# Amendment to Municipal Securities Disclosure > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2010-13165 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** June 10, 2010 - **Citation:** 75 FR 33100 ## Text SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 241 [Release No. 34-62184A; File No. S7-15-09] RIN 3235-AJ66 Amendment to Municipal Securities Disclosure AGENCY: Securities and Exchange Commission. ACTION: Final rule and interpretation. SUMMARY: The Securities and Exchange Commission (“Commission” or “SEC”) is adopting amendments to Rule 15c2-12 (“Rule 15c2-12” or “Rule”) under the Securities Exchange Act of 1934 (“Exchange Act”) relating to municipal securities disclosure. The amendments revise certain requirements regarding the information that a broker, dealer, or municipal securities dealer acting as an underwriter in a primary offering of municipal securities must reasonably determine that an issuer of municipal securities or an obligated person has undertaken, in a written agreement or contract for the benefit of holders of the issuer's municipal securities, to provide to the Municipal Securities Rulemaking Board (“MSRB”). Specifically, the amendments require a broker, dealer, or municipal securities dealer to reasonably determine that the issuer or obligated person has agreed to provide notice of specified events in a timely manner not in excess of ten business days after the event's occurrence; amend the list of events for which a notice is to be provided; and modify the events that are subject to a materiality determination before triggering a requirement to provide notice to the MSRB. In addition, the amendments revise an exemption from the Rule for certain offerings of municipal securities with put features (defined below as “demand securities”). The Commission also is providing interpretive guidance intended to assist municipal securities brokers, dealers, and municipal securities dealers in meeting their obligations under the antifraud provisions of the federal securities laws. DATES: Effective Date: August 9, 2010, except Part 241 will be effective June 10, 2010. Compliance Date: December 1, 2010 with respect to § 240.15c2-12. FOR FURTHER INFORMATION CONTACT: Martha Mahan Haines, Assistant Director and Chief, Office of Municipal Securities, at (202) 551-5681; Nancy J. Burke-Sanow, Assistant Director, Office of Market Supervision, at (202) 551-5620; Mary N. Simpkins, Senior Special Counsel, Office of Municipal Securities, at (202) 551-5683; Molly M. Kim, Special Counsel, Office of Market Supervision, at (202) 551-5644; Rahman J. Harrison, Special Counsel, Office of Market Supervision, at (202) 551-5663; and Steven Varholik, Special Counsel, Office of Market Supervision, at (202) 551-5615, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-6628. SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to Rule 15c2-12 under the Exchange Act. 1 1 17 CFR 240.15c2-12. I. Executive Summary On July 24, 2009, the Commission published for comment amendments to Rule 15c2-12 to improve the quality and timeliness of information about municipal securities that are outstanding in the secondary market. 2 The proposed amendments would have required a broker, dealer, or municipal securities dealer to reasonably determine that the issuer or obligated person has undertaken, in a written agreement or contract for the benefit of holders of the issuer's municipal securities (“continuing disclosure agreement”), to provide notice to the MSRB of specified events in a timely manner not in excess of ten business days after the event's occurrence. The proposal also would have amended the list of events for which a notice is to be provided and would have modified the events that are subject to a materiality determination before triggering the obligation to submit a notice to the MSRB. In addition, the amendments would have revised an exemption from the Rule for certain offerings of demand securities. 2 See Securities Exchange Act Release No. 60332 (July 17, 2009), 74 FR 36831 (July 24, 2009) (“Proposing Release”). The comment period for the proposed amendments expired on September 8, 2009. The Commission received twenty-nine comment letters in response to the proposed amendments from a wide range of commenters. 3 The respondents included the MSRB; state and local governments; mutual funds; trade organizations representing broker-dealers, government financial officials, and bond lawyers; and individual investors. Of the comment letters received, four expressed support for the proposed amendments; ten expressed support, but suggested modifications to certain provisions of the proposed amendments; three supported some of the proposed amendments and objected to others; and eight opposed the proposed amendments. In addition, four comment letters neither expressed support for nor opposed the proposed amendments. 3 Copies of all comments received on the proposed amendments are available on the Commission's Internet Web site, located at http://www.sec.gov/comments/s7-15-09/s71509.shtml. Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Exhibit A, which is attached to this release, contains a citation key to the comment letters received by the Commission on the proposed amendments. Some of the main concerns raised in the comment letters include: (i) The burden and costs associated with the proposed maximum ten business day time frame for submission of event notices; (ii) application of the proposed amendments to remarketings of demand securities; 4 and (iii) the proposed removal of the materiality condition from various disclosure events that trigger submission of an event notice to the MSRB. A number of commenters offered alternative approaches to the proposal to address their concerns and made suggestions regarding implementation of the proposed amendments. Also, some commenters addressed two proposals submitted by the MSRB relating to modifications to its Electronic Municipal Market Access (“EMMA”) system. 5 4 See infra note 28 and accompanying text for a description of demand securities. 5 See Securities Exchange Act Release Nos. 60314 (July 15, 2009), 74 FR 36300 (July 22, 2009); 61238 (December 23, 2009), 75 FR 492 (January 5, 2010); 60315 (July 15, 2009), 74 FR 36294 (July 22, 2009); and 61237 (December 23, 2009), 75 FR 485 (January 5, 2010). The EMMA system is a component of the MSRB's central municipal securities document repository for the collection and availability of continuing disclosure documents over the Internet. See http://emma.msrb.org. This release describes and addresses only those portions of the comment letters that are relevant to the proposed amendments. The portions of the comment letters that discuss the MSRB proposals relating to the EMMA system are being considered separately in the Commission's orders approving the MSRB proposals. 6 6 See Securities Exchange Act Release Nos. 62182 (May 26, 2010) (SR-MSRB-2010-09) and 62183 (May 26, 2010) (SR-MSRB-2010-10) (pursuant to delegated authority). The Commission has carefully considered all the comments it received regarding the proposed amendments and, as discussed below, is adopting the amendments substantially as proposed, with some modifications in response to comments. The amendments are intended to enhance the quality and availability of information about outstanding municipal securities. For the reasons discussed in this release, 7 the Commission believes that the amendments are consistent with the Commission's mandate to, among other things, adopt rules reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices in the market for municipal securities. In addition, the Commission is issuing interpretive guidance that is substantially the same as the guidance set forth in the Proposing Release and that is intended to assist municipal securities brokers, dealers, and municipal securities dealers in meeting their obligations under the antifraud provisions of the federal securities laws. 7 See also Proposing Release, supra note 2, 74 FR 36831. II. Background Rule 15c2-12 is intended to enhance disclosure, and thereby reduce fraud, in the municipal securities market by establishing standards for obtaining, reviewing, and disseminating information about municipal securities by their underwriters. 8 In 1989, the Commission adopted paragraphs (a) and (b)(1)-(4) of Rule 15c2-12 9 to require brokers, dealers, and municipal securities dealers (“Participating Underwriters”) acting as underwriters in primary offerings of municipal securities of $1,000,000 or more (subject to certain exemptions set forth in paragraph (d) of the Rule) to obtain, review, and distribute to potential customers copies of the issuer's official statement. 10 In 1994, the Commission adopted paragraph (b)(5) of the Rule (“1994 Amendments”), 11 which became effective in 1995 and was amended in 2008. 12 Paragraph (b)(5) prohibits Participating Underwriters from purchasing or selling municipal securities covered by the Rule in a primary offering, unless the Participating Underwriter has reasonably determined that an issuer or an obligated person 13 of municipal securities has undertaken in a continuing disclosure agreement to provide specified information to the MSRB in an electronic format as prescribed by the MSRB. 14 The information to be provided consists of: (1) Certain annual financial and operating information and audited financial statements (“annual filings”); 15 (2) notices of the occurrence of any of eleven specific events (“event notices”); 16 and (3) notices of the failure of an issuer or obligated person to make a submission required by a continuing disclosure agreement (“failure to file notices”). 17 8 See Securities Exchange Act Release No. 26985 (June 28, 1989), 54 FR 28799 (July 10, 1989) (“1989 Adopting Release”). For additional information relating to the history of the Rule, see Securities Exchange Act Release Nos. 34961 (November 10, 1994), 59 FR 59590 (November 17, 1994) (“1994 Amendments Adopting Release”) and 59062 (December 5, 2008), 73 FR 76104 (December 15, 2008) (“2008 Amendments Adopting Release”). 9 See 1989 Adopting Release, supra note 8. 10 17 CFR 240.15c2-12(a). 11 17 CFR 240.15c2-12(b)(5). 12 See 1994 Amendments Adopting Release and 2008 Amendments Adopting Release, supra note 8. 13 The term “obligated person” means “any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person committed by contract or other arrangement to support payment of all, or part of the obligations of the municipal securities to be sold in the Offering (other than providers of municipal bond insurance, letters of credit, or other liquidity facilities).” See 17 CFR 240.15c2-12(f)(10). 14 On December 5, 2008, the Commission adopted amendments to Rule 15c2-12 (“2008 Amendments”) to provide for a single centralized repository, the MSRB, for the electronic collection and availability of information about outstanding municipal securities in the secondary market. Specifically, the 2008 Amendments require a Participating Underwriter to reasonably determine that the issuer or obligated person has undertaken in its continuing disclosure agreement to provide the continuing disclosure documents: (1) Solely to the MSRB; and (2) in an electronic format and accompanied by identifying information, as prescribed by the MSRB. See 2008 Amendments Adopting Release, supra note 8. See also Securities Exchange Act Release No. 58255 (July 30, 2008), 73 FR 46138 (August 7, 2008) (“2008 Proposing Release”). The 2008 Amendments became effective on July 1, 2009. 15 17 CFR 240.15c2-12(b)(5)(i)(A) and (B). 16 17 CFR 240.15c2-12(b)(5)(i)(C). Currently, the following events, if material, require notice: (1) Principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the security; (7) modifications to rights of security holders; (8) bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the securities; and (11) rating changes. In addition, Rule 15c2-12(d)(2) provides an exemption from the application of paragraph (b)(5) of the Rule with respect to certain primary offerings if, among other things, the issuer or obligated person has agreed to a limited disclosure obligation. See 17 CFR 240.15c2-12(d)(2). As discussed in detail in Section III.C. below, the Commission is adopting amendments to the Rule to eliminate the materiality determination for certain of these events. 17 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event notices, and failure to file notices are referred to collectively herein as “continuing disclosure documents.” Since the adoption of the 1994 Amendments, the amount of outstanding municipal securities has more than doubled to $2.8 trillion. 18 Notably, despite this large increase in the amount of outstanding municipal securities, direct investment in municipal securities by individuals remained relatively steady from 1996 to 2009, ranging from approximately 35% to 39% of outstanding municipal securities. 19 At the end of 2009, individual investors held approximately 35% of outstanding municipal securities directly and up to another 34% indirectly through money market funds, mutual funds, and closed end funds. 20 There is also substantial trading volume in the municipal securities market. According to the MSRB, almost $3.8 trillion of long and short term municipal securities were traded in 2009 in over 10 million transactions. 21 Further, there are approximately 51,000 state and local issuers of municipal securities, ranging from villages, towns, townships, cities, counties, and states, as well as special districts, such as school districts and water and sewer authorities. 22 18 According to statistics assembled by the Securities Industry and Financial Markets Association (“SIFMA”), the amount of outstanding municipal securities grew from approximately $1.26 trillion in 1996 to $2.81 trillion at the end of 2009. See SIFMA Holders of U.S. Municipal Securities (available at http://www.sifma.org/uploadedFiles/Research/Statistics/SIFMA_USMunicipalSecuritiesHolders.pdf) (“SIFMA Report”). As noted in the Proposing Release, the amount of outstanding municipal securities was $2.69 trillion at the end of 2008, according to statistics assembled by SIFMA. See Proposing Release, supra note 2, 74 FR at 36834, n. 16 and accompanying text. 19 See SIFMA Report, supra note 18. As noted in the Proposing Release, direct investment in municipal securities by individuals from 1996 to 2008 ranged from approximately 35% to 39% of outstanding municipal securities, according to statistics assembled by SIFMA. See Proposing Release, supra note 2, 74 FR at 36834, n. 17 and accompanying text. 20 See SIFMA Report, supra note 18. As noted in the Proposing Release, at the end of 2008, individual investors held approximately 36% of outstanding municipal securities directly and up to another 36% indirectly through money market funds, mutual funds, and closed end funds, according to statistics assembled by SIFMA. See Proposing Release, supra note 2, 74 FR at 36834, n. 18 and accompanying text. 21 See MSRB, Real-Time Transaction Reporting, Statistical Patterns in the Municipal Market, Monthly Summaries 2009 (available at http://www.msrb.org/msrb1/TRSweb/MarketStats/statistical_patterns_in_the_muni.htm ). As noted in the Proposing Release, in 2008, almost $5.5 trillion of long and short term municipal securities were traded in 2008 in nearly 11 million transactions. See Proposing Release, supra note 2, 74 FR at 36834, n. 19 and accompanying text. 22 See, e.g., Report on Transactions in Municipal Securities prepared by Office of Economic Analysis and Office of Municipal Securities, the Division of Market Regulation, Commission, (July 1, 2004) (available at http://www.sec.gov/news/studies/munireport2004.pdf ). In addition, municipal bonds can and do default. In fact, at least 917 municipal bond issues went into monetary default during the 1990s, with a defaulted principal amount of over $9.8 billion. 23 Bonds for healthcare, multifamily housing, and industrial development, together with land-backed debt, accounted for more than 80% of defaulted dollar amounts. 24 In 2007, a total of $226 million in municipal bonds defaulted (including both monetary and covenant defaults). 25 In 2008, 140 issuers defaulted on $7.6 billion in municipal bonds. 26 There are reports that approximately $5 billion in municipal bonds are in default today. 27 23 See Standard and Poor's, A Complete Look at Monetary Defaults in the 1990s (June, 2000) (available at http://www.kennyweb.com/kwnext/mip/paydefault.pdf ) (“Standard and Poor's Report”). See also Moody's Investors Service, The U.S. Municipal Bond Rating Scale: Mapping to the Global Rating Scale And Assigning Global Scale Ratings to Municipal Obligations (March, 2008) (available at http://www.moodys.com/cust/content/content.ashx?source=StaticContent/Free%20pages/Credit%20Policy%20Research/documents/current/102249_RM.pdf ) (regarding municipal defaults of Moody's rated municipal securities). 24 See Standard and Poor's Report, supra note 23. See also Proposing Release, supra note 2, 74 FR at 36834. 25 See Joe Mysak, Subprime Finds New Victim as Muni Defaults Triple, Bloomberg News, May 30, 2008. 26 See Joe Mysak, Municipal Defaults Don't Reflect Tough Times: Chart of Day, Bloomberg News, May 28, 2009 (also noting that since 1999, issuers have defaulted on $24.13 billion in municipal bonds). 27 See, e.g., Mary Williams Walsh, State Debt Woes Grow Too Big to Camouflage, The New York Times, March 30, 2010. The Commission's experience with the operation of the Rule over the past 20 years, changes in the municipal market since the adoption of the 1994 Amendments, and recent market events have suggested the need for the Commission to reconsider certain aspects of the Rule. In particular, the Commission proposed amendments to the Rule's exemption for primary offerings of municipal securities in authorized denominations of $100,000 or more which, at the option of the holder thereof, may be tendered to the issuer or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by the issuer or its designated agent (“demand securities”). 28 28 17 CFR 240.15c2-12(d)(1)(iii). As the Commission discussed in the Proposing Release, at the time the Rule was adopted in 1989, demand securities were relatively new to the municipal market. 29 Approximately $13 billion of variable rate demand obligations (“VRDOs”) 30 were issued in 1989. 31 However, by 2009, it has been reported that approximately $32 billion of VRDOs were issued, 32 with trading in VRDOs representing approximately 34% of trading volume of all municipal securities. 33 Further, it has been reported that as of early 2009, the outstanding amount of VRDOs was estimated at approximately $400 billion. 34 During the fall of 2008, the VRDO market experienced significant volatility. 35 As the size, volatility, and complexity of the VRDO market and the number of investors have grown, so have the risks associated with less complete disclosure. Moreover, representatives of the primary purchasers of VRDOs—money market funds—have expressed concerns suggesting that the exemption in Rule 15c2-12 for these securities may no longer be justified. 36 These developments highlight the need for the Commission to improve the availability to investors of important information regarding demand securities. 29 See Proposing Release, supra note 2, 74 FR at 36834-5. 30 The Commission is not currently aware of any demand securities that were not issued as VRDOs. The MSRB describes VRDOs as “[ f]loating rate obligations that have a nominal long-term maturity but have a coupon rate that is reset periodically ( e.g., daily or weekly). The investor has the option to put the issue back to the trustee or tender agent at any time with specified ( e.g., seven days') notice. The put price is par plus accrued interest.” See http://www.msrb.org/MSRB1/glossary/view_def.asp?vID=4310. 31 See Two Decades of Bond Finance: 1989-2008, The Bond Buyer/Thomson Reuters 2009 Yearbook 4 (Matthew Kreps ed., Source Media, Inc.) (2009). 32 See Thomson Reuters, “A Decade of Municipal Bond Finance” (available at http://www.bondbuyer.com/marketstatistics/decade_1 ). 33 According to the MSRB, trading volume in VRDOs in 2009 was approximately $1.3 trillion. Total trading volume in 2009 for all municipal securities was approximately $3.8 trillion. See E-mail between Martha M. Haines, Assistant Director and Chief, Office of Municipal Securities, Division, Commission, and Marcelo Vieira, Director of Research, MSRB, January 26, 2010. As noted in the Proposing Release, in 2008, approximately $115 billion of VRDOs were issued, with trading in VRDOs representing approximately 38% of trading volume of all municipal securities. See Proposing Release, supra note 2, 74 FR at 36834, n. 27 and accompanying text. 34 See Andrew Ackerman, Regulation: MSRB Files Disclosure Proposals; Board Offers Four New Rules to SEC, The Bond Buyer, July 15, 2009. See also Proposing Release, supra note 2, 74 FR at 36834 and n. 27. 35 See Diya Gullapalli, Crisis On Wall Street: Muni Money-Fund Yields Surge—Departing Investors Send 7-Day Returns Over 5%, Wall Street Journal, September 27, 2008; Andrew Ackerman, Short-Term Market Dries Up: Illiquidity Leads to Lack of Bank LOCs, The Bond Buyer, October 7, 2008. (“The reluctance of financial firms to carry VRDOs is evident in the spike in the weekly [SIFMA] municipal swap index, which is based on VRDO yields and spiked from 1.79% on Sept. 10 to 7.96% during the last week of the month. It has since declined somewhat to 5.74%.”). See also Proposing Release, supra note 2, 74 FR at 36834, n. 33. 36 See, e.g., Letter from Karrie McMillan, General Counsel, Investment Company Institute (“ICI”), to Florence E. Harmon, Secretary, Commission (July 25, 2008) (available at http://www.sec.gov/comments/s7-13-08/s71308-44.pdf ); comments of participants in the 2001 SEC Municipal Market Roundtable—“Secondary Market Disclosure for the 21st Century,” (available at http://www.sec.gov/info/municipal/roundtables/thirdmuniround.htm ) (Leslie Richards-Yellen, Principal, The Vanguard Group: “ * * * what I'd like to see change the most is the inclusion of securities that have been carved out of Rule 15c2-12. I would like securities such as money market securities to be within the ambit of Rule 15c2-12. In addition, I'd like to see the eleven material events be expanded. The first eleven were very helpful. The ICI drafted a letter and we've added another twelve for the industry to think about and cogitate on * * *”, and Dianne McNabb, Managing Director, A.G. Edwards & Sons, Inc: “I think that in summary, we could use more specificity as far as what needs to be disclosed, the timeliness of that disclosure, such as the financial statements, more events, I think that we would agree that there are more events * * *”); and National Federation of Municipal Analysts, Recommended Best Practices in Disclosure for Variable Rate and Short-Term Securities, February, 2003 (recommendations for continuing disclosures of specified information) (available at http://www.nfma.org/publications/short_term_030207.pdf ); see Proposing Release, supra note 2, 74 FR at 36834, n. 15. See also ICI Letter at 5 (“We support the proposed amendment to improve VRDO disclosure * * *. Specifically, the availability of continuing disclosure information regarding VRDOs would greatly benefit investors by enhancing their ability to make and monitor their investment decisions and protect themselves from misrepresentations and questionable conduct in this segment of the municipal securities market.”), and Fidelity Letter at 2. Fidelity indicated in its letter that it assisted in the preparation of the ICI Letter and expressed support for all of the statements made in the ICI Letter. The Commission believes that investors and other municipal market participants today should be able to obtain continuing disclosure information regarding demand securities so that they can make more knowledgeable investment decisions and effectively manage and monitor their investments so as to reduce the likelihood of fraud facilitated by inadequate disclosure. Accordingly, the Commission is modifying the exemption in the Rule, as discussed below, for demand securities 37 by requiring Participating Underwriters to reasonably determine that the issuer of demand securities, or any obligated person, has undertaken in a written agreement to provide continuing disclosure documents to the MSRB. 37 See 17 CFR 240.15c2-12(d)(1)(iii). Specifically, the Commission is eliminating the exemption for primary offerings of demand securities contained in paragraph (d)(1)(iii) of the Rule and adding new paragraph (d)(5) to the Rule. Paragraph (d)(5) of the Rule, as revised, exempts primary offerings of demand securities from all of the provisions of the Rule except those relating to a Participating Underwriter's obligations pursuant to paragraph (b)(5) of the Rule and relating to recommendations by brokers, dealers, and municipal securities dealers pursuant to paragraph (c) of the Rule. As discussed in Section III.A. below, the Commission is adopting a modified version of its initial proposal to cover demand securities issued on or after the amendments' compliance date. As a result of these changes, Participating Underwriters, in connection with a primary offering of demand securities, will need to reasonably determine that the issuer or obligated person has entered into a continuing disclosure agreement with respect to the submission of continuing disclosure documents to the MSRB. In addition, brokers, dealers, and municipal securities dealers recommending the purchase or sale of demand securities will need to have procedures in place that provide reasonable assurance that they would receive prompt notice of event notices and failure to file notices. See 17 CFR 240.15c2-12(c). As discussed in detail below, the Commission is adopting, substantially as proposed, the amendments to Rule 15c2-12. In sum, the Commission is modifying, substantially as proposed, the Rule's exemption for demand securities by deleting current paragraph (d)(1)(iii) and adding new paragraph (d)(5) to the Rule, thereby applying the continuing disclosure requirements of paragraphs (b)(5) and (c) of the Rule 38 to a primary offering of demand securities. The amendments also modify, as proposed, paragraph (b)(5)(i)(C) of the Rule, thereby requiring all Participating Underwriters to reasonably determine that the issuer or obligated person has undertaken in a continuing disclosure agreement to provide event notices to the MSRB in a timely manner not in excess of ten business days, rather than merely in “a timely manner.” 38 See supra notes 11 through 16 and accompanying text for a description of paragraph (b)(5) of the Rule. Paragraph (c) of the Rule requires a broker, dealer, or municipal securities dealer that recommends the purchase or sale of a municipal security to have procedures in place that provide reasonable assurance that it will receive prompt notification regarding any event notice and any failure to file notice related to the municipal security. See 17 CFR 240.15c2-12(c). In addition, the Commission is adopting, with a few revisions from the proposal in the Proposing Release, an amendment to paragraph (b)(5)(i)(C) of the Rule relating to adverse tax events. Under the amendment, as revised from the proposal in the Proposing Release, this event item includes “the issuance by the IRS of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the security or other material events affecting the tax status of the security.” The amendments also add, as proposed, the following events to paragraph (b)(5)(i)(C) of the Rule: (1) Tender offers; (2) bankruptcy, insolvency, receivership or similar event of the issuer or obligated person; (3) the consummation of a merger, consolidation, or acquisition involving an obligated person or the sale of all or substantially all of the assets of the obligated person, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (4) appointment of a successor or additional trustee, or the change of name of a trustee, if material. Finally, the amendments delete the general materiality condition from paragraph (b)(5)(i)(C) of the Rule. In connection with the deletion of the general materiality condition from paragraph (b)(5)(i)(C) of the Rule, the amendments also add a materiality condition to select events contained in paragraph (b)(5)(i)(C) of the Rule. For those events in paragraph (b)(5)(i)(C) of the Rule that do not contain a materiality condition, Participating Underwriters will now need to reasonably determine that an issuer or obligated person has undertaken in a written agreement to provide notice of such events in all circumstances. These events include: (1) Principal and interest payment delinquencies with respect to the securities being offered; (2) unscheduled draws on debt service reserves reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting financial difficulties; (4) substitution of credit or liquidity providers, or their failure to perform; (5) defeasances; and (6) rating changes. III. Discussion of Amendments and Comments Received A. Modification of the Exemption for Demand Securities As discussed in the Proposing Release, generally there are no continuing disclosure agreements for demand securities today because primary offerings of these securities are currently exempt from the Rule. 39 When the Rule was adopted in 1989, the Commission exempted demand securities from its coverage in response to concerns that the Rule “might unnecessarily hinder the operation of the market” 40 for VRDOs, or similar securities. Paragraphs (b)(1) through (b)(4) of the Rule require a Participating Underwriter to review an official statement that the issuer “deems final” before it may bid for, purchase, offer, or sell municipal securities in an offering, deliver preliminary and final official statements to any potential customer, on request, and contract with the issuer to receive an adequate number of the final official statements to fulfill its regulatory responsibilities. Although remarketings of VRDOs may be primary offerings, 41 the Commission did not impose the requirements of paragraphs (b)(1) through (b)(4) of the Rule on Participating Underwriters of each remarketing—which could occur as frequently as weekly, and sometimes even daily, for each outstanding demand security—in part because of the burden this could impose on Participating Underwriters to comply with the Rule's provisions. 42 The Commission, in the 1994 Amendments Adopting Release, did not specifically address the application of paragraph (b)(5) of the Rule, which currently requires Participating Underwriters to reasonably determine that an issuer of municipal securities or an obligated person 43 has undertaken in a continuing disclosure agreement to provide specified information to the MSRB, to remarketings of demand securities. 44 39 See Proposing Release, supra note 2, 74 FR at 36836. 40 See 1989 Adopting Release, supra note 8, 54 FR at 28808, n. 68. See also Proposing Release, supra note 2, 74 FR at 36836. 41 See Rule 15c2-12(f)(7) for the definition of “primary offering.” 17 CFR 240.15c2-12(f)(7). Making a determination concerning whether a particular remarketing of demand securities is a primary offering by the issuer of the securities requires an evaluation of relevant provisions of the governing documents, the relationship of the issuer to the other parties involved in the remarketing transaction, and other facts and circumstances pertaining to such remarketing, particularly with respect to the extent of issuer involvement. 42 See 1989 Adopting Release, supra note 8, 54 FR at 28808 and n. 68. See also Proposing Release, supra note 2, 74 FR at 36836. 43 The term “obligated person” means “any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person committed by contract or other arrangement to support payment of all, or part of the obligations of the municipal securities to be sold in the Offering (other than providers of municipal bond insurance, letters of credit, or other liquidity facilities).” See 17 CFR 240.15c2-12(f)(10). 44 See 1994 Amendments Adopting Release, supra note 8. As discussed above, the Commission today is modifying the Rule's exemption for demand securities because its experience with the operation of the Rule and market changes since the adoption of the 1994 Amendments have suggested a need to reconsider its scope. The increased issuance, trading volume, and outstanding dollar amount of VRDOs indicate that many more investors currently own such securities than when the Rule was adopted in 1989. 45 Further, despite the periodic ability to tender VRDOs to issuers for repurchase, some investors, such as mutual funds, appear to hold VRDOs for long periods of time and therefore have a need for continuing disclosure information about the issuer or obligated person. 46 45 As stated in the Proposing Release, the increased investment interest and activity in VRDOs during 2008 may be attributable, in part, to the turmoil in the market for auction rate securities (“ARS”) that began in February 2008. See Proposing Release, supra note 2, 74 FR at 36834 and 36835, n. 48. 46 See Proposing Release, supra note 2, 74 FR at 36835, n. 45. Accordingly, the Commission believes that developments since 1989 warrant narrowing the Rule's provision exempting demand securities from continuing disclosure obligations in order to improve the availability of information to investors. Indeed, representatives of money market funds, the primary purchasers of demand securities, have expressed difficulty or, on some occasions, the inability to obtain information that they believe is necessary to oversee their investments in demand securities. 47 By narrowing the exemption for demand securities, the Commission intends to improve the availability of continuing disclosures, not only to institutional investors, such as mutual funds, that acquire these securities for their portfolios, but also to individual investors who own, or who may be interested in owning, demand securities. The availability of information regarding demand securities, in turn, should help institutional and individual investors make more informed decisions with respect to investments in those securities and should reduce the likelihood that such investors will be subject to fraud facilitated by inadequate disclosure. The Commission believes that broader requirements for consistent and accurate disclosure of important information should enhance the efficiency of the relevant capital market segments by better allocating capital at appropriate prices. 47 See Proposing Release, supra note 2, 74 FR at 36836. Consequently, the Commission is deleting the exemption for demand securities 48 set forth in paragraph (d)(1)(iii) of the Rule and adding new paragraph (d)(5) to the Rule, thereby making the continuing disclosure provisions of paragraphs (b)(5) 49 and (c) 50 of the Rule apply to a primary offering 51 of demand securities. 52 This change applies to any primary offering of demand securities (including a remarketing that is a primary offering) occurring on or after the compliance date of the amendments. 53 However, as more fully discussed below, 54 the Commission is revising the amendment from that proposed to include a “limited grandfather provision” (as defined below) for remarketings of currently outstanding demand securities. 55 Specifically, the continuing disclosure provisions will not apply to remarketings of demand securities that are outstanding in the form of demand securities on the day preceding the compliance date of the amendments and that continuously have remained outstanding 56 in the form of demand securities. 48 See supra note 28 and accompanying text. 49 See supra note 14 and accompanying text. 50 See supra note 38 for a description of Rule 15c2-12(c). 51 See Rule 15c2-12(f)(7) for the definition of primary offering. 17 CFR 240.15c2-12(f)(7). 52 See supra note 41. 53 As noted in Section III.G., the compliance date of the amendments to the Rule adopted herein is December 1, 2010. 54 See infra notes 111 and 112 and accompanying text, as well as the paragraph following the accompanying text. 55 See infra note 112 and accompanying text for discussion of comments related to the limited grandfather provision. 56 “Outstanding” generally means bonds that have been issued but have not yet matured or been otherwise redeemed. See, e.g, MSRB Glossary of Municipal Security Terms at http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=o. Thus, as amended, paragraph (d)(2)(B)(5) of the Rule states that “[w]ith the exception of paragraphs (b)(1) through (b)(4), this section shall apply to a primary offering of municipal securities in authorized denominations of $100,000 or more if such securities may, at the option of the holder thereof, be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent; provided, however, that paragraphs (b)(5) and (c) shall not apply to such securities outstanding as of November 30, 2010 for so long as they continuously remain in authorized denominations of $100,000 or more and may, at the option of the holder thereof, be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent” (emphasis added to indicate revised language) (“limited grandfather provision”). 57 57 The Commission also is slightly modifying the text of paragraph (d)(2)(B)(5) of the Rule from the version in the Proposing Release to clarify that demand securities remain exempt from paragraphs (b)(1)-(4) of the Rule, consistent with the Commission's description and discussion of the amendment in the Proposing Release. In the Proposing Release, the Commission requested comment on whether it is appropriate to revise the Rule's exemption for demand securities. The Commission specifically requested comment regarding investors' and other municipal market participants' need for continuing disclosure information relating to demand securities and the extent to which the amendment would provide benefits to these individuals. The Commission also requested comment regarding the effect of the amendment on Participating Underwriters, issuers, obligated persons, and others. Commenters were generally supportive of applying the continuing disclosure provisions of paragraph (b)(5) of the Rule to demand securities, so that a Participating Underwriter of these securities will be required to reasonably determine that the issuer or obligated person has entered into a continuing disclosure agreement to submit continuing disclosure documents to the MSRB. 58 A number of commenters agreed that applying continuing disclosure obligations to demand securities is “critical” to assist investors in making informed investment decisions. 59 One commenter noted that the market for VRDOs was among the sectors most affected by the recent market turmoil and, consequently, there is good reason to increase the availability of information about these securities to investors. 60 Similarly, another commenter stated that, during the recent market downturn, investors in VRDOs were well served by those issuers or obligated persons who voluntarily provided continuing disclosure documents, despite the Rule's exemption. 61 58 See California Letter at 1, CHEFA Letter at 2, Connecticut Letter at 1, DAC Letter at 3, e-certus Letter I at 11, Fidelity Letter at 3, Folts Letter at 1, ICI Letter at 2, NFMA Letter at 1, RBDA Letter at 2, and SIFMA Letter at 2. Although the Commission is eliminating certain exemptions, demand securities will continue to be exempt from paragraphs (b)(1)-(4) of the Rule. In other words, a Participating Underwriter of a demand security will continue to be exempt from the obligation to review an official statement that the issuer “deems final” before it may bid for, purchase, offer, or sell municipal securities. Some commenters urged the Commission to eliminate the exemption for demand securities from these provisions. See Fidelity Letter at 3 and RBDA Letter at 2, and SIFMA Letter at 2. One commenter expressed concern that not requiring Participating Underwriters to comply with these provisions with regard to demand securities suggests that the information required in the continuing disclosure documents may not be material for investors at the initial issuance of the demand securities. See SIFMA Letter at 2. The Commission believes that it is important for investors to have adequate information in order to make informed investment decisions. The Commission also notes that many official statements are prepared for demand securities. See http://www.emma.msrb.org. 59 See ICI Letter at 5. See also SIFMA Letter at 2 and RBDA Letter at 2. 60 See RBDA Letter at 2. See also Fidelity Letter at 2. 61 See CHEFA Letter at 2. Further, two commenters noted that application of paragraph (b)(5) of the Rule to demand securities might not significantly increase the disclosure burdens for many issuers and obligated persons. 62 One commenter noted that, because many VRDO issuers are already subject to continuing disclosure undertakings for their fixed rate debt, extending these obligations to VRDOs would impose minimal additional burdens, while enhancing disclosure to a much broader segment of investors. 63 Two commenters also noted that, as issuers of VRDOs, they have for a number of years voluntarily entered into continuing disclosure undertakings for those securities. 64 62 See Connecticut Letter at 1 and NFMA Letter at 1. 63 See NFMA Letter at 1. 64 See California Letter at 1 and Connecticut Letter at 1. Two commenters, however, disputed the assessment that extending paragraph (b)(5) to demand securities would not significantly increase the disclosure burdens for issuers and obligated persons. 65 These commenters focused particularly on the impact the amendment would have on borrowers who access tax-exempt debt markets through demand securities that are fully backed by direct-pay letters of credit (“LOC-backed demand securities”). One of the commenters noted that many of these are non-governmental conduit borrowers 66 who have no previous undertakings to provide continuing disclosure information and, for such entities, complying with paragraph (b)(5) of the Rule would not merely be an extension of preexisting obligations but a new and significant burden. 67 Moreover, the two commenters opposing the proposed change stated that many obligated persons with respect to LOC-backed demand securities do not prepare annual filings, such as audited financial statements, in the ordinary course of their business. 68 They therefore believed that eliminating the exemption from paragraph (b)(5) would impose costs and burdens that could potentially force some conduit borrowers using LOC-backed demand securities to withdraw from the tax-exempt bond market. 69 65 See CRRC Letter at 3-5 and NABL Letter at A-10. 66 A “conduit borrower” is an obligated person for whose benefit a state, political subdivision, municipality, or governmental agency or authority may issue tax-exempt municipal bonds. The security for this type of issue is customarily the credit of the conduit borrower or pledged revenues from the project financed, rather than the credit of the issuer. See, e.g., definitions of “conduit financing,” “conduit borrower,” and “issuer” in Glossary of Municipal Securities Terms (Second Edition—January 2004) of the MSRB, available at http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=c . 67 See NABL Letter at A-2, n. 1. 68 See CRRC Letter at 5 and NABL Letter at A-2. 69 See CRRC Letter at 5 and NABL Letter at A-10. Two commenters also expressed concern that, in complying with the revised Rule, smaller and not-for-profit obligated persons could encounter similar costs and burdens. See NABL Letter at A-2 (noting that many small businesses and non-profit organizations utilize LOC-backed demand securities in accessing the tax-exempt debt markets) and SIFMA Letter at 2-3. See also Section VI.B.2(c). As the Commission stated in the Proposing Release, it does not anticipate a significant increase in disclosure burdens with respect to demand securities. 70 Those issuers with outstanding demand securities—including LOC-backed demand securities—will have the limited grandfather provision available to them, and thus likely will not be subject to an undertaking to provide continuing disclosures for those securities. The Commission acknowledges that, if issuers of demand obligations, or obligated persons, have not previously issued securities that were subject to the Rule ( i.e., municipal securities other than demand securities), they will be entering into a continuing disclosure agreement for the first time and thereby will incur some costs and burdens to provide continuing disclosure documents to the MSRB. 71 However, as the Commission noted in proposing these amendments, a number of issuers of VRDOs, and obligated persons, already have outstanding fixed rate municipal securities, and some of these securities likely are subject to continuing disclosure agreements under the Rule. 72 Because any existing continuing disclosure agreement obligates an issuer or an obligated person to provide annual filings, event notices, and failure to file notices with respect to these fixed rate securities, providing disclosures by such issuers or obligated persons with respect to VRDOs is not expected to be a significant additional burden. 73 As the Commission stated in proposing these amendments, 74 it believes that any additional burden on issuers and obligated persons 75 with respect to demand securities is, on balance, justified by the enhancements to investor protection that should result from the improved availability of information with respect to these securities as a result of the amendments. 76 As noted above, a number of commenters supported this view. 77 70 See Proposing Release, supra note 2, 74 FR at 36837. 71 Id. 72 See Proposing Release, supra note 2, 74 FR at 36837. 73 See infra Section V.D. for a discussion regarding burden on issuers and obligated persons that do not currently provide annual filings, event notices, or failure to file notices. 74 See Proposing Release, supra note 2, 74 FR at 36837. 75 The Commission estimates that the amendment to modify the exemption from the Rule for a primary offering of demand securities would increase the number of issuers with municipal securities offerings that are subject to the Rule annually by 20%. See infra Section V.D. 76 For discussion of the burdens associated with the modification of the Rule as it relates to demand securities, see supra Section V.D. 77 See, e.g., CHEFA Letter at 2, Connecticut Letter at 1, e-certus Letter I at 11, Folts Letter at 1, ICI Letter at 5, NFMA Letter at 1, RBDA Letter at 2, and SIFMA Letter at 2. Regarding the concern that any new disclosure burdens may induce some obligated persons to withdraw from the tax-exempt municipal market because they do not prepare annual filings in the ordinary course of their business, the Commission notes that, for purposes of the Rule, annual filings are required only to the extent provided in the final official statements. Specifically, annual filings are composed of: (1) Audited financial statements, when and if available; and (2) other financial and operating data of the type included in the official statement. Pursuant to the undertaking contemplated by the Rule, annual financial information must be submitted for “each obligated person for whom financial information or operating data is presented in the final official statement. * * * ” 78 Annual financial information is defined as “financial information or operating data * * * of the type included in the final official statement with respect to an obligated person. * * * ” 79 As the Commission previously stated, the definition of annual financial information specifies both the timing of the information—that is, once a year—and, by referring to the final official statement, the type of financial information and operating data that is to be provided. 80 If financial information or operating data concerning an obligated person is included in the final official statement, then annual financial information would consist of the same type of financial information or operating data. 81 78 17 CFR 240.15c2-12(b)(5)(i)(A). 79 17 CFR 240.15c2-12(f)(9). 80 See 1994 Amendments Adopting Release, supra note 8, 59 FR at 59598. 81 Id. See paragraph (f)(3) of the Rule for the definition of “final official statement.” 17 CFR 240.15c2-12(f)(3). Further, pursuant to paragraph (b)(5)(i)(B) of the Rule, audited financial statements need to be submitted, pursuant to the issuer's and obligated person's undertaking in a continuing disclosure agreement, only “when and if available.” 82 This limitation, which is consistent with the Commission's position in the 1994 Amendments Adopting Release, should mitigate some concerns of those obligated persons that do not prepare audited financial statements in the ordinary course of their business. 83 Further, although not all issuers or obligated persons, in the ordinary course of their business, prepare audited financial statements or other financial and operating information of the type included in annual filings, a number of issuers and obligated persons do. 84 82 17 CFR 240.15c2-12(b)(5)(i)(B). 83 As discussed in the 1994 Amendments Adopting Release, the 1994 Amendments “[do] not adopt the proposal to mandate audited financial statements on an annual basis with respect to each issuer and significant obligor. Instead, the amendments require annual financial information, which may be unaudited, and may, where appropriate and consistent with the presentation in the final official statement, be other than full financial statements. * * * However, if audited financial statements are prepared, then when and if available, such audited financial statements will be subject to the undertaking and must be submitted to the repositories. Thus * * * the undertaking must include audited financial statements only in those cases where they otherwise are prepared.” See 1994 Amendments Adopting Release, supra note 8, 59 FR at 59599. 84 See http://www.emma.msrb.org for audited financial statements or other financial and operating information submitted to EMMA. The Commission acknowledges that issuers or obligated persons of demand obligations that assemble financial and operating data for the first time in response to their undertakings in a continuing disclosure agreement may incur incremental costs beyond those costs incurred by those issuers or obligated persons that already assemble this information. Also, smaller issuers or obligated persons may have relatively greater burdens than larger issuers or obligated persons. However, the overall burdens for these demand securities issuers or obligated persons in preparing financial information are expected to be commensurate with those of issuers or obligated persons that already are preparing financial information as part of their continuing disclosure undertakings. 85 The Commission believes that the burdens that will be incurred in the aggregate by issuers or obligated persons, as a result of the amendments with respect to demand securities, may not be significant and, in any event, are justified by the benefits to investors of enhanced disclosure. 86 The Commission further believes that the operations of an issuer or obligated person generally entail the preparation and maintenance of at least some financial and operating data. 85 Further, issuers or obligated persons that assemble financial and operating data for the first time may face a greater burden than those issuers or obligated persons that already assemble this information. The amendments therefore initially may have a disparate impact on those issuers or obligated persons, including small entities, entering into a continuing disclosure agreement for the first time, as compared with those that already have outstanding continuing disclosure agreements. 86 See infra Section V.D. As discussed therein, some commenters believed that the amendment could force some small entities to withdraw from the tax-exempt market because: (1) Disclosure of small issuers' or obligated persons' financial information would provide their large, national competitors with information about these small issuers or obligated persons, which they believed could result in a competitive disadvantage to them; and (2) small issuers or obligated persons would have to prepare costly audited financial statements. See, e.g., CRRC Letter at 3-4 and WCRRC Letter at 1. As discussed above, the undertakings contemplated by the amendments (and Rule 15c2-12 in general) require annual financial information only to the extent provided in the final official statement, and audited financial statements only when and if available. The Commission also stated in the Proposing Release, and reiterates herein, its belief that the application of paragraph (b)(5) to demand securities will not significantly burden Participating Underwriters in connection with the initial issuance and remarketing of demand securities. Any primary offering, including a remarketing of demand securities that is a primary offering (other than those subject to the limited grandfather provision), that occurs on or after the compliance date of the Rule will require a Participating Underwriter (including a Participating Underwriter serving as a remarketing agent) 87 to make a determination that an issuer or an obligated person has entered into a continuing disclosure agreement. Subsequent determinations for remarketings of the same issue of demand securities should not be burdensome because, once the Participating Underwriter has made such a determination for a particular issue of demand securities, at the time of a subsequent remarketing, the Participating Underwriter will be aware of the existence of the continuing disclosure agreement. Furthermore, remarketing agents that did not previously participate in an offering of such securities could confirm that an issuer or an obligated person has entered into an undertaking by obtaining an official statement from the issuer, the MSRB, 88 or from a variety of vendors. Such an official statement by definition must include a description of the issuer's undertakings. 89 In addition, a remarketing agent could obtain a copy of the actual continuing disclosure agreement from the issuer or obligated person at the time that it enters into a contract to act as a remarketing agent. 90 87 A remarketing agent is a broker-dealer responsible for reselling to new investors securities (such as VRDOs) that have been tendered for purchase by their owner. The remarketing agent also typically is responsible for resetting the interest rate for a variable rate issue and also may act as tender agent. See Proposing Release, supra note 2, 74 FR at 36836, n. 53. Further, a remarketing agent often serves as the Participating Underwriter in the initial issuance of the demand security. 88 The MSRB makes official statements for public offerings of municipal securities available on the Internet through its EMMA system for free. See Securities Exchange Act Release No. 59061 (December 5, 2008), 73 FR 75778 (December 12, 2008) (File No. SR-MSRB-2008-05) (order approving the MSRB's proposed rule change to make permanent a pilot program for an Internet-based public access portal for the consolidated availability of primary offering information about municipal securities). See also supra note 5 and MSRB Rule G-32. 89 17 CFR 240.15c2-12(f)(3). 90 One commenter believed the elimination of the exemption for LOC-backed demand securities would substantially increase a Participating Underwriter's burden in offering and remarketing these securities because the Participating Underwriter must: (1) Determine whether information concerning the obligated person is material and (2) if material, review the offering document to assure that it includes financial or operating data about the obligated person. In addition, this commenter stated that a Participating Underwriter would be required by the antifraud provisions of the Securities Act of 1933 and the Exchange Act to reasonably investigate key representations about the obligated person in the offering document before passing the securities along to investors and periodically repeat its “due diligence” of the obligated person before acting as a remarketing agent for primary offerings of such demand securities. See NABL Letter at A-11. However, such obligations of a Participating Underwriter already exist under the antifraud provisions of the federal securities laws. Some commenters argued that the amendment is too broad. 91 Specifically, these commenters stated that the amendment should not apply to conduit borrowers of LOC-backed demand securities, but rather to the letter of credit providers. 92 They stated that, for these securities, a bond trustee draws on the letters of credit issued by banks or financial institutions, rather than the underlying borrowers, for all payments of interest and principal, and to repurchase the securities if and when they are tendered. 93 Consequently, information in disclosure documents for some LOC-backed demand securities relates to the entities issuing the letters of credit, and not the conduit borrowers. 94 These commenters argued that, if the Commission applies paragraph (b)(5) of the Rule to LOC-backed demand securities, 95 the obligation to provide continuing disclosures should be imposed on the banks and financial institutions that provide credit enhancements, and not on the conduit borrowers. 96 91 See CRRC Letter at 2, NABL Letter at 2, and WCRRC Letter at 1 (endorsing CRRC Letter in its entirety). One of these commenters maintained that the Commission should not adopt the amendment relating to demand securities without Congressional authority. The commenter stated that the Commission does not have the “statutory authority to regulate the content of prospectuses used to offer exempt securities, except possibly under the authority of the antifraud provisions of the federal securities laws.” See NABL Letter at A-7. The Commission notes that the amendments do not address the contents of prospectuses used to offer exempt securities and, instead, are being adopted, among other things, pursuant to its authority under Section 15(c)(2)(D) of the Exchange Act, 15 U.S.C. 78 o (c)(2)(D), which grants the Commission authority to define, and to prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive or manipulative. 92 See CRRC Letter at 2 and NABL Letter at 2. Separately, another commenter remarked about the responsibilities of an issuer with respect to the underlying obligor of a demand security. The commenter stated that, “if it is the SEC's intention to have issuers disclose information either in the official statement or on a continuing basis regarding the underlying obligor,” issuers would be significantly burdened because they do not have such information first-hand. See GFOA Letter at 2. The Commission notes that its rulemaking does not amend provisions of Rule 15c2-12 relating to official statements. The Commission notes that, as with other conduit borrowings, issuers may require an obligated person of demand obligations to execute a continuing disclosure agreement as a condition of issuance, such that the underlying obligor bears the responsibility of providing continuing disclosures to the MSRB. 93 Id. See also NABL Letter at A-1. 94 See CRRC Letter at 2 and NABL Letter at A-2 and A-6. 95 See CRRC Letter at 2-3 and NABL Letter at 1-2. 96 See CRRC Letter at 3. As noted in the Proposing Release, the Commission believes that information regarding conduit borrowers is material to investors in credit enhanced offerings and therefore should be included in the official statements. 97 As the Commission has stated before in the context of municipal securities offerings as well as other types of securities offerings, the existence of credit enhancement is not a substitute for information about the underlying obligor or other obligated entity. 98 For example, Regulation AB, relating to disclosures in offerings of asset-backed securities, requires disclosure about the underlying pool of assets in addition to disclosures about credit enhancement and credit enhancement providers. 99 Furthermore, for VRDOs, as well as fixed rate securities, many governmental issuers and conduit borrowers routinely provide full disclosure about themselves in official statements, suggesting that they consider this information to be useful to investors. 100 The Commission also notes that it is possible for the issuers of credit enhancements, including letters of credit providers, to default on their obligations 101 or to have their ratings downgraded. 102 The possibility of such occurrences supports the likelihood that investors would consider information concerning the underlying obligor important to making investment decisions. 97 See Proposing Release, supra note 2, 74 FR at 36844, n. 113, citing 1989 Adopting Release, supra note 8, 54 FR at 28812. 98 See 1989 Adopting Release, supra note 8, 54 FR at 28812 (“The presence of credit enhancements generally would not be a substitute for material disclosure concerning the primary obligor on municipal bonds.”) 99 17 CFR 229.1100-1123. 100 For example, governmental obligors, non-profit health care facilities, colleges, and universities routinely provide disclosures about themselves in official statements. See, e.g., Connecticut Letter at 1; Official Statement dated November 4, 2009 for VRDOs issued by the Arizona Health Facilities Authority for the benefit of Catholic Healthcare West (available at http://emma.msrb.org/EP346945-EP47480-EP669523.pdf ); Official Statement dated August 22, 2008 for VRDOs issued by the Health and Educational Authority of the State of Missouri for the benefit of Saint Louis University (available at http://emma.msrb.org/OSPreview/OSPreview.aspx?documentId=MS271933&transactionId=MS274477 ); Official Statement dated October 12, 1994 for VRDOs of the City of Akron Ohio for its Sanitary Sewer System (available at http://emma.msrb.org/OSPreview/OSPreview.aspx?documentId=MS80311&transactionId=MS105003 ); and Official Statement dated April 15, 2005 for VRDOs of the Redevelopment Agency of the City and County of San Francisco Community Facilities District No. 7 for Hunters Point Shipyard Phase One Improvements (available at http://emma.msrb.org/MS233193-MS208501-MD405363.pdf ). 101 Since 1995, the Federal Deposit Insurance Corporation (“FDIC”) has taken the position that it may not honor unsecured letters of credit issued by financial institutions that are placed in FDIC receivership. See FDIC Statement of Policy regarding Treatment of Collateralized Letters of Credit after Appointment of the FDIC as Conservator or Receiver, 60 FR 27976, May 26, 1995, effective May 19, 1995. 102 See Proposing Release, supra note 2, 74 FR at 36839. In addition to the ratings downgrades of almost all issuers of municipal bond insurance over the past two years, the ratings of many issuers of letters of credit on municipal bonds were downgraded by one or more credit rating agencies. See, e.g., Jack Herman, S&P Downgrades Ratings or Revises Outlooks on 22 Banks, The Bond Buyer, June 19, 2009 (“Standard & Poor's Wednesday downgraded its ratings or revised its outlooks on 22 U.S. banks—more than half of which have provided letters of credit on municipal securities—to reflect the ongoing change in the banking industry.”); Dan Seymour, 1st-Half Credit Enhancers See a Topsy-Turvy World, The Bond Buyer, July 16, 2009. With respect to demand securities, one commenter stated that the Rule should not be amended to apply continuing disclosure requirements to demand securities, because owners of demand securities can choose to terminate their investment by exercising the option to put such securities for repurchase at face value or more, at least as frequently as every nine months. 103 The commenter argued that these investors can therefore sufficiently protect their investments. 104 Further, the commenter noted that when investors need financial and operating data to evaluate their investments, they are able to get such information from conduit borrowers, who typically provide the information voluntarily in order to support pricing and remarketing. 105 The commenter also questioned the need for the amendment when investors, as a condition to purchasing or maintaining an investment in demand securities, are free to demand undertakings to provide notices of certain events. 106 103 See NABL Letter at A-4—A-6. 104 Id. 105 See NABL Letter at A-8. 106 See NABL Letter at A-8 and A-9. The Commission does not believe that an investor's ability to tender a demand security for repurchase obviates the need for continuing disclosures. While a holder of demand obligations, such as VRDOs, may tender these securities for repurchase at par value, 107 when the investor is unable to obtain necessary information to make an informed decision as to whether to continue to hold demand securities, the investor may have no other option but to tender. However, the Commission does not believe that such outcome is in the interest of the investing public or the municipal securities market. Without adequate information about the issuer or obligated person, including annual financial information and audited annual financial statements, it would be difficult for an investor to evaluate whether to buy, hold, sell, or put the security. Moreover, most holders of VRDOs are money market funds 108 subject to the requirements of Rule 2a-7 under Investment Company Act of 1940 (“Investment Company Act”), 109 with an obligation to monitor the securities in their funds. 110 The availability of continuing disclosure information should facilitate the fulfillment of these obligations. The Commission also notes that one commenter, whose membership includes many money market funds, stated that “the availability of continuing disclosure information regarding VRDOs would greatly benefit investors by enhancing their ability to make and monitor their investment decisions and protect themselves from misrepresentations and questionable conduct in this segment of the municipal securities market.” 111 107 See 17 CFR 240.15c2-12(d)(1)(iii). 108 See, e.g., Standard & Poor's, Variable Rate Demand Obligations—A Primer: A Short Guide to Variable Rate Demand Obligations and the S&P National AMT-Free Municipal VRDO Index, November 1, 2009 (available at http://www2.standardandpoors.com/spf/pdf/index/VRDO_Primer.pdf ). 109 17 CFR 270.2a-7. 110 17 CFR 270.2a-7(c)(3)(iv). 111 See ICI Letter at 6. See also Fidelity Letter at 2. Some commenters sought clarification with respect to the proposed amendment relating to demand securities. Specifically, some commenters asked the Commission to clarify the meaning of “primary offering” with respect demand securities 112 and asked for guidance to distinguish remarketings that are primary offerings requiring continuing disclosure agreements from those that are not primary offerings. 113 These comments appear to be based upon the concern that the amendments could require a broker, dealer, or municipal securities dealer to obtain continuing disclosure documents for demand securities that were issued prior to the compliance date of the amendments. 112 See Kutak Letter at 2, NABL Letter at 4-5 and A-11, and SIFMA Letter at 2. 113 Id. The Commission acknowledges that, although there may be beneficial effects from subjecting outstanding demand obligations to paragraphs (b)(5) and (c) of the Rule, regardless of their date of initial issuance, doing so may be unduly burdensome and costly for certain market participants. For example, if all outstanding issuances of demand securities, such as VRDOs which generally are long-term securities, 114 became subject to paragraph (b)(5)(i)(C) of the Rule, it would be necessary for a Participating Underwriter, in the first remarketing of each issue of demand securities following the compliance date of the amendments, to reasonably determine that an issuer or obligated person has executed a continuing disclosure agreement. For such an agreement to be consistent with the Rule, a Participating Underwriter must reasonably determine that the issuer or obligated person has agreed to provide “[a]nnual financial information for each obligated person for whom financial information or operating data is presented in the final official statement, or, for each obligated person meeting the objective criteria specified in the undertaking and used to select the obligated persons for whom financial information or operating data is presented in the final official statement.” 115 However, for outstanding issues of demand securities, referring back to information included in the final official statement may be problematic because that document may be many years old. Without the limited grandfather provision, issuers and obligated persons would be required under continuing disclosure agreements to update annual financial information that may no longer be prepared or available. In addition, application of the amendments to remarketings of demand securities occurring on or after the compliance date could necessitate a large number of issuers and obligated persons of demand securities to enter into continuing disclosure agreements in a very short time period, which could delay remarketings and temporarily negatively impact the market for demand securities. 114 See supra Section II. for statistics on the amount of outstanding VRDOs. 115 17 CFR 240.15c2-12(b)(5)(i)(A). The Commission has considered the potentially significant difficulties and costs associated with implementing the amendment with respect to outstanding demand securities and the potential negative implications this may have on the demand securities market and investors. 116 As a result, the Commission has revised its original proposal to include a limited grandfather provision so that paragraphs (b)(5) and (c) of the Rule are not applicable to demand obligations outstanding in the form of demand securities immediately prior to the compliance date of these amendments, and that have remained continuously outstanding in the form of demand securities. 117 The Commission believes that the adoption of the limited grandfather provision strikes an appropriate balance between the need to improve disclosure available to investors and the recognition that the practical effects of applying paragraphs (b)(5) and (c) of the Rule to outstanding issues of demand securities could unduly burden certain issuers and obligated persons and thus may adversely impact the market. Although the Commission recognizes that the amendment to demand securities now is narrower than what was originally proposed, the Commission does not believe that the change detracts from the benefits of greater information about new issuances of demand obligations that the amendment will foster. The Commission believes that the burdens of continuing disclosure obligations, noted above, with respect to these securities justify the benefits, and the grandfather provision is consistent with other amendments that have been applied on a prospective basis. 118 Further, the Commission notes that some issuers and obligated persons of demand securities also have issued fixed rate municipal securities, and thus are subject to existing continuing disclosure obligations. 116 See infra Section VI.B. for a detailed description of costs associated with implementing this change. 117 Two commenters also expressed confusion regarding the application of paragraph (b)(5)(i)(A) of the Rule to demand securities. Paragraph (b)(5)(i)(A) requires that continuing disclosure agreements include annual financial information for each obligated person for whom financial information or operating data is presented in the final official statement. These commenters specifically questioned how Participating Underwriters would comply with the requirement in the limited instances where no final official statement was or is produced with respect to a demand security or when the final official statement that is produced contains no information regarding the underlying obligor. See NABL Letter at 2-3 and A-9 and SIFMA Letter at 2. The Commission believes that demand securities are purchased primarily by tax-exempt money market funds and that money market funds typically require official statements. See, e.g., Kutak Letter at 2 (commenting that VRDOs are typically targeted to money market funds) and NABL Letter at A-1 (acknowledging that demand securities are an important part of the investment portfolio of most tax-exempt money market funds). 118 See also infra Section VI.B.4. In conclusion, the Commission continues to believe that any additional burden imposed on Participating Underwriters, issuers, obligated persons, the MSRB, or others as a result of the amendment to the Rule relating to demand securities is justified by the benefits to investors of enhanced disclosure with respect to this important and widely-held type of security. Eliminating the exemption for demand securities, subject to the limited grandfather provision regarding demand securities outstanding as of the day prior to the amendments' compliance date, will improve the availability of information about these securities and should reduce the likelihood that investors will be subject to fraud facilitated by inadequate disclosure. Further, access to more information will assist money market funds 119 in complying with their obligations under Rule 2a-7 of the Investment Company Act. 120 The Commission also believes that the amendment will assist a broker, dealer, or municipal securities dealer in fulfilling its responsibilities to its customers, 121 specifically by facilitating the disclosure of important facts and complying with suitability and other sales practice obligations. 122 119 See supra note 47. 120 17 CFR 270.2a-7. 121 For example, a broker, dealer, or municipal securities dealer with access to annual filings and event notices submitted to the MSRB will be able to use information disclosed in these filings and notices when deciding to recommend the purchase or sale of a particular demand security. See, e.g., MSRB Rule G-17. 122 See, e.g., the MSRB, Reminder of Customer Protection Obligations in Connection with Sales of Municipal Securities, Interpretative Notice of Rule G-17, dated May 30, 2007 (available at http://www.msrb.org/msrb1/rules/notg17.htm ). B. Time Frame for Submitting Event Notices Under a Continuing Disclosure Agreement The Commission is adopting the amendment to paragraph (b)(5)(i)(C) of the Rule 123 to require a Participating Underwriter to reasonably determine that the issuer or obligated person has agreed in its continuing disclosure agreement to submit event notices to the MSRB “in a timely manner not in excess of ten business days after the occurrence of the event,” rather than “in a timely manner” as the Rule currently provides. The Commission also is adopting a substantially similar revision to the limited undertaking in paragraph (d)(2)(ii)(B) of the Rule. 124 123 17 CFR 240.15c2-12(b)(5)(i)(C). 124 17 CFR 240.15c2-12(d)(2)(ii)(B). See supra note 16 for a description of Rule 15c2-12(d)(2). Eighteen commenters provided their views on the proposed ten business day time period for the submission of event notices pursuant to a continuing disclosure agreement. 125 The majority of commenters opposed the proposal. Some commenters opposed establishing any outside time frame, 126 while others specifically objected to the proposed ten business day time period, particularly in the context of certain events. 127 One commenter cited the 1994 Amendments Adopting Release, in which the Commission stated that, at that time, it had not established a specific time frame with respect to submission of event notices because of the wide variety of events and circumstances the issuer could face. 128 This commenter believed that this rationale “was sound logic in 1994, and that it should still apply in 2009.” 129 Another commenter stated that it disagreed “with the SEC that there is systemic abuse with material events not being filed in a timely manner” 130 and argued that the Commission “should not mandate a specific time frame for submissions.” 131 125 See Halgren Letter, Los Angeles Letter, Portland Letter, CRRC Letter, WCRRC Letter, NFMA Letter, CHEFA Letter, NAHEFFA Letter, SIFMA Letter, Connecticut Letter, Kutak Letter, ICI Letter, Fidelity Letter, California Letter, San Diego Letter, NABL Letter, GFOA Letter, and Metro Water Letter. See also 1994 Amendments Adopting Release, supra note 8, 59 FR at 59601. 126 See NABL Letter at 5-6, GFOA Letter at 2-3, and Metro Water Letter at 1-2. 127 See Halgren Letter, Los Angeles Letter, Portland Letter, CRRC Letter, WCRRC Letter, NFMA Letter, CHEFA Letter, NAHEFFA Letter, SIFMA Letter, Connecticut Letter, Kutak Letter, California Letter, and San Diego Letter. See also the discussion below in this section regarding commenters' concerns about becoming aware of and submitting notices for events such as rating changes and trustee changes. 128 See NABL Letter at 5-6. 129 Id. 130 See GFOA Letter at 2. 131 Id. Four commenters expressed support for the ten business day time frame. 132 Two of these commenters stated that the proposal “would replace the imprecise `timely manner' language in the current Rule.” 133 These commenters also noted that “the absence of a specific time period with respect to `timely' has resulted in event notices being submitted months after the events have occurred,” 134 which has been detrimental “to investors who need this information to make informed investment decisions about when, and which, municipal securities to buy and sell.” 135 Further, they emphasized that they “strongly support the establishment of a definitive timeframe by which event notices must be filed, and have repeatedly called for improvements to the timeliness of municipal securities disclosure.” 136 132 See NFMA Letter at 1-2, SIFMA Letter at 3, ICI Letter at 6-7, and Fidelity Letter at 2. Fidelity indicated in its letter that it assisted in the preparation of the ICI Letter II and expressed support for all of the statements made in the ICI Letter. See Fidelity Letter at 2. 133 See ICI Letter at 6 and Fidelity Letter at 2. 134 Id. 135 Id. 136 Id. These commenters noted that timely submission of event notices directly impacts the pricing of a municipal bond. They posited that “reducing the time between the event and the required notice better informs the market that an event occurred, which is essential to evaluating a bond's credit quality and pricing.” 137 They further noted that a definitive time frame provides more timely information to pricing evaluation services and relieves them of dependence on bondholders to disclose the required information to them. 138 These commenters asserted that “without the proper notification, bonds could be priced incorrectly until the disclosure had been made.” 139 137 Id. 138 Id. 139 Id. As discussed in detail below, the Commission has considered the commenters' views and suggestions on this issue and continues to believe that the benefits of enabling investors to receive promptly information about important events affecting the issuer justify the incremental costs imposed on issuers and obligated persons as a result of the amendments. It has come to the Commission's attention, 140 as supported by some commenters, 141 that some event notices currently are not submitted until months after the events have occurred. Market participants, on the other hand, have emphasized the importance of the prompt availability of such information. 142 140 See Proposing Release, supra note 2, 74 FR at 36837, n. 69. See, e.g., Elizabeth Carvlin, Trustee for Vigo County, Ind., Agency Taps Reserve Fund for Debt Service, The Bond Buyer, April 2, 2004, at 3 (reporting the filing of a material event notice regarding a draw on debt service reserve fund that occurred in February); Alison L. McConnell, Two More Deals Under Audit By TEB Office, The Bond Buyer, April 5, 2006 (event notice of tax audit filed nine months after audit was opened); Susanna Duff Barnett, IRS Answers Toxic Query; Post 1986 Radioactive Waste Debt Not Exempt, The Bond Buyer, November 2, 2004 (material event notice filed October 29, 2004 regarding IRS technical advice memorandum dated August 27, 2004 that bonds issued to finance certain radioactive solid waste facilities were taxable; related preliminary adverse determination letter was issued in January, 2002); and Michael Stanton, IRS: Utah Pool Bonds Taxable; Issuer Disputes Facts of Case, The Bond Buyer, December 8, 1997 (issuer's receipt of August, 1997 IRS technical advice memorandum concluding certain bonds were taxable was disclosed on December 5, 1997). See also Peter J. Schmitt, Estimating Municipal Securities Continuing Disclosure Compliance: A Litmus Test Approach (available at http://www.dpcdata.com/html/about-researchpapers.html). 141 See supra note 134 and accompanying text. 142 See Proposing Release, supra note 2, 74 FR 36838, n. 70. See, e.g., National Federation of Municipal Analysts, Recommended Best Practices in Disclosure for General Obligation and Tax-Supported Debt (December 2001) (“Any material event notices, including those required under SEC Rule 15c2-12, should be released as soon as practicable after the information becomes available.”) (available at http://www.nfma.org/disclosure.php ); Peter J. Schmitt, Letter to the Editor, To the Editor: MuniFilings.com: The Once and Future Edgar?, The Bond Buyer, October 9, 2007, Commentary, Vol. 362, No. 32732, at 36 (“[F]iling issues are the sole cause of lack of transparency and disclosure availability in the industry. These filing issues include * * * late filing. * * *”). The Commission believes that delays in providing notice of the events set forth in paragraph (b)(5)(i)(C) of the Rule undermine the effectiveness of the Rule. Delays can, among other things, deny investors important information that they need to make informed decisions regarding whether to buy, sell or hold municipal securities. As noted above, two commenters echoed this sentiment by noting the importance of having timely submission of event notices to maintain the transparency of a municipal security's credit quality and pricing. 143 The Commission anticipates that, in providing for a maximum time frame, the amendments should foster the availability of more current information about municipal securities, and thereby help promote greater transparency and further enhance investor confidence in the municipal securities market. Furthermore, more up-to-date information about municipal securities is likely to improve the transparency in the market, should increase the efficiency of markets in allocating capital at appropriate prices that reflect the creditworthiness of issuers, which benefits issuers and investors alike, and should reduce the likelihood that investors will be subject to fraud facilitated by inadequate disclosure. 143 See ICI Letter at 6 and Fidelity Letter at 2. The Commission further believes that more timely information will aid brokers, dealers, and municipal securities dealers in satisfying their obligation to have a reasonable basis to recommend the purchase or sale of municipal securities. The Commission notes that the amendment requires Participating Underwriters to reasonably determine that issuers and obligated persons have contractually agreed to submit event notices in timely manner no later than “ten business days after the occurrence of the event,” rather than simply in a “timely manner.” On the other hand, there will be a significant benefit to investors and municipal market participants, because they will have a greater assurance that information about municipal securities will be available within a specific time frame of an event's occurrence. Indeed, while issuers and obligated persons under continuing disclosure agreements entered into prior to the compliance date of these amendments would have committed to submit event notices in a timely manner, this amendment will help to make the timing of such submissions more certain in the case of issuers and obligated persons that enter into continuing disclosure agreements on or after the compliance date of these amendments. 144 144 The Commission notes that the ten business day time frame will not apply to continuing disclosure agreements entered into with respect to primary offerings that occurred prior to the compliance date of these amendments or to remarketings of demand securities that qualify for the limited grandfather provision. See infra Section III.G. One commenter suggested that the Commission leave the current “timely” language in the Rule but provide examples of instances that it considers to be “timely.” 145 The Commission believes that the suggestion solely to provide guidance would not effectively accomplish the Commission's goal of improving the timeliness of submissions. Moreover, as the Commission noted in the Proposing Release, there have been significant delays in the submission of event notices. 146 As expressed by two commenters, “the absence of a specific time period” with respect to what constitutes timely submission of event notices has been a contributing factor to delays in submitting notices. 147 While one commenter cautioned the Commission against “trying to create a uniform standard for various events that are very different from each other,” 148 it is the Commission's view that providing a specified time frame will provide clarity regarding the standard to be included in continuing disclosure agreements for timely submission of event notices in all circumstances. In some cases, however, particularly when issuers or obligated persons know about events well in advance, investors may view timely disclosure as occurring within a day or a few days of the event. 145 See NABL Letter at 6. 146 See supra note 140. 147 See ICI Letter at 6 and Fidelity Letter at 3. 148 See GFOA Letter at 2. Although a number of commenters did not oppose a specified time frame for submission of event notices, they also did not support the ten business day proposal. Some of their concerns were: (i) The impracticability of meeting the time frame because of limited staff and resources, especially for smaller issuers; 149 (ii) the increased burdens and costs in connection with the additional monitoring and compliance necessary to submit notices within ten business days; 150 (iii) the difficulty in reporting events within ten business days when the issuer does not control the information ( e.g., rating changes, changes to the trustee, and changes to the tax status of bonds as a result of an IRS audit); 151 and (iv) the use of the “occurrence of the event” as the trigger for the obligation to submit a notice. 152 149 See CRRC Letter, WCRRC Letter, Portland Letter at 2, NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2, and NABL Letter at 5-6. 150 See Halgren Letter, Los Angeles Letter at 1, CRRC Letter, WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, and NABL Letter at 5-6. 151 See Connecticut Letter at 1-2, California Letter at 1-2, San Diego Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA Letter at 2, Kutak Letter at 2, and GFOA Letter at 2-3. 152 See California Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA Letter at 2, San Diego Letter at 1-2, GFOA Letter at 3, Kutak Letter at 2, and NABL Letter at 5-6. Many of these commenters focused their comments on their concerns about the difficulties associated with providing notice of specified events, particularly rating changes and trustee changes, within ten business days of their occurrence. 153 These commenters noted that rating changes and trustee changes are not within the issuer's control and that, with respect to rating changes, rating organizations do not directly notify issuers of rating changes. 154 As a result, these commenters believed that it would be difficult for most issuers to submit an event notice for a rating change within ten business days of its occurrence without incurring substantial costs associated with monitoring for rating changes. 153 See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA Letter at 2-4, San Diego Letter at 1-2, CHEFA Letter at 2, Kutak Letter at 2, California Letter at 1-2, NABL Letter at 8, and GFOA Letter at 3-4. 154 Id. Some commenters, who expressed concern about the ability of an issuer to learn of the event and then submit an event notice within the ten business day time frame, proposed alternative time periods ranging from 30 to 45 days from the event's occurrence. 155 Others, however, recommended that the Commission reduce the time frame. 156 Two of these commenters advocated a time frame of five business days from the occurrence of the event, which they noted is the amount of time permitted for submitting similar notices in the taxable debt market. 157 Another commenter recommended a time frame of four business days from the occurrence of the event.” 158 155 See Halgren Letter, Portland Letter at 2, NAHEFFA Letter at 4, and CHEFA Letter at 2. 156 See ICI Letter at 7, Fidelity Letter at 2, and e-certus Letter at 8. 157 See ICI Letter at 7 and Fidelity Letter at 3. 158 See e-certus Letter I at 8. Several commenters who opposed the ten business day time frame suggested a number of modifications. Some of these commenters proposed changing the trigger for submission of an event notice from the occurrence of the event to the issuer's actual knowledge of the event. 159 A number of commenters recommended removing “rating changes” from the list of disclosure events and requiring rating organizations to submit their rating changes directly to the MSRB's EMMA system. 160 Finally, one commenter suggested that, instead of specifying a time period, the Commission should modify the Rule to: (1) State that “issuers should disclose material events in a timely manner which in the normal course of business would be 10 business days;” (2) allow the ten business days to run from the time the issuer learned of the event, or 30 calendar days from the event itself; and (3) ensure that in the instances where issuers do not have control of the information ( e.g., a rating change due to the rating change of the credit enhancer), the issuer should not be responsible for submitting the information. 161 159 See Kutak Letter at 2, California Letter at 1-2, San Diego Letter at 1-2, and CHEFA Letter at 2. 160 See Halgren Letter, Portland Letter at 2, Los Angeles Letter at 1-2, California Letter at 3, CHEFA Letter at 2, GFOA Letter at 3-4, and NABL Letter at 8. 161 See GFOA Letter at 3. The Commission has considered commenters' concerns about the potential costs and burdens associated with the ten business day time period for submission of event notices. The Commission also has considered commenters' suggestion that the triggering event should be actual knowledge of the event rather than the event's occurrence. As the Commission noted in the Proposing Release, however, the events currently specified in paragraph (b)(5)(i)(C) of the Rule, and the additional event items included in the amendments, are significant and should become known to the issuer or obligated person expeditiously. 162 For example, events such as payment defaults, tender offers, and bankruptcy filings generally involve the issuer's or obligated person's participation. 163 Other events ( e.g., failure of a credit or liquidity provider to perform) are of such importance that an issuer or obligated person likely will become aware of such events, 164 or will expect an indenture trustee, paying agent, or other transaction participant to bring them to the issuer's or obligated person's attention, within a very short period of time. 165 Indeed, issuers and obligated persons could seek to obtain contractual agreements to be advised of the occurrence of such events by those persons or entities that may be expected to have direct knowledge of the occurrence. 162 See supra note 16 for a description of events currently contained in Rule 15c2-12(b)(5)(i)(C). See infra Section III.E. for a description of events added to the Rule by these amendments. 163 In addition, as the Commission noted in the Proposing Release, involvement of the issuer or obligated person is often required for substitution of credit or liquidity providers; modifications to rights of security holders; release, substitution, or sale of property securing repayment of the securities; and optional redemptions. See Proposing Release, supra note 2, 74 FR at 36838, n. 73. The Commission received no comments on this statement. See also Form Indenture and Commentary, National Association of Bond Lawyers, 2000. 164 For example, as the Commission noted in the Proposing Release, issuers or obligated persons should have direct knowledge of principal and interest payment delinquencies, determinations of taxability from the IRS, tender offers that they initiate, and bankruptcy petitions that they file. The Commission received no comments on this statement. 165 The Commission believes, as noted in the Proposing Release, that indenture trustees generally would be aware of principal and interest payment delinquencies; material non-payment related defaults; unscheduled draws on credit enhancements reflecting financial difficulties; the failure of credit or liquidity providers to perform; and adverse tax opinions. The Commission received no comments on this statement. The Commission notes that issuers and obligated persons may wish to consider negotiating a provision to include in indentures to which they are a party to require a trustee promptly to notify the issuer or obligated person in the event the trustee knows or has reason to believe that an event specified in paragraph (b)(5) of the Rule has or may have occurred. Consistent with the Commission's discussion in the Proposing Release, rating changes may affect the market price of the security, and thus bondholders and prospective investors should have access to this information. 166 While the Commission recognizes that an event such as a rating change is not directly within the issuer's control, Participating Underwriters today must reasonably determine that the issuer or obligated person has undertaken in a continuing disclosure agreement to provide notice of rating changes, if material. 167 While the Commission notes that the obligation to provide notice of rating changes is not new for those issuers that have issued municipal securities subject to a continuing disclosure agreement, the ten business day time frame may cause some issuers to monitor more actively for rating changes than they do today. The amendments revise the Rule to require the Participating Underwriter to reasonably determine that the continuing disclosure agreement provide for submission of event notices, including rating changes and trustee changes (if material), within ten business days after the event's occurrence. 166 See Proposing Release, supra note 2, 74 FR at 36840. 167 See infra Section IV., discussing the obligations of underwriters of municipal securities under the antifraud provisions of the federal securities laws. Several commenters raised concerns about meeting the ten business day time frame because of limited resources and staff, particularly with respect to smaller issuers, 168 and the increased burdens and costs associated with monitoring such events within the specified time frame. The Commission recognizes that some issuers, particularly smaller issuers, may require a greater effort initially to comply with their undertakings in continuing disclosure agreements that reflect the revised Rule. 169 The Commission notes that information about rating changes by organizations that rate municipal securities is readily accessible by issuers through the rating agencies' Internet Web sites. In addition, issuers may be able to subscribe to a service that provides them with prompt rating updates for their securities. For other events that may be outside of the issuer's control, such as a trustee change, issuers can contractually arrange to be notified of such an event immediately. 170 Accordingly, the Commission continues to expect that issuers and obligated persons generally will become aware of the Rule's disclosure events (or can make arrangements to ensure that they become aware) within ten business days after the event's occurrence and accordingly should be able to comply with their undertakings to submit event notices to the MSRB within the ten business day time frame. 171 168 See CRRC Letter, WCRRC Letter, Portland Letter at 2, NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2, and NABL Letter at 5-6. 169 The Commission recognizes that issuers that enter into continuing disclosure agreements for the first time, particularly smaller issuers, initially may need to become familiar with the steps necessary to ascertain whether there has been a rating change, and that there are burdens associated with this. 170 For example, under a trust indenture, the trustee may be obligated to notify an issuer before the trustee changes its name. See infra Section IV., discussing the obligations of underwriters of municipal securities under the antifraud provisions of the federal securities laws. 171 As noted in the Proposing Release, those issuers or obligated persons required by Section 13(a) or Section 15(d) of the Exchange Act to report certain events on Form 8-K (17 CFR 249.308) would already make such information public in a Form 8-K. See Proposing Release, supra note 2, 74 FR at 36838, n. 76. The Commission believes that such persons should be able to file material event notices, pursuant to the issuer's or obligated person's undertakings, within a short time after the Form 8-K filing. See 15 U.S.C. 78m and 78 o (d). The Commission received no comments on these statements. The Commission believes that, on balance, the ten business day time frame is appropriate. By specifying a ten business day time frame, the Commission intends to strike a balance between the need for event notices to be disseminated promptly and the need to allow adequate time for an issuer or obligated person to become aware of the event and to prepare and file the notice. The Commission believes that the ten business day time frame provides a reasonable amount of time for issuers to comply with their undertakings, while also allowing event notices to be made available to investors, underwriters, and other market participants in a timely manner. C. Materiality Determinations Regarding Event Notices 1. Deletion of the Materiality Condition Generally The Commission proposed to delete in certain instances the materiality condition found in paragraph (b)(5)(i)(C) of the Rule. Based on the Commission's experience with paragraph (b)(5)(i)(C), the Commission believes that notice of certain events currently listed therein need not be preceded by a materiality determination. These events include: (1) Principal and interest payment delinquencies with respect to the securities being offered; (2) unscheduled draws on debt service reserves reflecting financial difficulties; (3) unscheduled draws on credit enhancements reflecting financial difficulties; (4) substitution of credit or liquidity providers, or their failure to perform; (5) defeasances; and (6) rating changes. A number of commenters expressed support for deletion of the materiality condition. 172 Two of these commenters stated that “these disclosure events are of such high consequence and relevance to investors in informing their investment decisions that they should be disclosed as a matter of course.” 173 Another commenter noted that “these events should always be provided to investors because their occurrence is always important to investors and other market participants.” 174 One commenter stated that the proposal “to delete a materiality qualifier is not useful, but also would not unduly burden issuers or obligated persons except in three circumstances. 175 172 See NFMA Letter at 2, SIFMA Letter at 3, e-certus Letter at 8, ICI Letter at 7-8, and Fidelity Letter at 3. See also California Letter at 2 and San Diego Letter at 2 (each of these commenters support elimination of the materiality qualifier for each of the six events set forth in the Proposing Release except for the event relating to rating changes); see infra Section III.C.2.e. for a discussion of rating changes. 173 See ICI Letter at 7-8 and Fidelity Letter at 3. 174 See SIFMA Letter at 8. 175 See NABL Letter at 6-7. The three circumstances for which this commenter suggested retaining a materiality condition are: (i) Unscheduled draws of debt service reserves that reflect financial difficulties for LOC-backed demand securities; (ii) failed remarketings of LOC-backed demand securities; and (iii) defeasances. The Commission addresses each of these three circumstances later in this release. See infra Section III.C.2. Three commenters opposed the proposed change. 176 One commenter stated that the elimination of the materiality condition for all the events included in paragraph (b)(5)(i)(C) of the Rule would “increase issuers' administrative burden for monitoring the possible occurrence of these events.” 177 This commenter also believed that removal of the general materiality provision may result in the disclosure of non-material events. 178 Another commenter, while acknowledging the importance of these six events, argued that the materiality condition should be retained because “there is a risk that dividing event notices into two categories may introduce confusion where none now exists.” 179 Further, one commenter remarked that “establishing materiality is important in order to ensure that relevant information is passed to investors” and is “best made on a case by case basis, along with advice of counsel.” 180 176 See Metro Water Letter at 2, Connecticut Letter at 2, and GFOA Letter at 4. 177 See Metro Water Letter at 2. 178 Id. 179 See Connecticut Letter at 2. 180 See GFOA Letter at 4. The Commission believes that a materiality determination remains appropriate for specific events, as discussed below. 181 However, under the amendments, for each event that no longer is subject to a materiality condition, a Participating Underwriter must reasonably determine that the issuer or obligated person has agreed to submit a notice to the MSRB within ten business days of the event's occurrence, without regard to its materiality. The Commission believes that each of these events by its nature is of such importance to investors that it should always be disclosed. In particular, these events are likely to have a significant impact on the value of the underlying securities. Moreover, the Commission believes that notice of these events should reduce the likelihood that investors will be subject to fraud facilitated by inadequate disclosure. 182 181 The discussion in this section pertains to materiality determinations for events currently specified in paragraph (b)(5)(i)(C) of the Rule. For events to be added to the Rule by these amendments, the Commission discusses in Section III.E. below whether the materiality determination has been included for each such event. 182 The Commission applied the same rationale discussed in this paragraph to determine which of the new event items that are being added to the Rule by these amendments should contain a materiality condition. Further, the Commission continues to believe that the removal of the materiality condition for the aforementioned events is not expected to significantly increase the burden on issuers and obligated persons. Because of the significant nature of these events and their importance to investors in the marketplace, the Commission believes that issuers and obligated persons generally are already providing notice of most of these events pursuant to existing continuing disclosure agreements. It is the Commission's view that removing the materiality condition for these six disclosure events will help ensure that important information about significant events regarding municipal securities is promptly provided to investors and other market participants in all instances. The availability of this information to investors will enable them to make informed investment decisions and should reduce the likelihood that investors will be subject to fraud facilitated by inadequate disclosure. Furthermore, this information will assist brokers, dealers and municipal securities dealers in satisfying their obligation to have a reasonable basis to recommend municipal securities to investors. Deletion of the materiality condition also could simplify a determination by an issuer or obligated person with respect to whether a notice must be filed and facilitate their providing such notice promptly. Accordingly, the Commission is adopting the amendment as proposed. 2. Deletion of Materiality Condition for Specific Events As noted above, some commenters generally supported the proposed revision to the Rule eliminating the general materiality condition from all events, but expressed concerns regarding its elimination for specific events. The Commission discusses these comments below but, for the reasons discussed, is adopting the amendment, as proposed. a. Principal and Interest Payment Delinquencies One commenter suggested that, in light of the Commission's proposed amendment to delete the materiality condition from specified events, the definition of “principal and interest payment delinquency” should be clarified to take into account contractual grace periods and similar operational considerations, so that “minor operational variances” would not require event disclosure. 183 Other commenters opposed the deletion of the materiality condition from the principal and interest payment delinquency event because otherwise it may include reporting of certain delays in payment that are the result of circumstances outside of the issuer's control or are very limited in time ( e.g., technological glitches; a short-term disruption of the Federal Reserve Wire system; an error or lapse by the trustee or paying agent that is quickly corrected; or clerical error at the Depository Trust Company that is quickly corrected). 184 Two of these commenters noted that these circumstances may result in a “very short-term delay in crediting payments to bondholders” and that “in the past [they] would have treated such an event as not material.” 185 Further, these two commenters argued that requiring submission of notices in these circumstances “would create an unwarranted implication that the issuer has suffered financial adversity.” 186 183 See Kutak Letter at 3. 184 See California Letter at 2, San Diego Letter at 2, and GFOA Letter at 4. 185 See California Letter at 2 and San Diego Letter at 2. 186 Id. The Commission notes that a payment default often negatively affects the market value of a municipal security and may have adverse consequences for an investor who has an immediate need for such funds. The Commission therefore believes that notice of any payment default with respect to securities covered by the Rule, including those defaults that are quickly remedied or that result from a technological glitch or similar error, is important information for investors. The Commission notes that issuers and obligated persons may include the reason for a payment default in the event notice submitted to the MSRB. Delayed payment—even for a short period of time—may impact investors' investment decisions by inhibiting their ability to promptly reinvest such payment or by leaving them unsure whether to buy, hold, or sell municipal securities. Accordingly, the Commission believes that notice of principal and interest payment delinquencies on municipal securities should always be provided to aid investors in making investment decisions and help protect them from fraud, as well as to assist brokers, dealers, and municipal securities dealers in satisfying their obligation to have a reasonable basis to recommend a municipal security. b. Unscheduled Draws on Debt Service Reserves or Credit Enhancements Reflecting Financial Difficulties Unscheduled draws on debt service reserves and credit enhancements often adversely impact the market value of a municipal security and, in the Commission's view, should always be made available to investors and other market participants. 187 These events likely indicate that the financial condition of a municipal securities issuer or obligated person has deteriorated and that there is, potentially, an increased risk of a payment default or, in some cases, premature redemption. Bondholders and other market participants also would be concerned with the sufficiency of the amount of debt service and other reserves available to support an issuer or obligor through a period of temporary difficulty, as well as the present financial condition of the provider of any credit enhancement. 187 See Proposing Release, supra note 2, 74 FR at 36839. One commenter suggested that a materiality condition should be retained for unscheduled draws on debt-service reserves for LOC-backed demand securities. 188 This commenter argued that materiality is necessary in this limited instance because the proposed amendment “would require notice of unscheduled draws on debt service reserves that reflect financial difficulties of the obligated person, even when not material to an investment in the securities because they are traded on the strength of a bank letter of credit.” 189 188 See NABL Letter at 6-7. 189 Id. The Commission notes that notice is needed only when an unscheduled draw on debt-service reserves or credit enhancement indicates financial difficulties “with respect to the securities.” Thus, an issuer or obligor must consider, under the facts and circumstances of a particular municipal security and its relevant governing documents, whether or not such unscheduled draw reflects financial difficulties with respect to that security—a limitation that should help address some concerns about removal of the materiality condition. The same commenter also suggested retaining the “if material” condition for LOC-backed demand securities because the deletion of this condition, coupled with the modification to the exemption for demand securities, “would require notice of each failure to remarket securities when they are put, even though not material to an investor due to the existence of a letter of credit or other liquidity facility.” 190 190 Id. The Commission does not agree with this commenter's conclusion. One purpose of a letter of credit or other liquidity facility for demand securities is to provide liquidity in the event that a new investor is not found at the time the securities are tendered for repurchase. A draw in such a situation does not necessarily reflect financial difficulties “with respect to the securities” of the credit enhancement provider or the obligated person, but may reflect underlying market conditions, as evidenced by failed remarketings during 2008 and 2009. 191 In the event of a draw that does not reflect financial difficulties with respect to the securities, a notice would not be provided. A determination regarding the existence of financial difficulties must be made on a case-by-case basis, depending on the facts and circumstances surrounding such draws and failed remarketings. 191 See, e.g., Richard Williamson, HOUSING: HFAs Still Facing VR Debt Woes; No Relief Till 2011 Even With U.S. Aid, The Bond Buyer, October 7, 2009; Frank Sulzberger and Andrew Flynn, Lessons From Tough Times: Understanding VRDO Failures, The Bond Buyer, July 21, 2008 (“Until the recent credit crisis, few bonds had ever experienced a remarketing failure and when they did, liquidity providers were able to step in with little risk to their balance sheet. * * * In a normal market, the remarketing agent might step in and buy the tendered bonds, in order to prevent an actual draw on an LOC or credit facility. But this time around, the volume of the tenders and restrictions on their own liquidity made this choice difficult, if not impossible, for many remarketing agents.”) Finally, one commenter, who supported the deletion of the materiality condition, recommended deleting the phrase “reflecting financial difficulties” for events relating to unscheduled draws on debt-service reserves or credit enhancements. 192 This commenter suggested that, even with the removal of the materiality condition from these event items, the phrase “reflecting financial difficulties” may allow an issuer, in certain circumstances, to make a judgment regarding whether the occurrence of such an event would require disclosure. 193 192 See Fidelity Letter at 2. 193 See Fidelity Letter at 2. Although the Commission continues to believe that the disclosure of unscheduled draws is important to investors and other market participants, the Commission also recognizes that, in some circumstances, such draws are not the result of financial difficulties that would impact the creditworthiness of an issuer or obligated person, or the price of a municipal security. Accordingly, the Commission believes that the phrase “reflecting financial difficulties” should be retained in the Rule at this time. c. Substitution of Credit or Liquidity Providers, or Their Failure to Perform One commenter opposed eliminating the materiality condition from this event, in light of the proposed ten business day frame for submitting event notices to the MSRB. 194 This commenter acknowledged the importance of disclosing this information, but believed that as a result of the recent market turmoil, determining whether the occurrence of this event is material as a condition to providing notice remains important. 195 194 See GFOA Letter at 4. The commenter expressed concern about the removal of materiality condition in the context of the ten business day time frame. As the Commission noted earlier in this release, the events contained in paragraph (b)(5)(i)(C) of the Rule, which includes the substitution of credit or liquidity providers, or their failure to perform, are significant events that an issuer should become aware of within a very short period of time. See supra Section III.B. 195 See GFOA Letter at 4. The Commission believes that the identity of credit or liquidity providers and their ability to perform is important information for investors. 196 The Commission understands that credit ratings of municipal securities are typically based on the higher of the obligor's rating or the rating of the credit provider 197 and that, with occasional exceptions, credit enhancement is obtained from a credit provider with a higher rating than that of the obligor. When a credit enhancer such as a bond insurer is downgraded, the market value and the liquidity of the securities that it has enhanced generally decline. 198 Similarly, the identity and ability of a liquidity provider to perform typically is critical to investors. Investors in demand securities, for example, depend on liquidity providers to satisfy holders' right to tender their securities for repurchase in a timely manner. Furthermore, substitution of credit or liquidity providers requires direct involvement of an issuer or obligated person. 199 Thus, an issuer or obligated person would be aware of the impending occurrence of such an event and should be able to provide notice of the event within the ten business day time frame. As a result, the Commission believes that notice of substitution of credit or liquidity providers, or their failure to perform, should always be provided to aid investors in making investment decisions and protecting themselves from fraud and to assist brokers, dealers and municipal securities dealers in satisfying their obligation to have a reasonable basis to recommend municipal securities. 196 Two commenters recommended that the event notice pertaining to substitution of credit or liquidity providers or their failure to perform should be expanded to include any renewal, or modification, of any credit or liquidity facility or other agreements supporting or otherwise material to a municipal security. See ICI Letter at 8 and Fidelity Letter at 3. These commenters noted that changes to, or violations of, any of the credit or liquidity agreements pertaining to a municipal security can modify the security, thereby causing a mandatory tender event or impacting the prospects for its remarketing. In their view, these events can have significant implications for investors. The Commission, in this rulemaking, is taking a targeted approach at this time. The Commission will take these comments into account should it consider further improvements that could be made to the Rule. 197 See, e.g., Proposing Release, supra note 2, 74 FR at 36839, n. 80. 198 See, e.g., Proposing Release, supra note 2, 74 FR at 36839, n. 81. 199 See, e.g., Richard Williamson, Houston Metro Seeks LOC for Light Rail, The Bond Buyer, April 16, 2008; and Elizabeth Carvlin, Trends in the Region: Bond Contracts Stand at Center of Detroit Airport Dispute, The Bond Buyer, September 11, 2002. d. Defeasances One commenter expressly favored maintaining [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2010-13165. Public record. Not legal advice.