[Federal Register Volume 75, Number 166 (Friday, August 27, 2010)]
[Notices]
[Pages 52793-52796]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-21308]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-62755, File No. SR-MSRB-2010-02]
Self-Regulatory Organizations; Municipal Securities Rulemaking
Board; Order Granting Approval of Proposed Rule Change, as Modified by
Amendment No. 1 Thereto, to MSRB Rule G-34, CUSIP Numbers and New Issue
Requirements, To Enhance the Interest Rate and Descriptive Information
Currently Collected and Made Transparent by the MSRB on Municipal
Auction Rate Securities and Variable Rate Demand Obligations
August 20, 2010.
I. Introduction
On March 10, 2010, the Municipal Securities Rulemaking Board
(``MSRB''), filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to enhance the interest rate and
descriptive information currently collected and made transparent by the
MSRB on municipal Auction Rate Securities (``ARS'') and Variable Rate
Demand Obligations (``VRDOs''). The
[[Page 52794]]
proposed rule change was published for comment in the Federal Register
on April 2, 2010.\3\ The Commission received six comment letters about
the proposed rule change.\4\ On July 9, 2010, the MSRB filed with the
Commission, pursuant to Section 19(b)(1) of the Exchange Act \5\ and
Rule 19b-4 thereunder,\6\ Amendment No. 1 to the proposed rule
change.\7\ The Commission received no comment letters in response to
Amendment No. 1. This order approves the proposed rule change as
modified by Amendment No. 1.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 61793 (March 26,
2010), 75 FR 16878 (``Original Notice'') (the ``original proposed
rule change'').
\4\ See letters from: Vladimir Drozdoff, Centerport, New York,
dated April 4, 2010 (``Drozdoff Letter''); Joseph S. Fichera, Saber
Partners, LLC, New York, New York (``Saber Partners''), dated April
12, 2010 (``Saber Letter''); Heather Traeger, Associate Counsel,
Investment Company Institute (``ICI''), dated April 23, 2010 (``ICI
Letter''); Leslie M. Norwood, Managing Director and Associate
General Counsel, Securities Industry and Financial Markets
Association (``SIFMA''), dated April 23, 2010 (``SIFMA Letter'');
Robert J. Stracks, Counsel, BMO Capital Markets GKST Inc. (``BMO
Capital''), dated April 23, 2010 (``BMO Letter'') and Nik Mainthia,
dated July 12, 2010 (``Mainthia Letter'').
\5\ 15 U.S.C. 78s(b)(1).
\6\ 17 CFR 240.19b-4.
\7\ See Securities Exchange Act Release No. 62550 (July 22,
2010), 75 FR 44296 (``Notice of Amendment No. 1'').
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II. Description of the Proposed Rule Change, as Modified by Amendment
No. 1 to the Proposed Rule Change
The proposed rule change would enhance the interest rate and
descriptive information currently collected and made transparent by the
MSRB on municipal Auction Rate Securities (``ARS'') and Variable Rate
Demand Obligations (``VRDOs''). The proposed rule change would: (i)
Amend MSRB Rules G-8, books and records, and G-34(c), variable rate
security market information, to require brokers, dealers and municipal
securities dealers (collectively ``dealers'') to (a) submit to the MSRB
documents that define auction procedures and interest rate setting
mechanisms for ARS and liquidity facilities for VRDOs; (b) report to
the MSRB ARS bidding information; (c) report to the MSRB additional
VRDO information; and (d) communicate to an ARS Program Dealer the fact
that an order submitted for inclusion in an auction is on behalf of an
ARS issuer or conduit borrower (collectively ``rule change proposal'');
(ii) amend the MSRB Short-term Obligation Rate Transparency (``SHORT'')
System Facility to collect and disseminate the documents identified in
the rule change proposal (``SHORT System Facility amendment
proposal''); and (iii) amend the MSRB EMMA Short-term Obligation Rate
Transparency Service to make the documents collected in the SHORT
System Facility amendment proposal available on the MSRB's Electronic
Municipal Market Access (EMMA) Web site (the ``EMMA Short-term
Obligation Rate Transparency Service amendment''). A full description
of the proposal is contained in the Notice of Amendment No. 1.
The MSRB has requested that the proposed rule change, which may be
implemented in phases, be made effective on such date or dates as would
be announced by the MSRB in notices published on the MSRB Web site,
which dates would be no later than nine months after Commission
approval of the proposed rule change and would be announced no later
than sixty (60) days prior to the effective dates.
III. Summary of Comments Received and the MSRB's Response
General Comments
The Commission received six comment letters \8\ relating to the
Original Notice.\9\ The MSRB addressed the issues raised by the comment
letters on the original proposed rule change in the Notice of Amendment
No. 1. The Commission received no comment letters in response to the
Notice of Amendment No. 1.
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\8\ See supra note 4.
\9\ See supra note 3.
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While the commenters indicated general support for the MSRB's
effort to increase transparency of ARS and VRDO, four commenters on the
original proposed rule change expressed concerns about various aspects
of the proposal or suggested alternatives.\10\ Two other commenters who
have invested in ARS described problems they had experienced in that
market.\11\ Mr. Drozdoff fully supported the proposal, noting that he
held positions in two ARS and has been unable to obtain certain
information about them. Mr. Drozdoff further stated that the lack of
transparency creates the opportunity for manipulation and unfair
dealing.
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\10\ See Saber Letter, ICI Letter, SIFMA Letter and BMO Letter.
\11\ See Drozdoff Letter and Mainthia Letter.
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Additional VRDO Information
The original proposed rule change would increase the information
that a VRDO Remarketing Agent would be required to report to the SHORT
System. SIFMA expressed concern with the requirement in the proposed
rule change for VRDO Remarketing Agents to report the identity of each
tender agent and liquidity provider and maintain the accuracy of that
information. SIFMA noted that the Remarketing Agent is not in privity
of contract with the tender agent or the liquidity facility provider,
that the identities of these parties may change and that the
Remarketing Agent may not receive timely notification of such changes.
SIFMA suggested that Remarketing Agents only be required to report such
information on a ``best efforts'' basis.
The MSRB stated that it does not believe that it is appropriate for
VRDO Remarketing Agents to be required only to exercise best efforts to
report this information. Under the terms of the original proposed rule
change, the VRDO Remarketing Agent would be required to modify any past
submissions to the SHORT System in the event updated information about
the tender agents and liquidity providers becomes known. In response to
this comment, the MSRB provided in Amendment No. 1 that the requirement
to report these identities is based upon information known to the VRDO
Remarketing Agent as of the time of the interest rate reset. The
Commission believes that Amendment No. 1 adequately addresses this
concern.
SIFMA also expressed concern that the VRDO Remarketing Agent does
not necessarily know the par amount of VRDOs, if any, held by a
liquidity provider (``Bank Bonds'') at any point in time so that the
VRDO Remarketing Agent would be able to obtain and report accurate
information. SIFMA noted that VRDO Remarketing Agents may not know the
precise amount of securities held as Bank Bonds as a result of revised
amortization schedules for securities held as Bank Bonds as well as
instances when holders tender securities directly to a tender agent.
The MSRB noted in Amendment No. 1 that the proposal already adequately
addresses SIFMA's concern as it only requires VRDO Remarketing Agents
to report the par amount of Bank Bonds based upon information available
to the VRDO Remarketing Agent as of the time of the interest rate
reset. The Commission agrees that the requirement is reasonable because
the reporting requirement is limited to information available to the
VRDO Remarketing Agent.
ARS Bidding Information
Saber Partners and SIFMA both stated that ARS bidding information
required to be reported by ARS Program Dealers should be reported as
individual data elements instead of as a word-searchable document.
Saber Partners stated that greater transparency about the auctions
would address some of the investor confidence issues created by
[[Page 52795]]
the 2008 crisis and would encourage secondary market trading. Saber
Partners also noted a large volume of ARS still outstanding that could
benefit from additional market transparency. The MSRB agreed that
having ARS bidding information collected as data elements would be a
preferred method of data collection. The MSRB noted that collection of
data elements would facilitate data analysis and the computation of
statistics, such as a bid-to-cover ratio, that would provide meaningful
information about the demand for a specific ARS. Accordingly, in
response to these comments, Amendment No. 1 requires ARS bidding
information to be reported to the SHORT System as individual data
elements. The Commission believes Amendment No. 1 adequately addresses
their concerns.
SIFMA also expressed concerns with the requirement to report orders
submitted by an issuer or conduit borrower. SIFMA noted that some
issuers or conduit borrowers utilize a third party, such as an
investment adviser or registered representative, for submitting orders
to an ARS Program Dealer. In these cases, the ARS Program Dealer may
not know that such orders are on behalf of issuers or conduit
borrowers. To ensure ARS Program Dealers are provided with this
information, Amendment No. 1 includes a new requirement for any dealer
that receives an order for inclusion in an auction for ARS from an
issuer or conduit borrower of such ARS to disclose this fact when
submitting the order to an ARS Program Dealer. In Amendment No. 1, the
MSRB also amended the original proposed rule change by removing the
requirement to identify whether orders placed by an issuer or conduit
borrower were executed. The MSRB noted that ARS Program Dealers would
not be able to reliably ascertain whether orders on behalf of an issuer
or conduit borrower submitted by a third-party dealer were executed,
particularly if the third-party dealer submits more orders than just
those on behalf of the issuer or conduit borrower and only some of
those orders are filled.
SIFMA also suggested that the requirement to disclose the interest
rate(s) and aggregate par amount(s) of orders to sell at a specific
rate should be amended to read ``hold at a rate'' to conform to current
practice and documentation. SIFMA noted that when the rate drops below
that customer's ``hold at'' rate, the order is automatically converted
into a sell order. The MSRB acknowledged in Amendment No. 1 that this
requirement could be consolidated to simplify the rule language. The
MSRB stated that Amendment No. 1 removes the requirement to report
``sell at rate'' orders as the remaining ``hold at rate'' and ``sell at
any interest rate'' categories of orders should provide for the
reporting of all sell orders.
ARS and VRDO Documents
The original proposed rule change would require ARS Program Dealers
and VRDO Remarketing Agents to submit to the MSRB current and any new
or amended versions of ARS documents defining auction procedures and
interest rate setting mechanisms and VRDO documents consisting of
liquidity facilities, including Letter of Credit Agreements and Stand-
by Bond Purchase Agreements.
For existing documents, the original proposed rule change would
require VRDO Remarketing Agents to make and document best efforts to
obtain existing VRDO documents and specified a timeframe of ninety
business days from the date of effectiveness of a rule change for
dealers to submit such documents to the MSRB. For ARS documents, ARS
Program Dealers would be required to submit existing documents to the
MSRB no later than ninety business days from the date of effectiveness
of a rule change. On an ongoing basis, the original proposed rule
change included a requirement to submit new or amended versions of ARS
and VRDO documents no later than one business day after receipt by the
dealer.
ICI stated that timing is vital to the value of collecting and
disseminating this information to investors. Accordingly, ICI supported
the MSRB's original proposed submission deadline of 30 days from the
date of the proposed rule change instead of the proposal's 90-day
submission deadline. The MSRB agreed that it is important to have a
centralized source of ARS and VRDO documents as soon as practical.
Nonetheless, the MSRB believes that ninety days is an appropriate
timeframe for having such documents submitted to the MSRB given the
large number of documents that would need to be submitted to the MSRB
and the fact that, for outstanding issues, dealers may need time to
request documents from third parties.
ICI also stated that they strongly support the one-business-day
submission requirement for new or amended versions of the ARS and VRDO
documents. By contrast, SIFMA suggested that the deadline for
submitting such new or amended documents be five business days after
receipt. SIFMA stated that a one-business-day time frame is unduly
burdensome for a broker dealer to submit documents to which it is not a
party, noted the lack of a uniform manner in which dealers receive such
documents from issuers and liquidity facility providers, indicated that
it could take a couple of days internally at a broker dealer for these
documents to get routed to the proper place and stated that there are
approximately 16,500 outstanding VRDO transactions that are serviced by
approximately 80 different Remarketing Agents. The MSRB concluded that
a five-business-day deadline would be consistent with the timeframe for
submitting advance refunding documents to the MSRB and would be an
appropriate timeframe, at least initially, for such new or amended
versions of ARS and VRDO documents to be submitted to the MSRB.
Accordingly, in response to this comment, Amendment No. 1 provides a
five-business-day deadline for submitting new or amended versions of
ARS and VRDO documents to the MSRB. The Commission finds that the 90-
business-day and the five-business-day submission deadlines are
reasonable, at least initially.
SIFMA also requested clarification of the recordkeeping requirement
for VRDO Remarketing Agents to document best efforts to obtain existing
VRDO documents and asked whether such documents would be required to
contain signatures. The MSRB, in response to this comment, amended the
original proposed rule change in Amendment No. 1 to clarify that such
records are only required to be kept for those documents that are
unable to be obtained. The MSRB also noted that all documents would be
required to be final, operative versions of such documents. The MSRB
indicated that while this requirement does not necessarily require that
the document be signed, the MSRB noted that signatures would provide a
clear indication that the document reflects a final version. The
Commission believes that Amendment No. 1 adequately clarifies this
issue.
Other Comments
ICI recommended that the MSRB consider expanding the proposed
disclosures to ensure a more complete picture of the risks associated
with ARS, VRDOs and other variable rate securities, such as ``credit
enhancement'' data and documentation. In addition, ICI recommended that
the MSRB create a ``miscellaneous'' or ``catch-all'' category of
variable rate securities to provide investors with material information
about new products. The MSRB noted a separate MSRB initiative to
display on
[[Page 52796]]
EMMA information offered by credit ratings agencies would provide
additional access to credit enhancement features associated with
municipal securities on a market-wide basis.\12\ The MSRB agrees that
new products may benefit from the transparency offered for ARS and VRDO
by the SHORT System, and plans to review in the future whether changes
to the SHORT System and associated rules could accommodate future
products without subsequent system and rule modifications.
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\12\ See MSRB Notice 2010-13 (May 20, 2010).
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With regard to all other issues raised by the commenters, the
Commission believes that the MSRB has adequately addressed the
commenters' concerns.
IV. Discussion and Commission Findings
The Commission has carefully considered the proposed rule change,
the comment letters received, and the MSRB's responses to the comment
letters and finds that the proposed rule change is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to the MSRB \13\ and, in particular, the
requirements of Section 15B(b)(2)(C) of the Exchange Act \14\ and the
rules and regulations thereunder. Section 15B(b)(2)(C) of the Exchange
Act requires, among other things, that the MSRB's rules be designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in municipal securities, to remove impediments to and perfect the
mechanism of a free and open market in municipal securities, and, in
general, to protect investors and the public interest.\15\ In
particular, the Commission believes that the proposed rule change would
serve as an additional mechanism by which the MSRB works toward
removing impediments to and helping to perfect the mechanisms of a free
and open market in municipal securities by providing a centralized
venue for free public access to information about and documents
relating to ARS and VRDO. The proposed rule change would provide
greater access to information about and documents relating to ARS and
VRDO to all participants in the municipal securities market on an equal
basis thereby removing potential barriers to obtaining such
information. These factors serve to promote the statutory mandate of
the MSRB to protect investors and the public interest.
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\13\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
\14\ 15 U.S.C. 78o-4(b)(2)(C).
\15\ Id.
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V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the Exchange Act and the
rules and regulations thereunder applicable to the MSRB \16\ and, in
particular, the requirements of Section 15B(b)(2)(C) of the Exchange
Act \17\ and the rules and regulations thereunder. The proposal will
become effective as requested by the MSRB.
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\16\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
\17\ 15 U.S.C. 78o-4(b)(2)(C).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\18\ that the proposed rule change (SR-MSRB-2010-02), as
amended, be, and it hereby is, approved.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-21308 Filed 8-26-10; 8:45 am]
BILLING CODE 8010-01-P