July 2009 Proposing Release for Rule 15c2-12

Friday,
July 24, 2009

Part II

Securities and
Exchange
Commission

srobinson on DSKHWCL6B1PROD with PROPOSALS2

17 CFR Parts 240 and 241
Proposed Amendment to Municipal
Securities Disclosure; Proposed Rule

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

PO 00000

Frm 00001

Fmt 4717

Sfmt 4717

E:\FR\FM\24JYP2.SGM

24JYP2

36832

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240 and 241
[Release No. 34–60332; File No. S7–15–09]
RIN 3235–AJ66

Proposed Amendment to Municipal
Securities Disclosure
AGENCY: Securities and Exchange
Commission.
ACTION: Proposed rule and
interpretation.

srobinson on DSKHWCL6B1PROD with PROPOSALS2

SUMMARY: The Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
is publishing for comment proposed
amendments to Rule 15c2–12 under the
Securities Exchange Act of 1934
(‘‘Exchange Act’’) relating to municipal
securities disclosure. The proposal
would amend 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 proposed amendments
would 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, would
amend the list of events for which a
notice is to be provided, and would
modify the events that are subject to a
materiality determination before
triggering a notice to the MSRB. In
addition, the amendments would revise
an exemption from the rule for certain
offerings of municipal securities with
put features. The Commission also is
providing interpretive guidance
intended to assist municipal securities
issuers, brokers, dealers and municipal
securities dealers in meeting their
obligations under the antifraud
provisions.
DATES: Comments should be received on
or before September 8, 2009.
ADDRESSES: Comments may be
submitted by any of the following
methods:

Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/proposed.shtml); or

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

• Send an e-mail to [email protected]. Please include File
No. S7–15–09 on the subject line; or
• Use the Federal eRulemaking Portal
(http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File No.
S7–15–09. This file number should be
included on the subject line if e-mail is
used. To help us process and review
your comments more efficiently, please
use only one method. The Commission
will post all comments on the
Commission’s Internet Web site (http://
www.sec.gov/rules/proposed.shtml).
Comments are also available for public
inspection and copying 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. All
comments received will be posted
without change; we do not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly.
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; Cyndi N. Rodriguez,
Special Counsel, Office of Market
Supervision, at (202) 551–5636; Rahman
J. Harrison, Special Counsel, Office of
Market Supervision, at (202) 551–5663;
David J. Michehl, Special Counsel,
Office of Market Supervision, at (202)
551–5627; 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 requesting public
comment on a proposed amendment to
Rule 15c2–12 under the Exchange Act.1
I. Background
A. History of Rule 15c2–12
The Commission has long been
concerned with improving the quality,
timing, and dissemination of disclosure
in the municipal securities market. In an
1 17

PO 00000

CFR 240.15c2–12.

Frm 00002

Fmt 4701

Sfmt 4702

effort to improve the transparency of the
municipal securities market, in 1989,
the Commission adopted Rule 15c2–12 2
(‘‘Rule’’ or ‘‘Rule 15c2–12’’) and an
accompanying interpretation modifying
a previously published interpretation of
the legal obligations of underwriters of
municipal securities.3 As adopted in
1989, Rule 15c2–12 required, and still
requires, underwriters participating in
primary offerings of municipal
securities of $1,000,000 or more to
obtain, review, and distribute to
potential customers copies of the
issuer’s official statement. Specifically,
Rule 15c2–12 required, and still
requires, an underwriter acting in a
primary offering of municipal securities:
(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 noncompetitive 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; and (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.
While the availability of primary
offering disclosure significantly
improved following the adoption of
Rule 15c2–12, there was a continuing
concern about the adequacy of
disclosure in the secondary market.4 To
enhance the quality, timing, and
dissemination of disclosure in the
2 Id.
3 See Securities Exchange Act Release No. 26985
(June 28, 1989), 54 FR 28799 (July 10, 1989) (‘‘1989
Adopting Release’’).
4 In 1993, the Commission’s Division of Market
Regulation (n/k/a the Division of Trading and
Markets) (‘‘Division’’) conducted a comprehensive
review of many aspects of the municipal securities
market, including secondary market disclosure
(‘‘1993 Staff Report’’). Findings in the 1993 Staff
Report highlighted the need for improved
disclosure practices in both the primary and
secondary municipal securities markets. The 1993
Staff Report found that investors need sufficient
current information about issuers and significant
obligors to better protect themselves from fraud and
manipulation, to better evaluate offering prices, to
decide which municipal securities to buy, and to
decide when to sell. Moreover, the 1993 Staff
Report found that the growing participation of
individuals as both direct and indirect purchasers
of municipal securities underscored the need for
sound recommendations by brokers, dealers, and
municipal securities dealers. See Commission,
Division of Market Regulation, Staff Report on the
Municipal Securities Market (September 1993)
(available at http://www.sec.gov/info/
municipal.shtml).

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

secondary municipal securities market,
the Commission in 1994 adopted
amendments to Rule 15c2–12 (‘‘1994
Amendments’’).5 Among other things,
the 1994 Amendments placed certain
requirements on brokers, dealers, and
municipal securities dealers (‘‘Dealers’’
or, when used in connection with
primary offerings, ‘‘Participating
Underwriters’’).
Specifically, Rule 15c2–12, as
amended by the 1994 Amendments,
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 of
municipal securities or an obligated
person 6 has undertaken in a written
agreement or contract for the benefit of
holders of such securities (‘‘continuing
disclosure agreement’’) to provide
specified annual information and event
notices to certain information
repositories.7 The information to be
provided consists of: (1) Certain annual
financial and operating information and
audited financial statements (‘‘annual
filings’’); 8 (2) notices of the occurrence
of any of eleven specific events (‘‘event
notices’’); 9 and (3) notices of the failure
5 See Securities Exchange Act Release No. 34961
(November 10, 1994), 59 FR 59590 (November 17,
1994) (‘‘1994 Amendments Adopting Release’’). In
light of the growing volume of municipal securities
offerings, as well as the growing ownership of
municipal securities by individual investors, in
March 1994, the Commission published the
Statement of the Commission Regarding Disclosure
Obligations of Municipal Securities Issuers and
Others. See Securities Exchange Act Release No.
33741 (March 9, 1994), 59 FR 12748 (March 17,
1994) (‘‘1994 Interpretive Release’’). The
Commission intended that its statement of views
with respect to disclosures under the federal
securities laws in the municipal market would
encourage and expedite the ongoing efforts by
market participants to improve disclosure practices,
particularly in the secondary market, and to assist
market participants in meeting their obligations
under the antifraud provisions. Id.
6 The term ‘‘obligated persons’’ means persons,
including the issuer of municipal securities,
committed by contract or other arrangement to
support payment of all or part of the obligations on
the municipal securities to be sold in an offering.
See 17 CFR 240.15c2–12(f)(10).
7 See 17 CFR 240.15c2–12(b)(5)(i)(C). This
provision now provides that the annual information
and event notices are to be submitted to a single
repository, the MSRB. See infra note 11 and
accompanying text.
8 17 CFR 240.15c2–12(b)(5)(i)(A) and (B).
9 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,

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

of an issuer or other obligated person to
make a submission required by a
continuing disclosure agreement
(‘‘failure to file notices’’).10 The 1994
Amendments also amended Rule 15c2–
12 to require the Participating
Underwriter to reasonably determine
that an issuer of municipal securities or
an obligated person has undertaken in
the continuing disclosure agreement to
provide: (1) Annual filings to each
nationally recognized municipal
securities information repository
(‘‘NRMSIR’’); (2) event notices and
failure to file notices either to each
NRMSIR or to the MSRB; and (3) in the
case of states that established state
information depositories (‘‘SIDs’’), all
continuing disclosure documents to the
appropriate SID. Finally, the 1994
Amendments amended Rule 15c2–12 to
revise the definition of ‘‘final official
statement’’ to include a description of
the issuer’s or obligated person’s
continuing disclosure undertakings for
the securities being offered, and of any
instances in the previous five years in
which the issuer or obligated person
failed to comply, in all material
respects, with undertakings in previous
continuing disclosure agreements.
Furthermore, to promote more
efficient, effective, and wider
availability of municipal securities
information to investors and market
participants, 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.11 In the 2008 Amendments
Adopting Release, the Commission
stated that the establishment of a single
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 II.C., below, the Commission is proposing
to eliminate the materiality determination for
certain of these events.
10 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.’’
11 See Securities Exchange Act Release No. 59062
(December 5, 2008), 73 FR 76104 (December 15,
2008) (‘‘2008 Amendments Adopting Release’’). 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. The Commission
proposes that the effective date of the proposed
amendments discussed herein would be no earlier
than three months after any final approval of the
proposed amendments, should the Commission
adopt these proposed rule amendments.

PO 00000

Frm 00003

Fmt 4701

Sfmt 4702

36833

centralized repository will help provide
ready and prompt access to continuing
disclosure documents to investors and
other municipal market participants and
will help fulfill the regulatory and
information needs of municipal market
participants, including Dealers,
Participating Underwriters, mutual
funds and others.12 Specifically, the
2008 Amendments require the
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.13
B. Need for Further Amendments to
Rule 15c2–12
As discussed below, experience with
the operation of the Rule, 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, including
the 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 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 (‘‘demand
securities’’).14 Furthermore, since the
adoption of the 1994 Amendments,
municipal securities industry
participants have raised a number of
areas in which the Rule’s provisions
could be clarified or enhanced and have
expressed a desire for additional
information about these securities.15
12 See 2008 Amendments Adopting Release,
supra note 11, 73 FR at 76106.
13 Id. See also Securities Exchange Act Release
No. 59061 (December 5, 2008), 73 FR 75778
(December 12, 2008) (order approving the MSRB’s
proposed rule change to establish as a component
of its central municipal securities document
repository, the Electronic Municipal Market Access
(‘‘EMMA’’) system, the collection and availability of
continuing disclosure documents over the Internet
for free).
14 17 CFR 240.15c2–12(d)(1)(iii).
15 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

E:\FR\FM\24JYP2.SGM

Continued

24JYP2

36834

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

Since the adoption of the 1994
Amendments, the amount of
outstanding municipal securities has
more than doubled—to almost $2.7
trillion.16 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
2008, ranging from approximately 35%
to 39% of outstanding municipal
securities.17 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.18
There is also substantial trading volume
in the municipal securities market.
According to the MSRB, almost $5.5
trillion of long and short term municipal
securities were traded in 2008 in nearly
11 million transactions.19 Further, the
municipal securities market is
extremely diverse, with approximately
50,000 state and local issuers of these
securities. 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.20 Bonds for healthcare,
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).
16 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 $2.69 trillion at the end of
2008. See SIFMA Outstanding U.S. Bond Market
Debt (available at http://www.sifma.org/research/
pdf/Overall_Outstanding.pdf).
17 See SIFMA, Holders of U.S. Municipal
Securities (available at http://www.sifma.org/
research/pdf/Holders_Municipal_Securities.pdf)
(‘‘SIFMA Report’’).
18 Id.
19 See MSRB, Real-Time Transaction Reporting,
Statistical Patterns in the Municipal Market,
Monthly Summaries 2008 (available at http://
www.msrb.org/msrb1/TRSweb/MarketStats/
statistical_patterns_in_the_muni.htm).
20 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

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

multifamily housing, and industrial
development, together with land-backed
debt, accounted for more than 80% of
defaulted dollar amounts.21 In 2007, a
total of $226 million in municipal bonds
defaulted (including both monetary and
covenant defaults).22 In 2008, 140
issuers defaulted on $7.6 billion in
municipal bonds.23
At the time the Rule was adopted in
1989, municipal securities with put or
demand features were relatively new.
Approximately $13 billion of variable
rate demand obligations (‘‘VRDOs’’) 24
were issued in 1989.25 However, by
2008, new issuances of VRDOs had
grown to approximately $115 billion,26
with trading in VRDOs representing
approximately 38% of trading volume of
all municipal securities.27 Many issuers
and other obligated persons are reported
to have converted their municipal
auction rate securities (‘‘ARS’’) 28 to
securities with other interest rate modes
(as provided in related trust
indentures),29 such as VRDOs, or
refunded or otherwise refinanced their
ARS in order to reduce the unusually
high interest rates on ARS caused by
turmoil in the ARS market.30 This
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).
21 See Standard and Poor’s Report, supra note 20.
22 See Joe Mysak, Subprime Finds New Victim as
Muni Defaults Triple, Bloomberg News, May 30,
2008.
23 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).
24 VRDOs principally are demand securities.
25 See Two Decades of Bond Finance: 1989–2008,
The Bond Buyer/Thomson Reuters 2009 Yearbook
4 (Matthew Kreps ed., Source Media, Inc.) (2009).
26 Id.
27 According to the MSRB, trading volume in
VRDOs in 2008 was approximately $2.1 trillion.
Total trading volume in 2008 for all municipal
securities was approximately $5.5 trillion. See email between Martha M. Haines, Assistant Director
and Chief, Office of Municipal Securities, Division,
Commission, and Harold Johnson, Deputy General
Counsel, MSRB, May 28, 2009 (confirming 2008
trading volume in VRDOs and trading volume for
municipal securities).
28 Auction rate securities are not demand
securities.
29 ‘‘Interest rate modes’’ is the term used to refer
collectively to the various forms in which offerings
that include variable rate demand obligations may
typically be issued or converted. Such ‘‘multimodal’’ bonds typically include a variety of
optional forms (modes), such as fixed interest rate,
variable interest rates of different lengths (e.g.,
daily, weekly or monthly interest rate resets),
auction rate, and commercial paper.
30 See, e.g., Press Release, Dormitory Authority
State of New York, DASNY Moving Clients Out of
Auction Rate Securities (March 26, 2008) (available

PO 00000

Frm 00004

Fmt 4701

Sfmt 4702

conversion or refinancing appears to
have contributed to the increased
volume of new issues of VRDOs in
2008 31 and was accompanied by an
increased number of investors in
VRDOs, with some investors holding
these securities for long periods of
time.32 There has also been an increase
in the trading volume of VRDOs. As the
size and complexity of the VRDO
market and the number of investors has
grown, so have the risks associated with
less complete disclosure. In addition,
during the fall of 2008, the VRDO
market experienced significant
volatility.33 Moreover, there have been
concerns expressed by representatives
of the primary purchasers of VRDOs—
money market funds—that suggest that
the exemption in Rule 15c2–12 for these
securities may no longer be justified.34
All of these developments highlight the
need for the Commission to consider
whether improvements should be made
regarding the availability to investors of
important information regarding
demand securities.
As a result of the changes in the
VRDO market, the Commission believes
that investors and other municipal
market participants today should be
able to obtain ongoing continuing
disclosure information regarding
demand securities in order to make
more knowledgeable investment
decisions, to effectively manage and
monitor their investments, and thereby
be better able to protect themselves from
at http://www.dasny.org/dasny/news/2008/
080326moving.php); Press Release, Office of Chief
Financial Officer, District of Columbia, Over $100
Million Saved: $10 Million This Fiscal Year by CFO
Debt Management Strategy (May 27, 2008)
(available at http://newsroom.dc.gov/show.aspx/
agency/cfo/section/2/release/13845); Henry J.
Gomez, Bond Failures Could Mean Millions In Lost
Interest, Cleveland Plain Dealer, March 4, 2008, at
B3; Laura Brost, Citizens to Cut its Borrowing Cost,
Orlando Sentinel, March 14, 2008, at C3; and Matt
Krantz, Credit Crisis Forces Museums to be Creative;
Skittish Bond Investors Meant Their Interest Costs
Were Getting Out of Hand, USA TODAY, April 17,
2008, at 4B.
31 According to Thomson Reuters, VRDO
issuances in 2008 were much higher than in 2007—
approximately $115 billion in 2008 vs. $50 billion
in 2007. No ARS were reported to have been issued
during the same period in 2008. See Two Decades
of Bond Finance: 1989–2008, The Bond Buyer/
Thomson Reuters 2009 Yearbook 7 (Matthew Kreps
ed., Source Media, Inc.) (2009).
32 See infra note 45 and accompanying text.
33 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%.’’).
34 See supra note 15 and accompanying text.

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

misrepresentations and fraudulent
activities. Accordingly, the Commission
proposes to modify the exemption in the
Rule, as discussed below, for demand
securities 35 by requiring Participating
Underwriters to reasonably determine
that the issuer or obligated person of
demand securities has undertaken in a
written agreement to provide continuing
disclosure documents to the MSRB.
In addition, the Commission proposes
to require Participating Underwriters to
reasonably determine that the issuer or
obligated person has contractually
agreed to provide notice of specified
events within a certain time frame,
amend the list of events that would
trigger an issuer’s or other obligated
person’s obligation under its continuing
disclosure agreement to submit an event
notice to the MSRB, and amend the Rule
to modify those events that would be
subject to a materiality determination
before triggering a notice to the MSRB.36
As discussed below, the Commission
believes that these proposed changes
would, among other things, help
Participating Underwriters satisfy their
obligations and help improve the
availability of timely and important
information to investors of municipal
securities. In addition, in line with the
objectives behind the Commission’s
prior revisions to Rule 15c2–12 and the
2008 Amendments, these proposed
amendments are designed to help deter
fraud and manipulation in the
municipal securities market by
prohibiting the underwriting and
recommendation of transactions in
municipal securities for which adequate
35 See 17 CFR 240.15c2–12(d)(1)(iii). Specifically,
the Commission proposes to eliminate the
exemption for primary offerings of demand
securities contained in paragraph (d)(1)(iii) of the
Rule and to add new paragraph (d)(5) to the Rule.
Paragraph (d)(5) of the Rule, as proposed, would
exempt 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 a result of these proposed
changes, Participating Underwriters, in connection
with a primary offering of demand securities, would
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 would 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).
36 As discussed below in Section II.F., the
Commission is aware that undertakings by issuers
and obligated persons that were entered into prior
to the effective date of any final amendments would
be different from those entered into on or after the
effective date of any final amendments.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

information is not available on an
ongoing basis.
II. Description of the Proposed
Amendments to Rule 15c2–12
A. Modification of the Exemption for
Demand Securities
Rule 15c2–12(d) provides an
exemption for a primary offering 37 of
municipal securities in authorized
denominations of $100,000 or more, if
such securities, at the option of the
holder thereof, may 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.38 Demand securities qualify for
this exemption. The Commission now
proposes to delete the current
exemption for demand securities in
paragraph (d)(1)(iii) and add language in
new paragraph (d)(5) so that paragraphs
(b)(5) 39 and (c) 40 of the Rule also would
apply to a primary offering of demand
securities.
The Commission believes that its
experience with the operation of the
Rule and market changes since the
adoption of the 1994 Amendments have
suggested a need to modify the
exemption relating to demand securities
as described. The effect of this proposed
amendment would be to eliminate the
current exemption of demand securities
from the requirement that a
Participating Underwriter reasonably
determine that the issuer or obligated
person has undertaken, in a continuing
disclosure agreement, to provide
continuing disclosure documents to the
MSRB. As noted above, when this
exemption was adopted VRDOs were
relatively new and did not represent a
large proportion of the market.41
However, by 2008, the amount of
37 See Rule 15c2–12(f)(7) for a definition of
primary offering. 17 CFR 240.15c2–12(f)(7).
38 17 CFR 240.15c2–12(d)(1)(iii).
39 As noted above, Rule 15c2–12(b)(5) requires a
Participating Underwriter, before purchasing or
selling municipal securities in connection with an
offering of municipal securities, to reasonably
determine that the issuer or obligated person has
undertaken, in a written agreement or contract, for
the benefit of the holders of municipal securities,
to provide annual filings, material event notices,
and failure to file notices (i.e., continuing disclosure
documents) to the MSRB. See 17 CFR 240.15c2–
12(b)(5). See also supra note 11.
40 Rule 15c2–12(c) 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 notice of any
material event and any failure to file annual
financial information regarding the municipal
security. See 17 CFR 240.15c2–12(c).
41 See supra note 25 and accompanying text.

PO 00000

Frm 00005

Fmt 4701

Sfmt 4702

36835

issuances of VRDOs was approximately
$115 billion 42 and trading volume of
VRDOs exceeded 38 percent of all
municipal securities.43 The Commission
observes that an unusually high volume
of VRDOs were issued in 2008.44 The
increase in the amount of issuances and
trading volume of VRDOs seem to
indicate that more investors own such
securities. Furthermore, despite their
periodic ability to tender VRDOs to the
respective issuer for repurchase, some
investors in VRDOs appear to hold these
securities for long periods of time 45 and
would be better able to protect
themselves against manipulation and
fraud if they were able more easily to
access information about important
events, such as those listed in
paragraphs (b)(5) and (c) of the Rule.
Accordingly, the increased amount of
VRDO issuances, high VRDO trading
volume, increased number of investors
in VRDOs,46 and some investors’
tendency to hold these securities for
long periods of time highlight the risks
associated with less information being
available and suggest a need to take
42 See

supra note 25 and accompanying text.
supra note 27 and accompanying text.
44 See supra notes 30 and 31 and accompanying
text.
45 Telephone call between Heather Traeger,
Associate Counsel, Securities Regulation, Capital
Markets, ICI, and Martha M. Haines, Assistant
Director and Chief, Office of Municipal Securities,
Division, Commission, on July 14, 2009.
46 The recent increased investment interest and
activity in VRDOs may be attributable, in part, to
the recent turmoil in the market for ARS, which
began in February 2008. See MSRB Notice 2008–09
(February 19, 2008) (‘‘Recent downgrades of
municipal bond insurers and other short-term
liquidity concerns have created extreme volatility
in the market for municipal Auction Rate
Securities. There also have been an unprecedented
number of ‘failed auctions,’ meaning that investors
who chose to liquidate their positions through the
auction process were not able to do so.’’) (available
at http://www.msrb.org/msrb1/whatsnew/200809.asp). See also Anthony P. Inverso, 2008 FirstHalf Municipal Market Review: The End of
Securities and Bond Insurance As We Know It?
Building Futures, New Jersey Educational Facilities
Authority (June 2008) (stating that as downgrades
to bond insurer ratings grew, so did the rates on
ARS. Further stating that by the end of the first half
of 2008, nearly half of all auction rate securities will
have been converted or redeemed, mainly in the
form of more predictable fixed rate debt or variable
rate secured by a bank letter of credit.) (available
at http://www.njefa.com/njefa/pdf/newsletter/
NJEFA%20Building%20futures%20newsletter%20
June%202008%20Vol.%207,%20No.%201.pdf);
and Adrian D’Silva, Haley Gregg, and David
Marshall, Explaining the Decline in the Auction
Rate Securities Market, Chicago Fed Letter, The
Federal Reserve Bank of Chicago (November 2008)
(stating that the rash of failed auctions in the ARS
markets starting in February 2008 has prompted
issuers to consider a variety of potential solutions,
including: Finding buyers for ARSs in the
secondary market; converting ARSs to variable-rate
demand notes; and replacing ARSs with short term
debt funding.) (available at http://
www.chicagofed.org/publications/fedletter/
cflnovember2008_256.pdf). See also supra note 30.
43 See

E:\FR\FM\24JYP2.SGM

24JYP2

36836

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

measures designed to help improve the
availability of important information to
investors in this considerable segment
of the municipal market.
Representatives of money market funds
have discussed their difficulty or, on
some occasions, their inability to obtain
the information that they believe is
necessary to oversee their investments
in demand securities.47 Modification of
the exemption for demand securities, as
further discussed below, would help
improve the availability of continuing
disclosures about these securities, not
only to institutional investors, such as
mutual funds, that acquire demand
securities for their portfolios, but also to
individual investors who own, or who
may be interested in owning, demand
securities, and would help them make
better informed investment decisions,
and thereby better protect themselves.
Further, the Commission notes that
the exemption for demand securities,
which was included in the Rule when
Rule 15c2–12 was adopted in 1989, was
intended to respond to concerns
expressed by commenters ‘‘that
applying the provisions of the
[Proposed] Rule to variable rate demand
notes, or similar securities, might
unnecessarily hinder the operation of
this market, if underwriters were
required to comply with the provisions
of the Proposed Rule on each tender or
reset date.’’ 48 The exemption in the
original Rule was intended to ensure
that the remarketings would not be
affected by application of paragraphs (a)
and (b)(1)–(4) of the Rule, which require
Participating Underwriters to review an
official statement that the issuer ‘‘deems
final’’ before it may bid for, purchase,
offer or sell an offering; to deliver a
preliminary official statement or final
official statement to any potential
customer, upon request; and to contract
with the issuer to receive an adequate
number of the final official statement to
47 See, e.g., comments of Leslie Richards-Yellen,
Principal, The Vanguard Group, transcript of the
2001 Municipal Market Roundtable—‘‘Secondary
Market Disclosure for the 21st Century’’ (available
at http://www.sec.gov/info/municipal/roundtables/
thirdmuniround.htm) (‘‘* * * what I hope more
than anything is that variable rate demand
obligations become within the Rule 15c2–12
disclosure regime * * * put yourself in the position
of a fund, we have on one hand Rule 15c2–12,
which is very helpful and it sets the floor of what
kind of information must be delivered for a
secondary market, * * *. But on the other hand,
mutual funds are bound by Rule 2a–7 and that says
for short-term obligations what we must find for
every security, and Rule 2a–7 has legal
requirements that we must fulfill in order to buy the
securities, and * * * to make these findings we
have to make our own determination, we can’t rely
on rating agencies, we do this all in house.’’). See
also supra note 15.
48 See 1989 Adopting Release, supra note 3, 54 FR
at 28808, n. 68.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

accompany confirmation statements and
otherwise fulfill its regulatory
responsibilities. Although remarketings
of VRDOs may be primary offerings,49
the Commission did not impose
paragraphs (a) and (b)(1)–(4) of the Rule
on Participating Underwriters of each
remarketing—of which hundreds could
occur on the same day—because it
potentially would have made it
impractical and unduly burdensome for
Participating Underwriters to comply
with these Rule provisions.50
Generally, there are no continuing
disclosure agreements in place with
respect to VRDOs, because primary
offerings of these securities are exempt
from the Rule.51 Under the proposed
amendments, the Participating
Underwriter of a primary offering of
VRDOs would need to reasonably
determine that the issuer or obligated
person has entered into a continuing
disclosure agreement with respect to the
submission to the MSRB of continuing
disclosure documents. The proposed
amendment modifying the exemption
for VRDOs would apply to any initial
offering of VRDOs occurring on or after
the effective date of any final
amendments that the Commission may
adopt. In addition, the proposed
amendment also would apply to any
remarketing of VRDOs that are primary
offerings 52 occurring on or after the
effective date of any final amendments
that the Commission may adopt,
including any such remarketing of
VRDOs that initially were issued prior
to any such effective date.
Consequently, the initial issuance of
VRDOs, and any remarketing that is a
primary offering of VRDOs, following
the effective date of any final
amendments would require the
Participating Underwriter to reasonably
determine that the issuer or obligated
person has entered into a continuing
disclosure agreement reflecting the
proposed new provisions of the Rule.
supra note 37.
1994 Amendments Adopting Release,
supra note 5. The Commission notes that, in the
1994 Amendments Adopting Release, it did not
address the application of paragraph (b)(5) of the
Rule to remarketing of VRDOs, including the
practicality and burdens for Participating
Underwriters to comply with this provision. The
1994 Amendments did not reconsider any of the
exemptions contained in the Rule. As discussed
above, since that time, there have been significant
developments in the market related to demand
securities.
51 There may, however, be continuing disclosure
agreements for VRDOs that were initially issued in
an interest rate mode, such as a fixed rate mode,
subject to the Rule that were subsequently
converted to VRDOs in accordance with the
provisions of the related indenture.
52 17 CFR 240.15c2–12(f)(7).

PO 00000

49 See

The Commission, however,
preliminarily believes that the effect of
the application of paragraphs (b)(5) and
(c) of the Rule to VRDOs would not be
significantly burdensome for
Participating Underwriters in
connection with the initial issuance and
remarketing of VRDOs following the
effective date of any final amendments.
If the amendments are adopted, any
primary offering (including a
remarketing) that occurs on or after the
effective date of the Rule would require
a Participating Underwriter or a
Participating Underwriter serving as a
remarketing agent 53 for a particular
VRDO issue to make a determination
that an issuer or obligated person has
entered into a continuing disclosure
agreement for that issue reflecting the
new provisions of the Rule. The
Participating Underwriter or the
remarketing agent (who often served as
the underwriter in the initial issuance of
the VRDOs) would need to reasonably
determine that the issuer or obligated
person has entered into a continuing
disclosure agreement in which it
undertakes to provide continuing
disclosure documents to the MSRB.
However, once the Participating
Underwriter has made such a
determination for a particular VRDO
issue, it would be aware of the existence
of the continuing disclosure agreement
reflecting the proposed amendment, and
thus would easily be able to make the
necessary determination for
remarketings of that issue occurring
thereafter.54 Furthermore, remarketing
agents who did not previously
participate in a remarketing could
confirm that the issuer has entered into
an undertaking in conformity with the
proposed amendment by obtaining an
official statement from the issuer (which
by definition must include a description
of the issuer’s undertakings),55 from the
MSRB (under its program that makes
official statements for nearly every
offering of municipal securities
available on the Internet from the
MSRB’s EMMA system),56 or from a

50 See

Frm 00006

Fmt 4701

Sfmt 4702

53 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 MSRB, Municipal Securities
Rulemaking Board Glossary, Second Edition
(January 2004) (defining ‘‘remarketing agent’’)
(available at http://www.msrb.org/msrb1/glossary).
54 See infra Section III. for a reaffirmation of the
Commission’s interpretations regarding
Participating Underwriters’ obligations under Rule
15c2–12.
55 17 CFR 240.15c2–12(f)(3).
56 See Securities Exchange Act Release No. 59061
(December 5, 2008), 73 FR 75778 (December 12,
2008) (File No. SR–MSRB–2008–05) (order

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

variety of vendors. In addition, a
remarketing agent could obtain a copy
of the continuing disclosure agreement
from the issuer or obligated person at
the time that it enters into a contract to
act as a remarketing agent.
According to an industry
commentator, some rating agencies
recommend that variable-rate debt not
exceed 20 percent of the total debt
outstanding of governmental issuers.57
If governmental issuers follow this
recommendation, it would be likely that
state and local government issuers with
VRDOs would have some fixed rate
securities outstanding, at least some of
which likely would be subject to
continuing disclosure agreements under
Rule 15c2–12. Because any existing
continuing disclosure agreements for
those other outstanding securities
would obligate such issuers and
obligated persons to provide annual
filings, event notices and failure to file
notices with respect to their outstanding
securities, the Commission does not
anticipate that the modification of the
exemption for demand securities in the
proposed amendments would increase
significantly the obligation that they
would incur to provide continuing
disclosure documents to the MSRB.58
Furthermore, the Commission notes that
some annual filings, such as audited
financial statements, are often prepared
by issuers and obligated persons in the
ordinary course of their business. In
such cases, the obligation incurred by
an issuer or obligated person to provide
to the MSRB information that it has
already prepared should be small.59
Issuers and obligated persons of demand
obligations that have not previously
issued such securities, however, would
be entering into a continuing disclosure
agreement for the first time and would
incur some costs to provide continuing
disclosure documents electronically to
the MSRB.60
For the reasons stated above, the
Commission believes that application of
paragraphs (b)(5) and (c) of the Rule
would be appropriate in the case of
demand securities. The Commission
preliminarily believes that any
additional burden on Participating
approving the MSRB’s proposed rule change to
make permanent a pilot program for an Internetbased public access portal for the consolidated
availability of primary offering information about
municipal securities).
57 See Douglas Skarr, Auction Rate Securities: A
Primer For Finance Officers, Government Finance
Review, August 2005.
58 See infra Section V. for a discussion of the
collection of information burdens and costs as they
relate to the proposed amendment regarding
demand securities.
59 Id.
60 Id.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

Underwriters, issuers or obligated
persons, the MSRB or others would be
justified by the improved availability of
information to investors in demand
securities, so that investors in these
securities could make better informed
investment decisions and thereby better
protect themselves from
misrepresentations and fraudulent
activities. Investors now would have
better access to baseline information
and material events regarding VRDOs.
The availability of such information also
would assist brokers, dealers and
municipal securities dealers in fulfilling
their responsibilities to their
customers,61 such as disclosing material
facts about transactions and securities;
making suitable recommendations in
transactions for municipal securities;
and complying with other sales practice
obligations.62
The Commission requests comment
on whether it is appropriate to revise
the Rule’s exemption for demand
securities by proposing to apply
paragraphs (b)(5) and (c) of the Rule to
the offering of demand securities.63
Further, the Commission requests
comment regarding investors’ and other
municipal market participants’ need for
continuing disclosure information
relating to demand securities. In
addition, the Commission requests
comment on the extent to which the
proposed amendment would provide
benefits to investors and other
municipal market participants. The
Commission also requests comment
regarding the effect of the proposed
amendment on Participating
Underwriters, issuers and obligated
persons, and others.
B. Time Frame for Submitting Event
Notices Under a Continuing Disclosure
Agreement
The Commission proposes to modify
paragraph (b)(5)(i)(C) of the Rule 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 64 ‘‘in
a timely manner not in excess of ten
business days after the occurrence of the
event,’’ instead of ‘‘in a timely manner’’
61 For example, brokers, dealers and municipal
securities dealers with access to current information
contained in event notices submitted to the MSRB
would be able to use such information when
deciding whether or not to recommend the
purchase or sale of a particular demand security.
62 See 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).
63 See supra note 35.
64 See supra note 11 and accompanying text.

PO 00000

Frm 00007

Fmt 4701

Sfmt 4702

36837

as the Rule currently provides. The
Commission proposes a similar revision
to the limited undertaking in paragraph
(d)(2)(ii)(B) of the Rule 65 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 66 ‘‘in a timely
manner not in excess of ten business
days after the occurrence of the event,’’
instead of ‘‘in a timely manner’’ as the
Rule currently provides. Therefore,
under the proposed amendments, a
Participating Underwriter would need
to reasonably determine that the
continuing disclosure agreement
provides for the submission of notices to
the MSRB within a period up to and
including ten business days after the
occurrence of the event. In the 1994
Amendments, the Commission noted
that it had not established a specific
time frame with respect to ‘‘timely’’
because of the wide variety of events
and issuer circumstances.67 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.68 It has been
reported that some event notices have
not been submitted until months after
the events occurred.69 The Commission
believes that these delays can, among
other things, deny investors important
information that they need in order to
make informed decisions regarding
whether to buy or sell municipal
securities. More timely information
would aid brokers, dealers and
municipal securities dealers to be better
able to satisfy their obligations to have
a reasonable basis to recommend the
65 17

CFR 240.15c2–12(d)(2)(ii)(B).
supra note 11 and accompanying text.
67 See 1994 Amendments, supra note 5, 59 FR at
59601.
68 Id.
69 See, e.g., Elizabeth Carvlin, Trustee for Vigo
County, Ind., Agency Taps Reserve Fund for Debt
Service, The Bond Buyer, April 2, 2004, page 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).
66 See

E:\FR\FM\24JYP2.SGM

24JYP2

36838

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

purchase or sale of municipal securities
and aid investors in determining
whether the price they pay or receive for
their transactions is appropriate, and
thereby better protect themselves from
misrepresentations and other fraudulent
activities.
The Commission believes that longer
delays in providing notice of the events
set forth in paragraph (b)(5)(i)(C) of the
Rule undermine the effectiveness of the
Rule. Indeed, market participants have
emphasized the importance of the
prompt availability of such
information.70 In addition to helping to
reduce opportunities for fraudulent
activities, the Commission anticipates
that, in providing for a maximum time
frame within which event notices
should be disclosed under a continuing
a disclosure agreement, the proposed
amendment should foster the
availability of up-to-date information
about municipal securities, thereby
promoting greater transparency and
investor confidence in the municipal
securities market as a whole.
The Commission notes that, with
respect to Participating Underwriters,
the proposed amendment simply would
require them to reasonably determine
that issuers and obligated persons have
contractually agreed to submit event
notices ‘‘in a timely manner not in
excess of ten business days after the
occurrence of the event,’’ rather than in
a ‘‘timely manner.’’ On the other hand,
there would be a significant benefit to
investors and municipal market
participants, who would be able to
obtain information about municipal
securities 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 effective date
of any final amendments that the
Commission may adopt already would
have committed to submit event notices
in a timely manner, the proposed
amendment would help to make the
timing of such submissions more certain
in the case of issuers and obligated
persons that enter into continuing
70 See, e.g., National Federation of Municipal
Analysts, Recommended Best Practices in
Disclosure for General Obligation and TaxSupported 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 (‘‘We
suggest * * * that the true problem is issuer
compliance * * * filing issues are the sole cause
of lack of transparency and disclosure availability
in the industry. These filing issues include * * *
late filing, * * * ’’).

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

disclosure agreements on or after the
effective date of any final amendments
that the Commission may adopt.71
The Commission believes that the
proposed change regarding the time
frame for submission of event notices
would continue to provide an issuer or
obligated person with adequate time to
become aware of the event and,
pursuant to its undertaking, submit
notice of the event’s occurrence to the
MSRB. In proposing that event filings be
provided ‘‘in a timely manner not in
excess of ten business days after the
occurrence of the event,’’ the
Commission intends to strike a balance
between the need for such information
to be disseminated promptly and the
need to allow adequate time for an
issuer or other obligated person to
become aware of the event and to
prepare and file such a notice. The
Commission preliminarily believes that
the proposed ten business day time
frame would provide a reasonable
amount of time for issuers to comply
with their obligations under their
continuing disclosure agreements, while
also allowing event notices to be made
available to investors, underwriters, and
other market participants in a timely
manner.
By their nature, the events currently
listed in (and proposed to be added to)
subparagraph (b)(5)(i)(C) of the Rule are
significant and should become known to
the issuer or obligated person
expeditiously.72 For example, some
events, such as payment defaults, tender
offers and bankruptcy filings, generally
involve the issuer’s or obligated
person’s participation.73 Other events,
such as the failure of a credit or
liquidity provider to perform, are of
such importance that an issuer or
obligated person likely would become
aware of such events within the
proposed ten business day time frame 74
71 The Commission notes that the proposed ten
business day time frame would not apply to
continuing disclosure agreements entered into with
respect to primary offerings that occurred prior to
the effective date of any final amendments that the
Commission may adopt.
72 See supra note 9 for a description of events
currently contained in Rule 15c2–12(b)(5)(i)(C); See
infra Section II.E. for a description of events
proposed to be added to the Rule.
73 In addition, issuer or obligated person
involvement is often required for substitution of
credit or liquidity providers; modifications to rights
of security holders; release, substitution, sale of
property securing repayment of the securities; and
optional redemptions. See Form Indenture and
Commentary, National Association of Bond
Lawyers, 2000.
74 For example, issuers or obligated persons
should have direct knowledge of principal and
interest payment delinquencies, receipt of
preliminary or proposed determinations of
taxability from the IRS, tender offers that they
initiate, and bankruptcy filings.

PO 00000

Frm 00008

Fmt 4701

Sfmt 4702

or would expect an indenture trustee,
paying agent or other transaction
participant to bring the event to the
issuer’s or obligated person’s attention
within the proposed time frame for
submission of event notices.75 Although
a few events, such as rating changes, are
not directly within the issuer’s control,
the Commission expects that issuers and
obligated persons usually would
become aware of the events specified in
paragraph (b)(5)(i)(C) of the Rule within
the proposed ten business day time
frame.76 Accordingly, the Commission
believes that the proposed ten business
day time frame within which issuers or
obligated persons would submit notices
pursuant to a continuing disclosure
agreement would provide an adequate
amount of time for issuers or obligated
persons to prepare and submit event
notices to the MSRB. While the
proposed maximum time period for
submitting event notices would be ten
business days, in many instances it is
likely that a notice could be submitted
in fewer than ten business days. This,
however, would depend upon the
particular facts and circumstances of
each event.
The Commission requests comment
concerning the ability of issuers and
obligated persons to obtain information
regarding the occurrence of events
currently specified in, and that the
proposed amendments would add to,
paragraph (b)(5)(i)(C) of the Rule, in
sufficient time to prepare and file a
notice of such an occurrence in a timely
manner not in excess of ten business
days. If commenters believe that the
time frame that would be set forth in
continuing disclosure agreements for
submission of event notices should be
longer or shorter, they should provide
suggestions for the appropriate time and
the reasons for their views. For example,
should the time frame be four business
days, which is generally commensurate
with the time period required by Form
8–K? 77 Would a shorter period of time
raise difficulties for smaller municipal
75 The Commission believes that indenture
trustees generally would be aware of principal and
interest payment delinquencies; material nonpayment related defaults, unscheduled draws on
credit enhancements reflecting financial
difficulties; the failure of credit or liquidity
providers to perform; and adverse tax opinions or
events affecting the tax-exempt status of the
security.
76 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 the 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).
77 17 CFR 249.308.

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
issuers and obligated persons, and if so,
why would it? Furthermore, comment is
requested regarding the need to
establish such a time frame for
submissions of event notices. Should
the trigger for the ten business day time
frame begin when the issuer or obligated
person knew or should have known of
the occurrence of the event, rather than
the actual occurrence of the event?
Comment is also requested on whether
an issuer’s need to monitor for events
that would trigger an event notice
would impose any new burdens or
costs. Comment is requested on whether
the proposal would help to reduce
untimely submissions of event notices,
or whether untimely submissions of
event notices are caused by other
factors. Comment is also requested on
whether there are alternative ways to
modify a Participating Underwriter’s
obligations that would result in more
prompt availability of event notices to
investors.
C. Materiality Determinations Regarding
Event Notices

srobinson on DSKHWCL6B1PROD with PROPOSALS2

In the 1994 Proposing Release, the
Commission stated that the list of events
in paragraph (b)(5)(i)(C) of the Rule
consists of recognized material events
that reflect on the creditworthiness of
the issuer of the municipal security or
any significant obligor, as well as on the
terms of the securities that they issue.78
The Commission is proposing to delete
the condition in paragraph (b)(5)(i)(C) of
the Rule that presently provides that
notice of all of the listed events need be
made only ‘‘if material.’’ In connection
with the proposed deletion of the
materiality condition, the Commission
has reviewed each of the Rule’s current
specified events to determine whether
or not a materiality determination
should be retained for that particular
event and preliminarily believes such a
determination is still appropriate for
certain listed events, as discussed
below.79 As a result of this proposed
change, for those events listed in
paragraph (b)(5)(i)(C) that are not
proposed to contain the ‘‘if material’’
condition, the Participating Underwriter
must reasonably determine that the
issuer or other obligated person has
agreed to submit event notices to the
MSRB whenever such an event occurs.
78 See Securities Exchange Act Release No. 33742
(March 9, 1994), 59 FR 12759, 12761–2 (March 17,
1994).
79 The discussion in this section pertains to
materiality determinations for events currently
specified in paragraph (b)(5)(i)(C) of the Rule. For
events proposed to be added to the Rule, whether
a materiality determination would be included is
noted in the discussion below for each such
proposed event.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

The Commission now believes, based
on its experience with the operation of
paragraph (b)(5)(i)(C) of the Rule, that
notice of certain events currently listed
in paragraph (b)(5)(i)(C) need not be
preceded by a materiality determination
and always should be available because
of their importance to investors and
other market participants. 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. The availability of this
information to investors would enable
them to better protect themselves from
misrepresentations and fraud.
Furthermore, the availability of this
information would assist brokers,
dealers and municipal securities dealers
to satisfy their obligation to have a
reasonable basis on which to
recommend municipal securities.
The Commission believes that the
proposal to remove the materiality
condition for the aforementioned events
should not alter greatly the current
practice. Because of the significant
nature of these events and their
importance to investors in the
marketplace, the Commission believes
that issuers and obligated persons
would already be providing notice of
most, if not all, such events pursuant to
existing continuing disclosure
agreements.
More specifically, the Commission
believes that notice of principal and
interest payment delinquencies should
always be provided to aid investors in
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. Even
a small payment default may indicate
that an issuer or other obligated party
has begun to experience financial
distress. Further, a payment default
often adversely affects the market value
of a municipal security. Similarly,
unscheduled draws on debt service
reserves reflecting financial difficulties
and unscheduled draws on credit
enhancements reflecting financial
difficulties often have an adverse impact
on the market value of a security and
therefore should always be available to
investors to protect against fraud and to
other market participants to satisfy their
securities law obligations. The
Commission believes that investors
should always be provided with these

PO 00000

Frm 00009

Fmt 4701

Sfmt 4702

36839

notice of events because such events
likely indicate that the financial
condition of a municipal securities
issuer or obligor has deteriorated and
therefore that there is potentially an
increased risk of a payment default or,
in the case of default by an issuer or
other obligated party that results in
payment of the securities by the
provider of credit enhancement (such as
a standby letter of credit), 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, along with the present
financial condition of the provider of
any credit enhancement.
The identity of credit or liquidity
providers and their ability to perform is
important to investors. The Commission
understands that credit ratings of
municipal securities are typically based
on the higher of the issuer’s (or other
obligor’s) rating or the rating of the
credit provider.80 With occasional
exceptions, credit enhancement is
obtained from a credit provider with a
higher rating than that of the issuer or
other obligor. When a credit enhancer
such as a bond insurer is downgraded,
the market value and liquidity of the
securities that it has enhanced generally
decline.81 Similarly, the identity and
80 See, e.g., Municipal Structured Finance Criteria
Report: Dual-Party Pay Criteria for Long-Term
Ratings on LOC-Supported U.S. Public Finance
Bonds, Fitch Ratings, Public Finance, June 11, 2009
(noting that ‘‘U.S. public finance bonds supported
by bank letters of credit (LOC) are assigned longterm ratings one-to-two notches higher than the
rating on the LOC provider or the underlying rating
of the bond, whichever is higher, if [certain]
conditions hold true[.]’’)
81 See, e.g., Alistair Varr, Moody’s Warning
Ripples Through Municipal Bond Market,
MarketWatch, December 17, 2007 (noting that
‘‘when a security is cut to AA from AAA, the value
of the bond would go down.’’) (available at http://
www.marketwatch.com/story/moodys-bond-insurercall-has-unprecedented-effect-on-muni-market);
Jeffrey R. Kosnett, Why Municipal Bonds Are
Stumbling, Kiplinger.com, December 4, 2007
(stating that municipal bonds normally meriting a
triple-B or single-A rating being upgraded to tripleA status as a result of having bond insurance)
(available at http://www.kiplinger.com/columns/
balance/archive/2007/balance1204.html); ‘‘[T]he
municipal industry chose to use bond insurance to
enhance an issuer’s lower credit rating to that of the
higher insurance company’s rating. The last 18
months have exposed the risks of this choice when
insurance company downgrades, and auction-rate
security failures, forced numerous leveraged
investors to unwind massive amounts of debt into
an illiquid secondary market. The consequence was
that issuers of new debt were forced to pay
extremely high interest rates and investors were
confused by volatile evaluations of their
investments.’’ Enhancing Investor Protection and
the Regulation of Securities Markets: Before the S.

E:\FR\FM\24JYP2.SGM

Continued

24JYP2

36840

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

ability of a liquidity provider to perform
is typically critical to investors.
Investors in VRDOs, for example,
depend on liquidity providers to satisfy
holders’ right to ‘‘put’’ their securities in
a timely manner. As a result, the
Commission preliminarily believes that
notice of the substitution of credit or
liquidity providers, or their failure to
perform, should always be provided in
an event notice to aid investors to
protect against fraud and brokers,
dealers and municipal securities dealers
to satisfy their obligation to have a
reasonable basis to recommend
municipal securities.
Further, the Commission
preliminarily believes, for the same
purposes, that defeasances and rating
changes should always be available to
investors and other market participants.
Defeasances secured by a pool of U.S.
Treasury securities sufficient to pay
principal and interest commonly result
in a bond receiving the highest rating 82
and thus can affect the security’s market
value. Rating changes more generally
may affect the market price of the
security, making it important both to
bondholders and to investors who may
be considering the purchase of a
particular security.
The Commission, however, believes
that a materiality determination should
be retained for other events currently
listed in paragraph (b)(5)(i)(C) because
the occurrence of such events, in some
circumstances, may not be of such
importance to investors that they always
should be disclosed. Experience with
the operation of the Rule has not
provided information to propose a
change at this time, and the Commission
continues to believe that information
Comm. on Banking, Housing and Urban Affairs,
111th Cong. __, March 10, 2009 (statement of
Thomas Doe, Founder and CEO Municipal Market
Advisors) (available at http://banking.senate.gov/
public/index.cfm?FuseAction=Hearings.
Testimony&Hearing_ID=faf91bea-ca58-4bc1-873d33739dbb4f76&Witness_ID=64207b41-3512-414b8085-ae4b71520b0a).
82 Such defeasances are known as ‘‘advance
refundings’’ or ‘‘pre-refundings’’. See MSRB,
Municipal Securities Rulemaking Board Glossary,
Second Edition (January 2004) (defining ‘‘advance
refunding’’ and ‘‘defeasance’’) (available at http://
www.msrb.org/msrb1/glossary). See also MSRB,
EMMA Education Center, FAQ: ‘‘How am I affected
if my bond is advance refunded?’’ (available at
http://emma.msrb.org/EducationCenter/
FAQs.aspx?topic=AboutARD); Fitch Ratings,
Municipal Structured Finance Criteria Report:
Guidelines for Rating Prerefunded Municipal
Bonds, April 2, 2009 (available at http://
www.fitchratings.com/corporate/reports/
report_frame.cfm?rpt_id=431370§or_flag=&
marketsector=3&detail=); and Moody’s Investors
Service, Rating Methodology: Refunded Bonds,
June, 2007 (available at: http://www.moodys.com/
moodys/cust/research/MDCdocs/29/
2006700000441141.pdf?doc_id=2006700000441141
&frameOfRef=municipal).

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

about these events may, depending on
the facts and circumstances, not need to
be available to investors and other
market participants in all instances to
accomplish the Rule’s goals.83
Therefore, the Commission proposes to
modify the text of subparagraph
(b)(5)(i)(C) and subparagraphs
(b)(5)(i)(C)(2), (7), (8), and (10) of the
Rule, with regard to the Participating
Underwriter’s obligations, to specify
that a determination of materiality
would be retained for event notices
regarding non-payment related defaults;
modifications to rights of security
holders; bond calls; and the release,
substitution, or sale of property securing
repayment of the securities.
The Commission requests comment
on the proposed amendment to delete
the phrase ‘‘if material’’ in the case of
notices for 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. Are these events of
such importance to investors that their
occurrence always should be disclosed?
Are there situations in which notice of
the occurrence of these events would
not need to be available to investors to
protect themselves from fraud and to
brokers, dealers and municipal
securities dealers to aid them in
satisfying their obligations under the
securities laws? Are there other events
listed in the Rule as to which the
materiality determination should be
eliminated because their occurrence
always should be disclosed to investors?
Should a materiality determination be
retained for event notices regarding nonpayment related defaults; modifications
to rights of security holders; bond calls;
and the release, substitution, or sale of
property securing repayment of the
securities? Does the proposed
amendment to eliminate the materiality
determination for certain events create
or eliminate any burdens on issuers?
83 For example, a release of substitution of
property may involve a small amount of property
that is not particularly valuable or important to the
business of the issuer or obligated person, and
minor modifications to the rights of securities
holders are often made pursuant to the provisions
of trust indentures that allow them only if they are
not materially adverse to the interests of
bondholders.

PO 00000

Frm 00010

Fmt 4701

Sfmt 4702

D. Amendment Relating to Event
Notices Regarding Adverse Tax Events
Under a Continuing Disclosure
Agreement
The Commission proposes to modify
paragraph (b)(5)(i)(C)(6) of the Rule,
which presently 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,’’ if material.84 The proposed
amendment would revise paragraph
(b)(5)(i)(C)(6) of the Rule to provide
specifically for the disclosure of adverse
tax opinions, the issuance, by the
Internal Revenue Service (‘‘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 securities, or
other events affecting the tax-exempt
status of the security.85 As stated above,
such disclosure would be made to the
MSRB.
In adopting the 1994 Amendments,
the Commission noted that ‘‘an ‘event’
affecting the tax-exempt status of the
security may include the
commencement of litigation and other
legal proceedings, including an audit by
the Internal Revenue Service. * * *’’ 86
While the Commission continues to
believe that ‘‘events affecting the tax84 17

CFR 240.15c2–12(b)(5)(i)(C)(6).
Commission understands that when
determining whether interest on a bond issue is
taxable, the IRS first issues an audit letter to the
issuer (which may indicate whether or not IRS staff
suspects a problem with the particular transaction).
In the event that, as a result of the audit, IRS staff
believes that it has found a reasonable basis to
declare the interest on a bond issue under audit to
be taxable, IRS staff issues a Notice of Proposed
Issue (IRS Form 5701–TEB), which it recently began
to use instead of a letter referred to as a
‘‘preliminary determination of taxability.’’ If,
following subsequent discussions with, and review
of additional documents provided by, the entity
under audit, IRS staff continues to believe that
interest on the bonds should be declared taxable
and no settlement has been reached, it issues a
letter to the issuer referred to as a ‘‘proposed
determination of taxability.’’ Unless appealed to the
Office of Appeals of the IRS, a proposed
determination of taxability becomes a final
determination of taxability in 30 days. Final
determinations of taxability are not appealable to
the IRS and may not be appealed in a federal court
by an issuer. A bondholder who has received a tax
assessment on account of such a final determination
may take an appeal in federal court. See Internal
Revenue Manual (‘‘IRM’’) 4.81.14 to 4.81.1.19. See
also IRM 4.18.5.9 (setting forth Office of TaxExempt Bonds’ current practice regarding the
issuance of a Notice of Proposed Issue (IRS Form
5701–TEB) in instances in which preliminary
determinations of taxability would previously have
been issued).
86 See 1994 Amendments, supra note 5, 59 FR at
59600.
85 The

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
exempt status of the security’’ in
paragraph (b)(5)(i)(C)(6) of the Rule 87
can include an audit, and thus an audit
should be the subject of an event notice
when it is material, the Commission
recognizes that not all audits are
indications of a risk to the tax-exempt
status of interest on a municipal
security. The IRS Office of Tax Exempt
Bonds, through its examination
classification process, initiates
examinations in various market
segments with a view toward ensuring
broad examination coverage of the
various tax-exempt bond segments.88
However, determinations by the IRS,
such as proposed and final
determinations of taxability and Notices
of Proposed Issue (IRS Form 5701–TEB),
indicating that the IRS believes the
securities are or may be taxable and has
begun a formal administrative process
in that regard, indicate that there could
be a significant risk to the tax-exempt
status of a security. Accordingly, the
Commission believes that proposed and
final determinations of taxability and
Notices of Proposed Issue (IRS Form
5701–TEB) by the IRS relating to the
taxability of a municipal security are of
such importance that they always
should be disclosed pursuant to a
continuing disclosure agreement.
Investors consider the tax-exempt
status of a municipal security,
specifically the issuance of such IRS
notices, to be of great importance when
making investment decisions.89 Because
87 17

CFR 240.15c2–12(b)(5)(i)(C)(6).
communication among Clifford Gannett,
Director, Office of Tax-Exempt Bonds, Robert E.
Henn, Manager, Office of Tax-Exempt Bonds Field
Operations, Office of Tax-Exempt Bonds, IRS, and
Martha M. Haines, Assistant Director and Chief,
Office of Municipal Securities, Division,
Commission, on December 9, 2008. Information in
e-mail confirmed in telephone conversation
between Robert E. Henn, Manager, Office of TaxExempt Bonds Field Operations, Office of TaxExempt Bonds, IRS, and Martha M. Haines,
Assistant Director and Chief, Office of Municipal
Securities, Division, Commission, on May 29, 2009.
89 See In the Matter of Neshannock Township
School District, Securities Act Release No. 8411 and
Securities Exchange Act Release No. 49600, AP 3–
11461 (April 22, 2004) (settled action) (‘‘A
substantial risk to the tax-exempt status of
securities which have been sold as tax-exempt is a
material item.’’); In the Matter of Rauscher Pierce
Refsnes, Inc., Dain Rauscher Inc., and James R.
Feltham, Securities Act Release No. 7844 and
Securities Exchange Act Release No. 42644, A.P.
File No. 3–10182 (April 6, 2000) (settled action)
(‘‘* * * an essential feature of the 1992B
[Certificates of Participations] was the tax-exempt
status of the interest component to be paid to
investors’’); and In re: County of Orange, California;
Orange County Flood Control District and County
of Orange, California Board of Supervisors,
Securities Act Release No. 7260 and Securities
Exchange Act Release No. 36760, AP 3–8937
(January 1, 1996) (identifying tax-exempt status of
offering of securities as a material fact). See also,
e.g., Lori Trawinski, et al., The Bond Market
Association, Secondary Market Effects of Municipal

srobinson on DSKHWCL6B1PROD with PROPOSALS2

88 E-mail

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

the interest rate on a tax-exempt
municipal security generally is
significantly lower than the interest rate
on a comparable taxable security
because of the value of the municipal
security’s tax exemption, investors are
sensitive to factors that could affect the
value of the return that they would
receive from such an investment, such
as the tax exempt status of interest
earned on a municipal security that they
currently own or may purchase.90 A
determination by the IRS that interest
may, in fact, be taxable on a municipal
security purchased as tax-exempt 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.91 The
tax-exempt status of a municipal
security is also important to many
mutual funds whose governing
documents, with certain exceptions,
limit their investment to tax-exempt
municipal securities.92 Mutual funds
may liquidate securities that become
taxable, which could have adverse
consequences for the fund and its
holders. Therefore, retail and
institutional investors alike are
extremely interested in events that
Bond Tax Audit Disclosure, at 10 (August 2002)
(settled action) (available at http://www.gfoa.org/
downloads/Tax_Audit_Study_August_2002.pdf)
(study examining the effect of IRS audit
announcements on the secondary market for
municipal bonds and discussing the concerns of
investors and other municipal market participants);
Lynn Hume, Panel: This Top 10 List Doesn’t Have
Buy-Side Players Laughing, The Bond Buyer, May
5, 2006, NFMA Annual Conference, Vol. 356 No.
32375, at 7 (‘‘* * * and issuers’ failures to disclose
Internal Revenue Service notices that bonds are
taxable are among the ‘10 top things that drive the
buy side crazy,’ analysts and lawyers said * * *
during a panel session at the National Federation
of Municipal Analysts’ 23rd annual meeting .
* * *’’).
90 See, e.g., Lori Trawinski, et al., The Bond
Market Association, Secondary Market Effects of
Municipal Bond Tax Audit Disclosure, at 10
(August 2002); Kathleen Pender, State Energy
Bonds Could Be Hard Sell; Treasurer says most
won’t be tax-exempt, The San Francisco Chronicle,
February 21, 2001, at D1; and John Gin, Compare
apples to apples when looking at bonds; Taxequivalent yield is the test, The Times-Picayune,
September 5, 2007, Money; Money Watch, at 1; and
SIFMA, Calculator: Tax-Free vs. Taxable Yield
Comparison (available at http://
www.investinginbonds.com/
learnmore.asp?catid=8&subcatid=80).
91 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.
92 See Investment Company Institute, Frequently
Asked Questions About Money Market Funds
(available at http://www.ici.org/home/
faqs_money_funds.html#TopOfPage) (‘‘Typically,
tax-exempt money market funds, which seek to pay
dividends that are exempt from federal income tax
and/or state income tax, invest in instruments
issued by state and local governments (‘municipal
securities’).’’).

PO 00000

Frm 00011

Fmt 4701

Sfmt 4702

36841

could adversely affect the tax-exempt
status of the bonds that they own or may
purchase.
Subsequent to a 1993 Report of the
General Accounting Office,93 the IRS
established an Office of Tax-Exempt
Bonds with more than 60 staff members
devoted to audits and tax collections
related to tax-exempt municipal
securities.94 Staff of the Office of TaxExempt Bonds has identified numerous
offerings in which bonds sold as taxexempt were determined to be taxable.95
As a result, the IRS has collected a
significant amount of taxes—generally
through settlements with issuers and
obligated persons, but also with
bondholders.96 Furthermore, staff of the
IRS Office of Tax-Exempt Bonds has
established a Bondholder Unit to
increase the staff’s efficiency in
identifying bondholders in the case of
bonds determined to be taxable.97
93 See U.S. General Accounting Office, Tax Policy
and Administration—Improvements for More
Effective Tax-Exempt Bond Oversight, Report of the
General Accounting Office to the Chairman,
Subcommittee on Human Resources and
Intergovernmental Relations, Committee on
Government Operations, House of Representatives,
May 10, 1993 (available at http://archive.gao.gov/
t2pbat5/149322.pdf) (which recommended, in part,
that the existing bond audit program be redirected
and that program staffing levels, locations and
training needs be reassessed in light of the
program’s future).
94 E-mail from Clifford Gannett, Director, Office of
Tax-Exempt Bonds, IRS, to Martha M. Haines,
Assistant Director and Chief, Office of Municipal
Securities, Division, Commission, dated August 26,
2008. Information in e-mail confirmed in telephone
conversation between Robert E. Henn, Manager,
Office of Tax-Exempt Bonds Field Operations,
Office of Tax-Exempt Bonds, IRS, and Martha M.
Haines, Assistant Director and Chief, Office of
Municipal Securities, Division, Commission, on
May 29, 2009.
95 E-mail communications among Clifford
Gannett, Director, Office of Tax-Exempt Bonds,
Robert E. Henn, Manager, Office of Tax-Exempt
Bonds Field Operations, Office of Tax-Exempt
Bonds, IRS, and Martha M. Haines, Assistant
Director and Chief, Office of Municipal Securities,
Division, Commission, dated August 26, 2008 and
December 9, 2008. Information in e-mail confirmed
in telephone conversation between Robert E. Henn,
Manager, Office of Tax-Exempt Bonds Field
Operations, Office of Tax-Exempt Bonds, IRS, and
Martha M. Haines, Assistant Director and Chief,
Office of Municipal Securities, Division,
Commission, on May 29, 2009.
96 Id.
97 According to the 2008 Work Plan for the IRS
Office of Tax-Exempt Bonds, the bondholder
identification process is expected to be initiated no
later than the date a proposed adverse
determination is issued (available at http://
www.irs.gov/pub/irs-tege/teb_fy08_work_plan.pdf).
See, e.g., Susanna Duff Barnett and Lynn Hume, IRS
to Warn Mutual Funds of Taxability Letters Being
Sent to Over 12 Companies, The Bond Buyer,
March 30, 2004, Washington, at 1 (‘‘More mutual
funds can be expected to be contacted in the
future.’’) and Susanna Duff Barnett, A Growing
Caseload; More Challenges Face IRS Bond Office in
’05, The Bond Buyer, December 23, 2004,
Washington, Vol. 350 No. 32036, at 1 (‘‘One result

E:\FR\FM\24JYP2.SGM

Continued

24JYP2

36842

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

IRS staff has indicated 98 that during
the period from April 2007 through July
2008, approximately 80% of the audits
that received a preliminary
determination of taxability (now IRS
Form 5701–TEB 99) and were resolved
were settled through closing agreements
with the IRS. During the same period, of
those cases that received a proposed
determination of taxability and were
closed: approximately 25% were settled
through a closing agreement with IRS;
approximately 37.5% received final
determinations that the bonds were
taxable; and approximately 37.5% were
appealed to the IRS Office of Appeals.
In light of the foregoing discussion, the
Commission believes that the risk of
taxability following the issuance of
proposed and final determinations of
taxability and Notices of Proposed Issue
(IRS Form 5701–TEB) is significant.
Despite the possibility that these
events could adversely affect the taxexempt status of the bonds that
investors own or may purchase and thus
could significantly affect the pricing of
those municipal securities,100 it has
that has stemmed from the lengthier audits is the
IRS’ aggressive search for bondholder names earlier
in an audit cycle through so-called John Doe
summonses and other methods.’’).
98 E-mail from Robert Henn, Manager, Office of
Tax-Exempt Bonds Field Operation, IRS, to Martha
M. Haines, Assistant Director and Chief, Office of
Municipal Securities, Division, Commission, dated
July 14, 2009.
99 The IRS Office of Tax-Exempt Bonds now
issues Notices of Proposed Issue (IRS Form 5701–
TEB) in instances in which it previously would
have issued preliminary determinations of
taxability. E-mail from Clifford Gannett, Director,
Office of Tax-Exempt Bonds, IRS, to Martha M.
Haines, Assistant Director and Chief, Office of
Municipal Securities, Division, Commission, dated
August 26, 2008. Information in e-mail confirmed
in telephone conversation between Robert E. Henn,
Manager, Office of Tax-Exempt Bonds Field
Operations, Office of Tax-Exempt Bonds, IRS, and
Martha M. Haines, Assistant Director and Chief,
Office of Municipal Securities, Division,
Commission, on May 29, 2009.
100 See, e.g., Susanna Duff Barnett and Lynn
Hume, IRS to Warn Mutual Funds of Taxability
Letters Being Sent to Over 12 Companies, The Bond
Buyer, March 30, 2004, Washington, at 1 (‘‘The
bondholder community has been saying for years
that they want prompt disclosure of audits and
issuer discussions with the IRS relating to the taxexempt status of the bonds.’’—Tom Metzold,
president and portfolio manager at Eaton Vance
Management; ‘‘It’s vital to disclose the risk of
taxability to the entire marketplace to protect
potential investors.’’—Gerard J. Lian, then chairman
of the National Federation of Municipal Analysts
and vice president and senior analyst at Morgan
Stanley Investment Management.); and National
Federation of Municipal Analysts, NFMA releases
results of member survey (November 30, 2001)
(available at http://www.nfma.org/publications/
survey_results.pdf) (‘‘Over 54% of analysts
responding to the survey felt that all IRS audits,
whether routine, targeted or based on external
information, should be disclosed to the market.’’).
See also, Lori Trawinski, et al., The Bond Market
Association, Secondary Market Effects of Municipal
Bond Tax Audit Disclosure (August 2002) (available

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

been reported that notices regarding
such tax events are not always filed.101
The Commission believes that the
issuance of proposed and final
determinations of taxability and Notices
of Proposed Issue (IRS Form 5701–TEB)
by the IRS is important information that
should be made available to investors
and therefore should be part of a
Participating Underwriter’s obligation to
determine whether such events are
included in a continuing disclosure
agreement.
The Commission requests comment
on the proposed amendment to modify
the provision of the Rule regarding the
submission of a notice with respect to
adverse tax opinions 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.
Comment is requested on whether the
proposed amendment would further the
disclosure of such events and thereby
aid investors to protect themselves from
misrepresentations and fraud and
brokers, dealers and municipal
securities dealers to carry out their
obligations. The Commission requests
comment regarding the extent to which
investors and other market participants
would find it useful to be informed of
the issuance of 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-exempt status of
securities by the IRS. Commenters
should advise whether the proposal
would aid investors in their
understanding of potential adverse tax
consequences that may arise with
respect to a particular municipal
security. In addition, commenters
should address whether such
information is important to investors of
various types of municipal securities,
such as fixed and variable rate securities
or demand securities. Should the
at http://www.gfoa.org/downloads/
Tax_Audit_Study_August_2002.pdf) (‘‘This study
clearly demonstrates that effect for certain variablerate tax-exempt bonds, where rates paid by state
and local bond issuers have risen significantly
when news of the audit is made public. While
anecdotal evidence suggests similar effects for longterm, fixed-rate bonds, empirical evidence is
inconclusive.’’).
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).

PO 00000

Frm 00012

Fmt 4701

Sfmt 4702

continuing disclosure agreement specify
that a copy of the determinations of
taxability, Notices of Proposed Issue
(IRS Form 5701–TEB) or other material
notices issued by the IRS be provided to
the MSRB, or would a notice of any
such determination provide sufficient
information to investors? What would
be the benefit of disclosing a copy of
any such determination? What
drawbacks, if any, might such
disclosure entail? Should the Rule be
amended to require a Participating
Underwriter to reasonably determine
that the issuer or obligated person has
entered into a continuing disclosure
agreement to submit a notice of tax
audits? If so, why?
E. Addition of Events To Be Disclosed
Under a Continuing Disclosure
Agreement
The Commission also proposes to
amend paragraph (b)(5)(i)(C) of the Rule
by including notice of four additional
events the Participating Underwriter
must reasonably determine that the
issuer or other obligated person has
agreed to provide in its continuing
disclosure agreement. These would
include: (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.
1. Tender Offers
The Commission proposes to add
tender offers to the list of events in
subparagraph (b)(5)(i)(C)(8) of the
Rule.102 Under the proposed
amendment, the Participating
Underwriter must reasonably determine
that the issuer or obligated person has
agreed in its continuing disclosure
agreement to provide notice of tender
102 Generally, municipal securities are not subject
to Commission rules governing tender offers,
including Rule 13e–4 under the Exchange Act, 17
CFR 240.13e–4, which sets forth disclosure, time
periods, and other requirements governing tender
offers by issuers. In passing the Williams Act, P.L.
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.

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
offers to the MSRB.103 The Commission
believes that notice of the existence of
tender offers for municipal securities
would help investors to be better able to
protect themselves from
misrepresentations and fraud, including
deciding whether to tender their
holdings to the issuer or its
representative, and assist brokers,
dealers and municipal securities dealers
to carry out their obligations. Tender
offers typically require an investor to
respond within a limited time frame.104
Tender offers may provide an avenue of
liquidity to investors, such as during
periods of market turmoil.105 The
Commission believes that
communication of the existence of a
tender offer to municipal securities
investors is important to assist each
investor to make an informed, timely
decision whether or not to tender.106
Indeed, the recent events in the
market for ARS could be seen as an
example of the need to provide timely
notice within ten business days of a
tender offer. Since approximately midFebruary of 2008, the market for ARS
has experienced severe illiquidity, with
consequences to investors who
purchased what they may have believed
to be liquid, cash equivalent
investments.107 Some issuers and
103 See

supra note 11 and accompanying text.
Edward N. Gadsby, et al., Regulation of
Tender Offers, Federal Securities Exchange Act of
1934, § 7A.03 (David Colby, et al., ed., Matthew
Bender & Company, Inc.) (2008) (describing that
usually a time limit is placed on a tender offer).
105 See, e.g., Caitlin Devitt, Midwest Health
Systems Use New ARS Strategy; Two Systems See
to Ease ARS Sting, The Bond Buyer, March 7, 2008,
The Regions, Vol. 363 No. 32833, at 1 (describing
an issuer’s use of a tender offer in its auction rate
securities to provide liquidity).
106 The Commission proposes to retain 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. Thus, unlike
with respect to tender offers, the issuer would make
a materiality determination with respect to 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 (i.e., sinking fund redemptions)
are generally included in official statements;
therefore, information about such events is already
available to investors.
107 See, e.g., MSRB Notice 2008–09 (February 19,
2008) (reminding brokers, dealers and municipal
securities dealers of the application of MSRB
disclosure and suitability requirements that apply
to all customer transactions in municipal ARS and
stating, for example, that it may be a material fact
for an investor that an ARS recently was subject to
a failed auction); Press Release 2009–127,
Commission, SEC Finalizes ARS Settlements With
Bank of America, RBC, and Deutsche Bank (June 3,
2009) (announcing settlement of SEC’s complaints
alleging that Bank of America, RBC Capital Markets,

srobinson on DSKHWCL6B1PROD with PROPOSALS2

104 See

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

obligated persons have offered to
purchase some or all of their
outstanding ARS from investors who
desire liquidity.108 Notices about these
tender offers may not always be widely
disseminated. Had this information
been available from the then-existing
information repositories, it may have
become more widely known to the
market through these repositories and
through private information vendors
and news media who obtain information
from the repositories.
During a tender offer for municipal
securities, such as ARS, some investors
may be left in doubt whether their
securities were the subject of the offer.
To determine the facts about such offers,
it often is necessary for investors to seek
the information independently by
contacting the issuer or other obligated
person directly. Some investors may not
have been able to learn of the existence
of a tender offer for municipal securities
that they hold, in a timely fashion and,
in such a case, may not have been able
to tender their securities. The
Commission believes that the proposed
amendment requiring Participating
Underwriters to reasonably determine
that such notices are provided pursuant
to a continuing disclosure agreement
would help ensure the consistent
availability of this information to
investors when they make investment
decisions, and thereby assist them to be
better able to protect themselves from
misrepresentation and fraud.
The Commission believes that the
proposed amendment requiring
Participating Underwriters to reasonably
determine that issuers and other
obligated persons have agreed in their
continuing disclosure agreements to
provide notice of tender offers to the
MSRB 109 would result in this
information being more widely available
to investors through the MSRB. In
addition, the proposal to revise
paragraph (b)(5)(i)(C) of the Rule to
specify that event notices be submitted
in a timely manner not in excess of ten
business days after the event’s
occurrence, as discussed above, would
help to improve the timely availability
of tender offer information so that
investors would be afforded the
and Deutsche Bank failed to make their customers
aware of risks in ARS investments.).
108 See, e.g., notice dated March 28, 2008 of
Nationwide Children’s Hospital regarding the intent
of the hospital to bid for auction rate bonds
(available at https://www.nationalcity.com/content/
private-client-group/products-services/create-growwealth/pages/documents/2008-03-28.pdf) and
Caitlin Devitt, Midwest Health Systems Use New
ARS Strategy; Two Systems Seek To Ease ARS
Sting, The Bond Buyer, March 7, 2008, The Regions,
Vol. 363 No. 32833, at 1.
109 See supra note 11 and accompanying text.

PO 00000

Frm 00013

Fmt 4701

Sfmt 4702

36843

opportunity to make more informed
decisions whether to hold or tender
their securities. The Commission
believes that its proposal regarding
notice of tender offer disclosures would
enhance the ability of issuers, other
obligated persons, or others making
such tender offers to effectively
communicate their offers to a wider
constituency of bondholders and
thereby would increase the likelihood
that those holders would be informed of
the offer.
The Commission requests comment
regarding all aspects of the proposed
amendment of subparagraph
(b)(5)(i)(C)(8) of the Rule to include
tender offers. For example, would
specifying in Rule 15c2–12 the
submission to the MSRB of a notice of
a tender offer assist issuers and other
obligated persons in providing tender
offer information to bondholders on a
wider basis? Is there a benefit or
drawback to adding tender offers as an
event item in subparagraph
(b)(5)(i)(C)(8) of the Rule? Would the
proposal help prevent fraud? If so,
would the proposed amendment to
modify subparagraph (b)(5)(i)(C)(8) to
include notice of tender offers to the
MSRB be an appropriate avenue to
address this objective? If a tender offer
is open for a short period of time, is the
proposed ‘‘ten business day’’ standard
appropriate in the context of a tender
offer or would another time frame be
more appropriate? The Commission
seeks comment regarding whether
tender offers should be added to this
provision of Rule 15c2–12 and requests
suggestions concerning alternative
methods to address the concerns stated
above with regard to tender offers for
municipal securities. In addition,
comment is requested about the
existence and prevalence of exchange
offers for municipal securities and
whether exchange offers also should be
included in this provision. Further, the
Commission requests comment
regarding whether it should specify that
the Participating Underwriter
reasonably determine that the issuer or
obligated person has agreed to provide
particular information regarding a
tender offer that should be included in
such notices, such as: The offer price;
change in offer price; withdrawal rights;
identity of the offeror; an offeror’s
ability to finance the offer; conditions to
the offer; and the time frame and
manner for tendering securities and the
method for acceptance (e.g., whether all
securities tendered would be accepted
and, if not, the method for determining
which securities would be accepted).
Are there other items of information that

E:\FR\FM\24JYP2.SGM

24JYP2

36844

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

should be included in the notice to help
accomplish the purposes of the Rule or
would some of the items listed above be
unnecessary in this context? If so, please
specify which ones and explain the
rationale as to why they should or
should not be included.
2. The Occurrence of Bankruptcy,
Insolvency, Receivership or Similar
Events Regarding an Issuer or an
Obligated Person
The Commission proposes to add new
subparagraph (b)(5)(i)(C)(12) to the Rule
to require a Participating Underwriter to
reasonably determine that the
continuing disclosure agreement
requires a notice to be submitted to the
MSRB,110 in the case of bankruptcy,
insolvency, receivership or similar
event of the obligated person. Rule
15c2–12 would state in a Note following
the events specified in subparagraph
(b)(5)(i)(C)(12) that, for the purposes of
the subparagraph (b)(5)(i)(C)(12), the
event would be 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 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 or
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.111 Although issuers and other
obligated persons of municipal
securities rarely are involved in
110 See

supra note 11 and accompanying text.
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.

srobinson on DSKHWCL6B1PROD with PROPOSALS2

111 See

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

bankruptcy, insolvency, receivership or
similar events, the Commission notes
that the occurrence of such events, even
if rare, can significantly impact the
value of the municipal securities.
Information about these events is
important to investors and other market
participants,112 and knowledge of the
bankruptcy, insolvency, receivership or
similar event involving an issuer or
other obligated person would allow
investors to make informed decisions
about whether to buy, sell or hold the
municipal security and help prevent
fraud.113 Accordingly, the Commission
believes that Participating Underwriters
should be required to reasonably
determine that such information is
provided pursuant to a continuing
disclosure agreement.
Under current Rule 15c2–
12(b)(5)(i)(C)(2), 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.’’ 114 However, the
Commission further understands that
this may not be uniformly the case. The
proposed amendment would help
improve the availability of notice of
bankruptcy, insolvency, receivership, or
similar events to all investors. The
proposed Note, as described above, is
intended to clarify the scope of the
event item contained in new
subparagraph (b)(5)(i)(C)(12) of the Rule.
Moreover, because of the importance of
112 See, e.g., Letter from Karrie McMillan, General
Counsel, ICI, to Florence E. Harmon, Secretary,
Commission (September 22, 2008) (‘‘ICI Letter’’)
(available at http://www.sec.gov/comments/s7-2108/s72108-12.pdf) (suggesting that disclosure
information should include information relating to
bankruptcy and receivership); National Federation
of Municipal Analysts, Recommended Best
Practices in Disclosure for Land Secured Debt
Transactions, June 2000 (available at http://
data.memberclicks.com/site/nfma/
DG.BP.landsecuredpractices.doc.pdf)
(recommending best practice disclosures, including
disclosures of bankruptcy).
113 The Commission 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 3,
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.
114 See National Association of Bond Lawyers
(NABL) Form Indenture, dated June 1, 2002
(‘‘NABL Form Indenture’’).

PO 00000

Frm 00014

Fmt 4701

Sfmt 4702

such events to investors and their
possible impact on the value of the
security, a materiality condition would
not be added to proposed subparagraph
(b)(5)(i)(C)(12).
The Commission requests comment
regarding all aspects of the proposed
addition of the event relating to
bankruptcy, insolvency, receivership or
similar proceeding of the issuer or other
obligated person in the Rule. In
particular, the Commission requests
comment regarding whether there are
other similar events or proceedings
affecting the financial condition of
issuers or other obligated persons that
should be included as events requiring
notice. The Commission seeks input
regarding whether commenters believe
that the items contained in proposed
subparagraph (b)(5)(i)(C)(12) of the Rule
are already addressed by current
subparagraph (b)(5)(i)(C)(2) of the Rule
and thus whether it is unnecessary to
revise the Rule in this regard. The
Commission also seeks comment on
whether it is appropriate to exclude a
materiality determination from this
proposed event item.
3. Merger, Consolidation, Acquisition,
and Sale of All or Substantially All
Assets
The Commission proposes to add
subparagraph (b)(5)(i)(C)(13) to the Rule,
which would require a Participating
Underwriter reasonably to determine
that the continuing disclosure
agreement provides for the submission
of notice to the MSRB 115 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.116 Although mergers,
115 See

supra note 11 and accompanying text.
the Commission’s disclosure rules
that are applicable to reporting companies do not
apply to municipal securities, the Commission
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
116 Although

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

consolidations, acquisitions, and
substantial asset sales are events
believed to be rare among governmental
issuers,117 they are not uncommon for
obligated persons such as health care
institutions, other non-profit entities,
and for-profit businesses.118 Currently,
Rule 15c2–12 does not require
Participating Underwriters to reasonably
determine that continuing disclosure
agreements provide for notice of a
merger, consolidation, acquisition and
substantial asset sales involving such
obligated persons, if material.119
Investors often are not readily able to
obtain information about such actions
by obligated persons.
The Commission believes that notice
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
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.
117 But see Illinois Finance Authority, which was
created on January 1, 2004 following the
consolidation of seven existing state authorities. See
Illinois Finance Authority, Illinois Finance
Authority Bond Program Handbook, November 1,
2004 (available at http://www.il-fa.com/policies/
BondHandbook11-1-04.pdf).
118 For example, according to the American
Hospital Association, more than 680 hospital
mergers were announced from 1998–2006. See
American Hospital Association, TRENDWATCH
CHARTBOOK 2008—Trends in the Overall Health
Care Market, Chart 2.10: Announced Hospital
Mergers and Acquisitions, 1998–2006 (available at
http://www.aha.org/aha/trendwatch/chartbook/
2008/08chart2-10.pdf).
119 The materiality 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 must be determined through a
review of the particular facts and circumstances of
such event. Although in a number of instances such
events may be determined to be material, it is
possible for such an event to be so sufficiently
insignificant that an event notice would not be
required. For example, a merger or acquisition of a
small entity by one of substantial size may not be
material to investors in bonds for which the larger
entity is the obligated person, absent other
circumstances. On the other hand, such a merger or
acquisition may be material to investors in bonds
for which the small entity is the obligated person.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

such actions, other than pursuant to its
terms, if material, is important
information for investors and market
participants.120 The foregoing events
may signal that a significant change in
the obligated person’s corporate
structure could occur or has occurred.
In the case of such event, investors may
want to have information about the
identity and financial stability of the
obligated person that would be
responsible, following such event, for
payment of a municipal security.
Further, municipal security holders
generally may wish to know about the
obligated person’s creditworthiness,
particularly its ability to support
payment of the security following such
event when they assess whether to buy,
sell or hold a municipal security. A
notice regarding such an event, if
material, would help further the
availability of relevant information to
bondholders, market professionals, and
the public generally. Accordingly, the
Commission believes that it is
appropriate to include in the Rule the
proposed event item relating to 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. The Commission does
not believe that all mergers are
necessarily of sufficient importance that
information on mergers needs to be
made available in all instances. For
example, a merger could involve the
combination of a shell corporation or
other small entity into a very large
healthcare organization that is a conduit
borrower. Such a merger 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,
would not be important to investors.
The Commission requests comment
regarding all aspects of the proposed
addition to the Rule with respect to the
consummation or entry into or
termination of a definitive agreement
involving a merger, consolidation,
acquisition, or the sale of all or
substantially all of the assets of the
obligated person. The Commission
requests comment regarding the
frequency of such events, and whether
this information would be meaningful to
120 See ICI Letter, supra note 112 (suggesting that
disclosure information should include information
relating to material acquisitions and dispositions).

PO 00000

Frm 00015

Fmt 4701

Sfmt 4702

36845

investors. The Commission further
requests comment on whether a
determination of materiality for such
events is an appropriate condition to
add to this proposed provision. The
Commission also requests comments
regarding the benefits and drawbacks of
this proposed event item.
4. Successor, Additional, or Change in
Trustee
Finally, the Commission proposes to
add subparagraph (b)(5)(i)(C)(14) to the
Rule to require Participating
Underwriters to reasonably determine
that the issuer or other obligated person
has contractually agreed to submit
notice to the MSRB 121 when there is an
appointment of a successor or
additional trustee, or a change of name
of a trustee, if material.122 The proposed
amendment reflects the Commission’s
belief in the importance of an investor’s
ability to learn of a material change in
the trustee’s identity, given the
significant function and role of the
trustee for the holders of the municipal
security. The trustee makes critical
decisions that impact investors and has
a duty to represent the interests of
bondholders. For example, the trustee
often must determine whether:
Proposed amendments to the governing
documents of the municipal security are
permissible without bondholder
consent; parity obligations could be
issued; security could be released; or an
event of default has occurred.123 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.124 A trustee may also be
responsible for providing information
requested by investors; often the trustee
serves as the issuer’s dissemination
agent for continuing disclosures.
Although the identity of the trustee may
have little or no influence on a decision
whether to buy or sell a security under
normal circumstances, bondholders
would need to know the identity of a
trustee to be able to contact the trustee
for various reasons, particularly when
121 See

supra note 11 and accompanying text.
materiality of the name change of a trustee
must be determined through a review of the
particular facts and circumstances of such event.
For instance, it is possible for a name change by a
trustee to be so minor that an event notice would
not be required. 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.
123 See NABL Form Indenture, supra note 114.
124 Id.
122 The

E:\FR\FM\24JYP2.SGM

24JYP2

36846

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

an issuer or other obligated person may
be experiencing financial difficulty.
These factors support the need for
investors to know the identity of the
trustee. Yet, the Commission is unaware
of any method by which investors,
particularly individual investors,
presently have a consistent means of
obtaining up-to-date information about
changes to the identity of the trustee.
The proposed amendment therefore
would require that the Participating
Underwriter reasonably determine that
the continuing disclosure agreement
provide that a notice concerning a
change in the identity of the trustee be
submitted to the MSRB.
The Commission requests comment
regarding all aspects of the proposed
addition of subparagraph (b)(5)(i)(C)(14)
concerning the appointment of a
successor or additional trustee or the
change of name of a trustee. In
particular, the Commission requests
comment relating to the frequency of
such an event and the importance of
such information to investors.
Commenters should advise whether the
continuing disclosure agreement should
set forth other information regarding the
trustee that should be disclosed and
whether a determination of materiality
for such events is an appropriate
condition to add to this proposed
provision. Commenters are requested to
provide their views on the benefits and
drawbacks of this aspect of the proposal.
F. Effective Date and Transition
The proposed amendments to Rule
15c2–12 would impact only continuing
disclosure agreements that are entered
into in connection with primary
offerings occurring on or after the
effective date of these proposed
amendments, if they were adopted by
the Commission. The Commission
understands that existing undertakings
by issuers and obligated persons that
were entered into prior to the effective
date of any final amendments would 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 are proposed to be added to
paragraph (b)(5)(i)(C) of the Rule. In
addition, such existing undertakings
would provide for the submission of the
events specified in paragraph (b)(5)(i)(C)
of the Rule, ‘‘if material.’’
Further, the Commission is aware
that, prior to the effective date of any
final amendments, a broker, dealer, or
municipal securities dealer in primary

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

offerings of demand securities in
authorized denominations of $100,000
would not be required reasonably to
determine that the issuer or other
obligated person had entered into a
continuing disclosure agreement, as
prescribed by the Rule. The Commission
requests comment 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 for doing as discussed
above) than continuing disclosure
agreements entered into on or after any
effective date of the proposed
amendments, should the proposed
amendments be adopted by the
Commission.
The Commission preliminarily
believes that, if the proposed
amendments to Rule 15c2–12 were
adopted, it would be preferable to
implement them expeditiously. If the
Commission were to approve the
proposed amendments, the Commission
is preliminarily considering an effective
date that would be no earlier than three
months after any final adoption of the
proposed amendments in order to
permit sufficient time for the MSRB to
make necessary modifications to the
EMMA system and for Participating
Underwriters to comply with the new
Rule. The Commission requests
comment on such an effective date and
whether another effective date might be
preferable, if the Commission were to
adopt the proposed rule amendments. In
particular, comment is requested
regarding any transition issues with
respect to the proposed amendments,
such as whether there would be any
conflicts with respect to terms in
existing continuing disclosure
agreements.
The Commission notes that under
paragraph (c) of the Rule, a broker,
dealer, or municipal securities dealer
cannot recommend the purchase or sale
of a municipal security unless such
broker, dealer, or municipal securities
dealer has procedures in place that
provide reasonable assurance that it will
receive prompt notice of any event
disclosed pursuant to paragraphs
(b)(5)(i)(C) and (D) and paragraph
(d)(2)(ii)(B) of the Rule with respect to
the security. The Commission
recognizes that continuing disclosure
agreements entered into prior to the
effective date of any final amendments
that the Commission may adopt would
not reflect changes made to the Rule by
such amendments, including with
respect to event notices. As a result,
event items covered by a continuing

PO 00000

Frm 00016

Fmt 4701

Sfmt 4702

disclosure agreement entered into prior
to the effective date of any amendments
that the Commission may adopt may be
different from those event items covered
by a continuing disclosure agreement
entered into on or after the effective date
of any final amendments that the
Commission may adopt. Thus, in the
case of municipal securities subject to a
continuing disclosure agreement
entered into prior to the effective date
of any final amendments that the
Commission may adopt, the
recommending broker, dealer or
municipal securities dealer would
receive notice solely of those events
covered by that continuing disclosure
agreement, namely, the eleven events
specified in the current Rule. Because,
in that case, the continuing disclosure
agreement would not cover any of the
items proposed to be added to the Rule,
it would not be necessary for the
recommending broker, dealer, or
municipal securities dealer to have
procedures in place that provide
reasonable assurance that it received
prompt notice of events proposed to be
added to the Rule. The Commission
requests comment on the impact of the
proposed amendments with respect to
brokers, dealers, and municipal
securities dealers that recommend the
purchase or sale of municipal securities.
The Commission also requests comment
on what changes, if any, brokers, dealers
and municipal securities dealers would
have to make to their procedures as a
result of any final amendments that the
Commission may adopt relating to the
receipt of event notices. The
Commission also requests comment on
whether it should amend the Rule or
otherwise provide further guidance to
take into account differences in event
notices included in continuing
disclosure agreements entered into prior
to the effective date of any final
amendments that the Commission may
adopt and those event notices included
in continuing disclosure agreements
entered into on or after the effective date
of any final amendments that the
Commission may adopt.
The Commission seeks comment on
any other transition issues in
connection with the proposed
amendments to Rule 15c2–12. For
example, in connection with the 2008
Amendments, one commenter suggested
that continuing disclosure agreements
executed following the effective date of
the 2008 Amendments should amend all
prior continuing disclosure agreements
of the same issuer to incorporate the
changes to the Rule made in the 2008
Amendments. In the event that the
proposed amendments were to be

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
adopted, would transitional issues be
minimized by the fact that over time
fewer bonds would be subject to
continuing disclosure agreements
entered into prior to the effective date?
Would an effective date that is no earlier
than three months after any final
approval of the proposed amendments,
should the Commission determine to
adopt the proposed amendments,
provide adequate time for issuers and
underwriters to become informed about
the proposed amendments and adapt to
them?

srobinson on DSKHWCL6B1PROD with PROPOSALS2

III. Interpretive Guidance With Respect
to Obligations of Participating
Underwriters
As noted above in Section I.B., 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.125
Municipal security holders’ access to
meaningful information promotes
informed investment decision-making
about whether to buy, sell or hold
municipal securities 126 and thereby
better protection against
misrepresentations and fraudulent
activities. Availability of that
information also will aid brokers,
dealers, and municipal securities
dealers to satisfy their obligations under
the federal securities laws 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.127
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.
In prior releases, the Commission set
forth its interpretations of the
obligations of municipal underwriters
125 See 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). See also E-mail from Peter J.
Schmitt, CEO, DPC Data Inc., to SEC, RuleComments, dated September 19, 2008, regarding the
2008 Proposed Amendments.
126 See e.g., 2008 Amendments Adopting Release,
supra note 11, 73 FR at 76129.
127 See 1994 Amendments Adopting Release,
supra note 5, 59 FR at 59594–5.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

under the antifraud provisions of the
federal securities laws.128 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, it is
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.129 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.130
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.131 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.132
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
128 See Securities Exchange Act Release No.
26100 (September 22, 1988), 53 FR at 37787–91
(September 28, 1988) (‘‘1988 Proposing Release’’);
the 1989 Adopting Release, supra note 3, 54 FR at
28811–12; and the 1994 Interpretive Release, supra
note 5, 59 FR at 12757–58 (reaffirming the
Commission’s interpretation of the obligations of
municipal underwriters under the antifraud
provisions of the federal securities laws).
129 See 1989 Adopting Release, supra note 3, 54
FR at 28811. See also 1988 Proposing Release, supra
note 128, 53 FR at 37787.
130 In light of the underwriter’s obligation, as
discussed in the 1988 Proposing Release, supra note
128, 53 FR at 37787–91, the 1989 Adopting Release,
supra note 3, 54 FR 28811–12, and the 1994
Interpretive Release, supra note 5, 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
disclaimers by underwriters 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
therefore, are misleading and should not be
included in official statements. See 1994
Interpretive Release, supra note 5, 59 FR 12758
n.103.
131 See 1988 Proposing Release, supra note 128,
53 FR at 37790.
132 Under the 2008 Amendments, the MSRB is the
sole information repository.

PO 00000

Frm 00017

Fmt 4701

Sfmt 4702

36847

material respects, with any previous
informational undertakings in the
continuing disclosure agreement.133
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 should, therefore, be
disclosed in the final official
statement.134 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 for them to
comply with their undertakings to
provide secondary market disclosure.135
Moreover, such disclosure would assist
underwriters and others in assessing the
reliability of issuers’ or obligated
persons’ disclosure representations.136
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.
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.137 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.138 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.139 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);
133 Rule

15c2–12(f)(3), 17 CFR 15c2–12(f)(3).
1994 Amendments Adopting Release,
supra note 5, 59 FR at 59594–5.
135 Id. at 59595.
136 Id.
137 See 1988 Proposing Release, supra note 128,
53 FR at 37789 and 1989 Adopting Release, supra
note 3, 54 FR 28811–12.
138 Id.
139 Id.
134 See

E:\FR\FM\24JYP2.SGM

24JYP2

36848

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

(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.140 Sole reliance on
the representations of the issuer will not
suffice.141
The Commission has determined
further to expound upon its prior
interpretations regarding municipal
underwriter’s 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 the issuer’s
or obligated person’s ongoing disclosure
representations, if such issuer or
obligated person has a history of
persistent and material breaches or if it
has not remedied such past failures by
the time the offering commences.142 The
Commission believes that, if the
underwriter finds that the issuer or
obligated person has on multiple
occasions during the previous five
years,143 failed to provide on a timely
basis continuing disclosure documents,
including event notices and failure to
file notices, as required in continuing
disclosure agreements for prior
offerings, 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 is doubtful that
an underwriter could meet the
reasonable belief standard without the
underwriter affirmatively inquiring as to
that filing history.144 The underwriter’s
reasonable belief would 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
srobinson on DSKHWCL6B1PROD with PROPOSALS2

140 Id.
141 See 1988 Proposing Release, supra note 128,
53 FR at 37789.
142 See 1994 Amendments Adopting Release,
supra note 5, 59 FR at 59595.
143 17 CFR 240.15c2–12(f)(3).
144 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.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

representations made by the issuer or
obligated person.
Comment is solicited regarding
whether there are alternative or
additional ways in which an
underwriter could satisfy its obligations,
including obligations to ascertain
whether issuers or obligated persons are
abiding by their municipal disclosure
commitments. Commenters should
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.
IV. Request for Comments
The Commission seeks comment on
all aspects of the proposed amendments
to the Rule. In addition to the comments
requested throughout this release,
comment is requested on whether the
proposed amendments would further
the Commission’s goal of enhancing the
availability to investors important
information regarding municipal
securities and their issuers in a prompt
manner, and whether the proposed
amendments would improve investors’
ability to obtain such information.
Further, the Commission seeks
comment regarding the impact of the
proposed amendments on Participating
Underwriters, issuers and obligated
persons, institutional and individual
investors, the MSRB, information
vendors, and others that may be affected
by the proposed amendments.
In addition, the Commission requests
comment on whether there are
additional events for which notices
should be provided, and alternative
approaches or modifications to the
Commission’s proposed approach to
improving the public’s ability to obtain
important information about municipal
securities that the Commission should
consider. Commenters are requested to
indicate their views and to provide any
other suggestions that they may have.
V. Paperwork Reduction Act
Certain provisions of the proposed
amendments to the Rule contain
‘‘collection of information
requirements’’ within the meaning of
the Paperwork Reduction Act of 1995
(‘‘PRA’’).145 In accordance with 44
U.S.C. 3507 and 5 CFR 1320.11, the
Commission has 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

PO 00000

145 44

U.S.C. 3501 et seq.

Frm 00018

Fmt 4701

Sfmt 4702

to, a collection of information unless it
displays a currently valid control
number.
A. Summary of Collection of
Information
Under paragraph (b) of Rule 15c2–12,
a Participating Underwriter currently 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 noncompetitively 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.146 Under paragraph (c) of the
Rule, a broker-dealer that recommends
the purchase or sale of a municipal
security must 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.147
Under paragraph (d)(1)(iii) of the
Rule, a primary offering of municipal
securities in authorized denominations
of $100,000 or more is exempt from the
Rule, if the securities, at the option of
the holder thereof, may be tendered to
146 As noted above, the Commission recently
approved amendments to Rule 15c2–12 that, among
other things, established the MSRB as the sole
repository for continuing disclosure documents and
provided that those documents are to be submitted
to the MSRB in an electronic format. See 2008
Amendments Adopting Release, supra note 11.
Previously, continuing disclosure documents were
to be submitted to the NRMSIRs and the
appropriate SID, if any. The 2008 Amendments
became effective on July 1, 2009. The Commission
proposes that the effective date of the proposed
amendments discussed herein would be no earlier
than three months after the final approval of the
proposed amendments, should the Commission
adopt them.
147 17 CFR 240.15c2–12(c).

E:\FR\FM\24JYP2.SGM

24JYP2

srobinson on DSKHWCL6B1PROD with PROPOSALS2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
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.148 These securities are referred to
as demand securities or variable rate
demand obligations (‘‘VRDOs’’). The
Commission proposes to modify the
exemption for demand securities by
adding proposed paragraph (d)(5) to the
Rule, which would apply current
paragraphs (b)(5) and (c) of the Rule to
a primary offering of demand securities
in authorized denominations of
$100,000 or more.
Under the current Rule, a
Participating Underwriter must
reasonably determine that the issuer or
obligated person has undertaken in a
continuing disclosure agreement to
provide an event notice to the MSRB
when any of the following events with
respect to the securities being offered in
an offering occurs, if material: (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 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 securities; and (11) rating changes.149
Under the proposed amendments,
Participating Underwriters would 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 only in ‘‘a timely
manner.’’ In addition, the Commission
proposes to add 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-exempt status of the
securities; (2) tender offers; (3)
bankruptcy, insolvency, receivership or
similar event of the issuer or obligated
person; (4) the consummation of a
merger, consolidation, or acquisition
involving an obligated person or the sale
148 17
149 17

CFR 240.15c2–12(d)(1)(iii).
CFR 240.15c2–12(b)(5)(i)(C).

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

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, the Commission
proposes to delete the generally
applicable ‘‘if material’’ condition from
paragraph (b)(5)(i)(C) of the Rule and
instead indicate in specific event items
listed in that paragraph whether notice
of such event must be made only to the
extent that such event is material. In
this regard, Participating Underwriters
would need to reasonably determine
that notice of the following events
would be made in all circumstances: (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.
B. Proposed 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
current Rule used for demand securities,
the proposed amendments are intended
to promptly make available to brokerdealers, institutional and retail
investors, and others important
information about significant events
relating to municipal securities and
their issuers. The proposed amendments
would help enable investors and other
municipal securities market participants
to be better informed about important
events that occur with respect to
municipal securities and their issuers,
including with respect to demand
securities, and thus would allow
investors to better protect themselves
against fraud. In addition, the proposed
amendments would provide brokers,
dealers, and municipal securities
dealers with access to important
information about municipal securities
that they can use to carry out their
obligations under the securities laws.
This information could 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

PO 00000

Frm 00019

Fmt 4701

Sfmt 4702

36849

securities; Commission’s staff; and the
public generally.
C. Respondents
In December 2008, OMB approved a
revision to the collection of information
associated with the Rule in accordance
with 2008 Amendments to the Rule. The
current paperwork collection associated
with Rule 15c2–12 applies to brokerdealers, issuers of municipal securities,
and the MSRB. The paperwork
collection associated with today’s
proposed amendments applies to the
same respondents.
The proposal would require that a
Participating Underwriter in a primary
offering of municipal securities
reasonably determine that the issuer or
an obligated person has undertaken in a
continuing disclosure agreement to
submit event notices in a timely manner
not in excess of ten business days of
their occurrence to the MSRB, as well as
to submit such notices for proposed
additional disclosure items. The
proposal also would revise the Rule
with respect to whether or not a
materiality condition would apply to
each of the Rule’s specified events
prompting submission of notices to the
MSRB. In addition, the proposed
amendments would revise the Rule with
respect to its treatment of demand
securities. The Commission gathered
updated information regarding the
paperwork burden associated with Rule
15c2–12 in connection with the
Commission’s adoption of the 2008
Amendments and is using these
estimates in preparing the paperwork
collection associated with its current
proposal. In the 2008 Amendments
Adopting Release, the Commission
estimated that the number of
respondents impacted by the paperwork
collection associated with the Rule
consists of 250 broker-dealers and
10,000 issuers.150 The Commission’s
staff expects that the proposed
amendments would not change the
number of broker-dealer respondents
described in the 2008 Amendments
Adopting Release. The Commission’s
staff expects that the proposed
amendments would increase the
number of issuer respondents in
comparison to the Rule’s paperwork
current collection, as set forth in the
2008 Amendments Adopting Release.
This is because the proposed
amendments would expand the types of
securities covered under subparagraphs
(b)(5) and (c) of the Rule, thus
increasing the number of issuers having
a paperwork burden. Specifically, the
150 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.

E:\FR\FM\24JYP2.SGM

24JYP2

36850

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

Commission’s staff estimates 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.151
The Commission’s 2008 Amendments
Adopting Release included a paperwork
collection burden for the MSRB and, for
purposes of the proposed amendments,
the Commission’s staff expects that the
MSRB also would be a respondent.
D. Total Annual Reporting and
Recordkeeping Burden
In the 2008 Amendments Adopting
Release, the Commission included
estimates for the hourly burdens that the
Rule imposes upon broker-dealers,
issuers of municipal securities, and the
MSRB. The Commission’s staff has
relied on these estimates to prepare the
analysis discussed below for each of the
aforementioned entities.
The Commission’s staff estimates the
aggregate information collection burden
for the amended Rule would consist of
the following:
1. Broker-Dealers
The Commission’s staff estimates that
approximately 250 broker-dealers
potentially could serve as Participating
Underwriters in an offering of
municipal securities.152 Therefore, the
Commission’s staff estimates that, under
the proposed amendments, the
maximum number of broker-dealer
respondents would be 250.

srobinson on DSKHWCL6B1PROD with PROPOSALS2

a. Proposed Amendment To Modify the
Exemption for Demand Securities
Under the current Rule, the
Commission has estimated that the total
annual burden on all 250 broker-dealers
is 250 hours (1 hour annually per
broker-dealer).153 The Commission
believes that the proposed amendment
to modify the exemption from the Rule
151 In 2008, there were approximately 2,000
offerings of demand securities. See Two Decades of
Bond Finance: 1989–2008, The Bond Buyer/
Thomson Reuters 2009 Yearbook 7 (Matthew Kreps
ed., SourceMedia, Inc.) (2009). To provide estimates
that would not be under-inclusive, the
Commission’s staff has 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’s staff estimates 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 affected by
the Rule. 10,000 (number of issuers under current
Rule)/2,000 (number of additional issuers under
proposed amendments to the Rule) × 100 = 20%.
152 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
153 Id.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

for a primary offering of demand
securities in authorized denominations
of $100,000 or more, would increase the
number of issuers with municipal
securities offerings that are subject to
the Rule annually by 20%, based on the
Commission’s staff estimate of the ratio
of demand securities outstanding in
relation to the municipal security
market generally.154 The Commission’s
staff estimates 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-dealer by 20%, or .20 hours
(12 minutes = 60 minutes × .20 (20%))
and the total estimated annual
paperwork burden for all broker-dealers
by 20%, or 50 hours.155 This increased
burden represents the estimated
additional time broker-dealers would
need annually to review the continuing
disclosure agreements associated with
the additional municipal securities
offerings that would be subject to the
amended Rule. As discussed in more
detail below,156 the Commission notes
that the continuing disclosure
agreements that are reviewed by brokerdealers as part of their obligation under
the Rule are form agreements. The
proposed changes to the Rule would
result in minor changes to certain
provisions of these continuing
disclosure agreements. However,
because these continuing disclosure
agreements are form agreements, the
Commission does not believe that there
would be a substantial increase in the
annual hourly burden for broker-dealers
under the proposed amendments to the
Rule. Accordingly, the Commission’s
staff estimates that 250 broker-dealers
would incur an estimated average
burden of 300 hours per year to comply
with the Rule, as proposed to be
amended.157
b. Proposed Amendments to Events To
Be Disclosed Under a Continuing
Disclosure Agreement
The proposed amendments to
paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B)
of the Rule would not alter a brokerdealer’s obligation to reasonably
determine that the issuer or obligated
supra note 151.
hours (total annual burden for all brokerdealers under the current Rule) × .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
remarketings of VRDOs that are primary offerings.
156 See Section V.D.2., infra.
157 (250 hours (total estimated annual hourly
burden for all broker-dealers under the current
Rule) + 50 hours (total estimated additional annual
hourly burden for all broker-dealers under the
proposed amendments to the Rule) = 300 hours.

PO 00000

154 See

155 250

Frm 00020

Fmt 4701

Sfmt 4702

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.
As described above, the proposed
amendments to paragraph (b)(5)(i)(C) of
the Rule would add four new event
disclosure items to the Rule, as well as
amend an existing event disclosure item
currently contained in the Rule, and
would modify the events that are subject
to a materiality determination before
triggering a notice to the MSRB. In
addition, the proposed amendments to
paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B)
of the Rule would change the timing for
filing event notices from ‘‘in a timely
manner’’ to ‘‘in a timely manner not to
exceed ten business days.’’ The
Commission believes that these
amendments would not change 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.158
Accordingly, the Commission does not
believe that the proposed amendments
relating to the timing and scope of event
notices would affect the annual
paperwork burden for broker-dealers.
c. One-Time Paperwork Burden
The Commission’s staff estimates that
a broker-dealer would incur a one-time
paperwork burden to have its internal
compliance attorney prepare and issue a
notice advising its employees about the
proposed revisions to Rule 15c2–12, if
they are adopted by the Commission. In
the 2008 Amendments Adopting
Release, the Commission estimated that
it would take a broker-dealer’s internal
compliance attorney approximately 30
minutes to prepare and issue a notice
describing the broker-dealer’s
obligations in light of the 2008
Amendments to the Rule.159 The
Commission’s staff believes that this 30
minute estimate to prepare a notice
would also apply to a broker-dealer’s
internal compliance attorney to prepare
such a notice for these current
amendments to the Rule. The
Commission’s staff believes that the task
of preparing and issuing a notice
158 The Commission notes that while the
proposed amendments to the Rule do not change
this obligation, broker-dealers would need to
reasonably determine that the written agreement or
contract entered into by an issuer or obligated
person contains the proposed change to the timing
for filing event notices.
159 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
advising the broker-dealer’s employees
about the proposed amendments, if they
are adopted, is consistent with the type
of compliance work that a broker-dealer
typically handles internally.
Accordingly, the Commission’s staff
estimates that 250 broker-dealers would
each incur a one-time, first-year burden
of 30 minutes to prepare and issue a
notice to its employees regarding the
broker dealer’s obligations under the
proposed amendments.
d. Total Annual Burden for BrokerDealers
Under the proposed amendments, the
total burden on broker-dealers would be
425 hours for the first year 160 and 300
hours for each subsequent year.161
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 contemplated by the
existing Rule, as well as the proposed
amendments to the Rule, impose a
paperwork burden on issuers of
municipal securities.
a. Proposed Amendment To Modify the
Exemption for Demand Securities

srobinson on DSKHWCL6B1PROD with PROPOSALS2

The Commission’s staff believes that
the proposed amendment to delete
paragraph (d)(1)(iii) from the Rule,
which contains an exemption from the
Rule for a primary offering of demand
securities in authorized denominations
of $100,000 or more, and add new
paragraph (d)(5) to the Rule to apply
paragraphs (b)(5) and (c) of the Rule to
a primary offering of demand securities
in authorized denominations of
$100,000 or more, would increase the
number of issuers with a paperwork
burden under the Rule. In the 2008
Amendments Adopting Release, the
Commission estimated that the Rule
affected approximately 10,000
issuers.162 Using the estimate of 10,000
issuers from the 2008 Amendments
Adopting Release, the Commission’s
staff estimates that, under the proposed
amendments, the number of issuers
with a paperwork burden would
increase by approximately 20% 163 to
160 (250 (broker-dealers impacted by the proposed
amendments to the Rule) × 1.20 hours) + (250
(broker-dealers impacted by the proposed
amendments to the Rule) × .5 hour (estimate for
one-time burden to issue notice regarding brokerdealer’s obligations under the proposed
amendments to the Rule)) = 425 hours.
161 250 (broker-dealers impacted by the proposed
amendments to the Rule) × 1.20 hours = 300 hours.
162 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
163 See supra note 151.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

12,000 issuers.164 These additional
issuers would increase the aggregate
number of annual filings, event notices
and failure to file notices submitted
each year. In the 2008 Amendments
Adopting Release, the Commission
estimated 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).165 The proposed modification
to the Rule’s exemption for demand
securities would not alter these hourly
burdens. Thus, the Commission’s staff
estimates that the aggregate number of
annual filings, event notices and failure
to file notices submitted by issuers also
would increase by 20% from the
estimates contained in the 2008
Amendments Adopting Release.166
(i) Annual Filings
In the 2008 Amendments Adopting
Release, the Commission estimated that
Rule 15c2–12 imposed a total
paperwork burden of 11,250 hours on
10,000 issuers to prepare and submit
annual filings in any given year.167 In
determining the paperwork burden for
issuers under the 2008 Amendments
Adopting Release, the Commission
estimated that issuers would prepare
and submit a total of approximately
15,000 annual filings yearly.168 Under
the proposed amendment to modify the
current exemption for demand
securities contained in the Rule, the
Commission’s staff estimates that 12,000
municipal issuers with continuing
disclosure agreements would prepare
and submit approximately 18,000
annual filings yearly.169
In the 2008 Amendments Adopting
Release, the Commission estimated that
the process for an issuer to prepare and
submit annual filings to the MSRB in an
electronic format would require
164 10,000 (number of issuers under current Rule)
1.20 (20% increase) = 12,000. To provide estimates
that would not be under-inclusive, the
Commission’s staff has elected to use an estimate
that 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.
165 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
166 The Commission’s staff believes that this
estimated 20% increase in the number of each type
of continuing disclosure document filed by issuers
is appropriate since it maintains the same ratio
between the number of issuers and the number of
each type of document submitted by these issuers
as set forth in the 2008 Amendments Adopting
Release.
167 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
168 Id.
169 15,000 (annual filings under 2008
Amendments Adopting Release) × 1.20 (20%
increase in filings under proposed amendments) =
18,000 annual filings.

PO 00000

Frm 00021

Fmt 4701

Sfmt 4702

36851

approximately 45 minutes.170 The
proposed amendments to the Rule
would not change the way annual
filings are prepared and submitted. The
Commission’s staff estimates that, under
the proposed amendments, an issuer
would still require approximately 45
minutes to prepare and submit annual
filings to the MSRB in an electronic
format. Therefore, under the proposed
amendments, the total burden on issuers
of municipal securities to prepare and
submit 18,000 annual filings to the
MSRB in an electronic format is
estimated to be 13,500 hours.171
(ii) Event Notices
In determining the paperwork burden
for issuers under the 2008 Amendments
Adopting Release, the Commission
estimated that issuers would prepare
and submit a total of approximately
60,000 event notices yearly.172 Under
the proposed amendments to modify the
exemption for demand securities
contained in the Rule, the Commission’s
staff estimates that the 12,000 municipal
issuers with continuing disclosure
agreements would prepare and submit
approximately 72,000 event notices
yearly.173
In the 2008 Amendments Adopting
Release, the Commission estimated that
the process for an issuer to prepare and
submit event notices to the MSRB in an
electronic format would require
approximately 45 minutes.174 Since the
proposed amendments to the Rule
would not change the way event notices
are prepared and submitted, the
Commission’s staff estimates that, under
today’s proposed amendments, an issuer
still would require approximately 45
minutes to prepare and submit an event
170 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
171 18,000 (estimated number of annual filings
under proposed amendments) × .75 hours (45
minutes) (estimated time to prepare and submit
annual filings under the 2008 Amendments
Adopting Release) = 13,500 hours. To provide an
estimate for the paperwork burden that would not
be under-inclusive, the Commission’s staff elected
to use the higher end of the estimate for the total
number of annual filings estimated to be submitted
each year.
172 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
173 60,000 (number of event notices under 2008
Amendments Adopting Release) × 1.20 (20%
increase in filings under proposed amendments) =
72,000 event notices. The Commission’s staff’s
estimates of the additional event notices associated
with the proposed amendments relating to the
materiality condition and additional event
disclosure items contained in paragraph (b)(5)(1)(C)
of the Rule are discussed in Sections V.D.2.a.iii.
through vii. infra. As discussed below, the total
number of event notices estimated to be submitted
to the MSRB in connection with the proposed
amendments is 78,757 notices.
174 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.

E:\FR\FM\24JYP2.SGM

24JYP2

36852

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

notice. Therefore, under today’s
proposed amendments relating to
demand securities, the total burden on
issuers of municipal securities to
prepare and submit 72,000 event notices
to the MSRB is estimated to be 54,000
hours.175
(iii) Failure To File Notices
In the 2008 Amendments Adopting
Release, the Commission estimated that
Rule 15c2–12 currently imposes a total
paperwork burden of 1,000 hours on
10,000 issuers to submit failure to file
notices in any given year.176 In
determining the paperwork burden for
issuers under the 2008 Amendments
Adopting Release, the Commission
estimated that 10,000 issuers would
prepare and submit a total of
approximately 2,000 failure to file
notices yearly.177 Under the proposed
amendment to modify the exemption for
demand securities contained in the
Rule, the Commission’s staff estimates
that the 12,000 municipal issuers with
continuing disclosure agreements would
prepare and submit approximately 2,400
failure to file notices yearly.178
In the 2008 Amendments Adopting
Release, the Commission estimated that
the process for an issuer to submit
failure to file notices would require
approximately 30 minutes.179 Since the
proposed amendments to the Rule
would not change the way failure to file
notices are prepared and submitted, the
Commission’s staff estimates that, under
today’s proposed amendments, an issuer
would require approximately 30
minutes to prepare and submit a failure
to file notice. Therefore, under the
proposed amendments, the total burden
on issuers of municipal securities to
prepare and submit 2,400 failure to file
notices to the MSRB is estimated to be
1,200 hours.180

srobinson on DSKHWCL6B1PROD with PROPOSALS2

b. Proposed Amendments to Event
Notice Provisions of the Rule
The Commission proposes to modify
paragraph (b)(5)(i)(C) of the Rule, which
presently requires Participating
Underwriters to reasonably determine
175 72,000 (estimated number of material event
notices under proposed amendments) × .75 hours
(45 minutes) (estimated time to prepare and submit
material event notices under the 2008 Amendments
Adopting Release) = 54,000 hours.
176 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
177 Id.
178 2,000 (failure to file notices) × 1.20 (20%
increase in filings) = 2,400 failure to file notices.
179 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
180 2,400 (estimated number of failure to file
notices under proposed amendments) × .5 hours (30
minutes) (estimated time to prepare and submit
failure to file notices under the 2008 Amendments
Adopting Release) = 1,200 hours.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

that an issuer or obligated person has
entered into a continuing disclosure
agreement that, among other things,
contemplates the submission of an event
notice to the MSRB in an electronic
format upon the occurrence of any
events set forth in the Rule, if such
event is material. The current Rule
contains eleven such events. The
proposed amendments to this paragraph
of the Rule would add four new event
disclosure items and revise an existing
event disclosure item. In addition, the
proposed amendments to paragraphs
(b)(5)(i)(C) and (d)(2)(ii)(B) would revise
the Rule to state that event notices
should be submitted in a timely manner
‘‘not to exceed ten business days after
the occurrence of the event,’’ rather than
simply in a timely manner, as set forth
in the current Rule, and would apply to
some (but not all) events the materiality
condition that applies to the current
eleven events. In the 2008 Amendments
Adopting Release, the Commission
estimated that 60,000 event notices
would be prepared and submitted
annually. As described above, the
Commission’s staff estimates that the
proposed amendments to modify the
Rule’s exemption for demand securities
would increase the number of event
notices to be prepared and submitted to
72,000 annually.181 The Commission’s
staff believes that these proposed
amendments to paragraphs (b)(5)(i)(C)
and (d)(2)(ii)(B) of the Rule would
further increase the current annual
paperwork burden for issuers because
they would result in an increase in the
number of event notices to be prepared
and submitted.182
(i) Time Frame for Submitting Event
Notices Under a Continuing Disclosure
Agreement
Currently, paragraphs (b)(5)(i)(C) and
(d)(2)(ii)(B) of the Rule state that notice
of an event should be provided in ‘‘a
timely manner.’’ The proposed
amendment would revise these
provisions to state that such notice
should be provided ‘‘in a timely manner
not in excess of ten business days after
the occurrence of the event.’’ As noted
above, the Commission’s staff estimates
that an issuer can prepare and submit an
event notice in 45 minutes, which is the
hourly burden noted in the 2008
Amendments Adopting Release.183 The
proposed revision to the Rule regarding
the time period for submission of event
notices would not change this estimated
burden of 45 minutes, which is the
amount of time under the Rule’s current

PO 00000

181 See

supra note 173.

182 Id.
183 See

supra note 174 and accompanying text.

Frm 00022

Fmt 4701

Sfmt 4702

paperwork collection to prepare and
submit event notices. Rather, the change
in burden hours results from the fact
that more event notices are expected to
be filed under the proposed
amendments. The Commission’s staff
believes that the proposed change to
‘‘not in excess of ten business days after
the occurrence of the event’’ to submit
a event notice would not affect the
length of time it takes an issuer to
prepare and submit the notice and thus
would not have any impact on the
current paperwork burden with respect
to the length of time it would take an
issuer to prepare and submit an event
notice.
(ii) Modification With Regard to Those
Events for Which a Materiality
Determination Is Necessary
As discussed earlier, the Commission
believes that it is appropriate to delete
the condition in paragraph (b)(5)(i)(C) of
the Rule that presently provides that
notice of all of the listed events need be
made only ‘‘if material.’’ In connection
with the proposed deletion of the
materiality condition, the Commission
has reviewed each of the Rule’s current
specified events to determine whether a
materiality determination should be
retained for that particular event and
preliminarily believes such a
determination is still appropriate for
certain listed events.184 As a result of
this proposed change, for those events
listed in paragraph (b)(5)(i)(C) that are
not proposed to contain the ‘‘if
material’’ condition, the Participating
Underwriter must reasonably determine
that the issuer or other obligated person
has agreed to submit event notices to the
MSRB 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.185 The Commission, however,
believes that for other events currently
listed in paragraph (b)(5)(i) a materiality
determination should be retained.
184 The discussion in this section pertains to
materiality determinations for events currently
specified in paragraph (b)(5)(i)(C) of the Rule. For
events proposed to be added to the Rule, whether
a materiality determination is specified is included
in the discussion below for each such proposed
event.
185 See supra Section II.C. for a discussion of the
Commission’s rationale regarding why the
Commission proposes not to retain a materiality
condition for these events.

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
In a telephone conversation between
the Commission’s staff and MSRB staff
on June 12, 2009, Commission staff was
advised that the increase in the number
of event notices in connection with the
proposal to modify the materiality
condition would result in an increase of
no more than 1,000 event notices, taking
into account the increase in event
notices that would result from the
proposed amendment relating to
demand securities.186 Therefore, the
Commission’s staff estimates that this
proposed change to the materiality
condition would increase the total
number of event notices to be submitted
annually by issuers by 1,000 notices.

srobinson on DSKHWCL6B1PROD with PROPOSALS2

(iii) Amendment to the Submission of
Event Notices Regarding Adverse Tax
Events Under a Continuing Disclosure
Agreement
Subparagraph (b)(5)(i)(C)(6) of the
Rule refers to an event notice in the case
of adverse tax events. Under the
proposed amendments, subparagraph
(b)(5)(i)(C)(6) of the Rule would be
amended to include ‘‘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.’’ This proposed amendment
would address the circumstances in
which issuers would submit an event
notice to the MSRB with respect to IRS
determinations of taxability or other
material notices or determinations with
respect to the tax status of a municipal
security. As discussed above,187 the
Commission believes that the proposed
amendment to subparagraph
(b)(5)(i)(C)(6) of the Rule would clarify
that IRS determinations of taxability or
other material notices or determinations
with respect to the tax status of a
municipal security are events that
currently should be disclosed under a
continuing disclosure agreement. The
Commission’s staff estimates that the
proposed amendments 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.188
186 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. The MSRB staff believes that the potential
increase could be much smaller; however, the
Commission’s staff is using the estimate of 1,000
event notices to provide a conservative estimate.
187 See supra Section II.C.
188 During conversations with the Commission’s
staff in December 2008, the staff of the IRS
indicated that during a 12-month period it issues
approximately 130 notices of determinations of

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

(iv) Tender Offers
Subparagraph (b)(5)(i)(C)(8) of the
Rule refers to notice of an event in the
case of bond calls. Under the proposed
amendments, subparagraph
(b)(5)(i)(C)(8) of the Rule would be
amended to include tender offers. The
inclusion of tender offers in this
subparagraph of the Rule would expand
the circumstances in which issuers
would submit an event notice to the
MSRB. The Commission’s staff
estimates that proposed amendments to
subparagraph (b)(5)(i)(C)(8) of the Rule
would increase the total number of
event notices to be submitted by issuers
annually by approximately 100
notices.189
(v) The Occurrence of Bankruptcy,
Insolvency, Receivership or Similar
Event Regarding an Issuer or an
Obligated Person
Under the proposed amendments,
subparagraph (b)(5)(i)(C)(12) would be
added to the Rule and would contain a
new disclosure event in the case of
bankruptcy, insolvency, receivership or
similar event of the issuer or obligated
person. The proposed addition to the
Rule of bankruptcy, insolvency,
receivership or similar event of the
issuer or obligated person would
expand the circumstances in which
issuers would submit an event notice.
Based on a review of industry sources
by the Commission’s staff, the
Commission’s staff estimates that the
proposed amendment to add the new
bankruptcy, insolvency, receivership or
similar event of the issuer or obligated
person in subparagraph (b)(5)(i)(C)(8) of
the Rule would increase the total
number of event notices submitted by
issuers annually by approximately 24
notices.190
taxability. To provide an estimate that is not underinclusive, the Commission’s staff has estimated that
event notices are not currently submitted for any of
these IRS notices. Accordingly, the Commission’s
staff estimates that approximately 130 additional
event notices would be submitted under the
proposed amendments to subparagraph
(b)(5)(i)(C)(6) of the Rule.
189 Based on industry sources that included
lawyers, trade associations and vendors of
municipal disclosure information, the
Commission’s staff has estimated that there are
typically no more than 100 tender offers annually
in the municipal securities market. The
Commission’s staff believes that the actual number
of tender offers annually is significantly less than
100. However, to provide an estimate for the
paperwork burden that would not be underinclusive, the Commission’s staff has elected to use
the higher end of the estimate with respect to the
number of municipal tender offers that occur each
year.
190 The Commission’s staff based this estimate on
the following: (i) 917 (number of issuances of
municipal securities that defaulted during the
1990’s based on statistics contained in Standard

PO 00000

Frm 00023

Fmt 4701

Sfmt 4702

36853

(vi) Merger, Consolidation, Acquisition,
and Sale of All or Substantially All
Assets
Under the proposed amendments,
subparagraph (b)(5)(i)(C)(13) would be
added to the Rule and would contain a
new disclosure event 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 proposed
addition to the Rule of the merger,
consolidation, acquisition, or sale of all
or substantially all of the assets to the
Rule would expand the circumstances
in which issuers would submit an event
notice. The Commission’s staff believes
that the proposed amendment to add the
new event of merger, consolidation,
acquisition, or sale of all or substantially
all of the assets in subparagraph
(b)(5)(i)(C)(13) of the Rule would
increase the total number of event
notices submitted by issuers annually.
Based on a review of industry sources,
the Commission’s staff estimates that
the proposed amendment to add the
new bankruptcy, insolvency,
receivership or similar event of the
issuer or obligated person in
subparagraph (b)(5)(i)(C)(8) of the Rule
would increase the total number of
event notices submitted by issuers
annually by approximately 1,783
notices.191
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 proposed
amendments to the Rule) × (.002) (.2%) (estimated
percentage of all issuers that default annually) × 1
(estimated number of material event notices that an
issuer would file) = 24 notices. The Commission’s
staff notes that not all issuers that default
eventually enter bankruptcy. However, to provide
an estimate for the paperwork burden that would
not be under-inclusive, the Commission staff has
elected to use the number of defaults as a basis for
this estimate.
191 The Commission’s staff based this estimate 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’’) × 81%
(percentage of mergers in industries in which
municipal securities may exist) = 1782.81 notices
(rounded to 1783). The Commission staff estimated
the percentage of mergers in the municipal industry
based on data contained in the HSR Report. The

E:\FR\FM\24JYP2.SGM

Continued

24JYP2

srobinson on DSKHWCL6B1PROD with PROPOSALS2

36854

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

(vii) Successor or Additional Trustee, or
Change in Trustee Name

c. Total Burden on Issuers for Proposed
Amendments to Event Notices

Under the proposed amendments,
paragraph (b)(5)(i)(C)(14) would be
added to the Rule and would contain a
new disclosure event related to the
appointment of a successor or
additional trustee or the change of name
of a trustee, if material. The proposed
addition to the Rule of the event relating
to trustee changes would expand the
circumstances in which issuers would
submit an event notice to the MSRB.
The Commission’s staff believes that a
change affecting the largest trustee of
municipal securities would provide a
reasonable estimate of the number of
additional event notices that would be
submitted annually under this proposed
amendment to the Rule. The largest
trustee covered approximately 31% of
the municipal issuances in 2008.192 The
Commission’s staff believes that this
percentage represents a reasonable
estimate of the percentage of issuers
covered by the largest trustee. Thus, the
Commission’s staff estimates that a
change to the largest trustee would
cover approximately 31% of issuers, or
3,720 issuers, which would serve as a
conservative proxy for the number of
event notices to be submitted regarding
a change in trustee.193 Therefore the
Commission’s staff estimates that the
proposed amendment to add the new
disclosure event contained in paragraph
(b)(5)(i)(C)(14) of the Rule would
increase the total number of event
notices submitted by issuers annually
by approximately 3,720 notices.194

In the 2008 Amendments Adopting
Release, the Commission estimated that
the process for an issuer to prepare and
submit event notices to the MSRB in an
electronic format would require
approximately 45 minutes.195 As
discussed above, under the proposed
amendment to modify the Rule’s
exemption for demand securities, the
total number of issuers affected by the
Rule would increase to 12,000, the total
number of event notices submitted by
issuers would increase to 72,000, and
the annual paper work burden for
issuers to submit event notices would
increase to 54,000 hours. Under the
proposed amendments to paragraph
(b)(5)(i)(C) of the Rule, the
Commission’s staff estimates that the
12,000 municipal issuers with
continuing disclosure agreements would
prepare an additional 6,757 event
notices annually,196 raising the total
number of event notices prepared by
issuers annually to approximately
78,757.197 This increase in the number
of event notices would result in an
increase of 5,068 hours in the annual
paperwork burden for issuers to submit
event notices.198 This increase would
result in an annual paperwork burden
for issuers to submit event notices of
approximately 59,068 hours (54,000
hours + 5,068 hours).

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 the
banking and insurance industry segment which
accounted for 19% of reported merger transactions.
The Commission notes that each of the mergers
reported under the other industry segments may not
involve entities that have issued municipal
securities. However, to provide an estimate that is
not under-inclusive, the Commission’s staff has
estimated that all of the reported mergers in the
remaining industry segments would involve entities
that have issued municipal securities.
192 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).
193 The Commission’s staff based this estimate on
the following: 12,000 (estimated number of issuers
under proposed amendments) × .31 (31%)
(estimated percentage of issuers that would be
impacted by a change to the largest trustee of
municipal securities) = 3,720 issuers.
194 The Commission’s staff based this estimate on
the following: 3,720 (estimated number of issuers
that would be impacted by a change to the largest
trustee of municipal securities) × 1 (estimated
number of event notices that an issuer would file)
= 3,720 notices. The Commission staff believes that
the actual number of changes involving the trustee

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

that occur annually is significantly less than 3,720.
However, to provide an estimate for the paperwork
burden that would not be under-inclusive, the
Commission’s staff has elected to use an estimate
that takes into account a change involving the
largest trustee.
195 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
196 1000 (estimated number of additional notices
submitted under change to events materiality
condition) + 130 (estimated number of adverse tax
event notices under proposed amendments) + 100
(estimated number of tender offers event notices
under proposed amendments) + 24 (estimated
number of bankruptcy/insolvency event notices
under proposed amendments) + 1,783 (estimated
number of merger or acquisition event notices
under proposed amendments) + 3,720 (estimated
number of appointment/change of trustee event
notices under proposed amendments) = 6,757 (total
number of additional event notices that would be
prepared under the proposed amendments to the
event notice provisions of the Rule).
197 72,000 (number of event notices under
proposed amendments modifying the exemption for
demand securities exemption) + 6,757 (total
number of additional event notices that would be
prepared under the proposed amendments to the
event notice provisions of the Rule) = 78,757 event
notices.
198 6,757 (total number of additional event notices
that would be prepared under the proposed
amendments to the event notice provisions of the
Rule) × .75 hours (45 minutes) (estimated time to
prepare an event notice under 2008 Amendments
Adopting Release) = 5,067.75 hours (rounded to
5,068 hours).

PO 00000

Frm 00024

Fmt 4701

Sfmt 4702

d. Total Burden for Issuers
Accordingly, under the proposed
amendments, the total burden on issuers
to submit annual filings, event notices
and failure to file notices would be
73,768 hours.199
3. MSRB
In the 2008 Amendments Adopting
Release, the Commission estimated that
the MSRB incurred an annual burden of
approximately 7,000 hours to collect,
index, store, retrieve, and make
available the pertinent documents under
the Rule.200 As discussed above, the
Commission’s staff anticipates that the
proposed amendments to modify the
Rule’s exemption for demand securities
would increase filings submitted by
approximately 20% annually.201 In
addition, the Commission’s staff
estimates that the proposed
amendments to the event notice
provisions of the Rule would increase
filings submitted by approximately an
additional 9% annually. 202
Accordingly, the Commission’s staff
estimates that the total burden on the
MSRB of collecting, indexing, storing,
retrieving and disseminating
information requested by the public also
would increase by approximately 29%
or 2,030 hours (7,000 hours x .29). Thus,
the Commission’s staff estimates that
the total burden on the MSRB to collect,
store, retrieve, and make available the
disclosure documents covered by the
proposed amendments to the Rule
would be 9,030 hours annually.203
4. Annual Aggregate Burden for
Proposed Amendments
The Commission’s staff estimates that
the ongoing annual aggregate
information collection burden for the
proposed amendments to the Rule
would be 83,098 hours.204
199 13,500 hours (estimated burden for issuers to
submit annual filings) + 59,068 hours (estimated
burden for issuers to submit event notices) + 1,200
hours (estimated burden for issuers to submit
failure to file notices) = 73,768 hours.
200 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
201 See supra note 151.
202 6,757 (estimated additional event notices
under the proposed event notice amendments)/
77,000 (estimated number of continuing disclosure
documents submitted under current Rule (60,000
(event notices) + 15,000 (annual filings) + 2,000
(failure to file notices) = 77,000)) = .087 × 100 =
approximately 9%.
203 Annual burden for MSRB: 7000 hours (annual
burden under 2008 Amendments Adopting Release)
+ 2,030 hours (additional hourly burden under
proposed amendments) = 9,030 hours.
204 300 hours (total estimated burden for brokerdealers) + 73,768 hours (total estimated burden for
issuers) + 9,030 hours (total estimated burden for
MSRB) = 83,098 hours. The initial first-year burden
would be 83,223 hours: 425 hours (total estimated
burden for broker-dealers in the first year) + 73,768

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
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
proposed amendments to the Rule since
the proposed amendments do not
change 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 believes that the
MSRB may incur costs to modify the
indexing system in its EMMA system to
accommodate the proposed changes to
the Rule that would add additional
material disclosure events. Based on
information provided to the
Commission’s staff by 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 proposed
changes to the material disclosure
events of the Rule would be no more
than approximately $10,000.205

srobinson on DSKHWCL6B1PROD with PROPOSALS2

2. Issuers
(a) Current Issuers
The Commission expects that some
issuers that currently submit continuing
disclosure documents to the MSRB in
an electronic format (referred to herein
as ‘‘current issuers’’) could be subject to
some additional costs associated with
the proposed 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 would be costs
associated with any additional
submissions of event notices and failure
to file notices.
The cost for an issuer to have a thirdparty vendor convert paper continuing
disclosure documents into the MSRB’s
prescribed electronic format could 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. In the 2008 Amendments
Adopting Release, the Commission
hours (total estimated burden for issuers) + 9,030
hours (total estimated burden for MSRB) = 83,223
hours.
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.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

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.206
In the 2008 Amendments Adopting
Release, the Commission also estimated
that event notices and failure to file
notices consist of one to two pages.207
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 believes these estimates are
still accurate. In the 2008 Amendments
Adopting Release, the Commission
estimated that the high end of the
estimate for the number of event notices
submitted by an issuer annually is
three.208 Under the proposed
amendments to the Rule, some current
issuers would need to prepare
additional event notices for submission
to the MSRB. Some current issuers
could need to submit these additional
event notices to a third party to convert
into an electronic format for submission
to the MSRB. Under the proposed
amendments to the Rule, the
Commission’s staff estimates that a
conservative estimate of the number of
additional event notices that an issuer
would need to submit annually under
the proposed amendments would be
one, increasing the total estimate to
four.209 Each of these issuers would
incur an annual cost of $8 to convert the
additional event notice into an
electronic format for submission to the
MSRB.210 The Commission believes that
current issuers that already have the
technology resources to convert
continuing disclosure documents into
an electronic format for submission to
the MSRB would not incur any
additional external costs associated with
the proposed amendments to the Rule.
There may be some costs incurred by
issuers to revise their current template
for continuing disclosure agreements to
reflect the proposed amendments to the
Rule, if they are adopted. The
206 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
207 Id.
208 Id.
209 6,757 (estimated additional event notices
submitted under proposed amendments to event
notices)/12,000 (estimated number of issuers under
proposed amendments) = .563 notices per issuer
(rounded up to 1) (estimated number of additional
event notices submitted annually per issuer). To
provide an estimate that would not be underinclusive, the Commission’s staff has elected to use
an estimate that expects each issuer would submit
one additional event notice as a result of the
proposed amendments.
210 $8 (cost to have third party convert an event
notice or failure to file notice into an electronic
format) × 1 (maximum estimated number of
additional event or failure to file notices filed per
year per issuer)] = $8.

PO 00000

Frm 00025

Fmt 4701

Sfmt 4702

36855

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 proposed amendments, if the
Commission should adopt them. Based
on a review of industry sources, the
Commission believes that continuing
disclosure agreements are form
agreements. Based on a review of
industry sources, the Commission’s staff
estimates that it would take an outside
attorney approximately 15 minutes to
revise the template for continuing
disclosure agreements for a current
issuer, if the proposed amendments are
adopted. Thus, the Commission’s staff
estimates that the approximate cost of
revising a continuing disclosure
agreement to reflect the proposed
amendments for each current issuer
would be approximately $100,211 for a
one-time total cost of $1,000,000 212 for
all current issuers, if an outside counsel
were used to revise the continuing
disclosure agreement.
(b) VRDO Issuers
As discussed above, the Commission’s
staff estimates that the proposal relating
to demand securities would increase the
number of issuers affected by the Rule
by approximately 20% or 2,000 issuers
(referred to herein as ‘‘VRDO issuers’’).
VRDO issuers may have some external
costs associated with the preparation
and submission of annual filings, event
notices and failure to file notices. 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
proposed amendments to the Rule,
Participating Underwriters of VRDO
issuers would need to reasonably
determine that these VRDO issuers have
entered into continuing disclosure
agreements. 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
211 1 (continuing disclosure agreement) × $400
(hourly wage for an outside attorney) × .25 hours
(estimated time for outside attorney to revise a
continuing disclosure document in accordance with
the proposed amendments to the Rule) = $100. The
$400 per hour estimate for an outside attorney’s
work is based on the Commission’s staff review of
industry sources.
212 $100 (estimated cost to revise a continuing
disclosure agreement I accordance with the
proposed amendments to the Rule) × 10,000
(number of current issuers) = $1,000,000.

E:\FR\FM\24JYP2.SGM

24JYP2

36856

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

outside attorneys to reflect the proposed
amendments, if the Commission should
adopt them. Based on a review of
industry sources, the Commission
believes that continuing disclosure
agreements are form agreements. Also,
based on a review of industry sources,
the Commission’s staff estimates that it
would take an outside attorney
approximately 1.5 hours to draft a
continuing disclosure agreement. Thus,
the Commission’s staff estimates that
the approximate cost of preparing a
continuing disclosure agreement for
each VRDO issuer would be
approximately $600,213 for a one-time
total cost of $1,200,000 214 for all VRDO
issuers, if an outside counsel were to
prepare the entire agreement.
The Commission believes that VRDO
issuers generally would not incur any
other external costs associated with the
preparation of annual filings, event
notices (including those notices for the
new event disclosure items included in
the proposed amendments) and failure
to file notices. The Commission believes
that VRDO issuers would 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.215
The Commission believes that the
only external costs VRDO issuers could
incur in connection with the submission
of continuing disclosure documents to
the MSRB would be the costs associated
with converting them into an electronic
format. 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. VRDO 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 could 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 would
vary depending on how the VRDO
issuer elected to convert its continuing
disclosure documents into an electronic
213 1 (continuing disclosure agreement) × $400
(hourly wage for an outside attorney) × 1.5 hours
(estimated time for outside attorney to draft a
continuing disclosure document) = $600. The $400
per hour estimate is based on the Commission’s
staff review of industry sources.
214 $600 (cost for continuing disclosure
agreement) × 2,000 (number of VRDO issuers) =
$1,200,000.
215 See supra Section V.D.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

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 would
vary depending on the issuer’s current
technology resources. An issuer also
could elect to use a designated agent to
submit its continuing disclosure
documents to the MSRB. In the 2008
Amendments Adopting Release, the
Commission estimated that 30% of
issuers would elect to use designated
agents to submit continuing disclosure
documents to the MSRB.216 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 a review of industry
sources, the Commission’s staff
estimates this fee to range from $100 to
$500 per year depending on which
designated agent an issuer uses.217
Accordingly, the Commission’s staff
estimates that the high end of the total
annual cost that could be incurred by
VRDO issuers that use the services of a
designated agent would be
approximately $300,000.218
The cost for an issuer to have a thirdparty vendor transfer its paper
continuing disclosure documents into
an appropriate electronic format could
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. In the 2008 Amendments
Adopting 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.219 The
Commission still believes these
estimates are accurate. Under the
proposed amendments to the Rule, the
216 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
217 This estimated range of the annual fee for the
services of a designated agent is based on the
Commission’s staff review of industry sources in
December 2008.
218 2,000 (number of VRDO issuers) × .30
(percentage of issuers that use designated agents) ×
$500 (estimated annual cost for issuer’s use of a
designated agent) = $300,000. In order to provide
a total cost estimate that is not under-inclusive the
Commission’s staff elected to use the higher end of
the estimated range of annual fees for designated
agent’s services.
219 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.

PO 00000

Frm 00026

Fmt 4701

Sfmt 4702

Commission’s staff estimates that the
maximum number of event notices and
failure to file notices submitted by
issuers would increase to four.220
Accordingly, the Commission’s staff
estimates that the maximum external
costs for a VRDO issuer who elects to
have a third-party scan continuing event
notices or failure to file notices into an
electronic format under the proposed
amendments would be $32.221 In the
2008 Amendments Adopting Release,
the Commission estimated that the
approximate cost for an issuer to use a
third party vendor to scan an averagesized annual financial statement would
be $64 per annual statement, and that
the maximum number of annual filings
submitted per year is two.222 The
Commission believes that these
estimates are still accurate. The
proposed amendments to the Rule
would increase the number of issuers
submitting annual filings each year.
However, the proposed amendments to
the Rule would not increase the number
of annual filings each issuer submits
yearly. Thus, the Commission expects
that the number of annual filings
submitted yearly, per issuer, under the
proposed amendments to the Rule
would remain the same. Accordingly,
the Commission’s staff estimates that
the maximum external costs for a VRDO
issuer who elects to have a third-party
scan annual filings into an electronic
format under the proposed amendments
would be $128.223
Alternatively, a VRDO issuer that
currently does not have the appropriate
technology to convert paper continuing
disclosure documents into an electronic
format could elect to purchase the
resources to do so.224 In the 2008
220 6,757 (estimated additional event notices
submitted under proposed amendments)/12,000
(estimated number of issuers under proposed
amendments) = .563 notices per issuer (rounded up
to 1) (estimated number of additional event notices
submitted annually per issuer). To provide an
estimate that would not be under-inclusive, the
Commission’s staff has elected to use an estimate
that expects each issuer would submit one
additional material event notice as a result of the
proposed amendments.
221 The maximum cost is the cost to scan and
convert four material event or failure to file notices:
4 (number of notices submitted annually) × $8.00
(cost to scan and convert each notice) = $32.
222 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
223 The maximum cost is the cost to scan and
convert two annual filings: 2 (number of annual
filings submitted annually) × $64.00 (cost to scan
and convert each annual filing) = $128.
224 Generally, the technology resources necessary
to transfer 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

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

Amendments Adopting Release, the
Commission estimated that an issuer’s
initial cost to acquire these technology
resources could range from $750 to
$4,300.225 Some VRDO issuers 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 the electronic format
that it prescribes. In the 2008
Amendments Adopting Release, the
Commission estimated that an issuer’s
cost to update or acquire this software
could range from $50 to $300.226 The
Commission believes these estimates are
still accurate.
In addition, VRDO issuers without
direct Internet access could incur some
costs to obtain such access to submit the
documents. In the 2008 Amendments
Adopting 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.227 In the event that a VRDO
issuer does not have Internet access, it
could incur costs in obtaining such
access, which the Commission estimates
to be approximately $50 per month,
based on its limited inquiries to Internet
service providers.228 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 proposed
amendments to the Rule.229
Accordingly, the Commission
estimates that the costs to some of the
VRDO issuers to acquire technology
necessary to convert continuing
disclosure documents into an electronic
format to submit to the MSRB could
include: (i) An approximate cost of $8
per notice to use a third party vendor to
scan an event notice or failure to file
notice, and an approximate cost of $64
to use a third party vendor to scan an
average-sized annual financial
statement, (ii) an approximate cost
ranging from $750 and $4,300 to acquire
technology resources to convert
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.
225 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
226 Id.
227 Id.
228 Id.
229 Id.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

continuing disclosure documents into
an electronic format, (iii) $50 to $300
solely to upgrade or acquire the software
to submit documents in an electronic
format; and (iv) approximately $50 per
month to acquire Internet access. The
Commission included these estimates in
the 2008 Amendments Adopting
Release and the Commission believes
that they are still accurate.230
For a VRDO 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 total maximum
external cost such issuer would incur
would be $760 per year.231 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
total maximum external cost such
VRDO issuer would incur would be
$4,900 for the first year and $600 per
year thereafter.232 To be conservative for
purposes of the PRA, the Commission
estimates that any VRDO issuers that
incur costs associated with converting
continuing disclosure documents into
an electronic format would choose the
Category 2 option.233 The Commission’s
staff estimates that approximately no
more than 400 VRDO issuers would
incur costs associated with acquiring
technology resources to convert
230 Id.
231 The total maximum external cost for a
Category 1 VRDO issuer would be calculated as
follows: [$64 (cost to have third party convert
annual filing into an electronic format) × 2
(maximum estimated number of annual filings filed
per year per issuer)] + [$8 (cost to have third party
convert material event notice or failure to file notice
into an electronic format) × 4 (maximum estimated
number of event or failure to file notices filed per
year per issuer)] + [$50 (estimated monthly Internet
charge) × 12 months] = $760. The Commission’s
staff estimates that an issuer would file one to six
continuing disclosure documents per year. These
documents generally would consist of no more than
two annual filings and four event or failure to file
notices. The Commission’s staff estimates the
maximum number of documents filed annually per
issuer as follows: 5 documents (consisting of 2
annual filings and 3 event or failure to file notices
based on the Commission’s estimate from the 2008
Amendment Adopting Release) + 1 document
(consisting of the additional event notice that
would be filed under the proposed amendments to
the Rule).
232 The total maximum external cost for a
Category 2 VRDO issuer would 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) × 12
months] = $4900. After the initial year, issuers who
acquire the technology to convert continuing
disclosure documents into an electronic format
internally would only have the cost of obtaining
Internet access. $50 (estimated monthly Internet
charge) × 12 months = $600.
233 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.

PO 00000

Frm 00027

Fmt 4701

Sfmt 4702

36857

continuing disclosure documents into
an electronic format.234 Additionally,
the Commission’s staff estimates that
the estimated maximum annual costs for
those VRDO issuers that need to acquire
technology resources to submit
documents to the MSRB would be
approximately $1,960,000 235 for the
first year after the adoption of the
proposed amendments and
approximately $240,000 236 for each
year thereafter.
(c) Current and VRDO Issuers
Lastly, some current and VRDO
issuers may incur a one-time external
cost associated with the proposed
amendment to change the timing
requirement for submitting event
notices in the Rule 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 and VRDO issuers may
incur a one-time external cost associated
with monitoring for a change in the
name of the issuer’s trustee. One way an
issuer may monitor a change in the
name of its trustee cost would be to
have outside counsel add a notice
provision to the issuer’s trust indenture
requiring the trustee to provide the
issuer with notice of any change in the
trustee’s name. Based on a review of
industry sources, the Commission’s staff
estimates that it would take an outside
attorney approximately 15 minutes to
draft and add a notice provision for a
change in name of the trustee to an
indenture agreement. Thus, the
Commission’s staff estimates that the
approximate cost of adding this notice
provision to an issuer’s trust indenture
for each issuer would be approximately
$100,237 for a one-time annual cost of
$1,200,000 238 for all issuers.
F. Retention Period of Recordkeeping
Requirements
As an SRO subject to Rule 17a–1
under the Exchange Act,239 the MSRB is
234 2,000 VRDO issuers × 20% = 400 VRDO
issuers. The Commission used a 20% estimate in
the 2008 Amendment Adopting Release. See 2008
Amendments Adopting Release, supra note 11, 73
FR 76104. The Commission believes that this
estimate is still appropriate.
235 400 (Category 2 issuers) × $4,900 = $1,960,000.
236 400 (Category 2 issuers) × $600 = $240,000.
237 1 (continuing disclosure agreement) × $400
(hourly wage for an outside attorney) × .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 the
Commission’s staff review of industry sources.
238 $100 (estimated cost to have outside counsel
add a change of name notice provision to a trust
indenture) × 12,000 (number of issuers under the
proposed amendments) = $1,200,000.
239 17 CFR 240.17a–1.

E:\FR\FM\24JYP2.SGM

24JYP2

36858

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

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
proposed amendments to the Rule
would contain no recordkeeping
requirements for any other persons.
G. Collection of Information Is
Mandatory
Any collection of information
pursuant to the proposed amendments
to the Rule would be a mandatory
collection of information.

srobinson on DSKHWCL6B1PROD with PROPOSALS2

H. Responses to Collection of
Information Will Not Be Kept
Confidential
The collection of information
pursuant to the proposed amendments
to the Rule would not be confidential
and would be publicly available. The
collection of information that would be
provided pursuant to the continuing
disclosure documents under the
proposed amendments would be
accessible through the MSRB’s EMMA
system and would be publicly available
via the Internet.
I. Request for Comments
Pursuant to 44 U.S.C. 3506(c)(2)(B),
the Commission solicits comments
regarding: (1) Whether the proposed
collections of information are necessary
for the proper performance of the
functions of the agency, including
whether the information will have
practical utility; (2) the accuracy of the
Commission’s estimate of the burden of
the revised collections of information;
(3) whether there are ways to enhance
the quality, utility, and clarity of the
information to be collected; and (4)
whether there are ways to minimize the
burden of the collection of information
on those who are to respond, including
through the use of automated collection
techniques or other forms of information
technology.
The Commission has submitted to
OMB for approval the proposed
revisions to the current collection of
information titled ‘‘Municipal Securities
Disclosure.’’ Persons submitting
comments on the collection of
information requirements should direct
them to the Office of Management and
Budget, Attention: Desk Officer for the
Securities and Exchange Commission,
Office of Information and Regulatory
Affairs, Washington, DC 20503, and
should also send a copy of their
comments to Secretary, Securities and
Exchange Commission, 100 F Street,
NE., Washington, DC 20549–0609, with
reference to File No. S7–15–09, and to
the Securities and Exchange
Commission, Public Reference Room,

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

100 F Street, NE., Washington, DC
20549. As OMB is required to make a
decision concerning the collection of
information between 30 and 60 days
after publication, a comment to OMB is
best assured of having its full effect if
OMB receives it within 30 days of
publication. Requests for materials
submitted to OMB by the Commission
with regard to this collection of
information should be in writing,
should refer to File No. S7–15–09, and
be submitted to the Securities and
Exchange Commission, Public Reference
Room, 100 F Street, NE., Washington,
DC 20549.
VI. Costs and Benefits of Proposed
Amendment to Rule 15c2–12
The Commission is proposing
amendments to Rule 15c2–12 that
would amend 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 MSRB.
Specifically, the proposed amendments
would 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, would
amend the list of events for which a
notice must be provided, and would
modify the events that are subject to a
materiality determination before
triggering a notice to the MSRB. In
addition, the amendments would revise
an exemption from the rule for certain
offerings of municipal securities with
put features. These proposed
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 could make
more knowledgeable investment
decisions, effectively manage and
monitor their investments, and help
protect themselves against fraud, and so
brokers, dealers, and municipal
securities dealers could satisfy their
obligation to have a reasonable basis on
which to recommend a municipal
security.
The Commission is sensitive to the
costs and benefits of the proposed rule
amendments and requests comment on
the costs and benefits of the proposed
amendments to Rule 15c2–12 discussed

PO 00000

Frm 00028

Fmt 4701

Sfmt 4702

above. The Commission encourages
commenters to identify, discuss,
analyze, and supply relevant data
regarding any such costs or benefits.
A. Benefits
The proposed amendments would
modify paragraphs (b)(5)(i)(C) and
(d)(2)(ii)(B) of the Rule to provide that
a Participating Underwriter must
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 to exceed ten
business days after the occurrence of the
event. The current provisions of the
Rule state that a Participating
Underwriter must reasonably determine
that the continuing disclosure
agreement provides that event notices
are to be provided ‘‘in a timely manner’’
to the MSRB in an electronic format. As
discussed above, the Commission
preliminarily believes that more timely
availability of such significant
information would assist investors in
making better informed investment
decisions and should help reduce
instances of fraud. The Commission also
anticipates that, in providing for a
maximum time frame within which
event notices should be disclosed under
a continuing disclosure agreement, the
proposed amendment should foster the
availability of up-to-date information
about municipal securities, thereby
further promoting greater transparency
and investor confidence in the
municipal securities market as a whole,
and assisting investors to better protect
themselves against fraud. Moreover,
brokers, dealers and municipal
securities dealers should be able to more
readily carry out their responsibilities
under the securities laws. The
Commission believes that the proposed
change regarding the maximum time
frame for submission of event notices
should continue to provide an issuer
with adequate time to become aware of
the event and, pursuant to its
undertaking, submit notice of the
event’s occurrence to the MSRB. In
proposing that event notices be
provided ‘‘in a timely manner not in
excess of ten business days after the
occurrence of the event,’’ the
Commission intends to strike a balance
between the need for such information
to be disseminated promptly and the
need to allow adequate time for an
issuer to become aware of the event and
to prepare and file such a notice. The
Commission preliminarily believes that
the proposed time frame of ten business
days after the occurrence of the event
would provide a reasonable amount of
time for issuers to comply with their

E:\FR\FM\24JYP2.SGM

24JYP2

srobinson on DSKHWCL6B1PROD with PROPOSALS2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
obligations under their continuing
disclosure agreements, while also
allowing event notices to be made
available to investors in a more timely
manner. The Commission notes that
issuers would not be precluded from
submitting subsequent notices as
additional information relating to the
event becomes available.
The proposed amendments would
modify subparagraph (b)(5)(i)(C)(6) of
the Rule to 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 the issuance of proposed and
final determinations of taxability,
Notices of Proposed Issue (IRS form
5701–TEB), or other material notices or
determinations with respect to the taxexempt status of securities by the
Internal Revenue Service, as well as
adverse tax opinions and other events
affecting the tax-exempt status of such
securities. As discussed earlier, the
Commission believes that the taxexempt status of municipal securities is
of significant importance to investors
and other participants in the municipal
securities market.240 The Commission
believes that this tax-exempt status has
a significant impact on the value of
municipal securities, as well as on the
potential tax liability a municipal
security holder may incur if such status
were to change. Accordingly, the
Commission believes that this
amendment to subparagraph
(b)(5)(i)(C)(6) of the Rule would clarify
a Participating Underwriter’s obligation
to determine that the issuer has
undertaken in its continuing disclosure
agreements to provide notice of these
events that could affect the tax-exempt
status of its municipal securities.
The Commission is proposing to
delete the condition in paragraph
(b)(5)(i)(C) of the Rule that presently
provides that notice of all of the listed
events need be made only ‘‘if material.’’
The Commission has reviewed each of
the Rule’s current disclosure event
items and determined six instances in
which no materiality evaluation should
be necessary.241 Issuers would not need
to undertake the determination of
materiality for these six events, which
should help speed the disclosure of
these events to investors and the public
240 See

supra Section II.C.
events are: (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.
241 These

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

and eliminate the costs presently
required of an issuer to make such a
determination.
The proposed amendments would
add tender offers to subparagraph
(b)(5)(i)(C)(8) of the Rule, which
currently covers bond calls.242 The
Commission believes that the need to
reach all investors with important
information regarding a tender offer,
which necessitates that an investor
decide whether or not to tender within
the prescribed time period, makes its
proposed addition to the Rule
appropriate. As a result, the proposal
would help 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
proposed amendment to subparagraph
(b)(5)(i)(C)(8) of the Rule could help
eliminate the possibility of any investor
confusion regarding whether a certain
municipal security is the subject of a
tender offer. In all these ways, the
availability of this information would
help investors protect themselves from
misrepresentation and fraud, and would
also aid brokers, dealers and municipal
securities dealers to satisfy their
obligation to have a reasonable basis to
recommend a municipal security.
The proposed addition of
subparagraph (b)(5)(i)(C)(12) to the Rule
would require the Participating
Underwriter to reasonably determine
that the issuer or obligated person has
undertaken in a continuing disclosure
agreement to provide notice to the
MSRB, upon its bankruptcy, insolvency,
receivership or similar event.243 The
Commission notes that, while
bankruptcy, insolvency, receivership or
similar event of the issuer or obligated
person are uncommon in the municipal
market, these events can have a
significant impact on the price of the
municipal issuer’s securities. The
Commission believes that the potential
severity of the consequences to
investors from bankruptcy, insolvency,
receivership or similar event of the
issuer or obligated person, and the
corresponding benefit of the availability
of that information to help prevent
fraud, supports its proposal that the
Participating Underwriter should be
required to reasonably determine that
the issuer or obligated person has
undertaken in its continuing disclosure
agreement to provide notice to the
MSRB if such an event should occur.
In addition, the proposed
amendments would add subparagraph

PO 00000

242 See
243 See

supra Section II.E.1.
supra Section II.E.2.

Frm 00029

Fmt 4701

Sfmt 4702

36859

(b)(5)(i)(C)(13) to the Rule, which would
require the Participating Underwriter to
reasonably determine that the issuer or
obligated person has undertaken in a
continuing disclosure agreement to
provide notice to the MSRB, if material,
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.244 As with bankruptcy,
insolvency, receivership or similar
event of the issuer or obligated person,
there can be a potential impact on the
price of a municipal security as a result
of the consummation of a material
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. In such a circumstance, the
Commission believes that the proposed
amendment would help to ensure that
investors and other market participants
could obtain knowledge of the identity
of the entity that would have
responsibility for municipal security
repayment obligations after the
transaction is consummated. In
addition, investors and other market
participants would have the opportunity
to review the creditworthiness and other
aspects of the acquiring entity that
would support repayment of the
security following the transaction. Thus,
the proposed amendment would help to
prevent fraud.
Proposed subparagraph (b)(5)(i)(C)(14)
to the Rule would add the appointment
of a successor or additional trustee or
the change of name of a trustee to the
list of events contained in the Rule, if
material. As discussed earlier, the
Commission believes that the trustee of
a municipal security performs important
functions for investors in that
security.245 The Commission notes that
the proposed amendment would benefit
investors by helping to ensure that the
continuing disclosure agreement would
provide that investors be made aware of
the identity of and contact information
for the most current trustee for a
municipal security and that any changes
to the trustee’s identity would be made
244 See
245 See

E:\FR\FM\24JYP2.SGM

supra Section II.E.3.
supra Section II.E.4.

24JYP2

srobinson on DSKHWCL6B1PROD with PROPOSALS2

36860

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

known to investors in a timely manner,
not in excess of ten business days of the
event’s occurrence.
Further, the Commission proposes to
modify the exemption in the Rule for
demand securities. As discussed above,
when the Commission adopted this
exemption, demand obligations made
up a relatively small portion of the
municipal market.246 Recently,
issuances of demand securities have
increased.247 The Commission believes
that it is important that there be greater
information regarding these securities
available to investors, market
professionals, and the public generally.
Accordingly, the Commission believes
that modifying the Rule’s exemption for
demand securities would be beneficial
to investors and the prevention of fraud.
The modification of the Rule’s
exemption for demand securities would
provide investors with notice of the
events set forth in the Rule regarding
demand securities that may not have
been available previously. In addition,
this proposal would restrict a broker,
dealer or municipal securities dealer
from making recommendations
regarding such securities unless it has
procedures in place that provide
reasonable assurance that it would
receive prompt notice of the events set
forth in the Rule,248 which should
benefit investors because the broker,
dealer or municipal securities dealer
should have available to it continuing
disclosure information regarding the
demand obligation it recommends.
The Commission believes that the
proposed amendments would benefit
individual and institutional investors
who would be able to obtain greater
information about municipal securities
that they could use to make informed
investment decisions. Moreover, this
information would aid investors by
helping them to determine that they are
not the subject of fraudulent or
manipulative acts or practices with
respect to municipal security
transactions. In addition, the
Commission believes that the proposed
amendments could assist broker-dealers
and others, such as mutual funds, with
their compliance with regulatory
requirements because they would have
access to greater information about
municipal securities. Moreover,
municipal securities vendors could
benefit from the proposed amendments
because additional information about
municipal securities and their issuers
would be made available, which they
then could use in developing or
246 See

supra Section II.A.

247 Id.
248 See

17 CFR 240.15c2–12(c).

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

enhancing value-added products to offer
to interested parties.
In the Commission’s view, the
proposed amendments would have a
positive impact on the municipal
securities market and participants in
that market sector. It is possible that,
with more information available to
market professionals, individual
investors, and others regarding
municipal securities, including VRDOs,
there could be greater competition in
the marketplace with respect to the offer
and sale of municipal securities, to the
benefit of these individuals and entities.
Greater information enhances the ability
of market professionals, investors and
others to make investment-related
decisions about particular municipal
securities, which in turn can promote
competition in the marketplace.
Moreover, individual and institutional
investors might take into account the
fact that more information would be
available about municipal securities,
including VRDOs, when they decide
whether to purchase municipal
securities.
The Commission seeks comment on
the anticipated benefits of the proposed
amendments.
B. Costs
1. Broker-Dealers
The proposed amendments to
paragraph (b)(5)(i)(C) of the Rule would
add events that would require
Participating Underwriters to reasonably
determine that issuers or obligated
persons agreed to provide notice of and
would specify the maximum time
period in which such notices would
need to be submitted to the MSRB. The
Commission does not believe that the
proposed amendments to paragraph
(b)(5)(i)(C) of the Rule would cause
broker-dealers to incur any additional
recurring external or internal costs in
connection with their implementation,
if the proposals are adopted, because
they would not significantly alter the
existing Rule’s requirements for brokerdealers. Under the Rule, broker-dealers
already must reasonably determine that
issuers or obligated persons have
undertaken to provide notice of
specified events in their continuing
disclosure agreements and the addition
of a few more events that would require
notice to the MSRB and the addition of
a provision regarding the timeliness of
such notices should not significantly
increase broker-dealers’ obligations and
thus their costs. As noted above,
continuing disclosure documents
generally are form documents. The
broker-dealer must reasonably
determine that provisions relating to the

PO 00000

Frm 00030

Fmt 4701

Sfmt 4702

issuer’s or obligated person’s
undertaking to provide notice of those
events that are specified in the current
Rule, as well as those events that are
proposed to be added to the Rule, are
contained in the continuing disclosure
agreement.
The proposed amendments also
would modify the Rule’s exemption for
demand securities. The Commission
preliminarily believes that these
proposed amendments would not result
in any external recurring costs for
broker-dealers but could result in their
incurring a small increase in internal
recurring costs because these proposals
would increase the number of
municipal securities offerings subject to
paragraphs (b)(5) and (c) of the Rule.
The proposed deletion of paragraph
(d)(1)(iii) of the Rule and the addition of
new paragraph (d)(5) to the Rule, would
modify an exemption from the Rule for
primary offerings of demand securities.
As noted above, the Commission’s staff
estimates that the modification of this
exemption from the Rule would
increase the number of issuers with
municipal securities offerings subject to
the Rule by 20%.249 The Commission’s
staff estimates that the annual
information collection burden for each
broker-dealer under this proposed
amendment to the Rule would be 1.20
hours (1 hour and 12 minutes).250
Accordingly, the Commission’s staff
estimates that it would cost each brokerdealer $324 annually to comply with the
Rule, which represents a cost increase of
$54 annually over each broker-dealer’s
current annual cost to comply with the
Rule.251
In addition, the Commission’s staff
estimates that a broker-dealer could
have a one-time internal cost associated
with having an in-house compliance
attorney prepare and issue a
memorandum advising the brokerdealer’s employees about the proposed
revisions to Rule 15c2–12. The
Commission’s staff estimates it would
take internal counsel approximately 30
249 See

supra Section V.D.1.a.

250 Id.
251 1.20 hours (estimated annual information
collection burden for each broker-dealer) × $270
(hourly cost for a broker-dealer’s internal
compliance attorney) = $324. The hourly rate for
the compliance attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2008, 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 proposed
amendments to the Rule: $324 (annual cost under
amended rule) ¥ $270 (annual cost under current
Rule) = $54. This estimated cost for broker-dealers
also accounts for their review of continuing
disclosure agreements in connection with
remarketings of VRDOs that are primary offerings.

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
minutes to prepare this
memorandum,252 for a cost of
approximately $135.253 The
Commission further believes that the
ongoing obligations of broker-dealers
under the Rule would be handled
internally because compliance with
these obligations is consistent with the
type of work that a broker-dealer
typically handles internally.
The Commission seeks comment on
any other potential costs that may result
from the proposal amendments,
including whether there would be any
change to the cost of underwriting
variable rate demand obligations or
other types of municipal securities for
which greater information would be
available as a result of the Commission’s
proposals and, if so, whether there
would be any effect on a broker-dealer’s
business and revenues. The Commission
seeks comment on whether the
proposed amendments would adversely
affect the ability of broker-dealers to
serve as Participating Underwriters in
municipal securities offerings,
particularly in the case of offerings of
variable rate demand obligations. While
the Commission does not anticipate that
there would be any adverse
consequences to a broker-dealer’s
business, activities or financial
condition as a result of the proposed
amendments, it seeks commenters’
views regarding the possibility of any
such impact. The Commission requests
comment on any direct or indirect costs
broker-dealers could incur as a result of
the proposed amendments and asks
commenters to quantify those costs,
where possible.
2. Issuers
(a) Current Issuers

srobinson on DSKHWCL6B1PROD with PROPOSALS2

The Commission expects that some
current issuers could be subject to some
internal and external costs associated
with the proposed amendments to the
Rule. As noted above, the proposed
revisions to the Rule regarding the time
period for submission of event notices
and regarding the materiality condition
for such notices would not change the
substance of an event notice, the
method for filing an event notice, or the
location to which an event notices
252 See

supra Section V.D.1.c.
hours (estimated annual information
collection burden for each broker-dealer) × $270
(hourly cost for a broker-dealer’s internal
compliance attorney) = $135. The hourly rate for
the compliance attorney is from SIFMA’s
Management & Professional Earnings in the
Securities Industry 2008, modified by the
Commission’s staff to account for an 1,800-hour
work-year and multiplied by 5.35 to account for
bonuses, firm size, employee benefits and overhead.
253 .5

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

would be submitted.254 Accordingly, the
Commission preliminarily does not
believe that issuers would incur any
costs associated with the proposed
change to the timing provision of the
Rule, except to the extent that some
issuers may need to submit notices more
speedily than they do currently and may
need to be cognizant of events not
within their direct control, such as a
rating change, that would prompt
submission of an event notice. The
Commission preliminarily believes that
the costs for current issuers would
result from the proposed amendments to
the Rule associated with the proposed
new and modified event notice
provisions and the elimination of the
materiality determination for certain
event notices in the current Rule.255
Current issuers would incur internal
costs associated with the preparation of
the additional event notices that may
result from these proposed changes to
the event notice provisions of the Rule.
Current issuers also would incur costs if
they issue demand obligations, as
discussed below.
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 would be additional
costs associated with any additional
submissions of event notices and failure
to file notices. As noted above, the
Commission estimates that each current
issuer would submit one additional
event notice annually as a result of the
proposed amendments.256 If the 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 would have an additional
annual cost of $8 per notice.257 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 would
be no additional external costs
associated with the conversion of the
254 See supra Section V.D.2.b.i. See infra Section
V.I.B.2.b. for a discussion of the costs associated
with an increase in the number of issuers as a result
of the proposed amendment modifying the
exemption for demand securities.
255 As to two of the proposed new events, the
amendments would include a materiality
determination. Such a materiality determination
could result in costs to investors, market
professionals and others to the extent the issuer or
obligated person determined that the event was not
material and thus did not submit a notice to the
MSRB. If investors, market professionals and others
would have considered the information important
and had access to it, they might have made a
different investment decision.
256 See supra Section V.E.2.a.
257 Id.

PO 00000

Frm 00031

Fmt 4701

Sfmt 4702

36861

event notice into the MSRB’s prescribed
electronic format.
As discussed above,258 some current
issuers may incur a one-time cost of
$100 associated with the need to revise
the template for continuing disclosure
agreements, if the proposed
amendments are adopted.259
The Commission also believes that
current issuers could incur some
internal labor costs associated with the
preparation and submission of the
additional event notice. As discussed
above,260 the Commission’s staff
estimates that a current issuer would
submit a maximum of one additional
event notice annually.261 Thus, the
Commission staff estimates that the
maximum annual labor cost to prepare
and submit the additional event notice
is approximately $47 per current
issuer.262
The Commission seeks comment on
any other costs that the proposed
addition of several new event items, the
proposed maximum time frame to
submit event notices, and the revisions
with respect to the materiality condition
would have on issuers. While the
Commission preliminarily does not
believe that these proposals would have
a significant cost impact on issuers, it
seeks commenters’ views on any direct
or indirect cost consequences as a result
of the proposals. For example, would
the proposed amendments in any way
make it more likely or less likely for
issuers to obtain needed financing or to
obtain a broker-dealer to conduct a
primary offering on their behalf? Would
there be any costs incurred by investors,
market professionals or others as a
result of the proposed amendments? Are
258 Id.
259 Id. The Commission’s staff estimates that there
is an approximate cost of $100 associated with
revising each continuing disclosure agreement by
the current issuer’s outside counsel. Thus, the total
cost for revising continuing disclosure agreements
for all current issuers by the current issuers’ outside
counsel would be approximately $1,000,000.
260 Id.
261 This estimate includes additional event
notices that may be submitted as a result of the
proposed modification of the materiality condition
in paragraph (b)(5)(i)(C) of the Rule.
262 1 (maximum estimated number of additional
material event notices submitted per year per
issuer) × $63 (hourly wage for a compliance clerk)
× .75 hours (45 minutes) (estimated time for
compliance clerk to prepare and submit a material
event notice) = $47.25 (rounded to $47). The $63
per hour estimate for a compliance clerk is from
SIFMA’s Office Salaries in the Securities Industry
2008, 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. In order to provide an
estimate of total costs for issuers that would not be
under-inclusive, the Commission’s staff elected to
use the higher end of the estimate of annual
submissions of continuing disclosure documents.
See supra note 220.

E:\FR\FM\24JYP2.SGM

24JYP2

36862

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

there other internal or external costs not
identified by the Commission that could
result from the proposed amendments?
The Commission requests comment on
any direct or indirect costs issuers could
incur as a result of the proposed
amendments and asks commenters to
quantify those costs, where possible.
(b) VRDO Issuers

srobinson on DSKHWCL6B1PROD with PROPOSALS2

As discussed above, the Commission
estimates that the proposed
modification of the Rule’s exemption for
demand securities would increase the
number of issuers affected by the Rule
by approximately 20% or 2,000
issuers.263 These VRDO issuers may
have some costs associated with the
preparation and submission of
continuing disclosure documents. As
discussed above, the Commission
believes that each VRDO issuer may
have a one-time external cost of $600
associated with entering into a
continuing disclosure agreements.264
The Commission believes that the only
other external costs for VRDO issuers
would be the costs associated with
converting continuing disclosure
documents into an electronic format to
submit to the MSRB. As noted earlier,
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.265 VRDO 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 could 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 would vary depending on
how the VRDO issuer elected 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 would vary depending on
the issuer’s current technology
263 See

supra Section V.D.2.a.
supra Section V.E.2.b. The Commission’s
staff has estimated that there is an approximate cost
of $600 associated with drafting each continuing
disclosure agreement by the VRDO issuer’s outside
counsel. Thus, the total cost for preparing
continuing disclosure documents for all VRDO
issuers by the VRDO issuers’ outside counsel would
be approximately $1,200,000.
265 Id.
264 See

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

resources. An issuer also could use the
services of a designated agent to submit
its continuing disclosure documents to
the MSRB. In the 2008 Amendments
Adopting 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.266
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. As noted
above, the Commission’s staff 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 VRDO issuers.267
As noted above, the Commission
estimates that the costs to some of the
VRDO issuers may incur costs
associated with converting continuing
disclosure documents into an electronic
format to submit to the MSRB. These
costs could include: (i) An approximate
cost of $8 per notice to use a third party
vendor to scan a event notice or failure
to file notice, and an approximate cost
of $64 to use a third party vendor to
scan an average-sized annual financial
statement, (ii) an approximate cost
ranging from $750 and $4,300 to acquire
technology resources to convert
continuing disclosure documents into
an electronic format, (iii) $50 to $300
solely to upgrade or acquire the software
to submit documents in an electronic
format; and (iv) approximately $50 per
month to acquire Internet access.268
For a VRDO 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 total maximum
external cost such issuer would incur
would be $760 per year.269 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
total maximum external cost such
VRDO issuer would incur would be
$4,900 for the first year and $600 per
year thereafter. As noted above, in order
to provide a conservative cost estimate,
the Commission has estimated that any
VRDO issuer that incurs costs associated
with converting continuing disclosure
documents into the MSRB’s prescribed
electronic format would choose the

more expensive Category 2 approach.270
The Commission’s staff estimates that
approximately 400 VRDO issuers would
incur costs associated with acquiring
technology resources to convert
continuing disclosure documents into
an electronic format.271 Additionally,
the Commission’s staff estimates that
the maximum annual costs for those
VRDO issuers that need to acquire
technology resources to submit
documents to the MSRB would be
approximately $1,960,000 for the first
year after the adoption of the proposed
amendments and approximately
$240,000 for each year thereafter.272
Although the Commission
preliminarily does not believe that there
are any additional costs to issuers or
obligated persons of VRDOs as a result
of the proposed amendments, it requests
comment regarding any possible direct
or indirect costs that such issuers could
incur, such as any potential impact on
underwriting fees, interest costs, or
other costs generally. Would the
proposed amendments adversely affect
the business, activities or financial
condition of VRDO issuers or obligated
persons, their ability to engage brokerdealers to underwrite or to act as
remarketing agents of VRDOs, or to
engage financial advisors?
(c) Current and VRDO Issuers
Lastly, as discussed above, some
current and VRDO issuers may incur a
one-time external cost associated with
the proposed amendment to change the
timing requirement for submitting event
notices in the Rule 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 and VRDO issuers may
incur a one-time external cost associated
with monitoring for a change in the
name of the issuer’s trustee. One way an
issuer may monitor a change in the
name of its trustee cost would be to
have outside counsel add a notice
provision to the issuer’s trust indenture
requiring the trustee to provide the
issuer with notice of any change in the
trustee’s name. The Commission’s staff
estimates that the approximate cost of
adding this notice provision to an
issuer’s trust indenture for each issuer
would be approximately $100,273 for a
one-time annual cost of $1,200,000274
for all issuers.
270 See

supra Section V.E.2.b.
VRDO issuers × 20% = 400 VRDO
issuers. See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
272 See supra Section V.E.2.b.
273 See supra note 237.
274 See supra note 238.
271 2000

266 See 2008 Amendments Adopting Release,
supra note 11, 73 FR 76104.
267 See supra Section V.E.2.b.
268 Id.
269 See supra note 231.

PO 00000

Frm 00032

Fmt 4701

Sfmt 4702

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
The Commission requests comment
on any direct or indirect costs issuers or
obligated persons could incur as a result
of the proposed amendments and asks
commenters to quantify those costs,
where possible.
3. MSRB

srobinson on DSKHWCL6B1PROD with PROPOSALS2

Since the number of continuing
disclosure documents submitted would
increase as a result of the proposed
amendments, the MSRB could incur
costs associated with the proposed
amendments. The Commission’s staff
estimates that these costs for the MSRB
may include: (i) the cost to hire
additional clerical personnel at an
estimated annual cost of $127,890 to
process the additional submissions
associated with the proposed
amendments to the Rule 275 and (ii) the
cost to update its EMMA system to
accommodate indexing information in
connection with the proposed changes
to the material disclosure events of the
Rule. Based on information provided to
Commission staff by 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 proposed
changes to the material disclosure
events of the Rule would be
approximately $10,000.276 Therefore, in
connection with the proposed
amendments the MSRB would incur a
one-time cost of approximately $10,000
as well as a recurring annual cost of
approximately $127,890.277
Given that the MSRB has provided a
preliminary estimate of the costs that it
would incur in connection with the
proposed amendments, the Commission
does not believe that there are any other
direct or indirect additional costs that
the MSRB may incur as a result of the
proposals. The Commission seeks
comment on all direct and indirect costs
that its proposals would impose on the
MSRB and requests that those costs be
quantified, where possible.
275 2,030 hours (estimated additional annual
number of hours worked by a compliance clerk) ×
$63 (hourly wage for a compliance clerk) =
$127,890 (annual salary for compliance clerk). The
$63 per hour estimate for a compliance clerk is from
SIFMA’s Office Salaries in the Securities Industry
2008, 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
would incur on an annual basis under the proposed
amendments to the Rule. See Section V.D.
276 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.
277 See supra notes 261 and 262.

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

C. Request for Comment on Costs and
Benefits
The Commission preliminarily
believes that any additional burden or
costs on broker-dealers, issuers, and the
MSRB as a result of the proposed
amendments would be justified by the
improved availability of information to
broker-dealers, mutual funds that hold
municipal securities, analysts and other
market professionals, institutional and
retail investors, vendors of municipal
securities information, and the public
generally, all of which contribute to
investors’ ability to make more
knowledgeable investment decisions,
effectively manage and monitor their
investments, and protect themselves
from misrepresentation and fraud. This
availability also would contribute to
brokers, dealers and municipal
securities dealers’ reasonable basis to
recommend the purchase or sale of
municipal securities. To assist the
Commission in evaluating the costs and
benefits that could result from the
proposed amendments to the Rule, the
Commission requests comments on the
potential costs and benefits identified in
this proposal, as well as any other costs
or benefits that could result from the
proposed amendments to the Rule. In
particular, comments are requested on
whether there are costs or benefits to
any entity not identified above.
Commenters should provide analysis
and data to support their views on the
costs and benefits. In particular, the
Commission requests comment on the
costs and benefits of the proposed
amendments on broker-dealers, issuers,
the MSRB, other municipal securities
information vendors, as well as any
costs on others, including market
participants and investors.
VII. Consideration of Burden and
Promotion of Efficiency, Competition,
and Capital Formation
Section 3(f) of the Exchange Act 278
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 whether the action
would promote efficiency, competition,
and capital formation. In addition,
Section 23(a)(2) of the Exchange Act 279
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

PO 00000

278 15
279 15

U.S.C. 78c(f).
U.S.C. 78w(a)(2).

Frm 00033

Fmt 4701

Sfmt 4702

36863

not necessary or appropriate in
furtherance of the purposes of the
Exchange Act.
The proposed amendments to the
Rule would revise paragraph (b)(5) of
Rule 15c2–12 to require Participating
Underwriters to reasonably determine
that the issuer or obligated person has
agreed at the time of a primary offering:
(i) To provide notice of the events listed
in paragraph (b)(5)(i)(C) of the Rule in
a timely manner, but not later than ten
business days after the occurrence of the
event; 280 and (ii) to expand the list of
events in paragraph (b)(5)(i)(C) of the
Rule to include the following: 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; a tender offer;
bankruptcy, insolvency, receivership or
similar event of the issuer or obligated
person; and 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. The proposed
amendments would delete the
materiality condition for some, but not
all, of the events currently listed in
paragraph (b)(5)(i)(C) of the Rule. In
addition, the proposed amendments
would narrow the exemption currently
contained in paragraph (d)(1)(iii) of the
Rule for demand securities, by deleting
paragraph (d)(1)(iii), and adding
paragraph (d)(5) to the Rule to make the
event disclosure provisions contained in
section (b)(5)(i)(C) of the Rule applicable
to this category of municipal securities.
As discussed below, the Commission
preliminarily believes that the proposed
amendments to the Rule should help
make the municipal disclosure process
more efficient because of the proposed
new events to be added to paragraph
(b)(5)(i)(C) of the Rule; the proposal that
submissions of event notices to the
MSRB must be made in a timely manner
not in excess of ten business days of the
event’s occurrence; and the proposed
280 The Commission proposes a similar revision
to the limited undertaking in paragraph (d)(2)(ii)(B)
of the Rule 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,’’ instead of ‘‘in a
timely manner’’ as the Rule currently provides.

E:\FR\FM\24JYP2.SGM

24JYP2

srobinson on DSKHWCL6B1PROD with PROPOSALS2

36864

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

modification of the exemption for
demand securities through the
elimination of paragraph (d)(1)(iii) of
the Rule, and the addition of paragraph
(d)(5) to the Rule. Currently, the Rule
does not contain a specific time frame
within which a continuing disclosure
agreement must specify that event
notices will be provided to the MSRB.
Thus, the Commission believes the
proposed change should help
individuals or entities interested in
obtaining information about events
relating to municipal issuers to obtain
this information from the MSRB within
a specific time frame 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 not currently
included in the Rule. Further, certain
events listed in paragraph (b)(5)(i)(C) of
the rule would need to be disclosed,
without the issuer having to make a
materiality determination. Moreover,
the Rule currently contains an
exemption for demand securities, which
means that broker-dealers are not
required to reasonably determine that
the issuer or obligated person has
undertaken to provide the information
set forth in paragraph (b)(5) of the Rule.
As a consequence of the proposed
amendments, greater information about
municipal securities and their issuers
should 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
should be able to obtain greater
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 instances of fraud.
The Commission preliminarily
believes that this proposal could
promote competition in the purchase
and sale of municipal securities because
the greater availability and timeliness of
information as a result of the proposed
amendments could instill greater
investor confidence in the municipal
securities market. As a result, more

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

investors could be attracted to this
market sector and broker-dealers and
municipal issuers could compete for
their business. The proposed
amendments also could encourage
improvement in the completeness and
timeliness of issuer disclosures and
could foster additional interest in
municipal securities by retail and
institutional customers. In addition, the
greater availability of information about
municipal securities would be
beneficial to vendors of municipal
securities information as they develop
their value-added products. Thus, the
proposed amendments could promote
competition among those vendors of
municipal securities information that
could utilize the information provided
to the MSRB pursuant to continuing
disclosure agreements and would
compete with each other in creating and
offering for sale value-added products
relating to municipal securities. As
discussed above,281 the proposed
amendments to the Rule could result in
some additional cost and hourly
burdens for broker-dealers, issuers and
the MSRB. However, the Commission
preliminarily believes that these
increased burdens are justified by the
positive competitive impact of the
proposed amendments to the Rule.
Accordingly, the Commission
preliminarily does not believe that the
proposed amendments would result in
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Exchange Act.
The proposed amendments to the
Rule would 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, which could have
an impact on the value of the applicable
municipal security. In addition, the
proposed amendments would 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. The Commission believes
that these proposals should help
improve investors’ ability to make
informed investment decisions, which,
in turn, should help promote capital
formation generally. The proposed
amendments could have a positive
effect on capital formation because the
greater availability of information about
municipal securities could provide
institutional and retail investors with
more complete information regarding
these securities. As a result, investors

PO 00000

281 See

supra Sections V. and VI.

Frm 00034

Fmt 4701

Sfmt 4702

could be more comfortable that they
would have better access to important
information about a particular
municipal security when deciding
whether to purchase that security.
Based on the analysis above, the
Commission preliminarily believes that
the proposed amendments to the Rule
would not impose any burden on
competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. The
Commission requests comment on all
aspects of this analysis and, in
particular, on whether the proposed
amendments to the Rule would place a
burden on competition, as well as the
effect of the proposed amendments on
efficiency, competition, and capital
formation. The Commission specifically
seeks comment on whether the
proposed amendments would place a
burden on competition or have an effect
on efficiency, competition, and capital
formation with respect to issuers or
obligated persons, the MSRB, brokerdealers, other market participants,
investors, or others.
VIII. Consideration of Impact on the
Economy
For purposes of the Small Business
Regulatory Enforcement Fairness Act of
1996, or ‘‘SBREFA,’’ 282 the Commission
must advise the OMB as to whether the
proposed regulation constitutes a
‘‘major’’ rule. Under SBREFA, a rule is
considered ‘‘major’’ where, if adopted, it
results or is likely to result in: (1) An
annual effect on the economy of $100
million or more (either in the form of an
increase or a decrease); (2) a major
increase in costs or prices for consumers
or individual industries; or (3)
significant adverse effect on
competition, investment or innovation.
The Commission requests comment
on the potential impact of the proposed
rule amendments on the economy on an
annual basis. Commenters are requested
to provide empirical data and other
factual support for their view to the
extent possible.
IX. Regulatory Flexibility Analysis
This Initial Regulatory Flexibility
Analysis (‘‘IRFA’’) has been prepared in
accordance with the provisions of the
Regulatory Flexibility Act (‘‘RFA’’).283 It
relates to proposed amendments to Rule
15c2–12,284 under the Securities
Exchange Act of 1934, as amended.285
The proposed amendments would
282 Public Law No. 104–121, Title II, 110 Stat. 857
(1996) (codified in various sections of 5 U.S.C., 15
U.S.C. and as a note to 5 U.S.C. 601).
283 5 U.S.C. 603(a).
284 17 CFR 240.15c2–12.
285 15 U.S.C. 78a et seq.

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules
amend 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 would
require a broker, dealer, or municipal
securities dealer (or ‘‘Participating
Underwriter,’’ when used in connection
with primary offerings), 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 amend the
list of events for which notices would be
provided. In addition, the proposal
would modify the condition that event
notices be submitted to the Municipal
Securities Rulemaking Board, ‘‘if
material,’’ for some, but not all, of the
Rule’s specified events. Further, the
amendments would modify an
exemption from the rule for certain
offerings of municipal securities with
put features, by making the offering of
such securities subject to continuing
disclosure obligations set forth in the
Rule.

srobinson on DSKHWCL6B1PROD with PROPOSALS2

A. Reasons for the Proposed Action
The main purpose of the proposal 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 and
subsequent recommendation of
transactions in municipal securities for
which adequate information is not
available on an ongoing basis.
The Commission proposes to 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, instead of ‘‘in a timely
manner’’ as the Rule currently provides.
In 1994, the Commission adopted
amendments to Rule 15c2–12 and noted
that it had not established a specific
time frame with respect to ‘‘timely’’
because of the wide variety of events

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

and issuer circumstances.286 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.287 It has been
reported that there have been some
instances in which event notices were
not submitted until months after the
events occurred.288 The Commission
believes that delays deny investors
important information that they need in
order to make informed decisions
regarding whether to buy, sell, or hold
their municipal securities and to aid
them in determining whether the price
that they pay or receive for their
transactions is appropriate.289
The Commission preliminarily
believes that codifying in the Rule a
specific time within which event
notices would be provided, in
accordance with the continuing
disclosure agreement, to the MSRB
should result in these notices being
made available more promptly than at
present. Accordingly, the proposed
amendments would 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 specified events in a
timely manner not in excess of ten
business days after the event’s
occurrence. The Commission believes
this change would help promote more
timely disclosure of this important
information to municipal security
investors.
The Commission proposes to modify
paragraph (b)(5)(i)(C)(6) of the Rule,
which presently 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 proposal would revise
paragraph (b)(5)(i)(C)(6) of the Rule also
to provide for the disclosure of the
issuance of material ‘‘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
securities’’ by the IRS to the MSRB
under a continuing disclosure
agreement. A determination by the IRS
286 See Securities Exchange Act Release No.
34961 (November 10, 1994), 59 FR 59590, 59601
(November 17, 1994) (‘‘1994 Amendments’’).
287 Id.
288 See supra Section II.B.
289 Id.

PO 00000

Frm 00035

Fmt 4701

Sfmt 4702

36865

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.290 The taxexempt 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.291 Therefore, retail and
institutional investors alike are
extremely interested in events that
could adversely affect the tax-exempt
status of the municipal securities that
they own or may wish to purchase.292
The Commission is proposing that no
determination of materiality would be
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.293 The Commission
preliminarily believes that these events
are of such a high level of importance
to investors that notice of their
occurrence should always be included
in a continuing disclosure agreement.
Furthermore, the Commission
preliminarily believes that eliminating
the necessity to make a materiality
decision upon the occurrence of these
events would simplify issuer
compliance with the terms of
continuing disclosure agreements to
which they are a party and would help
to make such filings available more
quickly.
The proposal also would add the
following events, for which disclosure
notices would be provided pursuant to
a continuing disclosure agreement: (i)
Tender offers (paragraph (b)(5)(i)(C)(8)
of the Rule); 294 (ii) bankruptcy,
insolvency, receivership or similar
event of the issuer or obligated person
(paragraph (b)(5)(i)(C)(12) of the
Rule); 295 (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
290 See

supra Section II.D.

291 Id.
292 Id.
293 Id.
294 See
295 See

E:\FR\FM\24JYP2.SGM

supra Section II.E.1.
supra Section II.E.2.

24JYP2

36866

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

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); 296 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.297 The Commission believes
that there is a need to make available to
all investors such important information
affecting their decisions and the value of
their securities. The Commission
believes that the proposed addition of
these four events disclosure items
would substantially improve the
availability of important information in
the municipal securities market.
Finally, the proposal would 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 over the
last fourteen years suggests a need to
increase the availability of information
to investors regarding demand
securities.298 Furthermore, the recent
period of turmoil in the markets for
municipal auction rate securities and
variable rate demand obligations
(‘‘VRDOs’’) and the comments of
numerous primary purchasers of
demand securities also suggest that a
full exemption for demand securities is
no longer appropriate and that the
exemption should be modified to
provide that paragraphs (b)(5) and (c) of
the Rule relating to the disclosure of
continuing disclosure documents and
recommendations by broker-dealers also
would apply to the offerings of demand
securities.299

srobinson on DSKHWCL6B1PROD with PROPOSALS2

B. Objectives
The purpose of the proposal 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. Legal Basis
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 proposing
amendments to § 240.15c2–12 of Title
17 of the Code of Federal Regulations.
D. Small Entities Subject to the Rule
The proposal would apply to any
broker, dealer, or municipal securities
dealer that acts as an underwriter in a
primary offering of municipal securities
with an aggregate principal amount of
$1,000,000 or more and issuers of such
securities.
The RFA defines ‘‘small entity’’ to
mean ‘‘small business,’’ ‘‘small
organization,’’ or ‘‘small government
jurisdiction.’’ 300 The Commission’s
rules define ‘‘small business’’ and
‘‘small organization’’ for purposes of the
RFA for each of the types of entities
regulated by the Commission.
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.’’ 301
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.’’ 302
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.’’ 303
Based on information obtained by the
Commission’s staff in connection with
the 2008 Adopted Amendments, the
Commission estimates that 250 brokerdealers, including municipal securities
dealers, would be Participating
Underwriters within the meaning of
Rule 15c2–12. Based on a recent review
of industry sources, the Commission
does not believe that any Participating
Underwriters would be small brokerdealers or municipal securities dealers.
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.’’ 304 Currently,
300 5

U.S.C. 601(6).
CFR 240.0–10(c).
302 17 CFR 240.0–10(f).
303 17 CFR 230.157. See also 17 CFR 240.0–10(a).
304 5 U.S.C. 601(5).

296 See

supra Section II.E.3.
297 See supra Section II.E.4.
298 See supra Section II.A.
299 Id.

VerDate Nov<24>2008

19:07 Jul 23, 2009

301 17

Jkt 217001

PO 00000

Frm 00036

Fmt 4701

Sfmt 4702

there are more than 50,000 state and
local issuers of municipal securities 305
that would be subject to the proposal.
The Commission estimates that
approximately 40,000 state and local
issuers would be ‘‘small’’ entities for
purposes of the RFA. However, the
Commission believes that most issuers
of municipal securities would qualify
for the limited exemption in paragraph
(d)(2) of the Rule.306 The Commission
has estimated that currently 10,000
issuers have entered into continuing
disclosure agreements that provide for
their submitting continuing disclosure
documents to the MSRB and that, under
the proposed amendment to narrow the
Rule’s exemption for demand securities,
the number of affected issuers would
increase to 12,000 issuers. It is possible
that some of these issuers may be small
issuers.
The proposed amendments would
apply to all small entities that are
currently subject to Rule 15c2–12.
Because small entities already may
submit event notices for the current
disclosure items, these entities are able
to prepare event notices that are
proposed to be incorporated into the
Rule. The Commission expects that
providing the additional event
disclosure items would increase costs
incurred by small entities, to the extent
that their primary offerings of municipal
securities are covered by the Rule,
because they potentially would have to
provide a greater number of event
notices than they do currently.
However, the Commission notes this
increased cost would be approximately
$8 per entity annually. The
Commission’s staff has estimated that
for purposes of the Paperwork
Reduction Act each issuer, including
small entities, would be subject to an
annual reporting burden of
approximately 4.5 hours and an
estimated annual cost ranging from $600
to $760.307 In addition, some issuers
could have one-time costs ranging from
$50 to $4,300.308
E. Reporting, Recordkeeping and Other
Compliance Requirements
Rule 15c2–12 currently sets forth
eleven disclosure items that the
305 See Securities Exchange Act Release No.
33741 (March 9, 1994), 59 FR 12748 (March 17,
1994).
306 Specifically, Rule 15c2–12(d)(2) provides an
exemption from the application of paragraph (b)(5)
(Rule’s provisions regarding continuing disclosure
agreements) of the Rule 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).
307 See supra Section V.E.2.
308 Id.

E:\FR\FM\24JYP2.SGM

24JYP2

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

srobinson on DSKHWCL6B1PROD with PROPOSALS2

Participating Underwriter must
reasonably determine would be
provided, in accordance with the
continuing disclosure agreement, to the
MSRB. The proposed amendments to
Rule 15c2–12 would amend an existing
event disclosure item and add four new
event disclosure items. The proposed
amendments would clarify the current
disclosure item regarding adverse tax
opinions, add tender offers to the
current disclosure item regarding bond
calls contained in paragraph (b)(5)(C)(8),
and add three new disclosure items:
bankruptcy, insolvency, receivership or
similar event of the issuer or obligated
person; 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 the appointment of a
successor or additional trustee or the
change of name of a trustee, if material.
In addition, the proposal would modify
the condition that event notices be
submitted to the MSRB, ‘‘if material,’’
for some, but not all, of the Rule’s
specified events. The proposal also
would delete the current exemption for
demand securities in paragraph
(d)(1)(iii) and add language in new
paragraph (d)(5) so that paragraphs
(b)(5) 309 and (c) 310 of the Rule also
would apply to a primary offering of
demand securities. Lastly, the proposed
amendments would modify paragraphs
(b)(5)(i)(C) and (d)(2)(ii)(B) of the Rule 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,’’ instead of ‘‘in a timely manner’’
as the Rule currently provides.
309 Rule 15c2–12(b)(5) requires a Participating
Underwriter, before purchasing or selling municipal
securities in connection with an offering of
municipal securities, to reasonably determine that
the issuer or obligated person has undertaken, in a
written agreement or contract, for the benefit of the
holders of the municipal securities, to provide
annual filings, material event notices, and failure to
file notices (i.e., continuing disclosure documents)
to the MSRB. See 17 CFR 240.15c2–12(b)(5).
310 Rule 15c2–12(c) 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 notice of any
material event and any failure to file annual
financial information regarding the municipal
security. See 17 CFR 240.15c2–12(c).

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

F. Duplicative, Overlapping, or
Conflicting Federal Rules
The Commission believes that there
are no rules that duplicate, overlap, or
conflict with the proposed amendments
to Rule 15c2–12.
G. Significant Alternatives
The RFA directs the Commission to
consider significant alternatives that
would accomplish the stated objective,
while minimizing any significant
adverse impact on small entities. In
connection with the proposed revisions
to the Rule, the Commission considered
the following alternatives:
(1) Establishing differing compliance
or reporting requirements or timetables
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.
The Commission believes that
separate compliance or reporting
requirements or timetables for smaller
entities that would differ from the
proposed requirements, or exempting
broker-dealers from the obligations in
paragraph (b)(5) and (c) of the Rule with
respect to small issuers, would not
achieve the Commission’s objectives. At
the outset, the Commission notes that
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 agreements, does
not apply to a primary offering if the
conditions contained therein are met.311
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 proposal balances the informational
needs of investors and others with
regard to municipal securities issued by
small governmental jurisdictions with
the effects of the proposed rule change.
The adoption of separate rules for
311 Specifically, Rule 15c2–12(d)(2) provides an
exemption from the application of paragraph (b)(5)
(Rule’s provisions regarding continuing disclosure
agreements) of the Rule 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).

PO 00000

Frm 00037

Fmt 4701

Sfmt 4702

36867

broker-dealers with respect to
continuing disclosure agreements
entered into by smaller entities would
not be consistent with the Commission’s
intent to improve the greater availability
and timeliness of disclosures in the
municipal securities market.
Furthermore, the municipal securities
market could be disadvantaged by
disparate disclosures by small and large
entities pursuant to their continuing
disclosure agreements. Broker-dealers
and other market participants would be
better able to satisfy their legal
obligations under the federal securities
laws to have a reasonable basis on
which to recommend municipal
securities. In addition, the proposal
would impose performance standards
rather than design standards.
H. Request for Comments
The Commission encourages written
comments on matters discussed in the
IRFA. In particular, the Commission
requests comments on: (a) The number
of small entities that would be affected
by the proposed amendments; (b) the
nature of any impact the proposed
amendments would have on small
entities and empirical data supporting
the extent of the impact; (c) how to
quantify the number of small entities
that would be affected by and/or how to
quantify the impact of the proposed
amendments; and (d) potential costs to
small entities, if any, including costs
associated with providing event notices.
Such comments will be considered in
the preparation of the Final Regulatory
Flexibility Analysis, if the proposed rule
is adopted, and will be placed in the
same public file as comments on the
proposed rule itself. Persons wishing to
submit written comments should refer
to the instructions for submitting
comments in the front of this release.
X. 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 proposing
amendments to § 240.15c2–12 of Title
17 of the Code of Federal Regulations in
the manner set forth below.
Text of Proposed Rule Amendments
List of Subjects in 17 CFR Part 240
Brokers, Reporting and recordkeeping
requirements, Securities.
For the reasons set out in the
preamble, Title 17, Chapter II, of the
Code of Federal Regulations is proposed
to be amended as follows.

E:\FR\FM\24JYP2.SGM

24JYP2

36868

Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules

PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934
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.

*

*
*
*
*
2. Section 240.15c2–12 is amended by
the following:
A. Revise the introductory text of
paragraph (b)(5)(i)(C), and paragraphs
(b)(5)(i)(C)(2), (6), (7), (8), (10), and (11);
B. Add new paragraphs
(b)(5)(i)(C)(12), (13), and (14);
C. Revise paragraph (d)(1)(ii);
D. Remove paragraph (d)(1)(iii); and
E. Revise the paragraph (d)(2)(ii)(B);
and
F. Add new paragraph (d)(5).
The additions and revisions read as
follows.
§ 240.15c2–12
disclosure.

Municipal securities

*
*
*
*
(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-exempt status of the

srobinson on DSKHWCL6B1PROD with PROPOSALS2

*

VerDate Nov<24>2008

19:07 Jul 23, 2009

Jkt 217001

securities, or other events affecting the
tax-exempt 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), 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 or
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
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
*
*
*
*
*

PO 00000

Frm 00038

Fmt 4701

Sfmt 4702

(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)(5) and (c) of this section, this section
shall not 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.
*
*
*
*
*
PART 241—INTERPRETATIVE
RELEASES RELATING TO THE
SECURITIES EXCHANGE ACT OF 1934
AND GENERAL RULES AND
REGULATIONS THEREUNDER
*

*
*
*
*
3. Part 241 is amended by adding
Release No. 34–XXXXX and the release
date of X to the list of interpretative
releases.
Dated: July 17, 2009.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–17466 Filed 7–23–09; 8:45 am]
BILLING CODE 8010–01–P

E:\FR\FM\24JYP2.SGM

24JYP2