter at 3.
\302\ See CHEFA Letter at 3 and NAHEFFA Letter at 4.
\303\ See Fidelity Letter at 3.
\304\ See NFMA Letter at 2. Issuers should consider including
the trustee's updated contact and identification information in any
notice regarding a change in the trustee.
---------------------------------------------------------------------------
As noted in the Proposing Release, the Commission believes that
whether a change involving a trustee is material
[[Page 33122]]
must be determined through a review of the particular facts and
circumstances surrounding such an event.\305\ It is possible that a
change is so minor that it would not be material. For example, a name
change such as ``ABC National Bank and Trust Company of XYZ,'' to ``ABC
National Bank and Trust Company'' may not be material in the absence of
other factors, such as a change of the location at which the trustee
can be reached.\306\ On the other hand, when a trustee transfers all or
part of its trust operations to a different organization, on account of
a merger or otherwise, the Commission believes that it is important for
a bondholder to be able to determine the identity of the new trustee.
---------------------------------------------------------------------------
\305\ See Proposing Release, supra note 2, 74 FR at 36845, n.
122.
\306\ The Commission received no comments on this example.
---------------------------------------------------------------------------
F. Other Comments
Several commenters advocated additional changes to the Rule. Two
commenters suggested that the Commission establish a definitive time
period within which the delivery of required ongoing financial
information should be provided.\307\ Some commenters also suggested
that the Commission add other disclosure events to the Rule. These
events included: (i) Long-term funding commitments for payments; \308\
(ii) potential termination liabilities for an issuer's interest rate
swaps; \309\ (iii) the creation of any material financial obligation
(including contingent obligations); \310\ (iv) a ``catch all'' event
subject to a materiality determination; \311\ (v) clarification of the
tax-exempt status of a bond; \312\ (vi) modifications to escrow
agreements or escrows; \313\ (vii) various events related to swap
transactions; \314\ (viii) the conversion of bank bonds to a loan or
term note; \315\ and (ix) the termination of a conditional liquidity
facility.\316\ Two commenters requested that the Commission provide
interpretative guidance clarifying that climate risk disclosure is
material information that should be disclosed to bondholders.\317\
Finally, one commenter recommended that the Rule should require every
continuing disclosure agreement to include language that successor
parties will be bound by the terms of the agreement.\318\
---------------------------------------------------------------------------
\307\ See e-certus Letter I at 9 and Fidelity Letter at 3-4.
\308\ See Shalanca Letter at 1.
\309\ See Folts Letter at 1.
\310\ See ICI Letter at 9 and Fidelity Letter at 3.
\311\ Id.
\312\ Id.
\313\ Id.
\314\ See NFMA Letter at 3.
\315\ Id.
\316\ Id.
\317\ See T.R. Rose and Sierra Letter and NRDC Letter.
\318\ See Fidelity Letter at 4.
---------------------------------------------------------------------------
Other commenters proffered additional recommendations to improve
the municipal securities market in general and its transparency. In
this regard, three commenters suggested that the Commission petition
Congress to repeal the Tower Amendment, which restricts the Commission
from directly imposing disclosure requirements on municipal
issuers.\319\ One commenter recommended that the Commission establish
specific ``listing'' and ``de-listing'' conditions for the MSRB's EMMA
system.\320\ Another commenter suggested creating a 48-hour right of
rescission for retail bond buyers to rescind a transaction if the
seller has misrepresented information about a particular bond
offering.\321\ Finally, one commenter suggested the creation of an on-
line marketplace for bond dealers and individuals to buy or sell
municipal securities.\322\
---------------------------------------------------------------------------
\319\ See e-certus Letter I at 3, ICI Letter at 10-11, and
Fidelity Letter at 3.
\320\ See e-certus Letter I at 10.
\321\ See Becker Letter.
\322\ See Boatwright Letter.
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The Commission welcomes the foregoing views and suggestions to
revise Rule 15c2-12 and improve the transparency and other aspects of
the market for municipal securities. As evidenced by its adoption of
the 2008 Amendments and today's amendments, the Commission is committed
to considering proposals to further enhance the scope of municipal
market disclosures and their dissemination to investors. Although the
Commission, in this rulemaking, is taking a targeted approach at this
time, it will consider commenters' views as it continues its efforts to
bring greater transparency and other improvements to the municipal
securities market.
G. Compliance Date and Transition
The amendments to Rule 15c2-12 will impact only those continuing
disclosure agreements that are entered into in connection with primary
offerings of municipal securities that are subject to the Rule and that
occur on or after the December 1, 2010 compliance date of these
amendments. The Commission understands that existing undertakings by
issuers and obligated persons that were entered into prior to the
compliance date of these amendments do not require a broker, dealer, or
municipal securities dealer to reasonably determine that the issuer or
other obligated person had agreed to provide notice of specified events
in a timely manner not in excess of ten business days of the event's
occurrence or include the additional items discussed above that the
amendments added to paragraph (b)(5)(i)(C) of the Rule. In addition,
such existing undertakings provide for the submission of the events
specified in paragraph (b)(5)(i)(C) of the Rule, ``if material.''
Further, a Participating Underwriter in remarketings of demand
securities that are outstanding in the form of demand securities on the
day preceding the compliance date of these amendments, and that
continuously have remained outstanding in the form of demand
securities, is not required to reasonably determine that the issuer or
other obligated person has entered into a continuing disclosure
agreement, as prescribed by the amended Rule. Likewise, in the case of
municipal securities subject to a continuing disclosure agreement
entered into prior to the compliance date of these amendments, the
recommending broker, dealer, or municipal securities dealer will
receive notice solely of those events covered by that continuing
disclosure agreement, namely, the eleven events specified in the Rule
prior to today's amendments. These continuing disclosure agreements do
not cover any of the items to be added to the Rule by the amendments.
Thus, in the case of continuing disclosure agreements entered into
prior to the compliance date of these amendments, it is not necessary
for the recommending broker, dealer, or municipal securities dealer to
have procedures in place that provide reasonable assurance that it
receive prompt notice of the events added to the Rule by these
amendments.
The Commission requested comment on the impact of the amendments
with respect to brokers, dealers, and municipal securities dealers that
recommend the purchase or sale of municipal securities. The Commission
received one comment \323\ in response to its inquiry regarding the
potential effects and implications of existing continuing disclosure
agreements having different terms (e.g., lacking the proposed
additional events for which notices would be sent to the MSRB and the
specified ten business day deadline as discussed above) than continuing
disclosure agreements entered into on or after the compliance date of
these amendments. This commenter recommended that the Commission
require that each continuing disclosure agreement entered into by an
issuer after
[[Page 33123]]
the compliance date of these amendments should, by its terms, amend all
prior continuing disclosure agreements entered into by the issuer to
incorporate the new requirements of the amended Rule.\324\ The
Commission observes that, under the commenter's suggestion, the effect
would be to mandate the amendment of existing contracts. The Commission
believes that the better course is to apply the amendments to
continuing disclosure agreements entered into on or after the
compliance date. While the Commission is mindful of the implications of
differing disclosure obligations that will occur over time as a result
of this decision, this difference should diminish as existing municipal
securities mature or are redeemed.
---------------------------------------------------------------------------
\323\ See Fidelity Letter at 5.
\324\ Id.
---------------------------------------------------------------------------
Four commenters concurred with the Commission's proposed compliance
date of no earlier than three months after adoption of the
amendments.\325\ The Commission also received comments suggesting
various time frames for the compliance date of the amendments. One
commenter recommended a compliance date no later than three months
after Commission approval,\326\ and another commenter recommended no
later than nine months after Commission approval.\327\ Two commenters
suggested a time frame of no earlier than six months after the adoption
of the amendments by the Commission.\328\ These two commenters believed
that this suggested time frame is necessary to provide issuers, brokers
and dealers with sufficient time to familiarize themselves with new
amendments to the Rule and to establish processes to comply with the
new amendments.\329\ In addition, one of these commenters suggested an
even further unspecified delay for implementation of the amendments
pertaining to demand securities.\330\
---------------------------------------------------------------------------
\325\ See Kutak Letter, CHEFA Letter, Fidelity Letter at 2, and
ICI Letter at 10.
\326\ See NFMA Letter at 3.
\327\ See MSRB Letter at 2.
\328\ See NABL Letter at 10 and GFOA Letter at 5.
\329\ Id.
\330\ See NABL Letter at 10.
---------------------------------------------------------------------------
The Commission has considered commenters' various recommendations
and believes that a compliance date of approximately six months from
the date of the Commission's approval of the amendments is appropriate.
The Commission believes that this six month period should be sufficient
time for the MSRB to make the necessary modifications to its EMMA
system, for Participating Underwriters to revise their procedures to
comply with the Rule, as revised, and for issuers and obligated persons
to become aware of the amendments and plan for their implementation.
Accordingly, the Commission is establishing December 1, 2010 as the
compliance date of these amendments.
IV. Interpretive Guidance With Respect to Obligations of Participating
Underwriters
The Commission is aware that municipal securities industry
participants have expressed concern that some municipal issuers and
other obligated persons may not consistently submit continuing
disclosure documents, particularly event notices and failure to file
notices, in accordance with their undertakings in continuing disclosure
agreements.\331\ Municipal security holders' access to meaningful
information promotes informed investment decision-making about whether
to buy, sell, or hold municipal securities \332\ and better protection
against misrepresentation and fraud. Availability of that information
also will aid brokers, dealers, and municipal securities dealers in
complying with their obligations to have a reasonable basis for
recommending municipal securities. In the Commission's view, the flow
of municipal securities disclosure to investors and other market
participants depends on issuers and obligated persons abiding by their
undertakings in continuing disclosure agreements.\333\ Accordingly, the
Commission emphasizes that it is important for an underwriter in a
municipal offering to evaluate carefully the likelihood that the issuer
or obligated person will comply on a timely basis with the undertakings
it has made.\334\
---------------------------------------------------------------------------
\331\ See Proposing Release, supra note 2, 74 FR at 36847. See
also the comments of participants at the 2001 SEC Municipal Market
Roundtable--Secondary Market Disclosure for the 21st Century,
(available at http://www.sec.gov/info/municipal/roundtables/thirdmuniround.htm), E-mail from Peter J. Schmitt, CEO, DPC Data
Inc., to the Commission, Rule--Comments, dated September 19, 2008,
regarding the 2008 Proposed Amendments, and Peter J. Schmitt,
Estimating Municipal Securities Continuing Disclosure Compliance: A
Litmus Test Approach (available at http://www.dpcdata.com/html/about-researchpapers.html).
\332\ See, e.g., 2008 Amendments Adopting Release, supra note 8,
73 FR at 76129.
\333\ See 1994 Amendments Adopting Release, supra note 8, 59 FR
at 59594-5. The Commission notes that demand securities are subject
to paragraph (b)(5), as well as paragraph (c), of the Rule as a
result of the amendments being adopted today.
\334\ The Commission received no comments on this statement.
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In prior releases, the Commission set forth its interpretations of
the obligations of municipal underwriters under the antifraud
provisions of the federal securities laws.\335\ The Commission
discussed the duty of underwriters to the investing public to have a
reasonable basis for recommending any municipal securities and, in
fulfilling that obligation, their responsibility to review the issuer's
or obligated person's disclosure documents in a professional manner
with respect to the accuracy and completeness of statements made in
connection with the offering.\336\ The Commission today reaffirms its
previous interpretations and provides additional guidance with respect
to underwriters' responsibilities under the antifraud provisions of the
federal securities laws.\337\
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\335\ See 1988 Proposing Release, supra note 58; the 1989
Adopting Release, supra note 8, 54 FR at 28811-12; and Securities
Exchange Act Release No. 33741 (March 9, 1994), 59 FR 12748 (March
17, 1994) (``1994 Interpretive Release'') (reaffirming the
Commission's interpretation of the obligations of municipal
underwriters under the antifraud provisions of the federal
securities laws).
\336\ See 1989 Adopting Release, supra note 8, 54 FR at 28811.
See also 1988 Proposing Release, supra note 128, 53 FR at 37787.
\337\ In light of the underwriters' obligation, as discussed in
the 1988 Proposing Release, supra note 335, 53 FR at 37787-91, the
1989 Adopting Release, supra note 8, 54 FR 28811-12, and in the 1994
Interpretive Release, supra note 335, 59 FR 12757-58, to review the
official statement and to have a reasonable basis for its belief in
the accuracy and completeness of the official statement's key
representations, the Commission noted that a disclaimer by an
underwriter of responsibility for the information provided by the
issuer or other parties without further clarification regarding the
underwriter's belief as to accuracy, and the basis therefor, is
misleading and should not be included in official statements. See
1994 Interpretive Release, supra note 335, 59 FR 12758 n. 103.
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The provisions of paragraph (b) of Rule 15c2-12 are intended to
assist a municipal underwriter in meeting its ``reasonable basis''
obligations, including the requirement that an underwriter receive and
review a nearly complete final official statement prior to bidding for
or purchasing securities in connection with the offering.\338\ Under
paragraph (b)(5)(i)(C) of the Rule, the underwriter is obligated to
reasonably determine that the issuer or obligated person has
undertaken, in a written agreement or contract, for the benefit of the
bondholders, to provide continuing disclosure documents to the
MSRB.\339\ Further, the Rule's definition of ``final official
statement'' provides for the disclosure of any instances in the
previous five years in which any person identified in the continuing
disclosure agreement has failed to comply, in all material respects,
with any previous
[[Page 33124]]
informational undertakings in the continuing disclosure agreement.\340\
When the Commission in 1994 adopted these provisions of the Rule, it
stated its belief that the failure of the issuer or other obligated
person to comply in all material respects with prior informational
undertakings is information that is important to the market and,
therefore, should be disclosed in the final official statement.\341\ As
the Commission noted at that time, the provision in the Rule regarding
disclosure of a prior history of material non-compliance by issuers or
other obligated persons with their undertakings was specifically
intended to serve as an incentive to comply with their undertakings to
provide secondary market disclosure.\342\ Moreover, such disclosure
would assist underwriters and others in assessing the reliability of
issuers' or obligated persons' disclosure representations.\343\ The
Commission continues to believe in the importance of these Rule
provisions and would like to remind underwriters of their obligations
under Rule 15c2-12.
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\338\ See 1988 Proposing Release, supra note 335, 53 FR at
37790.
\339\ Pursuant to the 2008 Amendments, the MSRB is the sole
information repository.
\340\ Rule 15c2-12(f)(3), 17 CFR 15c2-12(f)(3).
\341\ See 1994 Amendments Adopting Release, supra note 8, 59 FR
at 59594-5.
\342\ Id. at 59595.
\343\ Id.
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The Commission previously has stated that, in its view, the
reasonableness of a belief in the accuracy and completeness of the key
representations in the final official statement, and the extent of a
review of the issuer's or other obligated person's situation necessary
to arrive at that belief, will depend upon all the circumstances.\344\
In both negotiated and competitively bid municipal offerings, the
Commission expects, at a minimum, that underwriters will review the
issuer's disclosure documents in a professional manner for possible
inaccuracies and omissions. The Commission previously has provided a
non-exclusive list of factors that it believes generally would be
relevant in determining the reasonableness of an underwriter's basis
for assessing the truthfulness of key representations in final official
statements.\345\ These factors include: (1) The extent to which the
underwriter relied upon municipal officials, employees, experts, and
other persons whose duties have given them knowledge of particular
facts; (2) the role of the underwriter (manager, syndicate member, or
selected dealer); (3) the type of bonds being offered (general
obligation, revenue, or private activity); (4) the past familiarity of
the underwriter with the issuer; (5) the length of time to maturity of
the bonds; and (6) whether the bonds are competitively bid or are
distributed in a negotiated offering.\346\ Sole reliance on the
representations of the issuer will not suffice.\347\
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\344\ See 1988 Proposing Release, supra note 58, 53 FR at 37789,
and 1989 Adopting Release, supra note 8, 54 FR 28811-12.
\345\ Id.
\346\ Id.
\347\ See 1988 Proposing Release, supra note 58, 53 FR at 37789.
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The Commission has determined further to expound upon its prior
interpretations regarding municipal underwriters' responsibilities. As
articulated in a prior interpretation, the Commission believes that it
is doubtful that an underwriter could form a reasonable basis for
relying on the accuracy or completeness of an issuer's or obligated
person's ongoing disclosure representations, if such issuer or
obligated person has a history of persistent and material breaches or
has not remedied such past failures by the time the offering
commences.\348\ The Commission believes that if the underwriter finds
that the issuer or obligated person has on multiple occasions during
the previous five years \349\ failed to provide on a timely basis
continuing disclosure documents, including event notices and failure to
file notices, as required in a continuing disclosure agreement for a
prior offering, it would be very difficult for the underwriter to make
a reasonable determination that the issuer or obligated person would
provide such information under a continuing disclosure agreement in
connection with a subsequent offering. In the Commission's view, it
also is doubtful that an underwriter could meet the reasonable belief
standard without the underwriter affirmatively inquiring as to that
filing history.\350\ The underwriter's reasonable belief should be
based on its independent judgment, not solely on representations of the
issuer or obligated person as to the materiality of any failure to
comply with any prior undertaking. If the underwriter finds that the
issuer or obligated person has failed to provide such information, the
underwriter should take that failure into account in forming its
reasonable belief in the accuracy and completeness of representations
made by the issuer or obligated person.\351\
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\348\ See 1994 Amendments Adopting Release, supra note 8, 59 FR
at 59595.
\349\ 17 CFR 240.15c2-12(f)(3).
\350\ The Commission notes that, in light of the adoption of the
2008 Amendments and their effective date of July 1, 2009, for
disclosures made on or after July 1, 2009, an underwriter could
verify that the information has been submitted electronically to the
MSRB.
\351\ In connection with event notices concerning the
appointment of a successor or additional trustee or the name change
of a trustee, if an issuer or obligated person obtains a contractual
commitment from the trustee specifying that the trustee will provide
notice of a change in the trustee's name to the MSRB or the issuer
or obligated person, the trustee fails to provide such notice, and
the issuer or obligated person otherwise is unaware of the trustee's
name change, the Commission believes that the underwriter may take
the trustee's failure to notify into account as a substantial
mitigating factor in forming a reasonable belief as to the accuracy
and completeness of the issuer's or obligated person's
representation regarding compliance with its undertakings.
Moreover, for so long as an issuer or obligated person
establishes and maintains policies and procedures reasonably
designed in light of the relevant facts and circumstances to ensure
compliance with its undertaking to provide notice of a rating change
with respect to its municipal security to the MSRB in a timely
manner, not in excess of ten business days after the occurrence of
the rating change, and the issuer or obligated person regularly
reviews the effectiveness of its policies and procedures and takes
prompt action to remedy any deficiencies, the Commission believes
that an underwriter, in forming a reasonable belief as to the
accuracy and completeness of the issuer's or obligated person's
representations regarding compliance with its undertakings, may take
into account the issuer's or obligated person's policies and
procedures, regular reviews, and prompt remedial action as a
substantial mitigating factor in the event of the issuer's or
obligated person's unintentional failure to provide such notice in
the prescribed manner.
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In the Proposing Release, the Commission solicited comment
regarding alternative or additional ways in which an underwriter could
satisfy its obligations, including obligations to ascertain if issuers
or obligated persons are abiding by their municipal disclosure
commitments.\352\ The Commission specifically requested that commenters
address the current practices used by underwriters to satisfy their
``reasonable basis'' obligation and any aspects of such practices that
could be addressed through further Commission interpretation or
rulemaking.
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\352\ See Proposing Release, supra note 2, 74 FR at 36848.
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The Commission received comments expressing concern that it can be
labor intensive and costly,\353\ and even impossible,\354\ for an
underwriter to make a reasonable determination that an issuer or an
obligated person would provide continuing disclosure information
pursuant to the Commission's interpretation. These commenters
particularly pointed to the difficulties underwriters face in examining
event disclosures for sufficiency.\355\ The commenters also
[[Page 33125]]
noted that, because underwriters are expected to examine disclosures
over a five-year period preceding new offerings, they need to continue
to depend on the Nationally Recognized Municipal Securities Information
Repository (``NRMSIR'') network for such information, which entails
searching for various filings in each of the NRMSIRs.\356\
Consequently, the commenters suggested that underwriters be permitted
to rely on representations by issuers or obligated persons that they
are in compliance with previous disclosure commitments as a basis for
forming a reasonable determination that such persons would comply going
forward.\357\
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\353\ See RBDA Letter at 2.
\354\ See NABL Letter at 11-12 and SIFMA Letter at 4.
\355\ See NABL Letter at 11-12, RBDA Letter at 2-3, and SIFMA
Letter at 4.
\356\ See RBDA Letter at 2 and SIFMA Letter at 4.
\357\ See NABL Letter at 12, RBDA Letter at 3, and SIFMA Letter
at 4. Further, one commenter asked the Commission to clarify that
underwriters may take into account the significance, materiality,
and extenuating circumstances of an issuer's or obligated person's
non-compliance with event disclosure provisions of continuing
disclosure agreements. See NAHEFA Letter at 4. As the Commission has
stated above, an underwriter's determination to recommend any
municipal security must be on a ``reasonable basis.'' Therefore, the
underwriter may consider such factors.
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The Commission believes that the interpretation included in the
Proposing Release is warranted, and it reiterates that interpretation
in this Adopting Release. The Commission continues to believe that the
benefits to investors from its interpretation justify the effort
required of underwriters to determine whether an issuer has a history
of repeatedly and materially breaching its undertakings.\358\ The
Commission has considered the comments described above and believes
that it is appropriate to add to its interpretation to address the
circumstances and extent of underwriter reliance on information
provided by issuers and obligated persons concerning event disclosures,
as raised by these comments.
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\358\ Since the Commission has not applied the primary market
provisions of the Rule to demand securities, the definition of
``final official statement'' does not apply to demand securities.
The Commission notes, however, that investors may have an
expectation that official statements for demand securities will
contain comparable information (such as a failure to comply, in all
material respects, with any previous continuing disclosure
undertakings) to that referred in the definition of ``final official
statement'' under the Rule.
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The Commission acknowledges that it may not be possible in some
cases for an underwriter independently to determine whether some
events, for which an event notice is necessary, have occurred.\359\ In
order to obtain this information, an underwriter may take steps, such
as asking questions of an issuer and, where appropriate, obtaining
certifications from an issuer, obligated person or other appropriate
party about facts, such as the occurrence of specific events listed in
paragraph (b)(5)(i)(C) of the Rule (without regard to materiality),
that the underwriter may need to know in order to form a reasonable
belief in the accuracy and completeness of an issuer's or obligated
person's ongoing disclosure representations. However, as discussed
above, the underwriter may not rely solely upon the representations of
an issuer or obligated person concerning the materiality of such events
or that it has, in fact, provided annual filings or event notices to
the parties identified in its continuing disclosure agreements (i.e.,
NRMSIRs, MSRB, and State Information Depositories).\360\ Instead, an
underwriter should obtain evidence reasonably sufficient to determine
whether and when such annual filings and event notices were, in fact,
provided.\361\ The underwriter therefore must rely upon its own
judgment, not solely on the representation of the issuer or obligated
person, as to the materiality of any failure by the issuer or obligated
person to comply with a prior undertaking.\362\
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\359\ Some of such information, such as the receipt of proposed
or final determinations of taxability, may be known solely to the
issuer or obligated person.
\360\ Therefore, the underwriter may not likewise rely solely on
a written certification from an issuer or obligated person that it
has provided all filings or notices.
\361\ For example, for annual filings and event notices due
prior to July 1, 2009, an underwriter could reasonably rely upon
information obtained from NRMSIRs and SIDs. In addition, an
underwriter could rely upon other evidence that such information was
provided, such as a certified copy of the annual filing or an event
notice from a responsible issuer official, representative of an
obligated person, or a designated agent and a receipt from a
delivery service or other evidence that the information had, in
fact, been sent. For filings made on or after July 1, 2009, however,
an underwriter should examine the filings available on the MSRB's
EMMA system. If the underwriter finds that some annual filings or
event notices appear to be missing, it may request the issuer
official or representative of an obligated person to provide a
written certification and evidence showing whether and when such
information was provided to the MSRB.
\362\ The Commission notes that the definition of ``final
official statement'' in the Rule provides for the inclusion of any
instances in the previous five years in which each person specified
pursuant to Rule 15c2-12(b)(5)(ii) failed to comply, in all material
respects, with any previous undertakings in a written contract or
agreement specified in Rule 15c2-12(b)(5)(i).
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The Commission notes that the obligation of a Participating
Underwriter to determine whether an issuer or an obligated person has
filed continuing disclosure documents is not new but dates back to when
paragraph (b)(5) of the Rule was adopted in 1994.\363\ Moreover, the
Commission notes that the launch of the MSRB's EMMA system should
assist underwriters in complying with their obligations. To the extent
underwriters must rely on NRMSIRs for disclosures made prior to the
creation of EMMA,\364\ the Commission notes that such reliance is time-
limited. Since final official statements of offerings subject to the
Rule must disclose the failures of an issuer or obligated person to
comply with continuing disclosure undertakings only for the previous
five years, underwriters presumably will no longer need to rely on
various NRMSIRs within approximately four years.\365\
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\363\ See 1994 Amendments Adopting Release, supra note 8.
\364\ See 2008 Amendments Adopting Release, supra note 8.
\365\ Since EMMA became effective as of July 1, 2009, continuing
disclosure documents for approximately the past year can be found
centrally within that system. Id.
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V. Paperwork Reduction Act
The Rule, as amended, contains ``collection of information
requirements'' within the meaning of the Paperwork Reduction Act of
1995 (``PRA'').\366\ In accordance with 44 U.S.C. 3507 and 5 CFR
1320.11, the Commission submitted revisions to the currently approved
collection of information titled ``Municipal Securities Disclosure''
(17 CFR 240.15c2-12) (OMB Control No. 3235-0372) to OMB. An agency may
not conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a currently valid control
number.
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\366\ 44 U.S.C. 3501 et seq.
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In the Proposing Release, the Commission solicited comments on the
collection of information requirements. The Commission noted that the
estimates of the effect that the amendments will have on the collection
of information were based on data from various sources, including the
most recent PRA submission for Rule 15c2-12. As discussed above, the
Commission received twenty-nine comment letters on the proposed
rulemaking. Of the comment letters the Commission received, some
commenters addressed the collection of information aspects of the
proposal.\367\ The Commission recently received data from the MSRB
reflecting the number of submissions to its EMMA system's continuing
disclosure service for the eight-month period from July 1, 2009,
through February 28, 2010.\368\ This data includes
[[Page 33126]]
the number of annual filings, event notices, and failure to file
notices that were submitted to EMMA during this period. Because the
EMMA system is now in operation and issuers or their agents are
submitting continuing disclosure documents to it, the MSRB is able to
provide the Commission with numbers for continuing disclosure documents
for an eight-month period, based on its actual experience with the new
system. When the eight months of EMMA data is annualized, the resulting
estimate corresponds closely with the Commission's collection of
information for estimates of continuing disclosure submissions in the
Proposing Release.\369\ The Commission is revising its estimates
contained in the Proposing Release slightly, however, to provide
estimates based on eight months of actual data provided by the MSRB for
annual filings, event notices, and failure to file notices.\370\
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\367\ See NABL Letter, e-certus Letter I, SIFMA Letter, GFOA
Letter, Connecticut Letter, California Letter, San Diego Letter,
NAHEFFA Letter, CHEFA Letter, Kutak Letter, Halgren Letter, Los
Angeles Letter, ICI Letter, Fidelity Letter, Metro Water Letter,
NFMA Letter, CRRC Letter, and WCRRC Letter.
\368\ See e-mail from Ernesto A. Lanza, General Counsel, MSRB,
to Martha M. Haines, Assistant Director and Chief, Office of
Municipal Securities, Division, Commission, dated March 3, 2010
(providing statistics relating to the number of submissions to the
MSRB's EMMA continuing disclosure service). The MSRB commenced
operating the continuing disclosure service of the EMMA system on
July 1, 2009.
\369\ See infra notes 417, 418, and 421.
\370\ See id. See also infra Section V.D.
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A. Summary of Collection of Information
Pursuant to paragraph (b) of Rule 15c2-12, a Participating
Underwriter is required: (1) To obtain and review an official statement
``deemed final'' by an issuer of the securities, except for the
omission of specified information, prior to making a bid, purchase,
offer, or sale of municipal securities; (2) in non-competitively bid
offerings, to send, upon request, a copy of the most recent preliminary
official statement (if one exists) to potential customers; (3) to send,
upon request, a copy of the final official statement to potential
customers for a specified period of time; (4) to contract with the
issuer to receive, within a specified time, sufficient copies of the
final official statement to comply with the Rule's delivery
requirement, and the requirements of the rules of the MSRB; and (5)
before purchasing or selling municipal securities in connection with an
offering, to reasonably determine that the issuer or obligated person
has undertaken, in a written agreement or contract for the benefit of
holders of such municipal securities, to provide annual filings, event
notices, and failure to file notices (i.e., continuing disclosure
documents) to the MSRB in an electronic format as prescribed by the
MSRB. Under paragraph (c) of the Rule, a broker-dealer that recommends
the purchase or sale of a municipal security is required to have
procedures in place that provide reasonable assurance that it will
receive prompt notice of any event specified in paragraph (b)(5)(i)(C)
of the Rule and any failure to file annual financial information
regarding the security.
Under the amendments, the Commission is modifying paragraph
(d)(1)(iii) of the Rule by adopting changes to paragraph (d)(5) to the
Rule, thereby applying paragraphs (b)(5) and (c) of the Rule to a
primary offering of demand securities in authorized denominations of
$100,000 or more (i.e., demand securities). This change applies to any
initial offering and remarketing that is a primary offering of demand
securities occurring on or after the compliance date of the amendments.
However, to address commenters' concerns about the impact of the
proposal on existing demand securities, the amendment does not apply to
remarketings of demand securities that are outstanding in the form of
demand securities on the day preceding the amendments' compliance date
and that continuously have remained outstanding in the form of demand
securities (i.e., such securities can qualify for a limited grandfather
provision).\371\
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\371\ See supra Section III.A.
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Under paragraph (b)(5)(i)(C) of Rule 15c2-12, a Participating
Underwriter is required to reasonably determine that the issuer or
obligated person has undertaken in a continuing disclosure agreement to
provide an event notice to the MSRB upon any of the following events:
(1) Principal and interest payment delinquencies with respect to the
securities being offered; (2) unscheduled draws on debt service
reserves reflecting financial difficulties; (3) unscheduled draws on
credit enhancements reflecting financial difficulties; (4) substitution
of credit or liquidity providers, or their failure to perform; (5)
defeasances; and (6) rating changes.\372\ Under the amendments, the
Commission is deleting the ``if material'' condition that existed in
the Rule with respect to these events.
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\372\ 17 CFR 240.15c2-12(b)(5)(i)(C).
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The Commission, however, is retaining the ``if material'' condition
regarding certain other events listed in paragraph (b)(5)(i)(C) of the
Rule. A Participating Underwriter will continue to be required to
reasonably determine that the issuer or obligated person has undertaken
in a continuing disclosure agreement to provide notice to the MSRB with
respect to the following events, if material: (1) Non-payment related
defaults; (2) modifications to rights of security holders; (3) bond
calls; and (4) release, substitution, or sale of property securing
repayment of the securities.
In addition, under the amendments, the Commission is adding the
following event items to paragraph (b)(5)(i)(C) of the Rule: (1) The
issuance by the IRS of proposed or final determinations of taxability,
Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices
or determinations with respect to the tax status of the securities, or
other material events affecting the tax status of the security; (2)
tender offers; (3) bankruptcy, insolvency, receivership or similar
event of the obligated person; (4) the consummation of a merger,
consolidation, or acquisition involving an obligated person or the sale
of all or substantially all of the assets of the obligated person,
other than in the ordinary course of business, the entry into a
definitive agreement to undertake such an action or the termination of
a definitive agreement relating to any such actions, other than
pursuant to its terms, if material; and (5) appointment of a successor
or additional trustee, or the change of name of a trustee, if material.
Further, under the amendments, Participating Underwriters will be
required to reasonably determine that the issuer or obligated person
has undertaken in a continuing disclosure agreement to provide event
notices to the MSRB, in an electronic format as prescribed by the MSRB,
in a timely manner not in excess of ten business days, rather than
simply in ``a timely manner.''
B. Use of Information
By specifying the time period for submission of event notices,
expanding the Rule's current categories of events, and modifying an
exemption in the Rule for demand securities, the amendments are
intended to promptly make available to broker-dealers, institutional
and retail investors, and others important information about
significant events relating to municipal securities and their issuers
or obligated persons. The amendments should assist investors and other
municipal securities market participants to obtain information about
municipal securities, including demand securities, and thus facilitate
their investment decisions and reduce the likelihood of fraud
facilitated by inadequate disclosure. In addition, the amendments
should provide brokers, dealers, and municipal securities dealers with
access to important information about municipal securities
[[Page 33127]]
that they can use to carry out their obligations under the securities
laws. This information may be used by individual and institutional
investors, underwriters of municipal securities, other market
participants, including broker-dealers and municipal securities
dealers, analysts, municipal securities issuers, the MSRB, vendors of
information regarding municipal securities, the Commission and its
staff, and the public generally.
C. Respondents
The paperwork collection associated with the Commission's
amendments to Rule 15c2-12 applies to broker-dealers, issuers of
municipal securities, and the MSRB. Although in the Proposing Release
the Commission estimated that its proposed amendments would not change
the number of broker-dealer respondents, the Commission estimated that
there would be an increase in the number of issuer respondents. Because
the proposed amendments would have expanded the types of securities
covered under subparagraphs (b)(5) and (c) of the Rule, there would
have been an increase in the number of issuers having a paperwork
burden. As discussed below, the Commission estimated that the proposed
revision of the Rule's exemption for demand securities would increase
the number of issuers with a paperwork burden by 2,000 issuers, for a
total of 12,000 issuer respondents.\373\ In the Proposing Release, the
Commission estimated that the number of respondents impacted by the
paperwork collection associated with the Rule would consist of 250
broker-dealers,\374\ 12,000 issuers,\375\ and the MSRB.\376\ The
Commission included these estimates of the number of respondents in the
Proposing Release and received no comments on them. The Commission
continues to believe that they are appropriate.
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\373\ See Proposing Release, supra note 2, 74 FR at 36849-50.
See also infra note 402 and accompanying text.
\374\ As discussed in the Proposing Release and below, the
Commission estimates that 250 broker-dealers will serve as
Participating Underwriters in offerings of municipal securities and
will have a paperwork collection burden as a result of the
amendments. This estimate is based on the Commission's 2008 PRA
submission (defined below) that included the estimated number of
broker-dealers that would serve as Participating Underwriters in
offerings of municipal securities in any given year and would
therefore be subject to a collection of information burden under
Rule 15c2-12. Although this estimate of 250 broker-dealers was
included in the 2008 PRA submission, the estimated number of broker-
dealers that could serve as Participating Underwriters in offerings
of municipal securities is not expected to change from the 2008 PRA
submission or as a result of the amendments. See Proposing Release,
supra note 2, 74 FR at 36849-50. See also PRA-2008-revised 15c2-12
Justification, Municipal Securities Disclosure (OMB Control No.
3235-0372), OMB, available at http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=200812-3235-013 (``2008 PRA submission'').
\375\ As discussed in the Proposing Release and below, the
Commission estimates that 12,000 issuers will have a paperwork
collection burden as a result of the amendments. This estimate is
based on the Commission's 2008 PRA submission that included the
estimate of 10,000 issuers that would have a paperwork burden under
Rule 15c2-12 in any given year and is not expected to change from
the 2008 PRA submission. See 2008 PRA submission, supra note 374. In
the Proposing Release, this estimate of 10,000 issuers was estimated
to increase by 20%, to 12,000 issuers, as described below, to
account for the proposed amendment to the Rule relating to demand
securities. As described below, the final amendments will not change
the estimated number of issuers that will submit annual financial
information, material event notices, and failure to file notices to
the MSRB. See Proposing Release, supra note 2, 74 FR at 36850, n.
151 and accompanying text, for a discussion of how the Commission
arrived at its estimate of a 20% increase in the number of issuers
as a result of the proposed amendment relating to demand securities.
See also infra note 402.
\376\ See Proposing Release, supra note 2, 74 FR at 36849-50.
See also 2008 PRA submission, supra note 374.
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As discussed above, the Commission is revising its amendment to the
Rule's exemption for demand securities to include a limited grandfather
provision for remarketings of currently outstanding demand
securities.\377\ The Commission believes that fewer issuers initially
will be affected by the amendments than estimated in the Proposing
Release as a result of the limited grandfather provision, which could
result in a somewhat lower number of issuer respondents that are
subject to the collection of information under the Rule than estimated
in the Proposing Release. However, the Commission notes that the
effects of the limited grandfather provision will diminish over time as
demand securities mature or are redeemed and new demand securities that
are subject to the Rule amendments are issued. In addition, the
Commission has no reason to believe the overall number of issuers of
demand securities will change materially going forward as a result of
these amendments. Because of the effects of the limited grandfather
provision will diminish over time, the Commission continues to believe
that 12,000 issuer respondents is an appropriate estimate.
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\377\ See infra Section III.A.
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D. Total Annual Reporting and Recordkeeping Burden
The Commission estimates the aggregate information collection
burden for the amended Rule to consist of the following:
1. Broker-Dealers
As discussed in the Proposing Release, the Commission estimated
that approximately 250 broker-dealers potentially could serve as
Participating Underwriters in an offering of municipal securities.\378\
The Commission received no comments on this estimate. The Commission
has reviewed this estimate and continues to believe that, under the
amendments, the maximum number of broker-dealers subject to a paperwork
burden will be 250.
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\378\ See Proposing Release, supra note 2, 74 FR at 36850.
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a. Amendment To Modify the Exemption for Demand Securities
As discussed in the Proposing Release, the Commission estimated
that the total annual burden on all 250 broker-dealers under the Rule
is 250 hours (1 hour annually per broker-dealer).\379\ In the Proposing
Release, the Commission estimated that the amendment to modify the
exemption from the Rule for a primary offering of demand securities
would increase the number of issuers with municipal securities
offerings that are subject to the Rule annually by 20%.\380\ This
percentage was based on the Commission's estimate of the ratio of
demand securities outstanding to the municipal securities market
generally.\381\
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\379\ Id.
\380\ See also infra note 402 and accompanying text for a
description of how the Commission arrived at its estimate of a 20%
increase in the number of issuers as a result of the amendment
relating to demand securities.
\381\ Id.
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As noted above, the Commission is adopting a limited grandfather
provision with respect to currently outstanding demand securities.
Although the Commission believes that the limited grandfather provision
initially could result in a somewhat lower number of issuer
respondents, for the reasons noted above, it continues to believe that
a 20% increase in the number of issuers with offerings subject to the
Rule is appropriate.\382\
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\382\ As discussed in Section V.D.2., infra, the Commission in
the Proposing Release solicited comment on the estimated 20%
increase in the number of issuers affected by a paperwork burden and
received no comments on this estimate. As discussed below, the
Commission continues to believe that this estimate is appropriate.
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As discussed in the Proposing Release, the Commission estimated
that this 20% increase in the number of issuers with offerings subject
to the Rule also would increase the estimated average annual burden for
each broker-
[[Page 33128]]
dealer by 20%, or .20 hours,\383\ and the total estimated annual
paperwork burden for all broker-dealers by 20%, or 50 hours.\384\ This
increased burden represents the additional time broker-dealers would
need annually to review the continuing disclosure agreements associated
with the offerings of demand securities subject to the amended Rule. As
discussed in the Proposing Release and below,\385\ the Commission notes
that the continuing disclosure agreements that are reviewed by broker-
dealers as part of their obligation under the Rule tend to be form
agreements. The amendments to the Rule that the Commission is adopting
will result in minor changes to certain provisions of these agreements.
However, because these continuing disclosure agreements tend to be
standard form agreements, the Commission does not believe that there
will be a substantial increase in the annual hourly burden for broker-
dealers under the amendments.
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\383\ 20% or .20 hours (12 minutes = 60 minutes x .20 (20%). See
Proposing Release, supra note 2, 74 FR at 36850.
\384\ 250 hours (total annual burden for all broker-dealers
under the Rule prior to the amendments) x .20 (20% increase in total
hourly burden) = 50 hours. This estimated increase in the annual
burden for broker-dealers also accounts for their review of
continuing disclosure agreements in connection with those
remarketings of demand securities that are now subject to the Rule.
See Proposing Release, supra note 2, 74 FR at 36850.
\385\ See infra Section V.E.2.a. See also Proposing Release,
supra note 2, 74 FR at 36850.
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In the Proposing Release, the Commission solicited comments on
broker-dealers' collection of information burdens, including those
relating to the amendment to modify the exemption for demand
securities. One commenter believed that the proposal failed to assess
the ``substantial additional time and expense'' required by
Participating Underwriters and remarketing agents to review and verify
disclosure about obligated persons in offerings of demand securities,
unless the amendments to the Rule were clarified to exclude offerings
of LOC-backed demand securities without primary or continuing
disclosure about the underlying obligor.\386\ This comment appears to
relate to a Participating Underwriter's review of issuers' primary
offering disclosure. As discussed in Section III above, the amendments
are not eliminating the exemption for demand securities from paragraphs
(b)(1)-(4) of the Rule, which relate to primary offering disclosure. As
a result, Participating Underwriters in offerings of demand securities
will continue to be exempt from the primary offering provisions of the
Rule. For this reason, the Commission does not believe that a
Participating Underwriter will incur ``substantial additional time and
expense'' in connection with the amendments, as suggested by the
commenter. The Commission has considered this comment, reviewed its
estimate in the Proposing Release in light of the comment, and believes
that it is unnecessary to revise the total hourly burden for broker-
dealers from its estimate in the Proposing Release.
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\386\ See NABL Letter at 12-13.
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Therefore, the Commission continues to believe that its estimate
that 250 broker-dealers will incur an estimated average burden of 300
hours per year to comply with the Rule, as amended, is
appropriate.\387\
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\387\ 250 hours (total estimated annual hourly burden for all
broker-dealers under the Rule prior to the amendments) + 50 hours
(total estimated additional annual hourly burden for all broker-
dealers under the amendments) = 300 hours.
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b. Amendments to Events To Be Disclosed Under a Continuing Disclosure
Agreement
As described above, the amendments to paragraph (b)(5)(i)(C) of the
Rule add four new disclosure events to the Rule, as well as amend an
existing disclosure event, and modify the number of events that are
subject to a materiality determination. In addition, the amendments to
paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of the Rule change the timing
for filing event notices from ``in a timely manner'' to ``in a timely
manner not to exceed ten business days.'' The amendments do not change
a broker-dealer's obligation under the Rule to reasonably determine
that the issuer or obligated person has undertaken, in a written
agreement or contract, for the benefit of holders of such municipal
securities, to provide annual filings, event notices, and failure to
file notices to the MSRB.\388\ Accordingly, because the broker-dealer
already is under an obligation to reasonably determine that an
appropriate undertaking has been made, the Commission does not believe
that the amendments relating to the timing and scope of event notices
will affect the annual paperwork burden for broker-dealers. In the
Proposing Release, the Commission solicited comments on broker-dealers'
collection of information requirements, including this estimate
relating to the amendments to events to be disclosed under a continuing
disclosure agreement. The Commission received no comments on this
estimate and continues to believe that it is appropriate.
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\388\ The Commission notes that, while the amendments do not
change this obligation, broker-dealers will need to reasonably
determine that the written agreement or contract entered into by an
issuer or obligated person contains the change to the timing for
filing event notices (i.e., not in excess of ten business days of
the occurrence of the event), as well as the new and revised
disclosure events.
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c. One-Time Paperwork Burden
The Commission estimates that a broker-dealer will incur a one-time
paperwork burden to have its internal compliance attorney prepare and
issue a notice advising its employees about the final revisions to Rule
15c2-12. In the Proposing Release, the Commission estimated that it
would take a broker-dealer's internal compliance attorney approximately
30 minutes to prepare and issue such a notice.\389\ The Commission
believes that the task of preparing and issuing a notice advising the
broker-dealer's employees about the amendments is consistent with the
type of compliance work that a broker-dealer typically handles
internally. In the Proposing Release, the Commission solicited comments
on broker-dealers' collection of information requirements, including
this estimate relating to broker-dealers' one-time paperwork burden.
The Commission received no comments on this estimate. Consistent with
its estimate in the Proposing Release, the Commission estimates that
250 broker-dealers will each incur a one-time, first-year burden of 30
minutes to prepare and issue this notice.
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\389\ See Proposing Release, supra note 2, 74 FR at 36850-51.
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d. Total Annual Burden for Broker-Dealers
Under the amendments, the total burden on broker-dealers is
estimated to be 425 hours for the first year \390\ and 300 hours for
each subsequent year.\391\ The Commission included these estimates in
the Proposing Release and solicited comments on them. In addition to
the comment discussed above relating to broker-dealers' obligations
with respect to demand securities, one commenter stated generally that
its ``review of [the Proposing Release] does not suggest any
unnecessary burden on municipal underwriters.'' \392\ This commenter
observed that, ``[b]y contrast, [the Proposing Release] suggests that
past practices have been too lax, and the Commission is simply making
underwriters' due diligence burden reasonable.'' \393\ This commenter
supported the proposal and suggested
[[Page 33129]]
additional changes to strengthen Participating Underwriters'
obligations under the Rule.\394\ The Commission has considered all of
the comments relating to the paperwork collection burden applicable to
broker-dealers and, for the reasons discussed above, continues to
believe that its estimates are appropriate.\395\
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\390\ (250 (broker-dealers impacted by the amendments) x 1.20
hours) + (250 (broker-dealers impacted by the amendments) x .5 hour
(estimate for one-time burden to issue notice regarding broker-
dealer's obligations under the amendments)) = 425 hours.
\391\ 250 (broker-dealers impacted by the amendments) x 1.20
hours = 300 hours.
\392\ See e-certus Letter I at 9.
\393\ Id.
\394\ See e-certus Letter I at 9-11.
\395\ In the Proposing Release, the Commission provided
interpretive guidance with respect to the obligations of
Participating Underwriters under the federal securities laws. In
connection with this interpretation, the Commission solicited
comment regarding alternative or additional ways in which an
underwriter could satisfy its obligations, including obligations to
ascertain if issuers or obligated persons are abiding by their
municipal disclosure commitments. See Proposing Release, supra note
2, 74 FR at 36848. The Commission received comments in response to
this solicitation, which are discussed in Section IV of this
release.
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2. Issuers
Issuers' undertakings regarding the submission of annual filings,
event notices, and failure to file notices that are set forth in
continuing disclosure agreements impose a paperwork burden on issuers
of municipal securities.\396\ In the Proposing Release, the Commission
provided estimates regarding the number of annual filings, event
notices, and failure to file notices that issuers would submit under
the proposed amendments. These estimates were based on the best
estimates of the MSRB staff at that time, which were made prior to the
MSRB's experience with its new EMMA system. The Commission recently
received data from the MSRB reflecting the number of submissions to the
EMMA system's continuing disclosure service for the eight-month period
from July 1, 2009, through February 28, 2010 (``Sample Period'').\397\
This data includes the number of annual filings, event notices, and
failure to file notices that were submitted during this Sample Period.
To provide PRA estimates that are based on the MSRB's actual experience
with respect to submissions of annual filings, event notices, and
failure to file notices to its EMMA system, the Commission has elected
to use the data obtained for the Sample Period to revise its estimates
in the Proposing Release.\398\ Because the Sample Period is less than a
full year,\399\ the Commission has annualized these numbers for the
purpose of revising its PRA estimates below.\400\
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\396\ For purposes of this section, the term ``issuers'' refers
to issuers and obligated persons.
\397\ See supra note 368.
\398\ The Commission's estimates in the Proposing Release are
somewhat lower than those derived from the Sample Period for annual
filings and event notices and somewhat higher for failure to file
notices, see infra notes 417, 418, and 421.
\399\ The Commission notes that, although the MSRB is able to
provide actual numbers of continuing disclosure documents that it
has received for the Sample Period, it is unable to provide any
actual or estimated number of issuers that have submitted continuing
disclosure documents to the EMMA system. This is because issuers
submit their filings using the CUSIP number for the security.
Because issuers could have several issuances of outstanding bonds,
they could submit documents under more than one CUSIP number.
Because of the potential for over-counting the number of issuers
with a paperwork burden if the Commission were to rely on CUSIP
numbers as a proxy for the number of affected issuers, it has
elected to base its estimates for the number of issuers with a
paperwork burden on estimates included in the Proposing Release.
\400\ The Commission notes that annualizing the data provided by
the MSRB for the Sample Period could have some limitations,
particularly since the Sample Period covered the period of
implementation of the EMMA system. Notwithstanding these
limitations, the Commission has reviewed the eight months of data
provided by the MSRB during the Sample Period and did not identify
any particular trends in the data that would suggest that
annualizing these numbers would result in an underestimate of number
of filings that the MSRB would receive during a twelve-month period.
Therefore, the Commission believes that annualizing this data
provides a reasonable basis for revising its PRA estimates.
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a. Amendment To Modify the Exemption for Demand Securities
The Commission believes that the amendment to delete paragraph
(d)(1)(iii) from the Rule, which contains an exemption from the Rule
for a primary offering of demand securities, and add new paragraph
(d)(5) to the Rule to apply paragraphs (b)(5) and (c) of the Rule to
demand securities, will increase the number of issuers with a paperwork
burden under the Rule. In the Proposing Release, the Commission
estimated that the Rule affected approximately 10,000 issuers.\401\
Using the estimate of 10,000 issuers, the Commission estimated in the
Proposing Release, and estimates again now, that the number of issuers
with paperwork burden as a result of the amendments will increase by
approximately 20% \402\ to 12,000 issuers.\403\ These additional
issuers will increase the aggregate number of annual filings, event
notices, and failure to file notices submitted each year. As noted
above, the Commission is revising its amendment to the exemption for
demand securities in the Rule to include a limited grandfather
provision for remarketings of currently outstanding demand
securities.\404\ Also as noted above, the Commission believes that
initially the limited grandfather provision could result in a somewhat
lower number of issuer respondents that are subject to the collection
of information under the Rule than was estimated in the Proposing
Release. However, the Commission notes that the effects of the limited
grandfather provision will diminish over time as demand securities
mature or are redeemed. In addition, the Commission has no reason to
believe that the overall number of issuers of demand securities will
change materially going forward as a result of these amendments.
Because of this factor, the Commission continues to believe that 12,000
issuer respondents is an appropriate estimate.
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\401\ See Proposing Release, supra note 2, 74 FR at 36851. See
also supra note 375 for an explanation of the estimate of 10,000
issuers.
\402\ Id. As described in the Proposing Release, in 2008, there
were approximately 2,000 offerings of demand securities. See also
Two Decades of Bond Finance: 1989-2008, The Bond Buyer/Thomson
Reuters 2009 Yearbook 7 (Matthew Kreps ed., SourceMedia, Inc.)
(2009). To provide conservative estimates, the Commission elected to
assume that all 2,000 offerings of demand securities were issued by
separate issuers and that each of those issuers currently is not a
party to a continuing disclosure agreement that provides for the
submission of continuing disclosure documents to the MSRB. Thus, the
Commission estimated that approximately 2,000 additional issuers
would be affected by the proposed amendments to the Rule. These
2,000 additional issuers represent a 20% increase in the total
number of issuers that would have a burden under Rule 15c2-12
(10,000 (number of issuers affected by the Rule prior to the
amendments)/2,000 (number of additional issuers under the amendments
to the Rule) x 100 = 20%). The Commission notes that the above-
referenced publication has not been updated and, accordingly
believes that this estimate, which is predicated on 2,000 offerings
of demand securities, continues to be based on the most recent
information available.
\403\ 10,000 (number of issuers affected by the Rule prior to
the amendments) x 1.20 (20% increase) = 12,000. The Commission
acknowledges that greater precision in determining the number of
issuers that will have a burden under the amendment is not possible.
For purposes of this analysis, the Commission assumes that all
issuers of demand securities currently are not a party to a
continuing disclosure agreement that provides for the submission of
continuing disclosure documents to the MSRB. The Commission realizes
that this assumption may result in an overestimate of the number of
issuers with a burden.
\404\ See supra Section III.A.
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In the Proposing Release, the Commission stated that the revision
to the Rule's exemption for demand securities would not alter the
Commission's previous PRA estimates of the hourly burdens for an issuer
to prepare and submit an annual filing (45 minutes), an event notice
(45 minutes), and a failure to file notice (30 minutes).\405\ Thus, the
Commission estimated that the aggregate number of annual filings, event
notices, and failure to file notices submitted by issuers also would
increase by 20% from the previous estimates.\406\ In the Proposing
[[Page 33130]]
Release, the Commission solicited comments on issuers' collection of
information requirements. The Commission received comments relating to
the hourly burdens associated with this amendment. These comments are
addressed in Section V.D.2.a.i, below.
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\405\ See Proposing Release, supra note 2, 74 FR at 36851.
\406\ The Commission believes that this estimated 20% increase
in the number of each type of continuing disclosure document filed
is appropriate since it maintains a corresponding relationship
between the number of issuers and the number of each type of
document submitted by these issuers, as discussed in the Proposing
Release. See Proposing Release, supra note 2, 74 FR at 36850, n.151.
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i. Comments Relating to Paperwork Burdens in Connection With the
Amendment Relating to Demand Securities
Several commenters offered their views on the impact of the
proposal to modify the exemption for demand securities.\407\ Of these
commenters, one expressed concern that the revision of the exemption
for demand securities could have an ``insurmountable administrative
burden'' on smaller issuers and non-profit obligated persons that
issued securities before the compliance date of the proposed
amendments.\408\ This commenter believed that the proposal could be
difficult for these entities to comply with, if they were required to
enter into continuing disclosure agreements years after the original
issuance of the bonds.\409\ Although this commenter did not
specifically define what it meant by ``administrative burden,'' this
commenter may be concerned about the paperwork collection hourly burden
on smaller issuers and obligated persons resulting from this amendment.
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\407\ See, e.g., SIFMA Letter, NABL Letter, GFOA Letter
(expressed support for the statements made in the NABL Letter), CRRC
Letter, and WCRRC Letter (WCRRC endorsed all of the positions
expressed in the CRRC Letter) (the concerns expressed by CRRC and
WCRRC are discussed in infra Sections V.D.2.b and V.E.2.c).
\408\ See SIFMA Letter.
\409\ Id.
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As proposed by the Commission, the amendment would have applied to
any initial offering and remarketing that is a primary offering of
demand securities occurring on or after the compliance date of the
amendments. However, to address commenters' concerns about the impact
of the proposal on outstanding demand securities, the Commission is
adopting a limited grandfather provision that provides that the
amendments will not apply to a remarketing of demand securities that
were issued prior to the amendments' compliance date and that
continuously have remained outstanding as demand securities. While the
Commission continues to acknowledge that the amendment will place some
additional burden on issuers of demand securities issued on or after
the compliance date of the amendments,\410\ the amendment as adopted is
forward-looking and generally will not apply to securities issued
before the compliance date of the proposed amendments. Therefore, the
Commission does not believe that the amendments will create an
``insurmountable administrative burden'' for issuers, including smaller
issuers and obligated persons, as expressed by the above commenter. The
Commission believes that the limited grandfather provision should
largely alleviate the concerns expressed by this commenter with respect
to demand securities that are currently outstanding.
---------------------------------------------------------------------------
\410\ Issuers of demand securities with fixed-rate debt
outstanding already would be subject to a continuing disclosure
agreement in which they undertake to provide continuing disclosure
documents, so they would be subject to minimal--if any--increased
burdens. See supra Section V.D.2.a.
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As the Commission stated in the Proposing Release, and reiterates
here, it does not anticipate a significant increase in disclosure
burdens with respect to demand securities.\411\ The Commission
acknowledges that, if issuers or obligated persons with respect to
demand securities have not previously issued securities subject to
continuing disclosure agreements, they will be entering into such
agreements for the first time and thereby will incur some time and
expense to provide continuing disclosure documents to the MSRB.\412\
The Commission believes that its estimate of a 20% increase in the
number of issuers or obligated persons that may be affected by the Rule
appropriately reflects the increase in the number of issuers that will
have a paperwork burden. The commenter did not dispute this estimate.
In addition, as the Commission noted in proposing these amendments,
many issuers and obligated persons with respect to demand securities
are likely to have outstanding fixed rate securities and already have
entered into continuing disclosure agreements consistent with the
Rule.\413\ Because any existing continuing disclosure agreement would
obligate an issuer or an obligated person to provide annual filings,
event notices, or failure to file notices with respect to these fixed
rate securities, providing disclosures with respect to these demand
securities is not expected to be a significant additional burden.
---------------------------------------------------------------------------
\411\ See supra notes 402 to 406 and accompanying text.
\412\ Id.
\413\ See Proposing Release, supra note 2, 74 FR at 36837.
---------------------------------------------------------------------------
Another commenter stated that the Proposing Release ``largely
failed to assess the substantial additional time and expense required
by issuers and other obligated persons to prepare (and for underwriters
and remarketing agents to professionally review and check) disclosure
about obligated persons in offerings of demand securities, unless the
proposed amendments are clarified so as not to preclude offerings of
LOC-backed demand securities without primary or continuing disclosure
about the underlying obligor.'' \414\ As discussed above, the
amendments are not eliminating the exemption for demand securities from
paragraphs (b)(1) through (b)(4) of the Rule, which relate to primary
offering disclosure. As a result, under the amendments, issuers of
demand securities will not have a paperwork burden with respect to
primary offering disclosures. Accordingly, the commenter's concern
appears misplaced.
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\414\ See NABL Letter (the GFOA Letter expressed support for the
statements made in the NABL Letter). The Commission notes that this
commenter disputed that the Commission's 45 minute estimate in
connection with the amendment to the time frame for the submission
of event notices. This comment is addressed in infra Section
V.D.2.b.i.
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ii. Annual Filings
Under the amendment to modify the Rule's exemption for demand
securities, the Commission estimates that 12,000 municipal issuers with
continuing disclosure agreements will prepare and submit approximately
22,909 annual filings yearly.\415\
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\415\ 19,091 (12,791 (total annual filings submitted to the MSRB
during the Sample Period)/.67) (annualized number of annual filings
submitted to the MSRB based on the Sample Period) x 1.20 (20%
increase in filings under the amendments) = 22,909 annual filings
(estimated number of annual filings under the amendments). In the
Proposing Release, the Commission estimated 18,000 annual filings
would be submitted to the MSRB under the amendments. The Commission
is revising this estimate to 22,909 filings to reflect actual
filings submitted to the MSRB. This revised estimate is higher than
the Commission's estimate in the Proposing Release by 4,909 annual
filings or by approximately 27.27%.
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As discussed in the Proposing Release, the Commission estimated,
and continues to believe, that an issuer will require approximately 45
minutes to prepare and submit annual filings to the MSRB in an
electronic format.\416\ Therefore, under the amendments, the total
burden on issuers of municipal securities to prepare and submit 22,909
annual filings to the MSRB in an electronic format is estimated to be
17,182 hours.\417\ Other than as noted
[[Page 33131]]
above, the Commission received no other comments on its estimates to
prepare and submit annual filings under the amendment for demand
securities. The Commission has considered the comments received and
believes that its estimates, as revised to take into account the data
provided by the MSRB, are appropriate.
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\416\ The Commission received comments relating to the time it
would take an issuer to prepare and submit an event notice under the
amendments. These comments are addressed in infra Section V.D.2.b.
\417\ 22,909 (estimated number of annual filings under the
amendments) x .75 hours (45 minutes) (estimated time to prepare and
submit annual filings under the amendments) = 17,181.75 (rounded to
17,182 hours). In the Proposing Release, the Commission estimated
number of hours to prepare and submit annual filings under the
amendment would be 13,500 hours. The Commission is revising this
estimate to 17,182 hours. This revised estimate is higher than the
estimate in the Proposing Release by 3,682 hours or by approximately
27.27%.
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iii. Event Notices
Under the amendment to modify the Rule's exemption for demand
securities, the Commission estimates that the 12,000 municipal issuers
with continuing disclosure agreements will prepare and submit
approximately 74,605 event notices yearly.\418\ As the Commission
discussed in the Proposing Release, the Commission estimated, and
continues to believe, that the process for an issuer to prepare and
submit event notices to the MSRB in an electronic format will require
approximately 45 minutes.\419\ Since the amendments to the Rule do not
change the way event notices are prepared and submitted, the Commission
estimates that an issuer still will require approximately 45 minutes to
prepare and submit an event notice. Therefore, under the amendments,
the total burden on issuers of municipal securities to prepare and
submit 74,605 event notices to the MSRB is estimated to be 55,954
hours.\420\ The Commission received comments relating to its estimates
to prepare and submit event notice filings generally under the proposed
amendments. These comments are addressed in Section V.D.2.b, below.
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\418\ 62,171 (41,654 (total number of event notice filings
submitted to the MSRB during the Sample Period)/.67) (annualized
number of event notices submitted to MSRB based on the sample
period) x .1.20 (20% increase in filings under the amendments) =
74,605 event notices (estimated number of event notices under the
amendments)). In the Proposing Release, the Commission estimated
72,000 event notice filings would be submitted to the MSRB under the
amendments. The Commission is revising its estimate to 74,605 event
notice filings. This estimate is higher than the estimate in the
Proposing Release by 2,605 event notices or approximately 3.62%. In
its analysis of the data the Commission received from the MSRB for
the Sample Period, the Commission noted that the MSRB received a
significant number of event notices for bond calls relative to the
event notices for other events. The Commission, however, did not
identify any particular trend for this event item in the data that,
in its view, would lead to an underestimate of event notices that
would be submitted in connection with the amendments. The
Commission's estimates of the number of additional event notices
associated with the amendments relating to the materiality condition
and number of additional event disclosure items contained in
paragraph (b)(5)(i)(C) of the Rule are discussed in Section V.D.2.b,
infra. As discussed below, the total number of event notices
estimated to be submitted to the MSRB in connection with the
amendments is 81,362 notices.
\419\ See Proposing Release, supra note 2, 74 FR at 36851-52.
\420\ 74,605 (estimated number of event notices under the
amendments) x .75 hours (45 minutes) (estimated time to prepare and
submit material event notices under the amendments) = 55,953.7 hours
(rounded to 55,954 hours). In the Proposing Release, the Commission
estimated that municipal issuers would spend 54,000 hours to prepare
and submit event notices to the MSRB. The Commission is revising its
estimate to 55,954 hours. This estimate is higher than the estimate
in the Proposing Release by 1,954 hours or 3.62%.
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iv. Failure To File Notices
Under the amendment to modify the exemption for demand securities,
the Commission estimates that the 12,000 municipal issuers with
continuing disclosure agreements will prepare and submit approximately
1,458 failure to file notices yearly.\421\ As the Commission discussed
in the Proposing Release, since the amendments to the Rule will not
change the way failure to file notices are prepared and submitted, the
Commission estimated, and continues to believe, that an issuer will
require approximately 30 minutes to prepare and submit a failure to
file notice.\422\ Therefore, under the amendments, the total burden on
issuers of municipal securities to prepare and submit 1,458 failure to
file notices to the MSRB is estimated to be 729 hours.\423\ The
Commission received no comments on its estimates to prepare and submit
failure to file notices and believes that its estimates, as revised to
take into account the data provided by the MSRB, are appropriate.
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\421\ 1,215 (814 (total number of failure to file notice filings
submitted to the MSRB during the Sample Period)/.67 (annualized
number failure to file notices submitted to MSRB) x 1.20 (20%
increase in filings) = 1,458 failure to file notices (estimated
number of failure to file notices under the amendments)). In the
Proposing Release, the Commission estimated that issuers would
prepare and submit 2,400 failure to file notices. The Commission is
revising its estimate to 1,458 failure to file notices. This
estimate is lower than the estimate in the Proposing Release by 942
failure to file notices or by 60.75%.
\422\ See Proposing Release, supra note 2, 74 FR at 36852.
\423\ 1,458 (estimated number of failure to file notices under
the amendments) x .5 hours (30 minutes) (estimated time to prepare
and submit failure to file notices under the amendments) = 729
hours. In the Proposing Release, the Commission estimated that
issuers would spend 1,200 hours to prepare and submit failure to
file notices. The Commission is revising its estimate to 729 hours.
This estimate is lower than the estimate in the Proposing Release by
471 hours or by 39.25%.
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b. Amendments to Event Notice Provisions of the Rule
Under the amendment to paragraph (b)(5)(i)(C) of the Rule, a
Participating Underwriter will be required to reasonably determine that
an issuer or obligated person has entered into a continuing disclosure
agreement that, among other things, provides for the submission of an
event notice to the MSRB in an electronic format upon the occurrence of
certain specified events, either in each instance that the event occurs
or subject to a materiality determination, as set forth in the amended
Rule. The amendments also add to the Rule four new event disclosure
items and revise an existing event disclosure item. In addition, the
amendments to paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) amend the Rule
to provide that a Participating Underwriter must reasonably determine
that an issuer of municipal securities or obligated person has
undertaken, in a written agreement or contract for the benefit of
holders of municipal securities, to provide event notices in a timely
manner ``not in excess of ten business days after the occurrence of the
event,'' rather than simply in a timely manner.
As discussed above, the Commission estimates that the amendment to
modify the Rule's exemption for demand securities will increase the
number of event notices to be prepared and submitted to an aggregate of
74,605 event notices annually.\424\ The Commission believes that the
amendments to paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of the Rule
also will increase the annual paperwork burden for issuers because of
the increase in the number of event notices to be prepared and
submitted, as discussed below.\425\
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\424\ See supra note 418 and accompanying text.
\425\ Id.
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i. Time Frame for Submitting Event Notices Under a Continuing
Disclosure Agreement
The amendments revise paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of
the Rule to state that notice of an event should be provided ``in a
timely manner not in excess of ten business days after the occurrence
of the event'' instead of simply in ``a timely manner.'' As noted
above, the Commission estimates that an issuer can prepare and submit
an event notice in 45 minutes.\426\ The amendment to the Rule providing
for a ten business day time limit for submission of event notices will
not change this estimated burden of 45 minutes, which is the amount of
time estimated under the Rule's previous paperwork collection to
prepare and submit event notices. Rather, the overall change in burden
results from the fact
[[Page 33132]]
that more event notices are expected to be filed as a result of the
amendments, as discussed in Section V.D.2.a.iii., above.\427\
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\426\ See supra note 405 and accompanying text.
\427\ See supra note 419 and accompanying text.
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Several commenters offered their views on the impact of the
proposal to establish a ten business day time frame for the submission
of event notices.\428\ A number of these commenters expressed concern
that the requirement would increase the burden for issuers.\429\ The
concerns expressed by these commenters included: (i) The
impracticability of meeting the ten business day time period because of
limited staff and resources, especially for smaller issuers; \430\ (ii)
the increased burdens and costs due to the additional monitoring to
comply with the ten business day time frame; \431\ (iii) the difficulty
in reporting events in which the issuer does not control the
information (e.g., rating changes, changes to the trustee, changes to
tax status of bonds under an IRS audit) within the ten business day
time period; \432\ and (iv) the use of the ``occurrence of the event''
as the trigger for the obligation to submit a notice.\433\ Many of
these commenters focused their concerns on the potential burdens
associated with reporting rating changes within the ten business day
time frame.\434\ These commenters noted that ratings information is not
within the issuer's control and that rating organizations do not
directly notify issuers of rating changes.\435\
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\428\ See, e.g., Halgren Letter, Los Angeles Letter, Portland
Letter, CRRC Letter, WCRRC Letter, NFMA Letter, CHEFA Letter,
NAHEFFA Letter, SIFMA Letter, Connecticut Letter, Kutak Letter, ICI
II Letter, Fidelity Letter, California Letter, San Diego Letter,
NABL Letter, GFOA Letter, and Metro Water Letter.
\429\ See Halgren Letter, Los Angeles Letter, CRRC Letter, WCRRC
Letter, CHEFA Letter, NAHEFFA Letter, SIFMA Letter, Connecticut
Letter, Kutak Letter, California Letter, San Diego Letter, NABL
Letter, GFOA Letter, and Metro Water Letter.
\430\ See CRRC Letter, WCRRC Letter, Portland Letter at 2,
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2,
and NABL Letter at 5-6.
\431\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter,
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, and NABL
Letter at 5-6, and 8-9.
\432\ See Connecticut Letter at 1-2, California Letter at 1-2,
San Diego Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA Letter at 2,
Kutak Letter at 2, and GFOA Letter at 2-3.
\433\ See California Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA
Letter at 2, San Diego Letter at 1-2, GFOA Letter at 3, Kutak Letter
at 2, and NABL Letter at 5-6.
\434\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA
Letter at 2-4, San Diego Letter at 1-2, California Letter at 1-2,
and GFOA Letter at 3-4.
\435\ Id.
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a. Discussion of Comments Relating to Impracticability of Meeting Time
Frame Due to Limited Staff and Resources, Especially for Smaller
Issuers
The Commission has considered commenters' concerns about the
potential costs and burdens associated with the ten business day time
frame for submission of event notices, especially for smaller issuers
with limited staff and resources. As discussed above, the Commission
estimates that 12,000 issuers will file 74,605 event notices annually.
Thus, an issuer will file on average approximately 6 event notices each
year (74,605/12,000 = 6.05) and spend a total of approximately 4.5
hours annually on average preparing them.\436\ The Commission does not
believe that spending approximately 4.5 hours annually on average
preparing and submitting event notices would be particularly burdensome
for issuers, even those with limited staff and resources.\437\
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\436\ The Commission estimates that issuers will spend
approximately 45 minutes on average to prepare and submit each event
notice. The comments that the Commission received relating to this
estimate are discussed below.
\437\ The Commission also notes that Rule 15c2-12 currently
provides a limited exemption, contained in paragraph (d)(2) of the
Rule, which provides that paragraph (b)(5) of the Rule does not
apply to a primary offering if the conditions contained therein are
met. This limited exemption from the Rule is intended to assist
small governmental jurisdictions that issue municipal securities
and, as a result of this exemption, most small issuers do not have a
paperwork burden under the Rule.
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b. Discussion of Comments Relating to Issuers' Increased Burdens and
Costs Due to Additional Monitoring, Lack of Issuer Control Over Events,
and Use of ``Occurrence of the Events'' as the Trigger
The Commission has considered comments that the Commission did not
fully account for the increased burdens and costs due to additional
monitoring to comply with the ten business day time frame, particularly
with respect to rating changes.\438\ As noted above, one or more
commenters believed that the ``actual knowledge'' of the occurrence of
the event should be used as the trigger for the obligation to submit an
event notice.\439\ These commenters expressed their concerns relatively
generally, and in most cases did not present any specific evidence to
support their conclusions or alternatives to the Commission's
estimates.
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\438\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter,
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, NABL Letter
at 5-6, 13, Connecticut Letter at 3, California Letter at 3, San
Diego Letter at 1-2, GFOA Letter at 2, and SIFMA Letter at 3.
\439\ See, e.g., Kutak Letter at 1. See also NAHEFFA Letter,
California Letter, San Diego Letter, CHEFA Letter, GFOA Letter,
Metro Water Letter, and NABL Letter.
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The Commission has considered the comments and believes that most
of the events currently specified in paragraph (b)(5)(i)(C) of the
Rule, and the additional event items included in the amendments, are
significant and should become known to the issuer or obligated person
expeditiously.\440\ Further, many events, such as payment defaults,
tender offers, and bankruptcy filings, generally involve the issuer's
or obligated person's participation.\441\ Other events (e.g., failure
of a credit or liquidity provider to perform) are of such importance
that an issuer or obligated person likely will become aware of such
events,\442\ or will expect an indenture trustee, paying agent, or
other transaction participant to bring them to the issuer's or
obligated person's attention within a very short period of time.\443\
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\440\ See supra note 372 and accompanying text for a description
of events currently contained in Rule 15c2-12(b)(5)(i)(C). See supra
Section III.E. for a description of events added to the Rule by
these amendments. The only events specified in the Rule that may not
be known to an issuer or obligated person expeditiously are rating
changes and trustee name changes.
\441\ In addition, as the Commission noted in the Proposing
Release, involvement of the issuer or obligated person is often
required for substitution of credit or liquidity providers;
modifications to rights of security holders; release, substitution,
or sale of property securing repayment of the securities; and
optional redemptions. See Form Indenture and Commentary, National
Association of Bond Lawyers, 2000.
\442\ For example, as the Commission noted in the Proposing
Release, issuers or obligated persons should have direct knowledge
of principal and interest payment delinquencies, proposed or final
determinations of taxability from the IRS, tender offers that they
initiate, and bankruptcy petitions that they file.
\443\ The Commission believes that indenture trustees generally
would be aware of principal and interest payment delinquencies;
material non-payment related defaults; unscheduled draws on credit
enhancements reflecting financial difficulties; the failure of
credit or liquidity providers to perform; and adverse tax opinions.
The Commission notes that issuers and obligated persons may wish to
consider negotiating a provision in indentures to which they are a
party to require a trustee promptly to notify the issuer or
obligated person in the event the trustee knows or has reason to
believe that an event specified in paragraph (b)(5) of the Rule has
or may have occurred.
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One commenter also expressed concern that the addition of
paragraphs (b)(5)(i)(C)(12) of the Rule (pertaining to notices of
bankruptcy, insolvency, receivership or similar event of an issuer or
obligated person) and (b)(5)(i)(C)(13) of the Rule (pertaining to
notices of mergers, consolidations and acquisitions or asset sales with
respect to an issuer or obligated person) would impose a burden on
issuers to undertake continuous monitoring of obligated
[[Page 33133]]
persons to determine whether such events occurred unless limited to
certain obligated persons and accompanied by a materiality
condition.\444\ As discussed above,\445\ bankruptcies and similar
events involving municipal issuers or obligated persons are relatively
rare and issuers may avoid directly monitoring obligated persons by
obtaining an agreement from them at the time of the primary offering to
notify the party responsible for making event notice filings of such an
event if and when it occurs.\446\ Similar to its discussion regarding
bankruptcies and similar events, the Commission believes that there are
a variety of methods by which issuers and obligated persons could avoid
having to directly monitor the activities of other obligated persons,
such as obtaining, at the time of the primary offering, an agreement
from them to provide information pertaining to a merger, consolidation,
acquisition or similar asset sale to the party responsible for filing
event notices.\447\
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\444\ See NABL Letter at 8-9.
\445\ See supra Section III.E.2.
\446\ Id.
\447\ Id.
---------------------------------------------------------------------------
One commenter believed that the time that would be required for
issuers and other obligated persons to establish and implement
procedures to provide notice of rating changes within ten business days
after their occurrence exceeds the Commission's estimate of 45 minutes
per event notice filing.\448\ This commenter believed that the
Commission's estimates did not include the time necessary to monitor
for rating changes, and that issuers would spend 26 to 52 hours per
year on such monitoring.\449\ Another commenter stated that, during the
2008-2009 fiscal year, it filed 169 separate ``material event notices''
relating to rating changes and that submission of such notices consumed
340 to 420 hours of staff time.\450\ This commenter further believed
that the ten business day time frame would exacerbate its burden since
it would have to devote more staff time to monitor for rating changes.
A third commenter believed that the ten business day time frame for
submission of event notices for rating changes would double compliance
time.\451\
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\448\ See NABL Letter at 5-6.
\449\ Id.
\450\ See California Letter at 3. See also San Diego Letter at 2
(expressing similar concern that complying preparing and submitting
event notices for rating changes required a ``significant commitment
of staff time and resources.'').
\451\ See Halgren Letter at 1.
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The Commission notes that issuers and obligated persons, under
current continuing disclosure agreements, contract to provide event
notices, including those relating to rating changes, ``in a timely
manner.'' The amendments add a maximum time frame of ten business days
for submission of an event notice, and the Commission acknowledges that
some issuers may have to monitor for certain events more frequently
than in the past, if they have been interpreting ``in a timely manner''
as allowing them to submit event notices more than ten business days
after the event occurred. The Commission's PRA estimate encompasses the
average amount of time spent monitoring for all of the events in the
Rule. As noted above, most of the Rule's events, except perhaps rating
changes and, in some cases, trustee name changes, should become known
to the issuer prior to the event, or immediately or within a short
period of time after the event.\452\ While the commenters asserted,
either generally or based on their own experience, that the Commission
underestimated the time required to monitor for rating changes, the
Commission emphasizes that the continuing disclosure agreements that
issuers enter into under the current Rule already require them to
submit notices for rating changes, which necessarily entails some
degree of monitoring.\453\ Furthermore, information about rating
changes is readily available on the Internet Web sites of the rating
agencies.
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\452\ With respect to one commenter's assertion that monitoring
for rating changes would take 26-52 hours each year, the Commission
notes that 45 minutes per event notice is an average. With respect
to the comment that, during the fiscal year 2008-2009, one commenter
spent 340-420 hours of staff time preparing and submitting notices
of rating changes, the Commission notes that this commenter is one
of the very largest municipal securities issuers and, as such,
likely has a large number of issues of municipal securities
outstanding with a variety of credit ratings that may change at a
variety of times. Accordingly, this issuer likely spends much more
time than the average issuer preparing and submitting event notices.
In addition, the Commission notes that the time period referenced by
this commenter encompasses the period prior to the establishment of
the MSRB's EMMA system as a single repository for continuing
disclosure, when issuers submitted continuing disclosure documents
to four information repositories. Accordingly, the Commission would
expect that the time spent by the average issuer to monitor for
rating changes would be substantially less than the estimate
provided by this commenter.
\453\ See 17 CFR 240.15c2-12.
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With respect to changes in trustees, the Commission believes that
issuers can minimize monitoring burdens simply by adding a notice
provision to the trust indenture that requires the trustee to provide
the issuer with notice of the appointment of a new trustee or any
change in the trustee's name.
The Commission continues to expect that issuers and obligated
persons generally will become aware of events subject to event notices
well within the ten business day time frame for submission of event
notices to the MSRB.\454\ The Commission believes that its burden
analysis takes into account compliance by issuers with the ten business
day time frame for preparing and submitting event notices, including
with respect to rating changes and trustee changes. The Commission
stresses that its estimate is an average of the burden associated with
all event notices referenced in the Rule. Although some issuers may
need to monitor more actively for certain events than they have in the
past, in particular for ratings changes, the Commission believes its 45
minute estimate continues to reflect, on average, the amount of time
required to prepare and submit an event notice, as most event notices
concern events that are within the issuer's control and therefore
require little if any monitoring.
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\454\ Those issuers or obligated persons required by Section
13(a) or Section 15(d) of the Exchange Act to report certain events
on Form 8-K (17 CFR 249.308) would already make such information
public in a Form 8-K. The Commission believes that such persons
should be able to file material event notices, pursuant to the
issuer's or obligated person's undertakings, within a short time
after the Form 8-K filing. See 15 U.S.C. 78m and 78o(d).
---------------------------------------------------------------------------
For the foregoing reasons, the Commission continues to believe
that, with respect to the amendment to the Rule regarding the ten
business day time frame for submission of event notices, its estimated
burden of 45 minutes to prepare and submit an event notice is
appropriate.
ii. Modification With Regard to Those Events for Which a Materiality
Determination Is Necessary
As discussed above, the Commission believes that it is appropriate
to delete the condition in paragraph (b)(5)(i)(C) of the Rule that
previously provided that notice of all of the listed events need be
made only ``if material.'' In connection with the deletion of the
materiality condition, the Commission reviewed each of the Rule's
specified events to determine whether a materiality determination
should be retained, and proposed to do so where appropriate.\455\ As a
result, for those events listed in paragraph (b)(5)(i)(C) for which the
materiality condition no longer applies, the Participating Underwriter
must reasonably determine that the issuer or other obligated person has
agreed to submit event notices to the MSRB
[[Page 33134]]
whenever such an event occurs. These events include: (1) Principal and
interest payment delinquencies with respect to the securities being
offered; (2) unscheduled draws on debt service reserves reflecting
financial difficulties; (3) unscheduled draws on credit enhancements
reflecting financial difficulties; (4) substitution of credit or
liquidity providers, or their failure to perform; (5) defeasances; and
(6) rating changes.\456\
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\455\ The discussion in this section pertains to materiality
determinations for events previously specified in paragraph
(b)(5)(i)(C) of the Rule. For new events being added to the Rule as
a result of these amendments, a materiality determination
discussion, if any, is included in the applicable section for each
new event.
\456\ See supra Section III.C.3. for a discussion of the
Commission's rationale regarding why it retained a materiality
condition for these events.
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Prior to the Commission's consideration of the Proposing Release,
the Commission staff was advised that the total number of event notices
as a result of the change to the materiality condition would increase
by no more than 1,000, taking into account the revised exemption for
demand securities.\457\ Thus, in the Proposing Release, the Commission
conservatively estimated that this change to the materiality condition
would increase the total number of event notices to be submitted
annually by issuers by 1,000 notices. The Commission received no
comments on this estimate. Although the Commission has slightly
increased the total number of continuing disclosure documents it
expects the MSRB to receive based on actual submissions the MSRB
received during the Sample Period,\458\ it continues to believe that
its estimate of 1,000 notices in connection with a change to the
materiality condition is appropriate.
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\457\ Telephone conversation between Ernesto A. Lanza, General
Counsel, MSRB, and Martha M. Haines, Assistant Director and Chief,
Office of Municipal Securities, Division, Commission, June 12, 2009.
As noted in the Proposing Release, although the MSRB staff believed
that the potential increase could be much smaller, the Commission is
continuing to use the estimate of 1,000 event notices to provide a
conservative estimate. See Proposing Release, supra note 2, 74 FR at
36853.
\458\ See supra Section V.D.2.
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Several commenters offered their views on the impact of the
proposal to delete the condition in paragraph (b)(5)(i)(C) of the Rule
that previously provided that notice of all of the listed events need
be made only ``if material.'' \459\ Two of these commenters expressed
concern that this change would increase the burden for issuers, but did
not specify whether the Commission's estimate of increased burdens was
inaccurate, or offer an alternative estimate.\460\
---------------------------------------------------------------------------
\459\ See, e.g., NABL Letter, Metro Water Letter, California
Letter, ICI Letter, and SIFMA Letter.
\460\ See NABL Letter and Metro Water Letter.
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One commenter believed that the proposal to delete the ``if
material'' qualification could burden issuers in certain
circumstances.\461\ Another commenter believed the deletion of the
materiality condition would increase monitoring burdens and require
disclosure of events that otherwise would not be disclosed.\462\ These
commenters, however, did not specifically call into question the
Commission's burden estimate, or offer an alternative estimate. The
Commission has reviewed its estimates in light of commenters' views and
believes that they do not reflect any new or additional burden that is
not contemplated by the Commission's estimates.
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\461\ See NABL Letter at 6-7. The three circumstances where the
commenter believes a materiality qualifier should be retained are:
(1) With respect to LOC-backed demand securities, notices of
unscheduled draws on debt service reserves that reflect financial
difficulties of the obligated person because they might not be
material to an investment in the securities because they are traded
on the strength of a bank letter of credit; (2) with respect to
demand securities, generally, require notice of each failure to
remarket securities when they are put, because they might not be
material to an investor due to the existence of a letter of credit
or other liquidity facility; and (3) notice of defeasances of
securities, because they might not be material to an investor if the
remaining term of the securities is very short.
\462\ See Metro Water Letter at 2.
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iii. Amendment to the Submission of Event Notices Regarding Adverse Tax
Events Under a Continuing Disclosure Agreement
Paragraph (b)(5)(i)(C)(6) of the Rule contemplates an event notice
in the case of certain adverse tax events. Under the amendments,
paragraph (b)(5)(i)(C)(6) of the Rule refers specifically to ``adverse
tax opinions, the issuance by the Internal Revenue Service of proposed
or final determinations of taxability, Notices of Proposed Issue (IRS
Form 5701-TEB) or other material notices or determinations with respect
to the tax status of the securities, or other material events affecting
the tax status of the security.'' As discussed above,\463\ the
Commission believes that the amendment to paragraph (b)(5)(i)(C)(6) of
the Rule clarifies that IRS proposed and final determinations of
taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other
material notices or determinations with respect to the tax status of a
municipal security are events that should be disclosed under a
continuing disclosure agreement. As discussed in the Proposing Release,
the Commission estimated that the amendment to paragraph
(b)(5)(i)(C)(6) of the Rule would increase the total number of event
notices to be submitted by issuers annually by approximately 130
notices.\464\
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\463\ See supra Section III.D.
\464\ Prior to the Commission's consideration of the proposed
amendments, in conversations with the Commission staff in December
2008, the staff of the IRS indicated that during a 12-month period
it issues approximately 130 notices of determinations of taxability.
See Proposing Release, supra note 2, 74 FR at 36853, n. 188.
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As described in greater detail above, the Commission is making a
few changes to the proposed text of the Rule to clarify the use of the
word ``material'' in this event item and to replace the phrase ``tax-
exempt status'' with ``tax status'' to provide greater clarity with
respect to the application of this disclosure event to a particular
kind of taxable municipal security. The Commission does not believe
that these changes will affect its estimate of 130 additional event
notices.
As discussed in Section III.D above, several commenters offered
their views on the impact of the proposal to amend the Rule to include
``the issuance by the IRS of proposed or final determinations of
taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other
material notices or determinations with respect to the tax-exempt
status of the securities, or other events affecting the tax-exempt
status of the security.'' \465\ One commenter noted that the municipal
market may be flooded with notices due to the generality and vagueness
of the proposed tax disclosure items, but did not specifically call
into question the Commission's burden estimate or offer an alternative
estimate.\466\ In addition, none of the other commenters specifically
called into question the Commission's estimate of 130 additional
notices. The Commission has reviewed its estimate in light of these
comments and believes that its estimate of 130 notices for this
disclosure event item remains appropriate.
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\465\ See, e.g., Connecticut Letter at 2, Metro Letter at 2,
NABL Letter at 7, Kutak Letter at 5-6, and GFOA Letter at 2.
\466\ See Kutak Letter at 4-7.
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iv. Tender Offers
Paragraph (b)(5)(i)(C)(8) of the Rule refers to notice of an event
in the case of bond calls. Paragraph (b)(5)(i)(C)(8) of the Rule is
amended to include tender offers as a disclosure event. The inclusion
of tender offers as an event item expands the circumstances in which
issuers undertake to submit an event notice to the MSRB. As discussed
in the Proposing Release, the Commission estimated that this amendment
would increase the total number of event notices to be submitted by
issuers annually by approximately
[[Page 33135]]
100 notices.\467\ The Commission received no comments on this estimate
and continues to believe that this estimate is appropriate.
---------------------------------------------------------------------------
\467\ See Proposing Release, supra note 2, 74 FR at 36853. Based
on industry sources that include lawyers, trade associations and
vendors of municipal disclosure information, the Commission
estimated that there are typically no more than 100 tender offers
annually in the municipal securities market.
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v. The Occurrence of Bankruptcy, Insolvency, Receivership or Similar
Event of the Obligated Person
Under the amendments, paragraph (b)(5)(i)(C)(12) is being added to
the Rule to provide for the submission of an event notice in the case
of bankruptcy, insolvency, receivership or similar event of the
obligated person. Adding bankruptcy, insolvency, receivership or
similar event of the obligated person as a disclosure event expands the
circumstances in which obligated persons undertake to submit an event
notice to the MSRB. Based on industry sources, the Commission estimated
in the Proposing Release that this amendment would increase the total
number of event notices submitted by obligated persons annually by
approximately 24 notices.\468\
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\468\ This estimate was based on the following: (i) 917 (number
of issuances of municipal securities that defaulted during the 1990s
based on statistics contained in Standard and Poor's ``A Complete
Look at Monetary Defaults in the 1990s'' (June, 2000))/10 (number of
years in a decade) = 91.7 (estimated number of issuances defaulting
per year) (rounded to 92); (ii) 92 (estimated number of issuances
defaulting per year)/50,000 (estimated total number of municipal
issuers) = .002 (.2%) (estimated percentage of all issuers that
default annually); and (iii) 12,000 (estimated number of issuers
under amendments to the Rule) x (.002) (.2%) (estimated percentage
of all issuers that default annually) x 1 (estimated number of
material event notices that an issuer will file) = 24 notices. The
Commission notes that not all issuers or obligated persons that
default eventually enter bankruptcy so the number of actual notices
may be less.
---------------------------------------------------------------------------
Several commenters offered their views on the impact of the
proposal to add bankruptcy, insolvency, receivership or similar event
of the obligated person as a new disclosure event.\469\ One of these
commenters expressed concern that the event item, unless revised, could
increase the burdens for issuers to engage in continuous monitoring of
obligated persons in certain circumstances.\470\ The Commission has
discussed this comment in Sections III.E.2 and V.D.2.b, above. None of
these commenters, however, called into question the Commission's
estimate of 24 additional event notices or offered an alternative
estimate. The Commission has reviewed its estimate in light of these
comments and believes that its estimate of 24 notices for this
disclosure event remains appropriate.
---------------------------------------------------------------------------
\469\ See Connecticut Letter at 2, GFOA Letter at 4, Metro Water
Letter at 2, and NABL Letter at 8.
\470\ See NABL Letter at 8.
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vi. Merger, Consolidation, Acquisition, or Sale of All or Substantially
All Assets
Under the amendments, paragraph (b)(5)(i)(C)(13) is being added to
the Rule to provide for the submission of event notices in the case of
a merger, consolidation, acquisition involving an obligated person or
sale of all or substantially all of the assets of the obligated person,
other than in the ordinary course of business, the entry into a
definitive agreement to undertake such an action or the termination of
a definitive agreement relating to any such actions, other than
pursuant to its terms, if material. The addition to the Rule of this
disclosure event will expand the circumstances in which issuers will
undertake to submit an event notice to the MSRB. The Commission
believes that this amendment will increase the total number of event
notices submitted by issuers annually. Based on industry sources, the
Commission estimated in the Proposing Release that adding the new event
item in paragraph (b)(5)(i)(C)(13) of the Rule would increase the total
number of event notices submitted by issuers annually by approximately
1,783 notices.\471\
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\471\ See Proposing Release, supra note 2, 74 FR at 36853. This
estimate was based on the following: (i) 2,201 (total number of
merger transactions reported under the Hart-Scott-Rodino Act in 2007
contained in the Hart-Scott-Rodino Annual Report Fiscal Year 2007
(November 2008) available at http://www.ftc.gov/os/2008/11/hsrreportfy2007.pdf (``HSR Report'') x 81% (percentage of mergers in
industries in which municipal securities may exist) = 1782.81
notices (rounded to 1783). The estimate of the percentage of mergers
in the municipal industry was based on data contained in the HSR
Report. The HSR Report contained data regarding the percentage of
merger transactions reported from nine industry segments. Of these
nine segments, the only segment that does not issue municipal
securities is banking and insurance, which accounted for 19% of
reported merger transactions. As discussed in the Proposing Release,
the Commission notes that each of the mergers reported under the
other industry segments may not involve entities that have issued
municipal securities so the number of affected municipal securities
issuers may be less.
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Several commenters offered their views on the impact of the
proposal to add a new disclosure event in the case of a merger,
consolidation, acquisition or sale of all or substantially all
assets.\472\ One of these commenters expressed concern that the event
item, unless revised, could increase the burdens for issuers to engage
in continuous monitoring of obligated persons in certain
circumstances.\473\ The Commission has discussed this comment in
Sections III.E.3 and V.D.2.b, above. None of these commenters, however,
called into question the Commission's estimate of 1,783 additional
event notices, or offered an alternative estimate. The Commission has
reviewed its estimate in light of these comments and believes that its
estimate of 1,783 notices for this disclosure event remains
appropriate.
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\472\ See Kutak Letter at 4, NFMA Letter at 2, SIFMA Letter at
4, Connecticut Letter, GFOA Letter at 4, ICI Letter at 8-9, Fidelity
Letter at 3, CRRC Letter at 5, and WCRRC Letter.
\473\ See NABL Letter at 8.
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vii. Successor or Additional Trustee, or Change in Trustee Name
Under the amendments, paragraph (b)(5)(i)(C)(14) is being added to
the Rule to provide for the submission of an event notice in the case
of the appointment of a successor or additional trustee or the change
of name of a trustee, if material. Adding this event item to the Rule
expands the circumstances in which issuers undertake to submit an event
notice to the MSRB. As the Commission noted in the Proposing Release,
the Commission believes that trustee changes occur infrequently and a
change affecting the largest trustee of municipal securities provides a
reasonable and conservative estimate of the number of additional event
notices that will be submitted annually under this amendment to the
Rule.\474\ The largest trustee was involved in approximately 31% of the
municipal issuances in 2008,\475\ and the Commission continues to
believe that this represents a reasonable estimate of the percentage of
issuers covered by the largest trustee. Thus, the Commission estimates
that a change to the largest trustee will impact approximately 31%, or
3,720 issuers. The Commission believes this serves as a conservative
proxy for the number of event notices to be submitted regarding a
change in trustee.\476\ Therefore, the Commission estimates that adding
the new event item contained in paragraph (b)(5)(i)(C)(14) of the Rule
will increase the total number of event notices
[[Page 33136]]
submitted by issuers annually by approximately 3,720 notices.\477\
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\474\ See Proposing Release, supra note 2, 74 FR at 36854.
\475\ See Two Decades of Bond Finance: 1989-2008, The Bond
Buyer/Thomson Reuters 2009 Yearbook 7 (Matthew Kreps ed.,
SourceMedia, Inc.) (2009) and Top 50 Trustee Banks: 2008, The Bond
Buyer/Thomson Reuters 2009 Yearbook 89 (Matthew Kreps ed.,
SourceMedia, Inc.) (2009).
\476\ This estimate is based on the following: 12,000 (estimated
number of issuers under amendments) x .31 (31%) (estimated
percentage of issuers that would be impacted by a change to the
largest trustee of municipal securities) = 3,720 issuers.
\477\ This estimate is based on the following: 3,720 (estimated
number of issuers that will be impacted by a change to the largest
trustee of municipal securities) x 1 (estimated number of event
notices that an issuer will file) = 3,720 notices. The Commission
believes that the actual number of changes involving the trustee,
which occur annually, is likely to be significantly less than 3,720.
However, to provide a conservative estimate for the paperwork
burden, the estimate takes into account a change involving the
largest trustee.
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Two commenters expressed concern regarding the increased costs and
burdens that some issuers would incur to report changes pertaining to
trustees within the Rule's ten business day time frame.\478\ These
comments are addressed in Section V.D.2.b, above. None of these
commenters, however, called into question the Commission's estimate of
3,720 notices, or offered an alternative estimate. The Commission has
reviewed its estimate in light of these comments and believes that its
estimate of 3,720 notices for this disclosure event remains
appropriate.
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\478\ See CHEFA Letter at 3 and NAHEFFA Letter at 4.
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c. Total Burden on Issuers for Amendments to Event Notices
In the Proposing Release, the Commission estimated and continues to
believe that the process for an issuer to prepare and submit event
notices to the MSRB in an electronic format will require approximately
45 minutes.\479\ As discussed above, the amendment to modify the Rule's
exemption for demand securities will increase total number of issuers
affected by the Rule to 12,000 issuers,\480\ the total number of event
notices submitted by issuers to 74,605 notices,\481\ and the annual
paperwork burden for issuers to submit event notices to 55,954
hours.\482\
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\479\ See Proposing Release, supra note 2, 74 FR at 36851.
\480\ See supra note 375.
\481\ See supra note 418.
\482\ See supra note 420.
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Under the amendments to paragraph (b)(5)(i)(C) of the Rule, the
Commission estimates that the 12,000 municipal issuers with continuing
disclosure agreements will prepare an additional 6,757 event notices
annually,\483\ raising the total number of event notices prepared by
issuers annually to approximately 81,362.\484\ This increase in the
number of event notices will result in an increase of 5,068 hours in
the annual paperwork burden for issuers to submit event notices.\485\
In total, the amendments will result in an annual paperwork burden of
approximately 61,022 hours (55,954 hours + 5,068 hours) for issuers to
submit notices to the MSRB.
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\483\ 1,000 (estimated number of additional notices due to
change to materiality condition) + 130 (estimated number of
additional adverse tax event notices) + 100 (estimated number of
tender offers event notices) + 24 (estimated number of bankruptcy/
insolvency event notices) + 1,783 (estimated number of merger or
acquisition event notices) + 3,720 (estimated number of appointment/
change of trustee event notices) = 6,757 (total estimated number of
additional event notices that will be prepared under the
amendments). See also Proposing Release, supra note 2, 74 FR at
36854.
\484\ 72,000 (number of event notices estimated under the Rule
under the amendments modifying the exemption for event notices in
the Proposing Release) + 2,605 (revised number of event notices
under amendments modifying the exemption for demand securities
exemption) + 6,757 (total number of additional event notices that
will be prepared under the amendments to the event notice provisions
of the Rule) = 81,362 event notices. This estimate is higher than
the estimate in the Proposing Release by 2,605 filings or 3.31%. See
supra notes 418, 483, and accompanying text.
\485\ 6,757 (total number of additional event notices that will
be prepared under the amendments to the event notice provisions of
the Rule) x .75 hours (45 minutes) (estimated time to prepare an
event notice) = 5,067.75 hours (rounded to 5,068 hours). See supra
note 483 and accompanying text.
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d. Total Burden for Issuers
Accordingly, under the amendments, the total burden on issuers to
submit annual filings, event notices and failure to file notices will
be 78,933 hours.\486\
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\486\ 17,182 hours (estimated burden for issuers to submit
annual filings) + 61,022 hours (estimated burden for issuers to
submit event notices) + 729 hours (estimated burden for issuers to
submit failure to file notices) = 78,933 hours. This estimate is
higher than the estimate in the Proposing Release by 5,165 hours or
7%. See supra notes 417, 420, 423, 485 and accompanying text.
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3. MSRB
As discussed in the Proposing Release, the Commission estimated,
and continues to believe, that the MSRB will incur an annual burden of
approximately 7,000 hours to collect, index, store, retrieve, and make
available the pertinent documents under the Rule.\487\ The Commission
anticipates that the amendment to modify the Rule's exemption for
demand securities will increase filings to the MSRB by approximately
20% annually.\488\ In addition, the Commission estimates that the
amendments to the event notice provisions of the Rule will increase
filings submitted to the MSRB approximately 9% annually.\489\
Accordingly, the Commission estimates that the total burden on the MSRB
of collecting, indexing, storing, retrieving and disseminating
information requested by the public also will increase by approximately
29% (20% + 9%) or 2,030 hours (7,000 hours x .29). Thus, the Commission
estimates that the total burden on the MSRB as a result of the
amendments will be 9,030 hours annually.\490\ The Commission included
these estimates in the Proposing Release and received no comments on
them. The Commission continues to believe that these estimates are
appropriate.
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\487\ See Proposing Release, supra note 2, 74 FR at 36854. This
estimate is further described in the Commission's 2008 PRA
submission. See 2008 PRA submission, supra note 374.
\488\ See supra note 402 and accompanying text.
\489\ 6,757 (estimated additional event notices under the final
event notice amendments)/77,000 (estimated number of continuing
disclosure documents submitted under the Rule prior to the
amendments (60,000 (event notices) + 15,000 (annual filings) + 2,000
(failure to file notices) = 77,000)) = .087 x 100 = approximately
9%. For additional information regarding PRA estimates related to
Rule 15c-12 prior to the amendments, including the estimate of
77,000, see 2008 PRA submission, supra note 374.
\490\ Annual burden for MSRB: 7,000 hours (annual burden under
the Rule prior to the amendments) + 2,030 hours (additional hourly
burden under amendments) = 9,030 hours.
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4. Annual Aggregate Burden for Amendments
The Commission estimates that, as a result of the amendments, the
ongoing annual aggregate information collection burden under the Rule
will be 88,263 hours.\491\
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\491\ 300 hours (total estimated burden for broker-dealers) +
78,933 hours (total estimated burden for issuers) + 9,030 hours
(total estimated burden for MSRB) = 88,263 hours. This estimate is
higher than the estimate in the Proposing Release by 5,165 hours or
6.22%.
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E. Total Annual Cost Burden
1. Broker-Dealers and the MSRB
The Commission does not expect broker-dealers to incur any
additional external costs associated with the amendments since there is
no change to the obligation of broker-dealers under the Rule to
reasonably determine that the issuer or obligated person has
undertaken, in a written agreement or contract for the benefit of
holders of such municipal securities, to provide annual filings, event
notices, and failure to file notices to the MSRB. The Commission
included this cost burden estimate in the Proposing Release and
received no specific comments on it. However, the Commission received
one comment relating to broker-dealers' costs under the Rule.\492\ This
commenter believed that the Commission underestimated the additional
burdens and costs that the amendments would impose on Participating
Underwriters to review disclosure about obligated persons in offerings
for demand securities, unless the amendments to the Rule were clarified
for offerings of LOC-backed demand securities.\493\
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\492\ See NABL Letter.
\493\ See NABL Letter at 12-13.
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[[Page 33137]]
In the Proposing Release, the Commission solicited comment
regarding the accuracy of its cost burden estimates in connection with
the revised collection of information that would apply to broker-
dealers.\494\ Although the commenter noted above provided general
comments relating to broker-dealers' burdens and costs under the Rule,
which are addressed in Section V.D.1.a, it did not offer specific
information or data that conflicts with the Commission's estimates nor
did it provide alternative estimates. Also, this commenter made a
similar statement with respect to burdens on issuers with respect to
demand securities, which the Commission addressed in Section V.D.2.a.i
above, and its response is also applicable here.
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\494\ See Proposing Release, supra note 2, 74 FR at 36858.
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In addition, the Commission believes that the MSRB may incur costs
to modify the indexing system of its EMMA system to accommodate the
amendments to the Rule that incorporate additional disclosure events.
As discussed in the Proposing Release, based on information provided to
the Commission staff by MSRB, the Commission estimated that the MSRB's
costs to update its EMMA system to accommodate the new or revised
disclosure events would be no more than approximately $10,000.\495\ The
Commission also included this cost estimate in the Proposing Release
and received no comments on it. The Commission continues to believe
that this estimate is appropriate.
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\495\ See Proposing Release, supra note 2, 74 FR at 36855, n.
205. Telephone conversation between Harold Johnson, Deputy General
Counsel, MSRB, and Martha M. Haines, Assistant Director and Chief,
Office of Municipal Securities, Division, Commission, November 7,
2008.
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2. Issuers
a. Current Issuers
The Commission expects that some issuers that already submit
continuing disclosure documents to the MSRB in an electronic format
(referred to herein as ``current issuers'') may be subject to some
costs associated with the amendments to the Rule. For current issuers
that convert their annual filings, event notices and/or failure to file
notices into the MSRB's prescribed electronic format through a third
party, there will be costs associated with any additional submissions
of event notices and failure to file notices.
The cost for an issuer to have a third-party vendor convert paper
continuing disclosure documents into the MSRB's prescribed electronic
format may vary depending on what resources are required to transfer
the documents into the appropriate electronic format. One example of
such a transfer would be the scanning of paper-based continuing
disclosure documents into an electronic format. As discussed in the
Proposing Release, the Commission estimated that the cost for an issuer
to have a third-party vendor scan documents would be $6 for the first
page and $2 for each page thereafter.\496\ The Commission also
estimated that event notices and failure to file notices consist of one
to two pages.\497\ Accordingly, the approximate cost for an issuer to
use a third-party vendor to scan an event notice or failure to file
notice would be $8 per notice. The Commission included this cost
estimate in the Proposing Release and received no comments on it. The
Commission believes that this estimate is still accurate.
---------------------------------------------------------------------------
\496\ See Proposing Release, supra note 2, 74 FR at 36855.
\497\ Id.
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In addition, the Commission estimated that an issuer submits three
event notices to the MSRB annually.\498\ As discussed above, the
Commission recently received updated information from the MSRB relating
to the actual number of annual filings, event notices and failure to
file notices submitted to its EMMA system during the Sample Period.
Based on this information from the MSRB, the Commission is updating its
PRA estimates of the total number of event notices that will be
submitted by issuers. The Commission also is updating its estimate to
reflect that an issuer on average will submit five event notices to the
MSRB annually plus an additional notice as a result of the new event
items.\499\ Under the amendments, some current issuers will need to
prepare additional event notices for submission to the MSRB. Some
current issuers may need to submit these additional event notices to a
third party for conversion into an electronic format for submission to
the MSRB. The Commission estimated that the number of additional event
notices that an issuer will need to submit annually under the
amendments is one, increasing the total estimate to six notices per
year.\500\ Each of these issuers will incur an annual cost of $8 to
convert the additional event notice into an electronic format for
submission to the MSRB.\501\ The Commission believes that current
issuers that already have the technological resources to convert
continuing disclosure documents into an electronic format for
submission to the MSRB will not incur any additional external costs
associated with the amendments. The Commission included this $8 cost
estimate in the Proposing Release and received no comments on it.
---------------------------------------------------------------------------
\498\ Id.
\499\ See discussion of estimate of the average number of event
notices to be submitted by each issuer, supra Section V.D.2.b.
\500\ 6,757 (estimated additional event notices submitted under
amendments)/12,000 (estimated number of issuers under amendments) =
.563 notices per issuer (rounded up to 1) (estimated number of
additional event notices submitted annually per issuer).
\501\ $8 (cost to have third party convert an event notice or
failure to file notice into an electronic format) x 1 (estimated
number of additional event or failure to file notices filed per year
per issuer) = $8.
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As the Commission noted in the Proposing Release, there may be some
costs incurred by issuers to revise their current template for
continuing disclosure agreements to reflect the amendments to the
Rule.\502\ The Commission understands that models currently exist for
continuing disclosure agreements that are relied upon by legal counsel
to issuers and, accordingly, these documents are likely to be updated
by outside attorneys to reflect the amendments. Based on industry
sources and as discussed in the Proposing Release, the Commission
believes that continuing disclosure agreements are form
agreements.\503\ Additionally, based on industry sources, the
Commission estimates that it will take an outside attorney
approximately 15 minutes to revise the template for continuing
disclosure agreements for a current issuer.\504\ Thus, the Commission
estimates that, for each current issuer, the approximate cost to revise
a continuing disclosure agreement to reflect the amendments will be
approximately $100,\505\ for a one-time total cost of $1,000,000 \506\
for all current issuers. The Commission included these cost estimates
in the Proposing Release and received no specific comments on them.
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\502\ See Proposing Release, supra note 2, 74 FR at 36855.
\503\ Id.
\504\ Id. Continuing disclosure agreements are prepared and
executed at the time of an offering of municipal securities, when an
issuer has already retained bond counsel for other purposes.
Accordingly, the Commission believes that there should only be
minimal incremental costs for an outside attorney to revise the
template for continuing disclosure agreements.
\505\ 1 (continuing disclosure agreement) x $400 (hourly wage
for an outside attorney) x .25 hours (estimated time for outside
attorney to revise a continuing disclosure document in accordance
with the amendments to the Rule) = $100. The $400 per hour estimate
for an outside attorney's work is based on industry sources.
\506\ $100 (estimated cost to revise a continuing disclosure
agreement in accordance with the amendments to the Rule) x 10,000
(number of current issuers) = $1,000,000.
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[[Page 33138]]
b. Demand Securities Issuers
As discussed above, the Commission estimates that the amendments
relating to demand securities will increase the number of issuers
affected by the Rule by approximately 20% or 2,000 issuers or obligated
persons (referred to herein as ``demand securities issuers'').\507\ As
discussed in the Proposing Release, demand securities issuers may have
some external costs associated with the preparation and submission of
annual filings, event notices and failure to file notices.\508\
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\507\ See supra Section V.D.2.a.
\508\ See supra note 402 and accompanying text.
---------------------------------------------------------------------------
Under the Rule, Participating Underwriters are required to
reasonably determine that an issuer has entered into a continuing
disclosure agreement to provide continuing disclosure documents to the
MSRB in an electronic format as prescribed by the MSRB. Under the
amendments, Participating Underwriters will need to reasonably
determine that these demand securities issuers have entered into
continuing disclosure agreements. This change applies to any initial
offering and remarketing that is a primary offering of demand
securities occurring on or after the compliance date of the
amendments.\509\ However, to accommodate commenters' concerns about the
proposal's impact on existing demand securities, the amendment does not
apply to remarketings of demand securities that are outstanding in the
form of demand securities on the day preceding the amendments'
compliance date and that continuously have remained outstanding in the
form of demand securities.
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\509\ As noted above, the compliance date of the amendments to
the Rule is December 1, 2010.
---------------------------------------------------------------------------
The Commission understands that models currently exist for
continuing disclosure agreements that are relied upon by legal counsel
to issuers and, accordingly, these documents are likely to be updated
by outside attorneys to reflect the amendments. Based on industry
sources, the Commission believes that continuing disclosure agreements
are form agreements. Also, based on industry sources, the Commission
estimates that it will take an outside attorney approximately 1.5 hours
to draft a continuing disclosure agreement. Thus, the Commission
estimates that the cost of preparing a continuing disclosure agreement
for each demand securities issuer will be approximately $600,\510\ for
a one-time total cost of $1,200,000 \511\ for all demand securities
issuers, if an outside counsel prepares the agreement. The Commission
included these estimates in the Proposing Release and did not receive
any comments on them. The Commission continues to believe they are
appropriate.
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\510\ 1 (continuing disclosure agreement) x $400 (hourly wage
for an outside attorney) x 1.5 hours (estimated time for outside
attorney to draft a continuing disclosure document) = $600. The $400
per hour estimate is based on industry sources. See supra note 504.
\511\ $600 (cost for continuing disclosure agreement) x 2,000
(number of demand securities issuers) = $1,200,000.
---------------------------------------------------------------------------
The Commission believes that demand securities issuers generally
will not incur any other external costs associated with the preparation
of annual filings, event notices (including notices for the new event
disclosure items included in the amendments) and failure to file
notices. The Commission believes that demand securities issuers will
prepare the information contained in these continuing disclosure
documents internally and that these internal costs have been accounted
for in the hourly burden section above.\512\
---------------------------------------------------------------------------
\512\ See supra Section V.D.2.a.
---------------------------------------------------------------------------
The Commission believes that the only external costs demand
securities issuers may incur in connection with the submission of
continuing disclosure documents to the MSRB will be the costs
associated with converting them into an electronic format. The
Commission believes that many issuers of municipal securities already
have the computer equipment and software necessary to convert paper
copies of continuing disclosure documents to electronic copies and to
electronically transmit the documents to the MSRB. Demand securities
issuers that presently do not have the ability to prepare their annual
filings, event notices or failure to file notices in an electronic
format may incur some costs to obtain electronic copies of such
documents if they are prepared by a third party (e.g., an accountant or
attorney) or, alternatively, to have a paper copy converted into an
electronic format. These costs may vary depending on how the demand
securities issuer elects to convert its continuing disclosure documents
into an electronic format. An issuer could elect to have a third-party
vendor transfer its paper continuing disclosure documents into the
appropriate electronic format. An issuer also could decide to undertake
the work internally, and its costs may vary depending on the issuer's
current technological resources. An issuer also could elect to use a
designated agent to submit its continuing disclosure documents to the
MSRB.
As discussed in the Proposing Release, the Commission estimated
that 30% of issuers would elect to use designated agents to submit
continuing disclosure documents to the MSRB.\513\ Generally, when
issuers utilize the services of a designated agent, they enter into a
contract with the agent for a package of services, including the
submission of continuing disclosure documents, for a single fee. Based
on industry sources, the Commission estimated this fee to range from
$100 to $500 per year depending on the designated agent an issuer
uses.\514\ Accordingly, the Commission estimated that the high end of
the total annual cost that may be incurred by demand securities issuers
that use the services of a designated agent will be $300,000.\515\ The
Commission included these estimates in the Proposing Release and
received no comments on them. The Commission continues to believe they
are appropriate.
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\513\ See Proposing Release, supra note 2, 74 FR at 36856.
\514\ This estimated range of the annual fee for the services of
a designated agent is based on industry sources in December 2008.
\515\ 2,000 (number of demand securities issuers) x .30
(percentage of issuers that use designated agents) x $500 (estimated
annual cost for issuer's use of a designated agent) = $300,000.
---------------------------------------------------------------------------
The cost for an issuer to have a third-party vendor convert its
paper continuing disclosure documents into an appropriate electronic
format may vary depending on the type of resources that are required.
One method would be to scan paper-based continuing disclosure documents
into an electronic format. As discussed in the Proposing Release, the
Commission estimated that the approximate cost for an issuer to use a
third-party vendor to scan an event notice or failure to file notice
would be $8 per notice, and that the maximum number of event notices or
failure to file notices that an issuer would submit annually is
three.\516\ The Commission included these estimates in the Proposing
Release and received no comments on them. As discussed above, the
Commission now estimates that an issuer will file five event notices.
The Commission believes that these estimates are appropriate. Under the
amendments, the Commission estimates that the maximum number of event
notices and failure to file notices submitted by issuers will increase
to six.\517\ Accordingly, the Commission
[[Page 33139]]
estimates that the maximum external costs for a demand securities
issuer that elects to have a third party scan continuing event notices
or failure to file notices into an electronic format under the
amendments is $48.\518\
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\516\ See Proposing Release, supra note 2, 74 FR at 36856.
\517\ 6,757 (estimated additional event notices submitted under
the amendments)/12,000 (estimated number of issuers under the
amendments) = .563 notices per issuer (rounded up to 1) (estimated
number of additional event notices submitted annually per issuer).
To provide a conservative estimate, the Commission estimates that
each issuer will submit one additional event notice as a result of
the amendments.
\518\ The maximum cost is the cost to scan and convert six event
or failure to file notices: 6 (number of notices submitted annually)
x $8 (cost to scan and convert each notice) = $48.
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As discussed in the Proposing Release, the Commission estimated
that the approximate cost for an issuer to use a third-party vendor to
scan an average-sized annual financial statement would be $64 per
annual statement, and that the maximum number of annual filings
submitted per year is two.\519\ The Commission included these estimates
in the Proposing Release and received no comments on them. The
Commission continues to believe that these estimates are appropriate.
Although the amendments will increase the number of issuers submitting
annual filings each year, the number of annual filings each issuer
submits will not increase. Thus, the Commission expects that the number
of annual filings submitted yearly, per issuer, under the amendments
will remain unchanged. Accordingly, the Commission estimates that the
maximum external costs for a demand securities issuer that elects to
have a third party scan its annual filings into an electronic format
will be $128.\520\
---------------------------------------------------------------------------
\519\ See Proposing Release, supra note 2, 74 FR at 36856.
\520\ The maximum cost is the cost to scan and convert two
annual filings: 2 (number of annual filings submitted annually) x
$64 (cost to scan and convert each annual filing) = $128.
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Alternatively, a demand securities issuer that currently does not
have the appropriate technology to convert paper continuing disclosure
documents into an electronic format could elect to purchase the
necessary resources to do so.\521\ As discussed in the Proposing
Release, the Commission estimated that an issuer's initial cost to
acquire these technological resources could range from $750 to
$4,300.\522\ Some demand securities issuers, however, may have the
necessary hardware to transmit documents electronically to the MSRB,
but may need to upgrade or obtain the software necessary to submit
documents to the MSRB in an electronic format. In the Proposing
Release, the Commission estimated that an issuer's cost to update or
acquire this software could range from $50 to $300.\523\ The Commission
included these estimates in the Proposing Release and received no
comments on them. The Commission continues to believe that these
estimates are appropriate.
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\521\ Generally, the technological resources necessary to
convert a paper document into an electronic format are a computer,
scanner and possibly software to convert the scanned document into
the appropriate electronic document format. Most scanners include a
software package that is capable of converting scanned images into
multiple electronic document formats. An issuer would only need to
purchase software if the issuer (i) has a scanner that does not
include a software package that is capable of converting scanned
images into the appropriate electronic format; or (ii) purchases a
scanner that does not include a software package capable of
converting documents into the appropriate electronic format.
\522\ See Proposing Release, supra note 2, 74 FR at 36857.
\523\ Id.
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In addition, demand securities issuers without direct Internet
access may incur some costs to obtain such access to submit the
documents. As discussed in the Proposing Release, the Commission noted
that Internet access is now broadly available to and utilized by
businesses, governments, organizations and the public, and the
Commission expects that most issuers of municipal securities currently
have Internet access.\524\ In the event that a demand securities issuer
does not have Internet access, it may incur costs in obtaining such
access, which the Commission estimated to be approximately $50 per
month, based on its limited inquiries to Internet service
providers.\525\ Otherwise, there are multiple free or low cost
locations that an issuer could utilize, such as various commercial
sites, which could help an issuer to avoid the costs of maintaining
continuous Internet access solely to comply with the amendments.\526\
The Commission included this estimate in the Proposing Release and
received no comments on it. The Commission continues to believe that
this estimate is appropriate.
---------------------------------------------------------------------------
\524\ Id.
\525\ Id.
\526\ Id.
---------------------------------------------------------------------------
The Commission estimated in the Proposing Release that the costs to
some of the demand securities issuers to acquire the technology
necessary to convert continuing disclosure documents into an electronic
format to submit to the MSRB may include: (i) Approximately $8 per
notice to use a third-party vendor to scan an event notice or failure
to file notice, and approximately $64 to use a third-party vendor to
scan an average-sized annual financial statement; (ii) approximately
$750 to $4,300 to acquire the technological resources to convert
continuing disclosure documents into an electronic format; (iii)
approximately $50 to $300 solely to upgrade or acquire the software to
submit documents in an electronic format; and (iv) approximately $50
per month to establish Internet access. The Commission included these
estimates in the Proposing Release and received no comments on them.
The Commission continues to believe that they are appropriate.\527\
---------------------------------------------------------------------------
\527\ Id.
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For a demand securities issuer that does not have Internet access
and elects to have a third-party convert continuing disclosure
documents into an electronic format (``Category 1''), the estimated
total maximum external cost such issuer would incur will be $776 per
year.\528\ For an issuer that does not have Internet access and elects
to acquire the technological resources to convert continuing disclosure
documents into an electronic format internally (``Category 2''), the
estimated total maximum external cost such demand securities issuer
would incur will be $4,900 for the first year and $600 per year
thereafter.\529\ To provide a conservative estimate for PRA purposes,
the Commission estimated that any demand securities issuers that incur
costs associated with converting continuing disclosure documents into
[[Page 33140]]
an electronic format will choose the Category 2 option.\530\ The
Commission estimated that approximately no more than 400 demand
securities issuers will incur costs associated with acquiring
technological resources to convert continuing disclosure documents into
an electronic format.\531\ The Commission included these estimates in
the Proposing Release and received no comments on them. The Commission
continues to believe they are appropriate.
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\528\ See Proposing Release, supra note 2, 74 FR at 36857. The
total maximum external cost for a Category 1 demand securities
issuer is calculated as follows: [$64 (cost to have third party
convert annual filing into an electronic format) x 2 (maximum
estimated number of annual filings filed per year per issuer)] + [$8
(cost to have third party convert event notices or failure to file
notices into an electronic format) x 6 (maximum estimated number of
event or failure to file notices filed per year per issuer)] + [$50
(estimated monthly Internet charge) x 12 months] = $776. The
Commission estimates that an issuer will file one to eight
continuing disclosure documents per year. These documents generally
will consist of no more than two annual filings and six event or
failure to file notices. The Commission estimates the maximum number
of documents filed annually per issuer as follows: 7 documents
(consisting of 2 annual filings and 5 event or failure to file
notices) + 1 document (consisting of the additional event notice
that would be filed under the amendments). In the Proposing Release,
the Commission estimated that the maximum number of documents filed
annually per issuer would be $760. This estimate was based on 5
documents (consisting of 2 annual filings and 3 event or failure to
file notices) + 1 document (consisting of the additional event
notice that would be filed under the amendments). As discussed
above, the Commission is updating this number to reflect more
current data submitted to the MSRB. See supra note 368 and
accompanying text. The above cost estimate is higher than the
estimate in the Proposing Release by $16 or 2.1%.
\529\ See Proposing Release, supra note 2, 74 FR at 36857. The
total maximum external cost for a Category 2 demand securities
issuer is to be calculated as follows: [$4300 (maximum estimated
one-time cost to acquire technology to convert continuing disclosure
documents into an electronic format)] + [$50 (estimated monthly
Internet charge) x 12 months] = $4900. After the initial year,
issuers who acquire the technology to convert continuing disclosure
documents into an electronic format internally will have only the
cost of obtaining Internet access. $50 (estimated monthly Internet
charge) x 12 months = $600.
\530\ See Proposing Release, supra note 2, 74 FR at 36857.
\531\ 2,000 demand securities issuers x 20% = 400 demand
securities issuers. The Commission used a 20% estimate in the
Proposing Release. The Commission believes that this estimate is
still appropriate.
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In addition, the Commission estimates that the aggregate maximum
annual costs for those demand securities issuers that need to acquire
technological resources to submit documents to the MSRB will be
approximately $1,960,000 \532\ for the first year after the adoption of
the amendments and approximately $240,000 \533\ for each year
thereafter. The Commission included these cost burden estimates in the
Proposing Release and received no comments on them. The Commission
continues to believe that these estimates are appropriate.
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\532\ 400 (Category 2 issuers) x $4,900 = $1,960,000.
\533\ 400 (Category 2 issuers) x $600 = $240,000.
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c. Current Issuers and Demand Securities Issuers
Some current issuers and demand securities issuers may incur a one-
time external cost associated with the amendment to revise the time
frame for submitting event notices from ``in a timely manner'' to ``in
a timely manner not to exceed ten business days after the occurrence of
the event.'' In particular, some current issuers and demand securities
issuers may incur a one-time external cost associated with becoming
apprised of the appointment of a new trustee or for the change in the
trustee's name. One way an issuer may become apprised of such a change
would be for its counsel to add a notice provision to the issuer's
trust indenture that requires the trustee to provide the issuer with
notice of the appointment of a new trustee or any change in the
trustee's name. Based on industry sources, the Commission estimates
that it will take an outside attorney approximately 15 minutes to draft
and add a provision to an indenture agreement requiring notice of a
change of trustee or to the trustee's name. Thus, the Commission
estimates that the approximate cost of adding this notice provision to
an issuer's trust indenture will be approximately $100 per issuer,\534\
for a one-time annual cost of $1,200,000 \535\ for all issuers. The
Commission included these cost burden estimates in the Proposing
Release and received no comments on them. The Commission continues to
believe they are appropriate.
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\534\ 1 (continuing disclosure agreement) x $400 (hourly wage
for an outside attorney) x .25 hours (estimated time for outside
attorney to draft and add a change of name notice provision to a
trust indenture) = $100. The $400 per hour estimate for an outside
attorney's work is based on industry sources.
\535\ $100 (estimated cost to have outside counsel add a notice
provision to a trust indenture) x 12,000 (number of issuers under
the amendments) = $1,200,000.
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As discussed in the Proposing Release, the Commission solicited
comment regarding the accuracy of its cost burden estimates in
connection with the revised collection of information applicable to
issuers. As noted above, although some commenters offered general
comments relating to issuers' burdens and costs under the Rule, they
did not quantify these burdens or costs. For example, some commenters
expressed the view that the Commission underestimated the burdens or
costs that would be imposed on issuers and obligated persons as a
result of the amendments.\536\ A number of commenters expressed concern
about additional burdens or costs, which they believed issuers would
incur as a result of the ten business day time frame for submitting
notices for events outside of the issuer's control.\537\ These
commenters also remarked that these increased burdens or costs would be
particularly difficult for small issuers.\538\ Although these
commenters provided general views relating to issuers' burdens and
costs under the Rule, which are addressed in Section V.D.2 above, they
did not offer specific information or data that conflicted with the
Commission's cost estimates nor did they provide alternative estimates.
As discussed above, the Commission agrees that some issuers, including
small issuers, will have increased burdens and costs under the Rule.
However, for the reasons discussed in Section V.D.2 above, the
Commission continues to believe that these burdens and costs are
accounted for in the Commission's PRA burden analysis.
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\536\ See Connecticut Letter at 3 (``I suspect that the
Commission has underestimated the true costs of some of these
proposals''), NABL Letter at 12-13 (``The Commission's estimates of
costs and other regulatory impacts * * * greatly underestimate the
likely impact of the amendments''), and GFOA Letter at 5 (``The
SEC's estimated time needed and costs associated with implementing
the proposals are a fraction of what issuers will likely incur. This
is true for both small and large issuers, as compliance costs and
monitoring will increase, as will an issuer's need to retain bond
counsel'').
\537\ See Halgren Letter at 1-2, Kutak Letter at 2, NAHEFFA
Letter at 3, Los Angeles Letter at 2, San Diego Letter at 3,
California Letter at 2-3, CHEFA Letter at 2-3, CRRC Letter at 5,
WCRRC Letter at 1, and Connecticut Letter at 3. See supra Section
V.D.2.i.a.c.
\538\ Id.
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In addition to the commenters discussed above, two commenters
opposed the proposed amendment to modify the exemption for demand
securities because they viewed it as imposing an audit requirement on
small issuers.\539\ One of these commenters stated that the proposal
could increase costs to a small issuer by $30,000-40,000 annually to
prepare audited or consolidated financial statements.\540\ The
commenter believed that such costs could force small demand securities
issuers to withdraw from the tax-exempt municipal market and thus
recommended that the Commission withdraw the proposed amendment to
modify the exemption for demand securities or create a limited
exception for LOC-backed demand securities.\541\
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\539\ See CRRC Letter at 5 and WCRRC Letter at 1 (generally
expressed support for comments in CRRC Letter).
\540\ Id.
\541\ Id.
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As discussed further in Section III.A. above, the Commission notes
that, for purposes of paragraph (b)(5)(i)(B) of the Rule, audited
financial statements need to be submitted, pursuant to the issuer's and
obligated person's undertaking in a continuing disclosure agreement,
only ``when and if available.'' \542\ This limitation, which is
consistent with the Commission's position in the 1994 Amendments
Adopting Release, should mitigate some concerns of those obligated
persons that do not prepare audited financial statements in the
ordinary course of their business.\543\ Further, although not all
issuers or obligated persons, in the ordinary course of their business,
prepare audited financial statements or other financial
[[Page 33141]]
and operating information of the type included in annual filings, a
number of issuers and obligated persons do.\544\
---------------------------------------------------------------------------
\542\ 17 CFR 240.15c2-12(b)(5)(i)(B). See also supra Section
III.A. concerning audited financial statements and 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
\543\ As discussed in the 1994 Amendments Adopting Release, the
1994 Amendments ``[do] not adopt the proposal to mandate audited
financial statements on an annual basis with respect to each issuer
and significant obligor. Instead, the amendments require annual
financial information, which may be unaudited, and may, where
appropriate and consistent with the presentation in the final
official statement, be other than full financial statements. * * *
However, if audited financial statements are prepared, then when and
if available, such audited financial statements will be subject to
the undertaking and must be submitted to the repositories. Thus * *
* the undertaking must include audited financial statements only in
those cases where they otherwise are prepared.'' See 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
\544\ See http://www.emma.msrb.org for audited financial
statements or other financial and operating information submitted to
EMMA.
---------------------------------------------------------------------------
The Commission acknowledges that issuers or obligated persons of
demand obligations that assemble financial and operating data for the
first time in response to their undertakings in a continuing disclosure
agreement may incur incremental costs beyond those costs incurred by
those issuers or obligated persons that already assemble this
information.\545\ Also, smaller issuers or obligated persons may have
relatively greater burdens than larger issuers or obligated persons.
However, the overall burdens for these demand securities issuers or
obligated persons in preparing financial information are expected to be
commensurate with those of issuers or obligated persons that already
are preparing financial information as part of their continuing
disclosure undertakings.\546\ The Commission believes that the burdens
that will be incurred in the aggregate by issuers or obligated persons,
as a result of the amendments with respect to demand securities, may
not be significant and, in any event, are justified by the benefits to
investors of enhanced disclosure.\547\
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\545\ The Commission, however, believes that the operations of
an issuer or obligated person generally entail the preparation and
maintenance of at least some financial and operating data.
\546\ Further, issuers or obligated persons that assemble
financial and operating data for the first time may face a greater
burden than those issuers or obligated persons that already assemble
this information. The amendments therefore initially may have a
disparate impact on those issuers or obligated persons, including
small entities, entering into a continuing disclosure agreement for
the first time, as compared with those that already have outstanding
continuing disclosure agreements.
\547\ See supra Section V.D. As discussed therein, some
commenters believed that the amendment could force some small
entities to withdraw from the tax-exempt market because: (1)
Disclosure of small issuers' or obligated persons' financial
information would provide their large, national competitors with
information about these small issuers or obligated persons, which
they believed could result in a competitive disadvantage to them;
and (2) small issuers or obligated persons would have to prepare
costly audited financial statements. See, e.g., CRRC Letter at 3-4
and WCRRC Letter at 1. As discussed above, the undertakings
contemplated by the amendments (and Rule 15c2-12 in general) require
annual financial information only to the extent provided in the
final official statement, and audited financial statements only when
and if available.
---------------------------------------------------------------------------
As indicated above, another commenter stated its view that the
proposed amendments would increase an issuer's need to retain bond
counsel.\548\ To the extent that bond counsel will need to be retained
to revise the continuing disclosure agreement or add a notice provision
to the issuer's trust indenture, the Commission has provided estimates
relating to these costs in Section V.E.2, above.
---------------------------------------------------------------------------
\548\ See GFOA Letter at 5.
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F. Retention Period of Recordkeeping Requirements
The amendments do not contain any recordkeeping requirements.
However, as a self-regulatory organization subject to Rule 17a-1 under
the Exchange Act,\549\ the MSRB is required to retain records of the
collection of information for a period of not less than five years, the
first two years in an easily accessible place. The amendments to the
Rule contain no recordkeeping requirements for any other persons.
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\549\ 17 CFR 240.17a-1.
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G. Collection of Information Is Mandatory
The collection of information is mandatory.
H. Responses to Collection of Information Will Not Be Kept Confidential
The collection of information will not be confidential and will be
publicly available. The collection of information will be accessible
through the MSRB's EMMA system and thus will be publicly available via
the Internet.
VI. Costs and Benefits of Amendments to Rule 15c2-12
A. Background
Rule 15c2-12 is intended to enhance disclosure and deter fraud in
the municipal securities market by establishing standards for
obtaining, receiving and disseminating information about municipal
securities by their underwriters.\550\ The amendments to Rule 15c2-12
revise certain requirements regarding the information that a
Participating Underwriter must reasonably determine that an issuer of
municipal securities or an obligated person has undertaken, in a
written agreement or contract for the benefit of holders of the
issuer's municipal securities, to provide to the MSRB. Specifically,
the amendments: (1) Narrow a previously-existing exemption from the
Rule for demand securities, subject to the limited grandfather
provision; (2) specify that the time period as to which the
Commission's rules require a Participating Underwriter to reasonably
determine that the issuer or obligated person has agreed to provide
notice of specified events in a timely manner must not be in excess of
ten business days after the event's occurrence; (3) eliminate
materiality qualifications for certain events triggering a notice to
the MSRB; and (4) add additional events to the list of events for which
a notice is provided.
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\550\ See 1989 Adopting Release, 1994 Amendments Adopting
Release, and 2008 Amendments Adopting Release, supra note 8.
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The Commission is deleting the exemption for demand securities set
forth in paragraph (d)(1)(iii) of the Rule and adding new paragraph
(d)(5) to the Rule, thereby making the continuing disclosure provisions
of paragraphs (b)(5) and (c) of the Rule apply to a primary offering of
demand securities,\551\ subject to the limited grandfather provision
described below. This change applies to any primary offering of demand
securities (including a remarketing that is a primary offering)
occurring on or after the compliance date of the final amendments.\552\
The Commission's amendment differs from the amendment the Commission
originally proposed in that it includes a ``limited grandfather
provision'' for remarketings of currently outstanding demand
securities. Specifically, the continuing disclosure provisions will not
apply to remarketings of demand securities that are outstanding in the
form of demand securities on the day preceding the compliance date of
the final amendments and that continuously have remained outstanding in
the form of demand securities. This amendment will increase the amount
of information in the market relating to primary offerings of demand
securities occurring on or after the compliance date and will provide
investors with valuable information, thereby enabling them to make
better informed investment decisions relating to whether they should
buy, sell, or hold such securities and reduce the likelihood that
investors will be subject to fraud facilitated by inadequate
disclosure.
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\551\ See supra note 38 and accompanying text.
\552\ As noted in Section III.G., the compliance date for the
amendments to the Rule is December 1, 2010.
---------------------------------------------------------------------------
The amendment to the Rule regarding notice of specified events ``in
a timely manner not in excess of ten business days'' after the event's
occurrence will have the effect of establishing a definitive time frame
for the submission of event notices. This provision will supplement the
``in a timely manner'' language that existed in the Rule prior to these
amendments, which allowed for the possibility of event notices being
submitted to the MSRB at inconsistent times for similar events, because
each issuer could decide for itself what constitutes ``in a timely
manner.''
[[Page 33142]]
Because the Rule did not contain a specific time frame for submission
of event notices, investors could not be certain whether or not an
event had occurred over an indefinite period in the past. This
amendment still requires Participating Underwriters to reasonably
determine that a continuing disclosure agreement provides for timely
disclosure, but sets an outside time frame of ten business days after
the event's occurrence for submission of an event notice. To the extent
that issuers provide disclosure within ten business days, consistent
with their continuing disclosure agreements, there likely will be more
certainty for investors concerning when they will receive information
concerning such events and, on the whole, more timely information to
investors and the municipal securities market generally. More up-to-
date information about municipal securities can serve to protect
investors from fraud facilitated by inadequate disclosure and assist
investors in determining whether the price of a municipal security is
appropriate.
The amendment to remove the ``materiality'' condition for six
specified events in paragraph (b)(5)(i)(C) of the Rule will have the
effect of increasing the disclosure of such events to investors and the
municipal securities market generally.\553\ In addition, issuers and
obligated persons no longer will have to separately analyze whether
each occurrence of such events is material.
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\553\ These events are: (1) Principal and interest payment
delinquencies; (2) unscheduled draws on debt service reserves
reflecting financial difficulties; (3) unscheduled draws on credit
enhancements reflecting financial difficulties; (4) substitution of
credit or liquidity providers, or their failure to perform; (5)
defeasances; and (6) rating changes.
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In addition, the amendment to modify paragraph (b)(5)(i)(C)(6) of
the Rule, which relates to a Participating Underwriter's obligation to
reasonably determine that the issuer or obligated person has undertaken
in a continuing disclosure agreement to provide notice to the MSRB of
certain tax events, will have the effect of enhancing the disclosure of
events that are important to investors in determining whether the tax
status of their municipal securities is at risk.
The amendment to modify paragraph (b)(5)(i)(C) of the Rule adds
four new event items to be disclosed to investors.\554\ The disclosure
of these events will provide investors and the market with important
information regarding municipal securities.
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\554\ These events are: (1) Tender offers; (2) bankruptcy,
insolvency, receivership or similar event of the obligated person;
(3) consummation of a merger, consolidation, or acquisition
involving an obligated person or the sale of all or substantially
all of the assets of the obligated person, other than in the
ordinary course of business, the entry into a definitive agreement
to undertake such an action or the termination of a definitive
agreement relating to such actions, other than pursuant to its
terms, if material; and (4) appointment of a successor or additional
trustee, or the change of name of a trustee, if material.
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These amendments are intended to help improve the availability of
timely and important information to investors and other market
participants regarding municipal securities, including demand
securities, so that investors can make more knowledgeable investment
decisions, effectively manage and monitor their investments, and help
reduce the likelihood of fraud facilitated by inadequate disclosure. In
addition, the amendments are intended to help brokers, dealers, and
municipal securities dealers to satisfy their obligation to have a
reasonable basis on which to recommend a municipal security.
The Commission is sensitive to the costs and benefits that result
from its rules. In the Proposing Release, the Commission identified
certain costs and benefits of the amendments as proposed and requested
comment on all aspects of its cost-benefit analysis, including the
identification and assessment of any cost and benefits not discussed in
the analysis. The Commission sought comment on the value of the
benefits identified and the accuracy of its cost estimates. The
Commission also encouraged commenters to provide relevant data. The
Commission received some comments relating to the Commission's cost-
benefit analysis. For the reasons discussed below, the Commission
continues to believe that its estimates of the benefits and costs of
the amendments to the Rule 15c2-12, as set forth in the Proposing
Release, are appropriate.
B. Benefits
The Commission discusses below the benefits of the Rule for each
amendment to the Rule.
1. Increased Disclosure Relating to Demand Securities
The Commission is modifying the Rule's exemption for primary
offerings of demand securities (including any remarketing that is a
primary offering) to narrow the Rule's prior exemption, which will
result in the greater availability of information about these
securities to investors, broker-dealers, municipal securities analysts,
and the securities markets generally. In addition, under this
amendment, a broker, dealer or municipal securities dealer that
recommends the purchase or sale of demand securities will need to have
procedures in place that provide reasonable assurance that it will
receive prompt notice of event notices and failure to file
notices.\555\
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\555\ See 17 CFR 240.15c2-12(c).
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The greater availability of information regarding demand securities
should increase the efficiency of markets in allocating capital at
appropriate prices that reflect the creditworthiness of issuers and
increase the efficiency of prices in the secondary market, benefiting
issuers and investors alike, and should also benefit investors by
allowing them to make more informed decisions whether to buy, sell or
hold these securities. This greater availability of information is also
likely to benefit brokers, dealers, or municipal securities dealers by
reducing their costs in forming a reasonable basis for recommending
demand securities. Specifically, these market participants will have
more information about these securities to draw upon when they are
deciding whether or not to recommend demand securities to investors.
Greater availability of information also will benefit broker-dealers
and municipal securities dealers by reducing their costs in
establishing secondary market quotations for demand securities. In
addition, greater transparency in the market due to the applicability
of the continuing disclosure requirements to demand securities should
reduce the likelihood that investors will be subject to fraud
facilitated by inadequate disclosure, resulting in potentially reduced
costs associated with such fraud.
By 2009, the outstanding amount of VRDOs was estimated to be
approximately $400 billion, which is a significant percentage of the
municipal securities market.\556\ The Commission recognizes that some
issuers of demand securities voluntarily provide continuing disclosure
documents, notwithstanding the exemption for demand securities that
existed prior to the amendments. Therefore, the above-referenced
benefits will result primarily from the additional disclosure that is
provided by issuers of demand securities that did not previously
provide continuing disclosure documents.
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\556\ See Andrew Ackerman, ``Concerns Raised on VRDOs,'' The
Bond Buyer, June 9, 2009.
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A number of commenters were supportive of applying the continuing
disclosure to demand securities.\557\
[[Page 33143]]
Several commenters agreed that the amendments relating to demand
securities are critical to assist investors in making informed
investment decisions.\558\ One commenter noted that the market for
demand securities was among the sectors most affected by the recent
market turmoil and, consequently, stated its view that there is
``little justification for exempting VRDOs from continuing disclosure
requirements.'' \559\ Similarly, another commenter stated that, during
the recent market downturn, investors in demand securities were well
served by those issuers or obligated persons who voluntarily provided
continuing disclosures about these securities, despite the Rule's
exemption.\560\ Another commenter believed that, because many VRDO
issuers already are subject to requirements for continuing disclosure
and the submission of material event notices for their fixed rate debt,
the submission of information with respect to their VRDOs will not be a
significant burden and will provide access to information about these
securities to a much broader segment of the market.\561\
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\557\ See California Letter at 1, CHEFA Letter at 2, Connecticut
Letter at 1, DAC Letter at 3, e-certus Letter I at 11, Fidelity
Letter at 3, Folts Letter at 1, ICI Letter at 2, NFMA Letter at 1,
RBDA Letter at 2, and SIFMA Letter at 2.
\558\ See, e.g., ICI Letter at 5, SIFMA Letter at 2, and RBDA
Letter at 2.
\559\ See RBDA Letter at 2.
\560\ See CHEFA Letter at 2.
\561\ See NMFA Letter at 1.
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2. More Timely Disclosure
Establishing an outside timeframe of ten business days after the
occurrence of the specified event to submit an event notice will help
improve the timeliness of the dissemination of the information to
investors and the market. The more timely availability of event notices
will help improve the efficient pricing of municipal securities and
will benefit investors by allowing them to make more informed
investment decisions and to do so with greater certainty as to the
timeliness of available information. The more timely availability of
event notices also will contribute to the speedier dissemination of
event notices to the market, which may, in turn, trigger important
contractual rights that may have otherwise been delayed. In addition,
the increased availability of up-to-date information about municipal
securities is likely to improve the transparency in the market; should
increase the efficiency of markets in allocating capital at appropriate
prices that reflect the creditworthiness of issuers, which benefits
issuers and investors alike; and should reduce the likelihood that
investors will be subject to fraud facilitated by inadequate
disclosure.
Four commenters supported the proposal to establish a ten business-
day timeframe for the submission of event notices pursuant to a
continuing disclosure agreement.\562\ Two of these commenters indicated
that the benefits of the proposed amendment include more timely and
efficient access to comprehensive and accurate information about
municipal securities, which is critical to investors.\563\ These
commenters also noted that the establishment of a definitive timeframe
by which event notices are to be submitted better informs the market
that an event has occurred, which assists in the efficient pricing of
their municipal securities.\564\ Two commenters also noted that the
definitive time frame provides more timely information to pricing
evaluation services and relieves investors of dependence on bondholders
to disclose information to these services.\565\
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\562\ See NFMA Letter at 1-2, SIFMA Letter at 3, ICI Letter at
6-7, and Fidelity Letter at 3-4.
\563\ See ICI Letter at 1 and Fidelity at 2.
\564\ Id.
\565\ Id.
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3. Increased Disclosure Due to the Deletion of the Materiality
Condition for Six Events
The Commission is adopting the proposal to delete the ``if
material'' condition with respect to notice for six of the Rule's
disclosure events.\566\ The deletion of the materiality condition for
these six events will benefit issuers by eliminating the costs
presently incurred by an issuer in making such a determination.
Further, because issuers will not need to make a materiality
determination, this Rule revision is likely to help speed the
disclosure of these six events to investors and other market
participants and help improve the efficient pricing of municipal
securities. Greater certainty that information about these events will
be disclosed pursuant to continuing disclosure agreements also is
likely to help improve the transparency of the municipal security's
pricing. The greater availability of information regarding events that
have an immediate effect on the valuation of the security will help
reduce the likelihood of fraud facilitated by inadequate disclosure,
and in return will help reduce costs associated with such fraud.
---------------------------------------------------------------------------
\566\ See supra note 553 describing the events.
---------------------------------------------------------------------------
A number of commenters supported the deletion of the ``if
material'' qualification for these six events and believed that this
change would be beneficial.\567\ For example, one commenter believed
that notice of these events should always be provided because their
occurrence is always important to investors and other market
participants. The commenter also noted that, in all probability, the
amendment will not result in many changes to current practice.\568\ Two
other commenters also agreed that these events are important to
investors, and generally should be known immediately to issuers.\569\
Another two commenters concurred that many disclosure events are of
such high consequence and relevance to investors in informing their
investment decisions that they should be disclosed as a matter of
course.\570\ These commenters also supported the unqualified disclosure
of two events, i.e., bond calls and non-payment related defaults, for
which a materiality condition is retained.\571\
---------------------------------------------------------------------------
\567\ See California Letter at 2, San Diego Letter at 2, SIFMA
Letter at 3, ICI Letter at 7-8, and Fidelity Letter at 3.
\568\ See SIFMA Letter at 3.
\569\ See California Letter at 2 and San Diego Letter at 2.
\570\ See ICI Letter at 7-8 and Fidelity Letter at 3.
\571\ Id.
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4. Increased Disclosure of Tax-Related Events
The amendments also require a Participating Underwriter to
reasonably determine that the issuer or obligated person has undertaken
in a continuing disclosure agreement to provide notice to the MSRB of
adverse tax opinions, the issuance by the Internal Revenue Service of
proposed or final determinations of taxability, Notices of Proposed
Issue (IRS Form 5701-TEB) or other material notices or determinations
with respect to the tax status of the security, or other material
events affecting the tax status of the security. The improved
disclosure of the tax status of municipal securities will benefit
investors by helping to ensure that the information about the tax
status of the municipal security is reflected in the price of the
security in a timely manner.
Two commenters agreed that the amendment will benefit investors and
the market. One commenter stated that the tax status of tax-exempt debt
is of critical concern to many municipal investors, particularly
municipal mutual funds, and that an adverse tax opinion likely will
substantially decrease the market value and liquidity of a
security.\572\ Thus, the subsequent sale of the affected security could
have a significant financial impact on
[[Page 33144]]
investors.\573\ A second commenter believed that investors have a
strong interest in being informed of actions taken by the IRS that
present a material risk to the tax-exempt status of their
holdings.\574\
---------------------------------------------------------------------------
\572\ See NFMA Letter at 2.
\573\ Id.
\574\ See SIFMA Letter at 3.
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5. Increased Disclosure of Additional Events
The amendments also add four new event items to Rule 15c2-12. The
amendments add the disclosure of tender offers to the provision of the
Rule that currently applies only to bond calls.\575\ Information
regarding a tender offer, which necessitates that an investor decide
whether or not to tender within the prescribed time period, will
improve the ability of issuers and other obligated persons to
communicate tender offers to bondholders effectively and of bondholders
to respond within the tender offer period. In addition, the amendment
should help reduce the possibility of investor confusion regarding
whether a certain municipal security is the subject of a tender offer.
---------------------------------------------------------------------------
\575\ See supra Section III.E.1.
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The amendments also add the disclosure of bankruptcy, insolvency,
receivership or similar event of the obligated person.\576\ While these
events are uncommon in the municipal market, their improved disclosure
can have a significant effect on the price of the municipal securities.
---------------------------------------------------------------------------
\576\ See supra Section III.E.2.
---------------------------------------------------------------------------
In addition, the amendments add the disclosure of the consummation
of a merger, consolidation, or acquisition involving an obligated
person or the sale of all or substantially all of the assets of the
obligated person, other than in the ordinary course of business, the
entry into a definitive agreement to undertake such an action or the
termination of a definitive agreement relating to any such actions,
other than pursuant to its terms, if material.\577\ As with bankruptcy,
insolvency, receivership or similar event of the obligated person, the
improved disclosure of the consummation of a material merger,
consolidation, or acquisition or the sale of all or substantially all
of the assets of the obligated person can have a significant effect on
the price of the municipal securities. This amendment is likely to help
improve investors' and other market participants' ability to obtain
knowledge of the identity of the entity that will have responsibility
for municipal security repayment obligations after the transaction is
consummated. In addition, investors and other market participants will
have the opportunity to review the creditworthiness and other aspects
of the acquiring entity that support repayment of the security
following the transaction.
---------------------------------------------------------------------------
\577\ See supra Section III.E.3.
---------------------------------------------------------------------------
The addition of these new disclosure events to the Rule will help
improve the informativeness of the municipal security prices with
respect to these events, which will benefit investors, issuers, broker-
dealers, municipal securities analysts and other market participants.
In addition, greater transparency should reduce the likelihood of fraud
facilitated by inadequate disclosure, and in return will help reduce
costs associated with such fraud.
Under the amendments, the appointment of a successor or additional
trustee or the change of name of a trustee, if material, is added to
the list of events contained in the Rule. As discussed earlier, the
trustee of a municipal security performs important functions for
investors in that security, including providing information to
bondholders.\578\ This amendment is likely to benefit investors by
helping reduce the costs associated with determining the identity of
and contact information for the most current trustee and that of any
new trustee.
---------------------------------------------------------------------------
\578\ See supra Section III.E.4.
---------------------------------------------------------------------------
Several commenters supported the addition of the new event items to
the Rule.\579\ For example, two commenters believed that disclosure of
trustee-related events will provide meaningful insights and information
regarding a particular bond.\580\ One of these commenters particularly
noted that it was critical that investors are informed of trustee name
changes since bondholders' rights are generally exercised through the
actions of the trustee.\581\ Another commenter noted that disclosure of
trustee-related events will likely always be of importance to both
retail and institutional investors.\582\
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\579\ See ICI Letter at 8, Fidelity Letter at 2-3, Connecticut
Letter at 2, NFMA Letter at 2, and SIFMA Letter at 4.
\580\ See ICI Letter at 8 and Fidelity Letter at 2.
\581\ See Fidelity Letter at 3.
\582\ See NFMA Letter at 2.
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B. Costs
The Commission discusses below the costs of the amendments to the
Rule for various market participants.
1. Broker-Dealers
Broker-dealers are not likely to incur significant additional
recurring external or internal costs in connection with the
implementation of the Rule, as amended, because the amendments will not
significantly alter the Rule's existing requirements for broker-
dealers. As discussed above, broker-dealers acting as Participating
Underwriters have an existing obligation to reasonably determine that
issuers or obligated persons have undertaken in their continuing
disclosure agreements to provide notice to the MSRB of specified
events. The Commission does not expect that the addition of several new
disclosure events to the Rule and a provision establishing the time
frame for submission of such notices are likely to significantly alter
broker-dealers' obligations under the Rule and thus their costs. As a
practical matter, broker-dealers' obligations affected by the
amendments involve verifying that the continuing disclosure agreement
contains an undertaking by the issuer or obligated person to provide
notice to the MSRB of the events that are listed in the Rule, including
the new events, within ten business days after the event's occurrence.
Moreover, because continuing disclosure documents generally are form
documents, a broker-dealer simply will need to make sure that the
continuing disclosure agreement reflects the amendments to the Rule.
The amendments also modify the Rule's exemption for demand
securities. This change applies to any initial offering and remarketing
that is a primary offering of demand securities occurring on or after
the compliance date of the amendments and does not apply to
remarketings of demand securities that are outstanding in the form of
demand securities on the day preceding the compliance date and that
continuously have remained outstanding in the form of demand securities
(i.e., the limited grandfather provision).
Although the amendments relating to demand securities are not
likely to result in external recurring costs for broker-dealers,
broker-dealers may incur an increase in internal recurring costs
because the proposals will increase the number of municipal securities
offerings subject to the Rule's disclosure requirements. As noted
above, the Commission estimates that the modification of the exemption
for demand securities will increase the number of issuers with
municipal securities offerings subject to the Rule by 20%.\583\ The
Commission estimates
[[Page 33145]]
that the annual information collection burden for each broker-dealer
under this amendment will be 1.20 hours (1 hour and 12 minutes).\584\
Accordingly, the Commission estimates that it will cost each broker-
dealer $349 annually to comply with the Rule, which represents a cost
increase of $79 annually over each broker-dealer's current annual
cost.\585\
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\583\ See supra Section V.D.2.a. As noted above, adoption of the
limited grandfather provision will not materially affect the
Commission's estimate of the number of demand securities issuers
that will be affected by the amendments. Therefore, the Commission
is retaining its estimate that there will be a 20% increase in the
number of issuers affected by the amended Rule.
\584\ Id.
\585\ 1.20 hours (estimated annual information collection burden
for each broker-dealer) x $291 (hourly cost for a broker-dealer's
internal compliance attorney) = $349. The hourly rate for the
compliance attorney is from SIFMA's Management & Professional
Earnings in the Securities Industry 2009, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. Cost increase for Broker-Dealers under the
amendments: $349 (annual cost under amendments) - $270 (previous
annual cost) = $79. This estimated cost for broker-dealers also
accounts for their review of continuing disclosure agreements in
connection with remarketings of demand securities that are primary
offerings. The Commission has slightly revised this cost estimate
upward from the estimate contained in the Proposing Release to
reflect updated hourly rate information from SIFMA for 2009.
---------------------------------------------------------------------------
In addition, the Commission estimates that a broker-dealer may have
a one-time internal cost associated with having an in-house compliance
attorney prepare and issue a memorandum advising the broker-dealer's
employees about the final revisions to Rule 15c2-12. The Commission
estimates that it will take internal counsel approximately 30 minutes
to prepare this memorandum,\586\ for a cost of approximately $146.\587\
The Commission further believes that the ongoing obligations of broker-
dealers under the Rule will be handled internally because compliance
with these obligations is consistent with the type of work that a
broker-dealer typically handles in-house.
---------------------------------------------------------------------------
\586\ See supra Section V.D.1.c.
\587\ .5 hours (estimated annual information collection burden
for each broker-dealer) x $291 (hourly cost for a broker-dealer's
internal compliance attorney) = $146. The hourly rate for the
compliance attorney is from SIFMA's Management & Professional
Earnings in the Securities Industry 2009, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. The Commission has slightly revised this cost
estimate upward from the estimate contained in the Proposing Release
to reflect updated hourly rate information from SIFMA for 2009.
---------------------------------------------------------------------------
The Commission included these specific cost estimates in the
Proposing Release and received no comments on them.\588\
---------------------------------------------------------------------------
\588\ These cost estimates correspond with the burden estimates
set forth in Section V.D.1., above. Therefore, to the extent the
Commission received comments that generally relate to broker-
dealers' costs under the Rule, they are discussed above, and the
responses to those comments are incorporated herein by reference.
The Commission does not believe that these comments affect these
cost estimates.
---------------------------------------------------------------------------
2. Issuers
a. Current Issuers
Some current issuers are likely to be subject to some internal and
external costs associated with the amendments. The costs for current
issuers will result from the amendments relating to the new and
modified event notice provisions and the elimination of the materiality
determination for certain of the Rule's events.\589\ Current issuers
will incur internal costs associated with the preparation of the
additional event notices that may result from these changes to the
Rule. Current issuers also will incur costs if they issue demand
obligations, as discussed in the next sub-section. As noted above, the
revisions to the Rule regarding the ten business day time frame for
submission of event notices and the elimination of the materiality
condition for many of the Rule's disclosure events will not change the
substance of an event notice, the method for filing an event notice, or
the location to which an event notice will be submitted. Consequently,
issuers may not incur costs associated with the new ten business day
time frame for submission of event notices. As discussed above, some
issuers, including small issuers, may need to submit event notices more
promptly than they do now and may need to monitor events not within
their direct control, such as a rating change, that will prompt
submission of an event notice.
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\589\ The amendments include a materiality condition for two of
the new disclosure events. A materiality determination may result in
costs to investors, market professionals and others to the extent
that the issuer or obligated person determines that the event is not
material and thus does not submit a notice to the MSRB. If
investors, market professionals and others would consider the
information important and have access to it, they may reach a
different investment decision.
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The Commission also believes that current issuers may incur some
internal labor costs associated with the preparation and submission of
additional event notices. As discussed above,\590\ the Commission
estimates that a current issuer will submit a maximum of one additional
event notice annually.\591\ Thus, the Commission estimates that the
maximum annual labor cost to prepare and submit the additional event
notice is approximately $44 per current issuer.\592\
---------------------------------------------------------------------------
\590\ See supra Section V.E.2.a.
\591\ This estimate includes additional event notices that may
be submitted as a result of the modification of the materiality
condition in paragraph (b)(5)(i)(C) of the Rule.
\592\ 1 (maximum estimated number of additional material event
notices submitted per year per issuer) x $59 (hourly wage for a
compliance clerk) x .75 hours (45 minutes) (estimated time for
compliance clerk to prepare and submit a material event notice) =
$44.25 (rounded to $44). The $59 per hour estimate for a compliance
clerk is from SIFMA's Office Salaries in the Securities Industry
2009, modified by the Commission's staff to account for an 1800-hour
work-year and multiplied by 2.93 to account for bonuses, firm size,
employee benefits and overhead. The Commission has slightly revised
this cost estimate downward from the estimate contained in the
Proposing Release to reflect updated hourly rate information from
SIFMA for 2009. To provide an estimate of total costs for issuers
that will not be under-inclusive, the Commission elected to use the
higher end of the estimate of annual submissions of continuing
disclosure documents.
---------------------------------------------------------------------------
For current issuers that convert their annual filings, event
notices and/or failure to file notices into the MSRB's prescribed
electronic format through a third party, there will be costs associated
with any additional submissions of event notices and failure to file
notices. As noted above, the Commission estimates that each current
issuer will submit one additional event notice annually as a result of
the amendments.\593\ If a current issuer uses a third-party vendor to
scan the additional event notice into an electronic format for
submission to the MSRB, the Commission estimates that such issuer will
have an additional annual cost of $8 per notice.\594\ For current
issuers that convert their annual filings, event notices and/or failure
to file notices into the MSRB's prescribed electronic format internally
there will be no additional external costs associated with such
conversion. Further, some current issuers may incur a one-time cost of
$100 associated with a revision to the template for continuing
disclosure agreements.\595\
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\593\ See supra Section V.E.2.a. These cost estimates correspond
with the burden estimates set forth in Section V.D.2., above.
Therefore, to the extent the Commission received comments that
generally relate to issuers' costs under the Rule, they are
discussed above, and the responses to those comments are
incorporated herein by reference. The Commission does not believe
that these comments affect these cost estimates.
\594\ Id.
\595\ Id. The Commission estimates that there is an approximate
cost of $100 associated with revising the issuer's continuing
disclosure agreement by the current issuer's outside counsel to
conform the agreement to the amendments. Thus, the total cost for
revising continuing disclosure agreements for all current issuers by
the current issuers' outside counsel will be approximately
$1,000,000.
---------------------------------------------------------------------------
The Commission included these specific cost estimates in the
Proposing Release and received no comments on them.\596\
---------------------------------------------------------------------------
\596\ The Commission has slightly revised these cost estimates
upward from the estimates contained in the Proposing Release to
reflect updated hourly rate information from SIFMA for 2009.
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[[Page 33146]]
b. Demand Securities Issuers
As discussed above, the Commission estimates that the modification
of the Rule's exemption for demand securities will increase the number
of issuers affected by the Rule by approximately 20% or 2,000
issuers.\597\ These demand securities issuers are likely to have some
costs associated with the preparation and submission of continuing
disclosure documents. Also as discussed in the PRA section above, the
Commission estimates that each demand securities issuer may have a one-
time external cost of $600 associated with preparing into a continuing
disclosure agreement.\598\
---------------------------------------------------------------------------
\597\ See supra Section V.C.
\598\ See supra Section V.E.2.b. The Commission estimated that
there is an approximate cost of $600 associated with drafting a
continuing disclosure agreement by the demand securities issuer's
outside counsel. Thus, the total cost for preparing continuing
disclosure documents for all demand securities issuers by the demand
securities issuers' outside counsel will be approximately
$1,200,000.
---------------------------------------------------------------------------
Other external costs for demand securities issuers are likely to be
the costs associated with converting continuing disclosure documents
into an electronic format to submit to the MSRB. As noted in the PRA
section above, the Commission believes that many issuers of municipal
securities currently have the computer equipment and software necessary
to convert paper copies of continuing disclosure documents to
electronic copies and to electronically transmit the documents to the
MSRB.\599\ Demand securities issuers that presently do not have the
ability to prepare their annual filings, event notices and/or failure
to file notices in an electronic format may incur some costs to obtain
electronic copies of such documents if they are prepared by a third
party (e.g., accountant or attorney) or, alternatively, to have a paper
copy converted into an electronic format. These costs will vary
depending on how the demand securities issuer elects to convert its
continuing disclosure documents into an electronic format. An issuer
may elect to have a third-party vendor transfer its paper continuing
disclosure documents into the appropriate electronic format. An issuer
also may decide to undertake the work internally, and its costs will
vary depending on the issuer's current technological resources. An
issuer also may use the services of a designated agent to submit its
continuing disclosure documents to the MSRB. In the Proposing Release,
the Commission noted that approximately 30% of municipal issuers rely
on the services of a designated agent to submit continuing disclosure
documents for them.\600\ Generally, when issuers utilize the services
of a designated agent, they enter into a contract with the agent for a
package of services, including the submission of continuing disclosure
documents, for a single fee. The Commission estimates that the annual
fees for designated agents range from $100 to $500 per issuer, for a
total maximum annual cost of $300,000 for all demand securities
issuers.\601\
---------------------------------------------------------------------------
\599\ Id.
\600\ See Proposing Release, supra note 2, 74 FR at 36862.
\601\ See supra Section V.E.2.b.
---------------------------------------------------------------------------
The Commission estimates that some demand securities issuers may
have to convert continuing disclosure documents into an electronic
format to submit to the MSRB. The costs associated with this conversion
may include: (i) Approximately $8 per notice to use a third-party
vendor to scan a event notice or failure to file notice, and
approximately $64 to use a third-party vendor to scan an average-sized
annual financial statement; (ii) approximately $750 to $4,300 to
acquire technological resources to convert continuing disclosure
documents into an electronic format; (iii) approximately $50 to $300
solely to upgrade or acquire the software to submit documents in an
electronic format; and (iv) approximately $50 per month to establish
Internet access.\602\
---------------------------------------------------------------------------
\602\ Id.
---------------------------------------------------------------------------
Based on the PRA section above, the Commission estimates that
Category 1 demand securities issuers will incur a total maximum
external cost of $776 per year.\603\ The Commission estimates that
Category 2 demand securities issuers will incur a total maximum
external cost of $4,900 for the first year and $600 per year
thereafter.\604\ As noted above, the Commission estimates that any
demand securities issuer that incurs costs associated with converting
continuing disclosure documents into the MSRB's prescribed electronic
format will choose the more expensive Category 2 option.\605\ The
Commission estimates that approximately 400 demand securities issuers
will incur costs associated with acquiring technological resources to
convert continuing disclosure documents into an electronic format.\606\
In addition, the Commission estimates that the maximum annual costs for
those demand securities issuers that need to acquire technological
resources to submit documents to the MSRB will be approximately
$1,960,000 for the first year after the adoption of the amendments and
approximately $240,000 for each year thereafter.\607\
---------------------------------------------------------------------------
\603\ A Category 1 demand securities issuer is one that does not
have Internet access and needs to have a third party convert
continuing disclosure documents into an electronic format. See supra
Section V.E.2.b.
\604\ A Category 2 demand securities issuer is one that does not
have Internet access and elects to acquire the technological
resources to convert continuing disclosure documents into an
electronic internally. See supra Section V.E.2.b.
\605\ Id.
\606\ 2,000 demand securities issuers x 20% = 400 demand
securities issuers.
\607\ See supra Section V.E.2.b.
---------------------------------------------------------------------------
The Commission included these specific cost estimates in the
Proposing Release and received no comments on them.\608\
---------------------------------------------------------------------------
\608\ These cost estimates correspond with the burden estimates
set forth in supra Section V.D.2. Therefore, to the extent the
Commission received comments that generally relate to issuers' costs
under the Rule, they are discussed above, and the responses to those
comments are incorporated herein by reference. The Commission does
not believe that these comments affect these cost estimates.
---------------------------------------------------------------------------
c. Current Issuers and Demand Securities Issuers
Lastly, as discussed in the PRA section above, some current issuers
and some demand securities issuers are likely to incur external costs
associated with the amendment to revise the timing for submitting event
notices from ``in a timely manner'' to ``in a timely manner not to
exceed ten business days after the occurrence of the event.'' \609\ In
particular, some current issuers and some demand securities issuers may
incur external costs associated with monitoring the appointment of a
new trustee or a change in the trustee's name. One way an issuer may
monitor such a change would be for its counsel to add a notice
provision to the issuer's trust indenture that requires the trustee to
provide the issuer with notice of the appointment of a new trustee or
any change in the trustee's name. The Commission estimates that the
approximate cost of adding this notice provision to an issuer's trust
indenture will be approximately $100 per issuer,\610\ for a one-time
annual cost of $1,200,000 \611\ for all issuers. The Commission
included these specific cost estimates in the Proposing Release and
received no comments on them.\612\
---------------------------------------------------------------------------
\609\ See supra Section V.E.2.c.
\610\ Id.
\611\ Id.
\612\ Id. These cost estimates correspond with the burden
estimates set forth in supra Section V.D.2. Therefore, to the extent
the Commission received comments that generally relate to issuers'
costs under the Rule, they are discussed above, and the responses to
those comments are incorporated herein by reference. The Commission
does not believe that these comments affect these cost estimates.
---------------------------------------------------------------------------
[[Page 33147]]
In addition to the burdens and costs discussed in the PRA section
above, the Commission received several comments relating to other costs
and burdens associated with the proposed amendments. Several commenters
expressed general concerns about the burdens and costs associated with
the establishment of a maximum ten business day time frame for the
submission of event notices. Some of these concerns included the
impracticability of meeting the time frame because of limited staff and
resources, especially for smaller issuers,\613\ and the increased
burdens and costs in connection with the additional monitoring and
compliance necessary to submit notices within ten business days.\614\
Other commenters expressed concerns relating to the submission of event
notices for information that the issuer does not control (e.g., rating
changes, changes to the trustee, and changes to the tax status of bonds
as a result of an IRS audit) within the ten business day time
frame.\615\ In particular, many of these commenters expressed concerns
regarding the costs associated with the reporting of rating changes
within the ten business day time frame. These commenters noted that
rating changes are not within the issuer's control and that rating
organizations do not directly notify issuers of rating changes.\616\ As
a result, these commenters believed that it would be difficult for most
issuers to meet the proposed ten business day time frame without
incurring substantial costs associated with monitoring for rating
changes,\617\ such as devoting more staff to the task of monitoring for
rating changes and/or subscribing to a service that will provide
issuers notice of rating changes.
---------------------------------------------------------------------------
\613\ See CRRC Letter, WCRRC Letter, Portland Letter at 2,
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2,
and NABL Letter at 5-6.
\614\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter,
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, and NABL
Letter at 5-6.
\615\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA
Letter at 2-4, San Diego Letter at 1-2, California Letter at 1-2,
NABL Letter at 8, and GFOA Letter at 3-4.
\616\ Id.
\617\ See, e.g., Halgren Letter at 1.
---------------------------------------------------------------------------
The foregoing comments chiefly relate to concerns regarding
submission of notices for events outside of the issuer's control. In
this regard, the Rule currently contains a disclosure event relating to
rating changes and so the concerns raised by these commenters are
inherent in the Rule as it existed prior to the amendments, except that
the amendments provide for event notices to be submitted within ten
business days of the event's occurrence. In addition, for some event
items, including rating changes, a materiality condition no longer will
be a part of the Rule. Ratings for municipal issuers are available on
the Internet Web sites of the rating agencies and thus issuers should
be able to ascertain readily whether a rating change has occurred. In
addition, issuers may be able to subscribe to a service that provides
them with prompt rating updates for their securities. The Commission
notes, however, that some issuers may have to monitor for these events
more frequently than in the past. However, as discussed above, the
Commission believes that its estimate of the time that issuers will
spend, on average, to prepare and submit notices of events, including
rating changes, is appropriate. With respect to the concern that some
issuers will have to pay a vendor to provide them with notice of rating
changes, the Commission reiterates that information regarding rating
changes is available for free on the Internet Web sites of the rating
agencies.
Several commenters also expressed general concerns about the costs
of the amendment that eliminates the materiality condition from certain
events. For example, one commenter believed that removal of the ``if
material'' condition from some events creates a risk of dividing events
into two disclosure categories that could cause confusion.\618\ Two
commenters believed that there are circumstances when an event, such as
delinquent payments, are beyond an issuer's control and do not
represent a financial failure on the issuer's part.\619\ According to
these commenters, in the past they would have treated such events as
immaterial.\620\ These commenters believed that if issuers have to file
notice in such circumstances, it could create an unwarranted
implication that the issuer has suffered financial adversity.\621\ Some
commenters believed that the materiality qualification should be
retained or included for certain specified events to prevent a large
volume of notices that are irrelevant to investors' decision to buy,
sell or hold municipal securities.\622\
---------------------------------------------------------------------------
\618\ See Connecticut Letter at 2.
\619\ See California Letter at 2 and San Diego Letter at 2.
\620\ Id.
\621\ Id.
\622\ See NABL Letter at 8 and Kutak Letter at 4.
---------------------------------------------------------------------------
In addition, several commenters expressed concerns about the costs
associated with the revised disclosure item regarding adverse tax
events. For example, one commenter stated that the Rule should not be
expanded to include notice of routine reviews and random audits because
they would unnecessarily alarm investors.\623\ Some commenters believed
that disclosure of potential taxability determinations could limit
issuers' options to negotiate settlements with the IRS in ways that do
not present material risk to bondholders\624\ and could affect market
perceptions of municipal issuers' securities, which would impose
increased interest rates and other costs to issuers, and would limit
future market access.\625\ Some of these commenters believed that the
proposal would lead to a flood of information about preliminary
taxability actions \626\ that could confuse and mislead investors \627\
or desensitize investors regarding adverse tax event
determinations.\628\ One of these commenters suggested that event
notices regarding adverse tax events should include a materiality
condition.\629\
---------------------------------------------------------------------------
\623\ See Connecticut Letter at 2.
\624\ See Metro Letter at 2, Kutak Letter at 5, and NABL Letter
7.
\625\ See Metro Letter at 2 and Kutak Letter at 5.
\626\ See Kutak Letter at 6.
\627\ See Kutak Letter at 6, NABL Letter at 7, and GFOA Letter
at 4.
\628\ See Kutak Letter at 6.
\629\ See NABL Letter at 7.
---------------------------------------------------------------------------
Furthermore, as discussed in Section III.A. above, several
commenters expressed general concerns about the costs of the proposal
relating to the modification of the exemption for demand securities.
For example, one commenter noted that the elimination of the Rule's
exemption for demand securities from the Rule would impose such
insurmountable administrative costs that small issuers and non-profit
organizations would refuse to enter continuing disclosure
agreements.\630\ Similarly, some commenters also believed that the
elimination of the exemption for demand securities would hinder or
prevent many issuers, particularly small issuers and non-profits, from
using LOC-backed demand securities to access the tax-exempt
markets.\631\ They opined that local communities would be hurt as a
result of the proposed amendment to delete the exemption for demand
securities because small issuers and obligated persons that rely on the
exemption will have to pass along to users of their service any
increased costs that they
[[Page 33148]]
may incur.\632\ One of the commenters remarked that many non-
governmental conduit borrowers \633\ have no previous undertakings to
provide continuing disclosure information and, for such persons,
complying with paragraph (b)(5) of the Rule would not merely be an
extension of pre-existing obligations but a new and significant
burden.\634\
---------------------------------------------------------------------------
\630\ See SIFMA Letter at 2-3.
\631\ See CRRC Letter at 3-5, NABL Letter A-9--A-12, and WCRRC
Letter at 1.
\632\ See CRRC Letter at 3-5 and WCRRC Letter at 1.
\633\ See NABL Letter at A-2, n. 1.
\634\ Id.
---------------------------------------------------------------------------
Moreover, two commenters stated that many obligated persons of LOC-
backed demand securities do not prepare annual filings, such as audited
financial statements, in the ordinary course of their business.\635\ As
discussed in the PRA section above, one of these commenters believed
that they would incur $30,000-$40,000 per year to prepare audited or
consolidated financial statements.\636\ The commenters therefore
believed that eliminating the exemption for demand securities would
impose administrative costs and burdens that could potentially force
some conduit borrowers of LOC-backed demand securities to withdraw from
the tax-exempt bond market.\637\
---------------------------------------------------------------------------
\635\ See CRRC Letter at 5 and NABL Letter at A-2.
\636\ See CRRC Letter at 5. See also supra note 539 and
accompanying text.
\637\ See CRRC Letter at 5 and NABL Letter at A-10. Two
commenters also expressed concern that, in complying with the
revised Rule, smaller and not-for-profit obligated persons could
encounter similar administrative costs and burdens. See NABL Letter
at A-2 (noting that many small businesses and non-profit
organizations utilize LOC-backed demand securities in accessing the
tax-exempt debt markets) and SIFMA Letter at 2-3.
---------------------------------------------------------------------------
As discussed in Section III.A. above, the Commission has considered
the comments concerning the costs and burden on demand securities
issuers and obligated persons. In response to commenters' concerns, the
Commission has revised the proposal relating to demand securities to
include a limited grandfather provision. The Commission notes that a
number of demand securities issuers and obligated persons, including
some small issuers and non-profit organizations, do voluntarily enter
into continuing disclosure agreements.\638\ Further, many demand
securities issuers and obligated persons are likely also to have
outstanding fixed rate securities \639\ that are subject to continuing
disclosure agreements. Because any such existing continuing disclosure
agreement would obligate an issuer or an obligated person to provide
annual filings, event notices, or failure to file notices with respect
to these fixed rate securities, providing disclosures with respect to
demand securities should not be a significant additional burden for
issuers and obligated persons that already have outstanding fixed rate
securities.
---------------------------------------------------------------------------
\638\ Id.
\639\ See Proposing Release, supra note 2, 74 FR at 36837.
---------------------------------------------------------------------------
Regarding the concern that any new disclosure burdens may induce
some obligated persons to withdraw from the tax-exempt municipal market
because they do not prepare annual filings in the ordinary course of
their business, the Commission notes that, for purposes of the Rule,
annual filings are required only to the extent provided in the final
official statements.\640\ Further, pursuant to paragraph (b)(5)(i)(B)
of the Rule, audited financial statements need to be submitted,
pursuant to the issuer's and obligated person's undertaking in a
continuing disclosure agreement, only ``when and if available.'' \641\
This limitation, which is consistent with the Commission's position in
the 1994 Amendments Adopting Release, should mitigate some concerns of
those obligated persons that do not prepare audited financial
statements in the ordinary course of their business.\642\ Further,
although not all issuers or obligated persons, in the ordinary course
of their business, prepare audited financial statements or other
financial and operating information of the type included in annual
filings, a number of issuers and obligated persons do.\643\
---------------------------------------------------------------------------
\640\ See supra Section III.A. for additional discussion
concerning the provision of annual filings and audited financial
statements.
\641\ 17 CFR 240.15c2-12(b)(5)(i)(B). See also supra Section
III.A.
\642\ As discussed in the 1994 Amendments Adopting Release, the
1994 Amendments ``[do] not adopt the proposal to mandate audited
financial statements on an annual basis with respect to each issuer
and significant obligor. Instead, the amendments require annual
financial information, which may be unaudited, and may, where
appropriate and consistent with the presentation in the final
official statement, be other than full financial statements. * * *
However, if audited financial statements are prepared, then when and
if available, such audited financial statements will be subject to
the undertaking and must be submitted to the repositories. Thus * *
* the undertaking must include audited financial statements only in
those cases where they otherwise are prepared.'' See 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
\643\ See http://www.emma.msrb.org for audited financial
statements or other financial and operating information submitted to
EMMA.
---------------------------------------------------------------------------
The Commission acknowledges that issuers or obligated persons of
demand obligations that assemble financial and operating data for the
first time in response to their undertakings in a continuing disclosure
agreement may incur incremental costs beyond those costs incurred by
those issuers or obligated persons that already assemble this
information.\644\ Also, smaller issuers or obligated persons may have
relatively greater burdens than larger issuers or obligated persons.
However, the overall burdens for these demand securities issuers or
obligated persons in preparing financial information are expected to be
commensurate with those of issuers or obligated persons that already
are preparing financial information as part of their continuing
disclosure undertakings.\645\ The Commission believes that the burdens
that will be incurred in the aggregate by issuers or obligated persons,
as a result of the amendments with respect to demand securities, may
not be significant and, in any event, are justified by the benefits to
investors of enhanced disclosure.\646\
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\644\ The Commission, however, believes that the operations of
an issuer or obligated person generally entail the preparation and
maintenance of at least some financial and operating data.
\645\ Further, issuers or obligated persons that assemble
financial and operating data for the first time may face a greater
burden than those issuers or obligated persons that already assemble
this information. The amendments therefore initially may have a
disparate impact on those issuers or obligated persons, including
small entities, entering into a continuing disclosure agreement for
the first time, as compared with those that already have outstanding
continuing disclosure agreements.
\646\ See supra Section V.D. As discussed therein, some
commenters believed that the amendment could force some small
entities to withdraw from the tax-exempt market because: (1)
Disclosure of small issuers' or obligated persons' financial
information would provide their large, national competitors with
information about these small issuers or obligated persons, which
they believed could result in a competitive disadvantage to them;
and (2) small issuers or obligated persons would have to prepare
costly audited financial statements. See, e.g., CRRC Letter at 3-4
and WCRRC Letter at 1. As discussed above, the undertakings
contemplated by the amendments (and Rule 15c2-12 in general) require
annual financial information only to the extent provided in the
final official statement, and audited financial statements only when
and if available.
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3. MSRB
Since the number of continuing disclosure documents submitted will
increase as a result of the amendments, the MSRB may incur costs
associated with the amendments. The Commission estimates that these
costs for the MSRB may include: (i) The cost to hire additional
clerical personnel at an estimated annual cost of $119,770 to process
the additional submissions associated with the amendments; \647\
[[Page 33149]]
and (ii) the cost to update its EMMA system to accommodate indexing
information in connection with the changes to the Rule's disclosure
events. Based on information provided to the Commission staff by the
MSRB staff in a telephone conversation on November 7, 2008, the MSRB
staff estimated that the MSRB's costs to update its EMMA system to
accommodate the final changes to the disclosure events would be
approximately $10,000.\648\ Therefore, in connection with the
amendments, the MSRB would incur a one-time cost of approximately
$10,000 as well as a recurring annual cost of approximately
$119,770.\649\
---------------------------------------------------------------------------
\647\ 2,030 hours (estimated additional annual number of hours
worked by a compliance clerk) x $59 (hourly wage for a compliance
clerk) = $119,770 (annual salary for compliance clerk). The $59 per
hour estimate for a compliance clerk is from SIFMA's Office Salaries
in the Securities Industry 2009, modified by the Commission's staff
to account for an 1800-hour work-year and multiplied by 2.93 to
account for bonuses, firm size, employee benefits and overhead. The
estimate for additional annual hours worked by a compliance clerk is
the estimated additional hourly burden the MSRB will incur on an
annual basis under the amendments. The Commission has slightly
revised this cost estimate downward from the estimate contained in
the Proposing Release to reflect updated hourly rate information
from SIFMA for 2009. See supra Section V.D.3.
\648\ See Proposing Release, supra note 2, 74 FR at 36855, n.
205. Telephone conversation between Harold Johnson, Deputy General
Counsel, MSRB, and Martha M. Haines, Assistant Director and Chief,
Office of Municipal Securities, Division, Commission, November 7,
2008.
\649\ See supra notes 487 through 490.
---------------------------------------------------------------------------
The Commission received a comment letter from the MSRB relating to
its costs associated with the proposed amendments.\650\ The MSRB stated
that, in determining whether to approve or modify the proposed
amendments, the Commission should note that changes to the manner of
providing disclosures under the Rule or to the parties expected to make
submissions, i.e., if third parties were to submit event notices rather
than issuers or obligated persons, may have an impact on the design and
timing of necessary EMMA system changes to implement the revised
continuing disclosure provisions.\651\ The MSRB also stated that the
Commission should verify that any such revisions can reasonably be
implemented; that the revisions would improve the efficiency,
timeliness and public access process; and that no direct charges would
be imposed on the MSRB for revisions such as third-party
submissions.\652\ Further, the MSRB noted that certain revisions would
likely result in a longer planning, development and implementation time
frame and could result in greater development and operational
costs.\653\
---------------------------------------------------------------------------
\650\ See MSRB Letter at 2.
\651\ Id.
\652\ Id.
\653\ Id.
---------------------------------------------------------------------------
C. Limited Grandfather Provision Relating to Modification of Exemption
for Demand Securities
As discussed in Section III.A. above, the Commission is revising
the amendment relating to demand securities from that proposed in the
Proposing Release to include a limited grandfather provision, so that
paragraphs (b)(5) and (c) will not apply to demand securities
outstanding as of November 30, 2010. The Commission believes that the
limited grandfather provision strikes an appropriate balance between
the need to improve disclosure available to investors and the
recognition that the practical effects of applying paragraphs (b)(5)
and (c) of the Rule to outstanding issues of demand securities could
unduly burden issuers and obligated persons and thus may adversely
impact the market. As the Commission noted in Section III.A. above,
there would be benefits to making outstanding demand obligations
subject to paragraphs (b)(5) and (c) of the Rule because greater
information about these securities would be available to investors on a
timely basis. However, demand securities, such as VRDOs, generally are
long-term securities. If an outstanding demand security became subject
to paragraph (b)(5)(i)(C) of the Rule, a Participating Underwriter, in
the first remarketing of the VRDO following the compliance date of the
amendments, would have to reasonably determine that an issuer or an
obligated person has executed a continuing disclosure agreement to
provide annual financial information for each obligated person for whom
financial information or operating data is presented in the final
official statement.
For an outstanding issue of demand securities, however, referring
back to information included in the final official statement may be
problematic, if not impossible, because the official statement may be
years old. Thus, its information would be out-of date, thereby
increasing the underwriter's cost of complying with Rule 15c2-12
substantially. In addition, the official statement may be difficult to
obtain if the remarketing agent was not the underwriter of the original
offering. Further, absent the limited grandfathering provision, the
issuer or the obligated person of such security, pursuant to its
continuing disclosure undertaking, would have needed to update annual
financial information that may no longer be prepared or available,
which may also be a potentially costly undertaking. In addition,
application of the amendments to remarketings of demand securities
occurring on or after the compliance date would necessitate a large
number of issuers or obligated persons of demand securities entering
into continuing disclosure agreements in a very short time period,
which could delay remarketings and temporarily disrupt the markets for
demand securities. The Commission believes that the benefits of
applying paragraphs (b)(5) and (c) of the Rule to demand securities
outstanding prior to the compliance date would not justify the high
cost of such change to both Participating Underwriters and issuers or
obligated persons of such securities and therefore is adopting the
limited grandfather provision. The Commission further notes that some
issuers or obligated persons of demand securities also have issued
fixed rate municipal securities and, in that case, continuing
disclosures about those issuers or obligated persons should be
available to investors.
VII. Consideration of Burden and Promotion of Efficiency, Competition,
and Capital Formation
Section 3(f) of the Exchange Act \654\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action would promote efficiency, competition, and capital
formation. In addition, Section 23(a)(2) of the Exchange Act \655\
requires the Commission, when adopting rules under the Exchange Act, to
consider the impact such rules would have on competition. Section
23(a)(2) of the Exchange Act also prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
---------------------------------------------------------------------------
\654\ 15 U.S.C. 78c(f).
\655\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
The municipal securities market is comprised of approximately
51,000 issuers that are states and local governments or their agencies
and instrumentalities. As discussed in more detail above, there are
approximately $400 billion of new issuances of municipal securities
annually and approximately $2.8 trillion of municipal securities are
outstanding.\656\ There are two primary types of municipal securities:
general obligation bonds and revenue bonds. General obligation bonds
are backed by the full faith and credit of the issuer and are also
usually secured by specific tax levies. In contrast, revenue bonds are
generally secured by a pledge of specific revenues of the issuer, which
are typically
[[Page 33150]]
derived from the facility financed by the bonds (for example, water
rates may be used to pay principal and interest on the bonds issued to
pay for construction of a water system). Revenue bonds are further
divided into two general types: Governmental and private purpose.
Governmental bonds are issued to finance the needs of the states or
local governments, their agencies and instrumentalities. Private
purpose bonds (often referred to as conduit bonds), however, are issued
to provide the benefit of a tax-exempt interest rate to a private
entity as permitted by various provisions of the Internal Revenue Code.
The obligation to pay conduit bonds rests entirely on the private
borrower, such as 501(c)(3) hospitals, colleges and universities, the
owners of low and moderate income housing projects and of small
industrial facilities.
---------------------------------------------------------------------------
\656\ See supra Section II.
---------------------------------------------------------------------------
As described above, because of the diversity of disclosure
practices, the Commission believes that the informational efficiency of
the municipal bond market could be improved. As a result, the
Commission believes that the amendments are appropriate to enhance the
efficiency of the municipal securities market, particularly in the
sense of informational efficiency. Informational efficiency helps
investors efficiently allocate capital, since it helps to ensure that a
security's price accurately reflects important information. When
accurate information is available, the municipal security's price
serves to convey aggregate information to investors, further
facilitating investment decisions. The amendments encourage disclosure
of information that, in the Commission's view, reasonable investors
consider important in their transaction decisions. The amendments
strengthen the municipal disclosure process because of the new events
being added to paragraph (b)(5)(i)(C) of the Rule. In addition,
inclusion of the provision that submissions of event notices to the
MSRB be made in a timely manner not in excess of ten business days of
the event's occurrence, and the deletion of the exemption for demand
securities (other than those demand securities that qualify for the
limited grandfather provision), also is expected to promote the
efficiency of the municipal securities market, as described above
including in the cost-benefit section. Currently, the Rule does not
contain a specific time frame within which event notices must be
provided to the MSRB pursuant to a continuing disclosure agreement.
Thus, the Commission believes that the revision relating to the time
frame for submission of event notices will help individuals and others
to obtain greater information about municipal securities within ten
business days of the event's occurrence. In addition, certain events
regarding municipal securities that may be important to investors, such
as certain tender offers or the consummation of a merger,
consolidation, or acquisition involving an obligated person or the sale
of all or substantially all of the assets of the obligated person,
other than in the ordinary course of business, the entry into a
definitive agreement to undertake such an action or the termination of
a definitive agreement relating to any such actions, other than
pursuant to its terms, if material, are now included as event items in
the Rule. Further, certain events listed in paragraph (b)(5)(i)(C) of
the Rule will now be disclosed without the issuer first having to make
a materiality determination.
Moreover, the Rule's exemption for demand securities has been
narrowed, although a limited grandfather provision is in place for many
pre-existing demand obligations.\657\ As a consequence of the
amendments, in some cases, greater information about municipal
securities and their issuers will be more readily accessible on a more
timely basis to broker-dealers, mutual funds analysts and other market
professionals, institutional and retail investors, and the public
generally. Thus, these individuals and entities are expected to have
access to important information about municipal securities within a
specific ten business day time frame, which could aid them in making
better informed and more efficient investment decisions and should help
reduce the likelihood of fraud facilitated by inadequate disclosure. To
the extent that greater information efficiency ultimately allows for
better allocation of investments in the municipal securities market,
the amendments are expected to promote allocative efficiency as well.
---------------------------------------------------------------------------
\657\ As discussed above, although it may be optimal for all
outstanding demand obligations to be subject to paragraph (b)(5) and
(c) of the Rule, the application of the continuing disclosure
requirements of the Rule to all outstanding demand securities issued
prior to the compliance date may be burdensome for issuers and
Participating Underwriters because they would need to enter into a
continuing disclosure agreement for any remarketing that is a
primary offering that occurs on or after the compliance date, which,
potentially, could temporarily disrupt the market for demand
securities.
---------------------------------------------------------------------------
The Commission considers the existing state of the municipal
securities market to be a competitive one, given the large number and
diversity of issuers, and the volume of municipal securities regularly
issued and remarketed, as noted above, despite certain characteristics
of municipal bonds, discussed below, that lead to a certain degree of
non-fungibility and market segmentation. The size of the municipal
securities market--with approximately 51,000 issuers, $400 billion of
new issuances annually, and approximately $2.8 trillion in securities
outstanding--suggests that the market for issuance and purchase of
municipal securities may be highly competitive. Additionally, investors
can substitute to some degree their portfolios between municipal
securities and other securities, particularly fixed-income securities
of comparable credit quality. Depending on the municipality, these may
include U.S. Treasury obligations, corporate bonds, and, more recently,
taxable bonds known as Build America Bonds. Such substitutability
implies that municipal issuers must currently compete not only with
each other but also with other comparable opportunities available to
investors. Relative to this existing competitive benchmark, the
Commission believes that the amendments promote competition in the
purchase and sale of municipal securities, as described below.
Because of the limited grandfather provision and the transition
aspects of the amendments discussed in Section IV above, a number of
issuers will have differing disclosure undertakings. In this regard,
some issuers of demand securities will qualify for the limited
grandfather provision. In addition, the Commission recognizes that by
not applying the amendments to continuing disclosure agreements entered
into prior to the amendments' compliance date, for a period of time
there will be municipal securities that are subject to differing
disclosure. This circumstance may cause some confusion and thus could
lead to some inefficiency with respect to investors and broker-dealers
who otherwise would prefer uniform disclosure. Because of the nature of
the market for demand securities, the Commission does not believe that
it is appropriate to impose requirements that would mandate revisions
to existing continuing disclosure agreements.
The Commission believes that the amendments will promote
competition in the purchase and sale of municipal securities due to the
greater availability and timeliness of information as a result of the
amendments. Competition is generally more robust when many willing
buyers and many willing sellers transact with full information.
Competition in the municipal securities market is generally based on
the premise that investors are informed of
[[Page 33151]]
the various attributes of the investment instruments, and issuers are
competing for investors. Even with multiple sellers and buyers, if
there are high search costs (that is, if investors have to incur high
costs to gather relevant information), these costs can be a barrier to
effective competition. The Commission believes that its amendments will
tend to remove this barrier. As a result, more investors may be
attracted to this market sector and broker-dealers and municipal
issuers can compete for their business.
The amendments are designed to encourage improvement in the
completeness and timeliness of issuer disclosures and thus foster
additional interest in municipal securities by retail and institutional
customers. In addition, the greater availability of information about
municipal securities will be beneficial to vendors of municipal
securities information as they develop their value-added products.
Thus, the amendments will promote competition among those vendors of
municipal securities information that utilize the information provided
to the MSRB pursuant to continuing disclosure agreements and compete
with each other in creating and offering for sale value-added products
relating to municipal securities. As discussed above,\658\ the
amendments may result in some additional cost and hourly burdens for
broker-dealers, issuers and the MSRB.
---------------------------------------------------------------------------
\658\ See supra Sections V.E.1. and V.E.2.
---------------------------------------------------------------------------
By providing more timely disclosure of important information to an
important segment of the capital markets as a whole, the Commission
believes that these amendments also will improve the allocative
efficiency of capital formation both within the municipal segment of
the fixed income market and within the municipal bond market, in
particular. Allocative efficiency of capital is enhanced when investors
are able to make better-informed investment decisions since capital
should flow to its most efficient use. The amendments will provide
investors and other municipal market participants with notice of
additional events, to be provided in a timely manner not in excess of
ten business days of the event's occurrence, and the Commission has
provided a limited grandfathering provision. The Commission believes
that the limited grandfather provision strikes an appropriate balance
between the need to improve disclosure available to investors and the
recognition that the practical effects of applying paragraphs (b)(5)
and (c) of the Rule to outstanding issues of demand securities could
unduly burden issuers and obligated persons and thus may adversely
impact the market. In addition, the amendments will help to provide
investors and other municipal market participants with access to
important information about demand securities that previously were not
subject to the Rule's disclosure provisions. To assess the effect of
the amended Rule on capital formation, the Commission has evaluated the
benefits of enhanced disclosure on the allocative efficiency of the
capital market.
In the Proposing Release, the Commission considered the proposed
amendments in light of the standards set forth in the above-noted
Exchange Act provisions. The Commission solicited comment on whether,
if adopted, the proposal would result in any anti-competitive effects
or would promote efficiency, competition or capital formation. The
Commission asked commenters to provide empirical data or other facts to
support their views on any anti-competitive effects or any burdens on
efficiency, competition or capital formation that might result from the
proposed amendments. The Commission received some comments about the
competitive effects of the proposed amendments.
As discussed above,\659\ some commenters believed that the
elimination of the Rule's exemption for demand securities would force
some issuers, particularly small issuers and non-profit organizations,
to choose between accepting the burdens of complying with the
continuing disclosure provisions of the Rule and withdrawing from the
tax-exempt market.\660\ Two of these commenters argued that the
proposed amendment would have a chilling effect on competition for
small issuers and obligated persons because it would favor their large
national competitors that are either already reporting companies or
have superior financial and employee resources to comply with the
Rule.\661\ In their view, the proposed amendment would force small and
local businesses that rely on the exemption for demand securities to
choose between giving up their proprietary financial information and
accessing tax-exempt financing. Revelation of this financial
information, in their view, would favor competitors, relative to the
status quo.\662\ They opined that there could be a negative impact on
capital formation if these businesses decided to forego tax exempt
financing and were unable to obtain other sources of lending and if
investors were not afforded the opportunity to acquire the securities
that these businesses otherwise would have issued.\663\
---------------------------------------------------------------------------
\659\ See supra Section III.A.
\660\ See NABL Letter A-9-A-12, CRRC Letter at 3-5, and WCRRC
Letter at 1.
\661\ See CRRC Letter at 3-5, and WCRRC Letter at 1.
\662\ Id.
\663\ See CRRC Letter at 3-5, and WCRRC Letter at 1.
---------------------------------------------------------------------------
The Commission acknowledges that for those primary offerings of
demand securities that no longer will be exempt from the Rule and for
which the issuer is not currently submitting continuing disclosure
documents to the MSRB, the practice will be different than it was prior
to the amendments. In such cases, Participating Underwriters will need
to reasonably determine that the issuer or obligated person has
undertaken, in a continuing disclosure agreement, to provide continuing
disclosure documents to the MSRB. This change applies to any initial
offering and remarketing that is a primary offering of demand
securities unless the limited grandfather provision applies. Those
issuers that have not previously issued securities covered by the Rule
will be entering into a continuing disclosure agreement for the first
time and thereby will incur some costs to provide continuing disclosure
documents to the MSRB. Although the Commission recognizes that, if some
small entities elected to forego tax-exempt financing because of the
impact of the amendments, the amendments could have an adverse impact
on those entities; however, it believes that any additional burden on
issuers and obligated persons is, on balance, justified by the improved
availability of information with respect to demand securities. This
conclusion, moreover, is supported by a number of commenters.\664\
Therefore, while the Commission is mindful of the additional burdens
that may befall certain competitors in the market, based on its
analysis as well as other comments submitted, the Commission continues
to believe the overall result of the amendments will be to promote
competition in the municipal securities market.
---------------------------------------------------------------------------
\664\ See, e.g., CHEFA Letter at 2, Connecticut Letter at 1, e-
certus Letter I at 11, Folt Letter at 1, ICI Letter at 5, NFMA
Letter at 1, RBDA Letter at 2, and SIFMA Letter at 2.
---------------------------------------------------------------------------
In addition, as the Commission previously noted, a number of
issuers and obligated persons of demand securities are likely to have
outstanding fixed rate securities. Some of these securities, in turn,
likely would be subject to continuing disclosure agreements under the
Rule. Because any
[[Page 33152]]
existing continuing disclosure agreement would obligate an issuer or an
obligated person to provide annual filings, event notices, or failure
to file notices with respect to these fixed rate securities, providing
disclosures with respect to demand securities is not expected to be a
significant additional burden for these issuers and obligated persons.
Regarding the concern that any new disclosure burdens may induce
some obligated persons to withdraw from the tax-exempt municipal market
because they do not prepare annual filings in the ordinary course of
their business, the Commission notes that, for purposes of the Rule,
annual filings are required only to the extent provided in the final
official statement.\665\ Further, pursuant to paragraph (b)(5)(i)(B) of
the Rule, audited financial statements need to be submitted, pursuant
to the issuer's and obligated person's undertaking in a continuing
disclosure agreement only ``when and if available.'' \666\ This
limitation, which is consistent with the Commission's position in the
1994 Amendments Adopting Release, should mitigate some concerns of
those obligated persons that do not prepare audited financial
statements in the ordinary course of their business.\667\ Further,
although not all issuers or obligated persons, in the ordinary course
of their business, prepare audited financial statements or other
financial and operating information of the type included in annual
filings, a number of issuers and obligated persons do.\668\
---------------------------------------------------------------------------
\665\ See supra Section III.A. for additional discussion
concerning the provision of annual filings and audited financial
statements.
\666\ 17 CFR 240.15c2-12(b)(5)(i)(B). See also supra Section
III.A. concerning audited financial statements and 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
\667\ As discussed in the 1994 Amendments Adopting Release, the
1994 Amendments ``[do] not adopt the proposal to mandate audited
financial statements on an annual basis with respect to each issuer
and significant obligor. Instead, the amendments require annual
financial information, which may be unaudited, and may, where
appropriate and consistent with the presentation in the final
official statement, be other than full financial statements. * * *
However, if audited financial statements are prepared, then when and
if available, such audited financial statements will be subject to
the undertaking and must be submitted to the repositories. Thus * *
* the undertaking must include audited financial statements only in
those cases where they otherwise are prepared.'' See 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
\668\ See http://www.emma.msrb.org for audited financial
statements or other financial and operating information submitted to
EMMA.
---------------------------------------------------------------------------
The Commission acknowledges that issuers or obligated persons of
demand obligations that assemble financial and operating data for the
first time in response to their undertakings in a continuing disclosure
agreement may incur incremental costs beyond those costs incurred by
those issuers or obligated persons that already assemble this
information.\669\ Also, smaller issuers or obligated persons may have
relatively greater burdens than larger issuers or obligated persons.
However, the overall burdens for these demand securities issuers or
obligated persons in preparing financial information are expected to be
commensurate with those of issuers or obligated persons that already
are preparing financial information as part of their continuing
disclosure undertakings.\670\ The Commission believes that the burdens
that will be incurred in the aggregate by issuers or obligated persons,
as a result of the amendments with respect to demand securities, may
not be significant and, in any event, are justified by the benefits to
investors of enhanced disclosure.\671\
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\669\ The Commission, however, believes that the operations of
an issuer or obligated person generally entail the preparation and
maintenance of at least some financial and operating data.
\670\ Further, issuers or obligated persons that assemble
financial and operating data for the first time may face a greater
burden than those issuers or obligated persons that already assemble
this information. The amendments therefore initially may have a
disparate impact on those issuers or obligated persons, including
small entities, entering into a continuing disclosure agreement for
the first time, as compared with those that already have outstanding
continuing disclosure agreements.
\671\ See supra Section V.D. As discussed therein, some
commenters believed that the amendment could force some small
entities to withdraw from the tax-exempt market because: (1)
Disclosure of small issuers' or obligated persons' financial
information would provide their large, national competitors with
information about these small issuers or obligated persons, which
they believed could result in a competitive disadvantage to them;
and (2) small issuers or obligated persons would have to prepare
costly audited financial statements. See, e.g., CRRC Letter at 3-4
and WCRRC Letter at 1. As discussed above, the undertakings
contemplated by the amendments (and Rule 15c2-12 in general) require
annual financial information only to the extent provided in the
final official statement, and audited financial statements only when
and if available.
---------------------------------------------------------------------------
Two commenters viewed the addition of the event item for mergers,
acquisitions, and substantial asset sales as ``anti-competitive,''
because they believed that disclosure of such events by closely held
companies prior to public announcement would allow competitors to
interfere with the transaction.\672\ However, the Commission believes
that competition in the market for corporate control would be enhanced,
not reduced, by the possibility of disclosure creating more open
conditions for the sale of privately held-companies. The Commission
further notes that parties to mergers and acquisition agreements
generally may, subject to legal obligations, include remedies in such
agreements that are designed to balance the conflicting interests of
the buyer and the seller.
---------------------------------------------------------------------------
\672\ Id.
---------------------------------------------------------------------------
For the foregoing reasons, pursuant to Section 3(f) of the Exchange
Act, the Commission has considered the amendments to the Rule and
believes that they, on balance, should promote efficiency and capital
formation and increase competition. In addition, pursuant to Section
23(a)(2) of Exchange Act, the Commission does not believe that they
impose a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
VIII. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with the provisions of the Regulatory
Flexibility Act (``RFA'').\673\ It relates to amendments to Rule 15c2-
12 \674\ under the Exchange Act.\675\ The amendments revise certain
requirements regarding the information that a broker, dealer, or
municipal securities dealer acting as an underwriter in a primary
offering of municipal securities must reasonably determine that an
issuer of municipal securities or an obligated person has undertaken,
in a written agreement or contract for the beneficial holders of the
issuer's municipal securities, to provide, and revise an exemption from
the rule. Specifically, the amendments: (1) Require a Participating
Underwriter to reasonably determine that an issuer or obligated person
has agreed to provide notice of specified events in a timely manner not
in excess of ten business days of the occurrence of the event; and (2)
modify the list of events for which notices are to be provided. In
addition, the amendments modify the condition that event notices are to
be submitted to the MSRB ``if material,'' for some, but not all, of the
Rule's specified events. Further, the amendments revise an exemption
from the Rule for demand securities, by making the offering of those
securities subject to the continuing disclosure obligations set forth
in the Rule. This change applies to any initial offering and
remarketing that is a primary offering of demand securities occurring
on or after the compliance date of the amendments.\676\ However, to
address commenters' concerns about the impact of the
[[Page 33153]]
amendments on existing demand securities, the amendment does not apply
to remarketings of demand securities that are outstanding in the form
of demand securities on the day preceding the amendments' compliance
date and that continuously have remained outstanding in the form of
demand securities.
---------------------------------------------------------------------------
\673\ 5 U.S.C. 604(a).
\674\ 17 CFR 240.15c2-12.
\675\ 15 U.S.C. 78a et seq. See also Proposing Release, supra
note 2, 74 FR at 36836.
\676\ As noted above, the compliance date of the amendments to
the Rule is December 1, 2010.
---------------------------------------------------------------------------
A. Need for Amendments to Rule 15c2-12
The main purpose of the amendments is to improve the availability
of significant and timely information to the municipal securities
markets and to help deter fraud and manipulation in the municipal
securities market by prohibiting the underwriting of, and subsequent
recommendation of transactions in, municipal securities for which
adequate information is not available on an ongoing basis.
The amendments modify paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of
Rule 15c2-12 to require a Participating Underwriter to reasonably
determine that the issuer or obligated person has agreed in its
continuing disclosure agreement to provide event notices to the MSRB in
an electronic format as prescribed by the MSRB, in a timely manner not
in excess of ten business days after the occurrence of any such event.
Previously, the Rule stated that event notices were to be provided ``in
a timely manner.'' In 1994, the Commission adopted amendments to Rule
15c2-12 and noted at that time that it had not established a specific
time frame with respect to ``timely'' because of the wide variety of
events and issuer circumstances.\677\ However, the Commission stated
that, in general, this determination must take into consideration the
time needed to discover the occurrence of the event, assess its
materiality, and prepare and disseminate the notice.\678\ It has been
reported that there have been some instances in which event notices
were not submitted until months after the events occurred.\679\ The
Commission believes that such delays can deny investors important
information that they need to make informed decisions regarding whether
to buy, sell, or hold municipal securities. Moreover, notice of
important events can aid investors in determining whether the price
that they pay or receive for their municipal security transactions is
appropriate.\680\
---------------------------------------------------------------------------
\677\ See 1994 Amendments, supra note 7, 59 FR at 59601
\678\ Id.
\679\ See Proposing Release, supra note 2, 74 FR at 36837.
\680\ Id.
---------------------------------------------------------------------------
The Commission believes that codifying in the Rule a specific time
within which event notices are to be provided to the MSRB, in
accordance with the continuing disclosure agreement, should result in
these notices being made available more promptly than at present.
Accordingly, the amendments require a broker, dealer, or municipal
securities dealer (i.e., a Participating Underwriter) to reasonably
determine that an issuer or obligated person has agreed, in a
continuing disclosure agreement, to provide notice of the Rule's
specified events in a timely manner not in excess of ten business days
after the event's occurrence. The Commission believes that this change
will help promote more timely disclosure of this important information
to municipal security investors.
Paragraph (b)(5)(i)(C)(6) of the Rule currently requires
Participating Underwriters reasonably to determine that the issuer or
obligated person has entered into a continuing disclosure agreement to
submit a notice for ``[a]dverse tax opinions or events affecting the
tax-exempt status of the security.'' The Commission is adopting, with
certain modifications from that proposed, an amendment to paragraph
(b)(5)(i)(C)(6) of the Rule to require that Participating Underwriters
reasonably determine that the issuer or obligated person has entered
into a continuing disclosure agreement to submit a notice for
``[a]dverse tax opinions, the issuance by the Internal Revenue Service
of proposed or final determinations of taxability, Notices of Proposed
Issue (IRS Form 5701-TEB) or other material notices or determinations
with respect to the tax status of the security, or other material
events affecting the tax status of the security.'' A determination by
the IRS that interest on a municipal security may, in fact, be taxable
not only could reduce the security's market value, but also could
adversely affect each investor's federal and, in some cases, state
income tax liability.\681\ The tax-exempt status of a municipal
security is also important to many mutual funds whose governing
documents, with certain exceptions, limit their investments to tax-
exempt municipal securities.\682\ Therefore, retail and institutional
investors alike are very interested in events that could adversely
affect the tax-exempt status of the municipal securities that they own
or may wish to purchase.\683\
---------------------------------------------------------------------------
\681\ See Proposing Release, supra note 2, 74 FR at 36840-41.
\682\ Id.
\683\ Id.
---------------------------------------------------------------------------
Under the Rule, as amended, a materiality determination is no
longer necessary for the following six existing events: (1) Principal
and interest payment delinquencies with respect to the securities being
offered; (2) unscheduled draws on debt service reserves reflecting
financial difficulties; (3) unscheduled draws on credit enhancements
reflecting financial difficulties; (4) substitution of credit or
liquidity providers, or their failure to perform; (5) defeasances; and
(6) rating changes.\684\ The Commission believes that these events are
of such importance to investors that notice of their occurrence should
always be provided pursuant to a continuing disclosure agreement.
Furthermore, the Commission believes that eliminating the necessity to
make a materiality decision upon the occurrence of these events will
simplify issuer compliance with the terms of their continuing
disclosure agreements and will help to make such filings available more
promptly to investors and others.
---------------------------------------------------------------------------
\684\ See Proposing Release, supra note 2, 74 FR at 36839-40.
---------------------------------------------------------------------------
The amendments also add the following events, for which disclosure
notices are to be provided pursuant to a continuing disclosure
agreement: (i) Tender offers (paragraph (b)(5)(i)(C)(8) of the Rule);
\685\ (ii) bankruptcy, insolvency, receivership or similar event of the
obligated person (paragraph (b)(5)(i)(C)(12) of the Rule); \686\ (iii)
the consummation of a merger, consolidation, or acquisition involving
an obligated person or the sale of all or substantially all of the
assets of the obligated person, other than in the ordinary course of
business, the entry into a definitive agreement to undertake such an
action or the termination of a definitive agreement relating to any
such actions, other than pursuant to its terms, if material (paragraph
(b)(5)(i)(C)(13) of the Rule); \687\ and (iv) appointment of a
successor or additional trustee, or the change of name of a trustee
(paragraph (b)(5)(i)(C)(14) of the Rule), if material.\688\ The
Commission believes that there is a need to make available to all
investors this important information because it can affect their
investment decisions and the value of their municipal securities. The
Commission further believes that the addition of these four events
disclosure items to the Rule will substantially improve the
[[Page 33154]]
availability of important information in the municipal securities
market.
---------------------------------------------------------------------------
\685\ See Proposing Release, supra note 2, 74 FR at 36842-46.
\686\ Id.
\687\ Id.
\688\ Id.
---------------------------------------------------------------------------
Finally, the amendments modify the Rule's exemption for demand
securities by eliminating paragraph (d)(1)(iii) to Rule 15c2-12 and
adding new paragraph (d)(5) to the Rule. The Commission's experience
with the operation of the Rule and changes in the municipal securities
market suggest a need to increase the availability of information to
investors regarding demand securities.\689\ Furthermore, the recent
period of turmoil in the market for municipal auction rate securities
and demand securities also suggests that the Rule's exemption for
demand securities is no longer appropriate and that the exemption
should be modified to apply paragraphs (b)(5) and (c) of the Rule,
relating to the submission of continuing disclosure documents and
recommendations by brokers, dealers, and municipal securities dealers,
respectively, to primary offerings of demand securities.\690\
---------------------------------------------------------------------------
\689\ See Proposing Release, supra note 2, 74 FR at 36835-37.
\690\ Id.
---------------------------------------------------------------------------
B. Objectives
The purpose of the amendments is to achieve more efficient,
effective, and wider availability of municipal securities information
to broker-dealers, mutual funds, analysts and other market
professionals, institutional and retail investors, and the public
generally, and to help prevent, fraudulent, deceptive, or manipulative
acts or practices in the municipal securities market.
C. Significant Issues Raised by Public Comment
In the Proposing Release, the Commission requested comment on
matters discussed in the IRFA.\691\ No commenter suggested that the
Rule would have a significant impact on smaller broker-dealers, who are
not entities directly subject to the Rule. As discussed in greater
detail above, several commenters raised concerns regarding the impact
of the proposed amendments on small issuers, although they are not
directly subject to the rule.\692\
---------------------------------------------------------------------------
\691\ See Proposing Release, supra note 2, 74 FR at 36867.
\692\ See CRRC Letter, WCRRC Letter, Kutak Letter, CHEFA Letter,
NAHEFFA Letter, Connecticut Letter, SIFMA Letter, NABL Letter, and
GFOA Letter. See supra Sections III.B., III.E., and V.D.
---------------------------------------------------------------------------
D. Small Entities Subject to the Rule
The amendments apply directly to any broker, dealer, or municipal
securities dealer that acts as a Participating Underwriter in a primary
offering of municipal securities with an aggregate principal amount of
$1,000,000 or more and indirectly issuers of such securities.
The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small government jurisdiction.'' \693\ The
Commission's rules define ``small business'' and ``small organization''
for purposes of the RFA for each of the types of entities the
Commission regulates.
---------------------------------------------------------------------------
\693\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------
A broker-dealer is a small business if its total capital (net worth
plus subordinated liabilities) on the last day of its most recent
fiscal year was $500,000 or less, and is not affiliated with any entity
that is not a ``small business.'' \694\
---------------------------------------------------------------------------
\694\ 17 CFR 240.0-10(c).
---------------------------------------------------------------------------
A municipal securities dealer that is a bank (including a
separately identifiable department or division of a bank) is a small
business if it has total assets of less than $10 million at all times
during the preceding fiscal year; had an average monthly volume of
municipal securities transactions in the preceding fiscal year of less
than $100,000; and is not affiliated with any entity that is not a
``small business.'' \695\
---------------------------------------------------------------------------
\695\ 17 CFR 240.0-10(f).
---------------------------------------------------------------------------
For purposes of Commission rulemaking, an issuer or person, other
than an investment company, is a ``small business'' or ``small
organization'' if its ``total assets on the last day of its most recent
fiscal year were $5 million or less.'' \696\
---------------------------------------------------------------------------
\696\ 17 CFR 230.157. See also 17 CFR 240.0-10(a).
---------------------------------------------------------------------------
Based on information obtained by the Commission's staff, the
Commission estimates that 250 broker-dealers, including municipal
securities dealers, would be Participating Underwriters within the
meaning of Rule 15c2-12.\697\ Based on a recent review of industry
sources, the Commission does not believe that any Participating
Underwriters would be small broker-dealers or municipal securities
dealers.\698\ The Commission did not receive any comments on this
issue.
---------------------------------------------------------------------------
\697\ See supra Section V.C.
\698\ See Proposing Release, supra note 2, 74 FR at 36866.
---------------------------------------------------------------------------
A ``small governmental jurisdiction'' is defined by the RFA to
include ``governments of cities, counties, towns, townships, villages,
school districts, or special districts, with a population of less than
fifty thousand.'' \699\ Currently, there are approximately 51,000 state
and local issuers of municipal securities \700\ that are subject to the
amendments. The Commission estimates that approximately 40,000 state
and local issuers are ``small'' entities for purposes of the RFA.
However, the Commission believes that most issuers of municipal
securities qualify for the limited exemption in paragraph (d)(2) of the
Rule.\701\ In the 2008 Amendments Adopting Release, the Commission
estimated that 10,000 issuers would enter into continuing disclosure
agreements that provide for their submitting continuing disclosure
documents to the MSRB.\702\ Under the amendment to narrow the Rule's
exemption for demand securities, the number of affected issuers is
estimated to increase to 12,000 issuers.\703\ Some of these issuers may
be small issuers.
---------------------------------------------------------------------------
\699\ 5 U.S.C. 601(5).
\700\ See Securities Exchange Act Release No. 33741 (March 9,
1994), 59 FR 12748 (March 17, 1994).
\701\ Specifically, Rule 15c2-12(d)(2) provides an exemption
from the application of paragraph (b)(5) of the Rule (Rule's
provision regarding Participating Underwriters obligations with
respect to continuing disclosure agreements) with respect to primary
offerings if, among other things, the issuer or obligated person has
agreed to a limited disclosure obligation, including sending certain
material event notices to the MSRB. See 17 CFR 240.15c2-12(d)(2).
\702\ See 2008 Adopting Release, supra note 7, 73 FR at 76121.
\703\ See Proposing Release, supra note 2, 74 FR at 36850.
---------------------------------------------------------------------------
In the Proposing Release, the Commission requested comment on the
above estimates. The Commission received no comments responding to
these estimates and continues to believe that they are appropriate.
E. Reporting, Recordkeeping and Other Compliance Requirements
The amendments apply to all small entities that are currently
subject to Rule 15c2-12. Because small entities already may submit
notices to the MSRB to disclose events already covered by the Rule,
these entities should be able to prepare notices for events that are
incorporated into the Rule by the amendments. The Commission expects
that adding the new disclosure events will increase costs incurred by
small entities, to the extent that their primary offerings of municipal
securities are covered by the Rule, because they potentially will have
to provide a greater number of event notices than they do currently.
F. Action To Minimize Effect on Small Entities and Consideration of
Alternatives
In connection with the final revisions to the Rule, the Commission
considered the above comments and the following alternatives:
(1) Establishing differing compliance or reporting requirements or
timetables
[[Page 33155]]
which take into account the resources available to smaller entities;
(2) Exempting smaller entities from coverage of the disclosure
requirements, or any part thereof;
(3) The clarification, consolidation, or simplification of
disclosure for small entities; and
(4) Use of performance standards rather than design standards.
As noted above, breaker-dealers who are the entities directly
subject to the Rule are not likely to be significantly affected by the
amendments. The Commission notes, however, that it has adopted a
delayed compliance date of December 1, 2010, to allow broker-dealers,
and other entities indirectly affected by the Rule, additional time to
familiarize themselves with the amendments and to give the MSRB time to
make the necessary system changes to its EMMA system. As for issuers
who are not directly subject to the Rule, the Commission notes that
Rule 15c2-12 currently provides differing compliance criteria for
larger and smaller issuers because most small issuers of municipal
securities are eligible for the limited exemption currently contained
in paragraph (d)(2) of the Rule. The exemption in Rule 15c2-12(d)(2)
provides that paragraph (b)(5) of the Rule, which relates to the
submission of continuing disclosure documents, does not apply to a
primary offering if the conditions contained therein are met.\704\ This
limited exemption from the Rule is intended to assist small
governmental jurisdictions that issue municipal securities. In the case
of primary offerings by small governmental jurisdictions that are not
covered by the exemption, the Commission notes that the amendments
balance the informational needs of investors and others with regard to
municipal securities issued by small governmental jurisdictions with
the impact effects of the amendments on such small issuers.\705\
---------------------------------------------------------------------------
\704\ See 17 CFR 240.15c2-12(d)(2).
\705\ The Commission also notes that the Rule's exemption for
primary offerings of municipal securities that have an aggregate
principal amount of less than $1,000,000 may also apply to small
issuers and small governmental jurisdictions. See 17 CFR 240.15c2-
12(a).
---------------------------------------------------------------------------
Further, the Commission believes that, in the case of those issuers
that do not qualify for the exemption in paragraph (d)(2) of the Rule
and that issue securities after the amendments compliance date, there
should be comparable standards for municipal securities disclosure
events. The Commission nevertheless recognizes that by not applying the
amendments to continuing disclosure requirements entered into prior to
the amendments' compliance date, for a period of time there will be
municipal securities that are subject to differing disclosure. The
Commission is mindful of the potential difficulties presented by
revising continuing disclosure agreements that reflect contractual
commitments entered into by the municipal issuer at the time of the
security's issuance. These differences in disclosure that will result
from applying the amendments to new issuances and not to municipal
securities outstanding prior to the compliance date will, however,
diminish over time. With respect to the clarification, consolidation,
or simplification of disclosure for small entities, the Commission
notes that, although the amendments are uniform for large and small
issuers, they are largely based on existing requirements.
IX. Statutory Authority
Pursuant to the Exchange Act, and particularly Sections 2, 3(b),
10, 15(c), 15B, 17 and 23(a)(1) thereof, 15 U.S.C. 78b, 78c(b), 78j,
78o(c), 78o-4, 78q and 78w(a)(1), the Commission is adopting amendments
to Sec. 240.15c2-12 of Title 17 of the Code of Federal Regulations in
the manner set forth below.
Text of Rule Amendments
List of Subjects in 17 CFR Part 240
Brokers, Reporting and recordkeeping requirements, Securities.
0
For the reasons set out in the preamble, Title 17, Chapter II, of the
Code of Federal Regulations is amended as follows.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
1. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *
0
2. Section 240.15c2-12 is amended by the following:
0
A. Revise the introductory text of paragraph (b)(5)(i)(C), and
paragraphs (b)(5)(i)(C)(2), (b)(5)(i)(C)(6), (b)(5)(i)(C)(7),
(b)(5)(i)(C)(8), (b)(5)(i)(C)(10), and (b)(5)(i)(C)(11);
0
B. Add new paragraphs (b)(5)(i)(C)(12), (13) and (14);
0
C. Revise paragraph (d)(1)(ii);
0
D. Remove paragraph (d)(1)(iii);
0
E. Revise paragraph (d)(2)(ii)(B); and
0
F. Add new paragraph (d)(5).
The additions and revisions read as follows.
Sec. 240.15c2-12 Municipal securities disclosure.
* * * * *
(b) * * *
(5)(i) * * *
(C) In a timely manner not in excess of ten business days after the
occurrence of the event, notice of any of the following events with
respect to the securities being offered in the Offering:
* * * * *
(2) Non-payment related defaults, if material;
* * * * *
(6) Adverse tax opinions, the issuance by the Internal Revenue
Service of proposed or final determinations of taxability, Notices of
Proposed Issue (IRS Form 5701-TEB) or other material notices or
determinations with respect to the tax status of the security, or other
material events affecting the tax status of the security;
(7) Modifications to rights of security holders, if material;
(8) Bond calls, if material, and tender offers;
* * * * *
(10) Release, substitution, or sale of property securing repayment
of the securities, if material;
(11) Rating changes;
(12) Bankruptcy, insolvency, receivership or similar event of the
obligated person;
Note to paragraph (b)(5)(i)(C)(12): For the purposes of the
event identified in paragraph (b)(5)(i)(C)(12) of this section, the
event is considered to occur when any of the following occur: The
appointment of a receiver, fiscal agent or similar officer for an
obligated person in a proceeding under the U.S. Bankruptcy Code or
in any other proceeding under state or federal law in which a court
or governmental authority has assumed jurisdiction over
substantially all of the assets or business of the obligated person,
or if such jurisdiction has been assumed by leaving the existing
governing body and officials or officers in possession but subject
to the supervision and orders of a court or governmental authority,
or the entry of an order confirming a plan of reorganization,
arrangement or liquidation by a court or governmental authority
having supervision or jurisdiction over substantially all of the
assets or business of the obligated person.
(13) The consummation of a merger, consolidation, or acquisition
involving an obligated person or the sale of all or substantially all
of the assets of the obligated person, other than in the ordinary
course of business, the entry into a definitive agreement to undertake
such an action or the termination of a definitive agreement relating to
any
[[Page 33156]]
such actions, other than pursuant to its terms, if material;
(14) Appointment of a successor or additional trustee or the change
of name of a trustee, if material; and
* * * * *
(d) * * *
(1) * * *
(ii) Have a maturity of nine months or less.
* * * * *
(2) * * *
(ii) * * *
(B) In a timely manner not in excess of ten business days after the
occurrence of the event, notice of events specified in paragraph
(b)(5)(i)(C) of this section with respect to the securities that are
the subject of the Offering; and
* * * * *
(5) With the exception of paragraphs (b)(1) through (b)(4), this
section shall apply to a primary offering of municipal securities in
authorized denominations of $100,000 or more if such securities may, at
the option of the holder thereof, be tendered to an issuer of such
securities or its designated agent for redemption or purchase at par
value or more at least as frequently as every nine months until
maturity, earlier redemption, or purchase by an issuer or its
designated agent; provided, however, that paragraphs (b)(5) and (c) of
this section shall not apply to such securities outstanding on November
30, 2010, for so long as they continuously remain in authorized
denominations of $100,000 or more and may, at the option of the holder
thereof, be tendered to an issuer of such securities or its designated
agent for redemption or purchase at par value or more at least as
frequently as every nine months until maturity, earlier redemption, or
purchase by an issuer or its designated agent.
* * * * *
PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER
0
3. Part 241 is amended by adding Release No. 34-62184A and the release
date of May 26, 2010, to the list of interpretative releases.
By the Commission.
Dated: May 26, 2010.
Elizabeth M. Murphy,
Secretary.
Note: Exhibit A to the Preamble will not appear in the Code of
Federal Regulations
Exhibit A
Key to Comment Letters Cited in Adopting Release Amendment to
Municipal Securities Disclosure (File No. S7-15-09)
1. Letter from Bill Boatwright, Wealth Advisor, UBS Financial
Services, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated
July 16, 2009 (``Boatwright Letter'').
2. Letter from James R. Folts, Investor, to Elizabeth M. Murphy,
Secretary, Commission, dated August 4, 2009 (``Folts Letter'').
3. Letter from Leonard Becker, Investor, to Elizabeth M. Murphy,
Secretary, Commission, dated August 12, 2009 (``Becker Letter'').
4. Letter from Charles Halgren, Financial Analyst, to Elizabeth
M. Murphy, Secretary, Commission, dated August 18, 2009 (``Halgren
Letter'').
5. Letter from Philip A. Shalanca, Retired School Business
Administrator, to Elizabeth M. Murphy, Secretary, Commission, dated
August 30, 2009 (``Shalanca Letter'').
6. Letter from Glenn Byers, Assistant Treasurer and Tax
Collector, County of Los Angeles, to Mary Schapiro, Chairman,
Commission, dated August 31, 2009 (``Los Angeles Letter'').
7. Letter from Kenneth L. Rust, Chief Administrative Officer,
City of Portland, Oregon (``Portland''), and Eric H. Johansen, Debt
Manager, Portland, to Elizabeth M. Murphy, Secretary, Commission,
dated September 1, 2009 (``Portland Letter'').
8. Letter from Jerry Moffatt, State President, California Refuse
Recycling Council (``CRRC''), and Doug Button, North District
President, CRRC, to Elizabeth M. Murphy, Secretary, Commission,
dated September 2, 2009 (``CRRC Letter'').
9. Letter from Lisa S. Good, Executive Director, National
Federation of Municipal Analysts (``NFMA''), to Elizabeth M. Murphy,
Secretary, Commission, dated September 2, 2009 (``NFMA Letter'').
10. Letter from Connecticut Health and Educational Facilities
Authority (``CHEFA''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 4, 2009 (``CHEFA Letter'').
11. Letter from Robert Donovan, Executive Director, Rhode Island
Health and Educational Building Corporation, on behalf of the
National Association of Health and Education Facilities Finance
Authorities (``NAHEFFA''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 4, 2009 (``NAHEFFA Letter'').
12. Letter from Brian G. Thomas, Assistant General Manager/Chief
Financial Officer, The Metropolitan Water District of Southern
California (``Metro Water''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 4, 2009 (``Metro Water Letter'').
13. Letter from Trish Roath, Executive Director, CRRC, Kristan
Mitchell, Executive Director, Oregon Refuse & Recycling Association,
and Brad Lovas, Executive Director, Washington Refuse & Recycling
Association, on behalf of West Coast Refuse & Recycling Coalition
(``WCRRC''), to Elizabeth M. Murphy, Secretary, Commission, dated
September 7, 2009 (``WCRRC Letter'').
14. Letter from Ronald A. Stack, Chair, Municipal Securities
Rulemaking Board (``MSRB''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``MSRB Letter I'').
15. Letter from Richard T. McNamar, President, e-certus, Inc.
(``e-certus''), to Elizabeth M. Murphy, Chairman, Commission, dated
September 8, 2009 (``e-certus Letter I'').
16. Letter from Leon J. Bijou, Managing Director and Associate
General Counsel, Securities Industry and Financial Markets
Association (``SIFMA''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``SIFMA Letter'').
17. Letter from Michael Decker, Co-Chief Executive Officer,
Regional Bond Dealers Association (``RBDA''), and Mike Nicholas, Co-
Chief Executive Officer, RBDA, to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``RBDA Letter'').
18. Letter from Denise L. Nappier, Treasurer, State of
Connecticut, to Elizabeth M. Murphy, Secretary, Commission, dated
September 8, 2009 (``Connecticut Letter'').
19. Letter from Daniel C. Lynch, Kutak Rock LLP, to Elizabeth M.
Murphy, Secretary, Commission, dated September 8, 2009 (``Kutak
Letter'').
20. Letter from Tom Sanzillo, Consultant, T.R. Rose Associates,
Mark Kresowick, Corporate Accountability Representative, Sierra
Club, and Lisa Anne Hamilton, Counsel, to Elizabeth M. Murphy, dated
September 8, 2009 (``T.R. Rose and Sierra Letter'').
21. Letter from Paula Stuart, Chief Executive Officer, Digital
Assurance Certification, LLC (``DAC''), to Elizabeth M. Murphy,
Secretary, Commission, dated September 8, 2009 (``DAC Letter'').
22. Letter from Karrie McMillan, General Counsel, Investment
Company Institute (``ICI''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``ICI Letter'').
23. Letter from Mark Paxson, General Counsel, Office of
California State Treasurer, to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``California Letter'').
24. Letter from Donald F. Steuer, Chief Financial Officer,
County of San Diego, to Elizabeth M. Murphy, Secretary, Commission,
dated September 8, 2009 (``San Diego Letter'').
25. Letter from Scott C. Goebel, Senior Vice President and
General Counsel, FMR Co., Fidelity Investments (``Fidelity''), to
Elizabeth M. Murphy, Secretary, Commission, dated September 11, 2009
(``Fidelity Letter'').
26. Letter from William A. Holby, President, National
Association of Bond Lawyers (``NABL''), to Elizabeth M. Murphy,
Secretary, Commission, dated September 23, 2009 (``NABL Letter'').
27. Letter from Frank R. Hoadley, Chairman, Governmental Debt
Management Committee, Government Finance Officers Association
(``GFOA''), to Elizabeth M. Murphy, Secretary, Commission, dated
September 24, 2009 (``GFOA Letter'').
28. Letter from Richard T. McNamar, President, e-certus, Inc.
(``e-certus''), to
[[Page 33157]]
Elizabeth M. Murphy, Secretary, Commission, dated October 14, 2009
(``e-certus Letter II'').
29. Letter from Peter Lehner, Executive Director, Natural
Resources Defense Council (``NRDC''), to Elizabeth M. Murphy,
Secretary, Commission, dated December 15, 2009 (``NRDC Letter'').
[FR Doc. 2010-13165 Filed 6-9-10; 8:45 am]
BILLING CODE 8010-01-P