Municipal Securities Disclosure; Final Rule
Federal RegisterNov 17, 1994
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-34961; File No. S7-5-94]
RIN 3235-AG13
Municipal Securities Disclosure
AGENCY: Securities and Exchange Commission.
ACTION: Final Rule.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting amendments to Rule 15c2-12 under the
Securities Exchange Act of 1934 (``Exchange Act'') to deter fraud and
manipulation in the municipal securities market by prohibiting the
underwriting and subsequent recommendation of securities for which
adequate information is not available. The amendments prohibit a
broker, dealer, or municipal securities dealer (``Participating
Underwriter'') from purchasing or selling municipal securities unless
the Participating Underwriter has reasonably determined that an issuer
of municipal securities or an obligated person has undertaken in a
written agreement or contract for the benefit of holders of such
securities to provide certain annual financial information and event
notices to various information repositories; and prohibit a broker,
dealer, or municipal securities dealer from recommending the purchase
or sale of a municipal security unless it has procedures in place that
provide reasonable assurance that it will receive promptly any event
notices with respect to that security.
DATES: Effective Date: This rule is effective on July 3, 1995 except
for Sec. 240.15c2-12(c) which is effective on January 1, 1996.
Compliance Date: Sections 240.15c2-12(b)(5)(i)(A) and 240.15c2-
12(b)(5)(i)(B) shall not apply with respect to fiscal years ending
prior to January 1, 1996; and Secs. 240.15c2-12(d)(2)(ii) and 240.15c2-
12(d)(2)(iii) shall not apply to an Offering of municipal securities
commencing prior to January 1, 1996.
FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel,
Janet W. Russell-Hunter, Attorney, or Paula R. Jenson, Senior Counsel
(concerning the rule and release generally), (202) 942-0073, Office of
Chief Counsel, Division of Market Regulation, Mail Stop 7-10; Gautam S.
Gujral, Attorney (concerning information repositories) (202) 942-0175,
Office of Market Supervision, Division of Market Regulation, Mail Stop
5-1, and David A. Sirignano, Senior Legal Adviser to the Director (202)
942-2870, or Amy Meltzer Starr, Attorney (concerning annual financial
information, obligated persons, and material events generally), (202)
942-1875, Division of Corporation Finance, Mail Stop 7-6 Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Introduction and Summary
The Commission has long been concerned with disclosure in both the
primary and secondary markets for municipal securities.1 As part
of the Securities Acts Amendments of 1975, Congress established a
limited regulatory scheme for the municipal securities market. This
limited regulatory scheme included mandatory registration of municipal
securities brokers and dealers, and the creation of the Municipal
Securities Rulemaking Board (``MSRB''). In 1989, acting in response to
consistently slow dissemination of information in connection with
primary offerings of municipal securities, the Commission, pursuant to
its authority under Exchange Act Section 15(c)(2),2 adopted Rule
15c2-123 and an accompanying interpretation concerning the due
diligence obligations of underwriters of municipal securities.4 In
1993, the Commission's Division of Market Regulation conducted a
comprehensive review of many aspects of the municipal securities
market, including secondary market disclosure.5 Findings in the
September, 1993 Staff Report on the Municipal Securities Market
(``Staff Report'') regarding the growing participation of individual
investors, who may not be sophisticated in financial matters, as well
as the proliferation of complex derivative municipal securities,
underscored the need for improved disclosure practices in both the
primary and secondary municipal securities markets.6 Information
about the issuer and other obligated persons is as critical to the
secondary market,7 where little information about municipal
issuers and obligated persons is regularly disseminated, as it is in
primary offerings, where, as a general matter, good disclosure
practices exist. As one industry group testified, today ``secondary
market information is difficult to come by even for professional
municipal analysts, to say nothing of retail investors.''8
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\1\Both the Securities Act and the Exchange Act were enacted
with broad exemptions for municipal securities from all of their
provisions except the antifraud provisions of the Securities Act
Section 17(a) and Exchange Act Section 10(b). Municipal securities
received special exemptions not only based on considerations of
federal-state comity, but also due to the lack of perceived abuses,
at the time of enactment, in the municipal securities market as
compared with the corporate market. Furthermore, until recently, the
typical purchasers of municipal securities were institutional
investors with financial expertise.
\2\Section 15(c)(2) of the Exchange Act prohibits municipal
securities dealers from effecting any transaction in, or inducing or
attempting to induce the purchase or sale of, any municipal security
by means of a ``fraudulent, deceptive, or manipulative act or
practice,'' and authorizes the Commission, by rules and regulations,
to define and prescribe means reasonably designed to prevent such
acts and practices. Exchange Act Section 15(c)(2), 15 U.S.C.
78o(c)(2). Rule 15c2-12 also was adopted pursuant to the
Commission's authority under Exchange Act Section 2, 3, 10, 15, 15B,
and 23; 15 U.S.C. 78b, 78c, 78j, 78o, 78o-4, 78q, and 78w.
\3\17 CFR 240.15c2-12. Rule 15c2-12 was proposed for adoption in
1988, and adopted in 1989. See Securities Exchange Act Release No.
26100 (Sept. 22, 1988), 53 FR 37778 (``1988 Release''); Securities
Exchange Act Release No. 26985 (June 28, 1989), 54 FR 28799 (``1989
Release''). Rule 15c2-12 requires an underwriter of municipal
securities (1) to obtain and review an issuer's official statement
that, except for certain information, is ``deemed final'' by an
issuer prior to making a purchase, offer, or sale of municipal
securities; (2) in negotiated sales, to provide the issuer's most
recent preliminary official statement (if one exists) to potential
customers; (3) to deliver to customers, upon request, copies of the
final official statement for a specified period of time; and (4) to
contract to receive, within a specified time, sufficient copies of
the issuer's final official statement to comply with the rule's
delivery requirement, and the requirements of the rules of the MSRB.
\4\The 1989 Release also stated that issuers are primarily
responsible for the content of their disclosure documents, and may
be held primarily liable under the federal securities laws for
misleading disclosure. See 1989 Release at n. 84.
\5\Since September, 1993, other initiatives related to the
municipal securities market have been taken. On April 7, 1994, the
Commission approved changes to MSRB rule G-19 concerning suitability
of recommendations, and rule G-8 concerning recordkeeping.
Securities Exchange Act Release No. 33869 (April 7, 1994), 59 FR
17632. These changes are designed to ensure that dealers, before
making recommendations to customers, take appropriate steps to
determine that the transaction is suitable. Concurrently, the
Commission approved MSRB rule G-37 relating to the linkage between
political contributions and the municipal securities business.
Securities Exchange Act Release No. 33868 (April 7, 1994), 59 FR
17621. The rule seeks to end ``pay to play'' abuses in the municipal
securities market by prohibiting dealers from conducting certain
types of business with an issuer within two years after any
contribution by the dealer or certain affiliated persons of the
issuer who could influence the awarding of municipal securities
business. On June 20, 1994, the MSRB filed with the Commission a
proposal to amend MSRB rule G-14 concerning reports of sales or
purchases, and procedures for reporting inter-dealer transactions.
Securities Exchange Act Release No. 34458 (July 28, 1994), 59 FR
39803. The proposed rule change is a first step to increase
transparency in the municipal securities market by collecting and
disseminating information on interdealer transactions. On December
19, 1993, the Commission issued a release proposing for public
comment amendments to the rule regulating money market funds, Rule
2a-7 under the Investment Company Act of 1940. Investment Company
Act Release No. 19959 (Dec. 28, 1993), 58 FR 68585.
\6\By 1993, individual investors, including those holding
through mutual funds and money market funds, held approximately 76%
of municipal debt outstanding, as compared with 44% in 1983. The
Bond Buyer, ``Holders of Municipal Debt,'' (July 1, 1994) at 5.
\7\The municipal securities market is not the only market for
debt securities that suffers from information inefficiencies. For
that reason, the Commission also is exploring means to increase the
amount of information concerning issuers of corporate debt
securities. See Securities Exchange Act Release No. 34139 (June 7,
1994), 59 FR 29453.
\8\Statement of Gerald McBride, Chairman, Municipal Securities
Division, Public Securities Association, Before the House Committee
on Energy and Commerce, Telecommunications and Finance Subcommittee
(October 7, 1993) at 5.
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Notwithstanding voluntary industry initiatives to improve
disclosure, particularly primary market disclosure, the Staff Report
recommended that the Commission use its interpretive authority to
provide guidance regarding the disclosure obligations of municipal
securities participants under the antifraud provisions of the federal
securities laws, and that the Commission amend Rule 15c2-12 to prohibit
municipal securities dealers from recommending outstanding municipal
securities unless the issuer has committed to make available ongoing
information regarding its financial condition. In order to assist
issuers, brokers, dealers, and municipal securities dealers in meeting
their obligations under the antifraud provisions, in March, 1994, the
Commission published the Statement of the Commission Regarding
Disclosure Obligations of Municipal Securities Issuers and Others
(``Interpretive Release''),9 which outlined its views with respect
to the disclosure obligations of market participants under the
antifraud provisions of the federal securities laws in connection with
both primary and secondary market disclosure.
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\9\Securities Act Release No. 7049 (March 9, 1994), 59 FR 12748.
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Concurrent with the publication of the Interpretive Release, the
Commission published Securities Exchange Act Release No. 33742
(``Proposing Release''),10 which requested comment on amendments
to Rule 15c2-12 (``Proposed Amendments'') designed to enhance the
quality, timing, and dissemination of disclosure in the municipal
securities market by placing certain requirements on brokers, dealers,
and municipal securities dealers. In proposing the amendments, the
Commission intended to further deter fraud by preventing the
underwriting and recommendation of transactions in municipal securities
about which little or no current information exists. Brokers, dealers,
and municipal securities dealers serve as the link between the issuers
whose securities they sell and the investors to whom they recommend
securities. Investors, especially individual investors, place their
reliance on these securities professionals for their recommendations of
municipal securities.
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\1\0Securities Exchange Act Release No. 33742 (March 9, 1994),
59 FR 12759. Also on March 9, the Commission published Securities
Exchange Act Release No. 33743, which proposed the adoption of Rule
15c2-13. Proposed Rule 15c2-13 would have required brokers, dealers,
and municipal securities dealers to disclose mark-up information in
riskless principal transactions in municipal securities; and to
disclose when a particular municipal security is not rated by a
nationally recognized statistical rating organization (``NRSRO'').
Due to the recent development of proposals by the MSRB and market
participants to make pricing information available to investors, the
Commission has determined to defer the riskless principal mark-up
proposal for six months. In addition, the portion of proposed Rule
15c2-13 that would require disclosure if a municipal security is not
rated by an NRSRO has been deferred, and will be withdrawn if the
MSRB acts to adopt similar amendments to its confirmation rule, Rule
G-15. See Securities Exchange Act Release No. 34962 (November 10,
1994).
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The amendments to Rule 15c2-12 ensure that brokers, dealers, and
municipal securities dealers will review the secondary market
disclosure practices of issuers and other obligated persons at the time
of an offering of municipal securities.13 This scrutiny at the
time of initial issuance of municipal securities will result in the
dissemination of important information by issuers and other obligated
persons throughout the term of the municipal securities. As a result of
the amendments, brokers, dealers, and municipal securities dealers will
be better able to satisfy their obligation under the federal securities
laws to have a reasonable basis on which to recommend municipal
securities, as well as their obligations under the rules of the MSRB.
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\1\3Participating Underwriters generally maintain a market in an
issue of municipal securities in the period following an offering.
Failure by a Participating Underwriter to receive assurances with
respect to undertakings to provide secondary market disclosure will
increase the difficulty of its formulation of a reasonable basis on
which to recommend a municipal security during this period of
secondary market trading.
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The availability of secondary market disclosure to all municipal
securities market participants will enable investors to better protect
themselves from misrepresentation or other fraudulent activities by
brokers, dealers, and municipal securities dealers. A lack of
consistent secondary market disclosure impairs investors' ability to
acquire information necessary to make intelligent, informed investment
decisions, and thus, to protect themselves from fraud.
In the Proposing Release, comment was requested on each aspect of
the Proposed Amendments, as well as on standards for recognition of
nationally recognized municipal securities information repositories
(``NRMSIRs''). In response to the request for comments, the Commission
received over 390 comment letters representing over 475 groups and
individuals. The commenters represented all types of participants in
the municipal securities market, including issuers, underwriters,
investors, counsel, analysts, financial advisers, banks, insurance
providers, disclosure services, and the MSRB.14 The comment
letters presented a variety of thoughtful views on the issues raised by
the Proposing Release.15 The Commission has determined to adopt
amendments to Rule 15c2-12, with certain modifications that are
designed to address concerns expressed by commenters.16 In
addition, the suggestions of a group of industry participants that
cooperated to assist the Commission in its efforts to improve
disclosure in the municipal securities market have been
valuable.17
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\1\4Among others, the Commission received 232 letters
representing the views of 242 issuers and issuer associations; 52
letters representing the views of 57 brokers, dealers, and municipal
securities dealers; and 8 letters representing the views of 8
investors and investor associations.
\1\5The Commission has given consideration to the views of some
commenters who questioned the Commission's authority to adopt the
amendments to Rule 15c2-12. See, e.g., Letter of ABA Business Law
Section; Letter of Hawkins Delafield & Wood; Letter of NABL. The
Commission believes that it has ample authority to adopt the
amendments.
\1\6The comment letters and a summary of the comment letters
prepared by Commission staff are contained in Public File No. S7-5-
94. See also Public File No. S7-4-94.
\1\7See Joint Response to the Securities Exchange Commission on
Releases Concerning Municipal Securities Market Disclosure prepared
by American Bankers Association's Corporate Trust Committee,
American Public Power Association, Association of Local Housing
Finance Agencies, Council of Infrastructure Financing Authorities,
Government Finance Officers Association, National Association of
Counties, National Association of State Auditors, Comptrollers and
Treasurers, National Council of State Housing Agencies, National
Federation of Municipal Analysts, Public Securities Association
(``Joint Response'').
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Commenters across a broad range of market participants supported
the goal of improved secondary market disclosure for the municipal
securities market, but emphasized that flexibility is necessary, given
the diversity that exists in the municipal securities market.18 As
adopted, the amendments to Rule 15c2-12 will further that goal by
prohibiting underwritings unless there are commitments to provide
ongoing disclosure, while, at the same time, providing issuers with
significant flexibility to determine the appropriate nature of that
disclosure. The amendments retain the requirement that a Participating
Underwriter ascertain that an issuer or obligated person has undertaken
to provide secondary market disclosure, including notices of material
events, to information repositories, but rely on the parties to the
transaction to establish who will provide secondary market disclosure,
and what information is material to an understanding of the security
being offered.
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\1\8See, e.g., Joint Response; Letter of Chapman and Cutler;
Letter of Florida Division of Bond Finance of the State Board of
Administration; Letter of J.P. Morgan Securities, Inc.; Letter of
National Association of Bond Lawyers (``NABL''); Letter of Orrick,
Herrington & Sutcliffe (``Orrick Herrington''); Letter of Public
Securities Association (``PSA'').
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The amendments build upon and reinforce current market practices
that have provided, as a general matter, good quality disclosure in
official statements, and extend those practices to the secondary
market. As is currently the practice, under the amendments, the
participants in an underwriting would continue to determine which
persons are material to an understanding of the Offering. Information
concerning those persons would be included in the final official
statement. Financial information and operating data that is material to
an offering at the outset generally remains material throughout the
life of the securities. Under the amendments, that information would be
provided on an annual basis. Put simply, the amendments reflect the
belief that purchasers in the secondary market need the same level of
financial information and operating data in making investment decisions
as purchasers in the underwritten offering.
The Proposed Amendments would have prohibited a broker, dealer, or
municipal securities dealer from recommending the purchase or sale of a
municipal security, unless it had reviewed the annual and event
information provided pursuant to the undertaking. Commenters
anticipated that such a prohibition would have a considerable negative
impact on secondary market liquidity. Furthermore, brokers, dealers,
and municipal securities dealers considered the proposed recommendation
prohibition to be problematic from a compliance perspective. The
Commission has modified this provision to require instead that brokers,
dealers, and municipal securities dealers recommending municipal
securities in the secondary market have procedures to obtain material
event notices. Because under existing law brokers, dealers, and
municipal securities dealers are required to use information
disseminated into the marketplace in forming a reasonable basis for
recommending securities to investors, the rule does not impose
mechanical review requirements on a trade-by-trade basis.
The amendments contain an exemption to minimize the effect on small
issuers. Offerings in which neither the issuer nor any obligor is
obligated with respect to more than $10 million dollars in municipal
securities outstanding following an offering will be exempt from the
amendments, on the condition that there is a limited undertaking to
provide upon request, or annually to a state information depository, at
least the financial information or operating data they customarily
prepare, and that is publicly available. In addition, the undertaking
must meet the amendment's requirement regarding notices of material
events.
II. Description of Amendments To Rule 15c2-12
A. Amendments With Respect to the Underwriting of Municipal Securities
Under the amendments to Rule 15c2-12, a broker, dealer, or
municipal securities dealer (``Participating Underwriter'')19 will
be prohibited, subject to certain exemptions, from purchasing or
selling municipal securities in connection with a primary offering of
municipal securities with an aggregate principal amount of $1,000,000
or more (``Offering''),20 unless the Participating Underwriter has
made certain determinations.21 Specifically, the Participating
Underwriter must reasonably determine that an issuer of municipal
securities or an obligated person, either individually or in
combination with other issuers of such municipal securities or other
obligated persons,22 has undertaken in a written agreement or
contract for the benefit of holders of such securities, to provide,
either directly or indirectly through an indenture trustee or a
designated agent, certain annual financial information and event
notices to various information repositories.23
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\1\9See Rule 15c2-12(a).
\2\0The amendments also include an exemption for small and
infrequent issuers. See Section II.D.1., infra.
\2\1Rule 15c2-12(b)(5)(i).
\2\2These concepts are discussed in Section II.A.1.b., infra.
\2\3Information repositories are discussed in Section II.C.,
infra.
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The ``reasonable determination'' required by the amendments to Rule
15c2-12 must be made by the Participating Underwriter prior to its
purchasing or selling municipal securities in connection with an
Offering. A Participating Underwriter would, therefore, need to receive
assurances from the issuer or obligated persons that such undertakings
would be made before agreeing to act as an underwriter. A dealer could
look to provisions in the underwriting agreement or bond purchase
agreement that describe the undertakings for the benefit of bondholders
made elsewhere, such as in a trust indenture, bond resolution, or
separate written agreement.24 In a competitively bid offering,
such assurances also might be found in a notice of sale. Of course,
representations concerning commitments to provide secondary market
disclosure, like any other key representations by an issuer, are
subject to specific verification, such that a Participating Underwriter
has a reasonable basis to believe that such representations are true
and accurate. Thus, investigation of an issuer's or obligated person's
undertakings to provide secondary market disclosure would be an element
of the Participating Underwriter's professional review of offering
documents.25
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\2\4See Letter of Merrill Lynch, Pierce, Fenner & Smith
(``Merrill Lynch'').
\2\5As noted in the 1988 Release, the obligations of managing
underwriters and underwriters participating in an offering differ.
An underwriter participating in an offering need not duplicate the
efforts of the managing underwriter, but must satisfy itself that
the managing underwriter reviewed the accuracy of the information in
the official statement in a professional manner and therefore had a
reasonable basis for its recommendation. Underwriters participating
in offerings, however, have a duty to notify the managing
underwriter of any factors that suggest inaccuracies in disclosure,
or signal the need for additional investigation. See 1988 Release at
n. 87.
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Because the amendments prohibit Participating Underwriters from
purchasing or selling securities in the absence of undertakings in a
written agreement or contract, such agreement or contract would have to
be in place at the time the issuer delivers the securities to the
Participating Underwriter.26 As discussed below, in conditioning
the closing of an Offering on the existence of an agreement or
contract, this provision of the amendments permits flexibility as to
where undertakings for continuing disclosure are memorialized.27
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\2\6See Letter of Kutak Rock; Letter of Section of Urban, State
and Local Government Law, American Bar Association (``ABA Urban Law
Section''); Letter of Colorado Municipal Bond Supervisory Board.
\2\7In contrast to the requirement in Rule 15c2-12(b)(5) that
Participating Underwriters reasonably determine that issuers or
obligated persons have undertaken to provide secondary market
disclosure prior to the time they ``purchase or sell'' municipal
securities, Rule 15c2-12(b)(1) requires Participating Underwriters
to obtain and review an official statement deemed final by the
issuer (``DFOS'') prior to the time they ``bid for, purchase, offer,
or sell'' securities. Thus, under Rule 15c2-12(b)(1), in a
competitive underwriting, a Participating Underwriter must obtain
and review the DFOS prior to placing a bid on an issue of municipal
securities. Because the term ``offer'' encompasses the distribution
of a preliminary official statement, as well as oral solicitations
of indications of interest, in a negotiated underwriting, a
Participating Underwriter is required to obtain and review the DFOS
prior to the time it distributes the preliminary official statement
to potential investors. If no offers are made, the Participating
Underwriter is required to obtain and review the DFOS by the earlier
of the time it agrees (whether in principle or by signing the bond
purchase agreement) to purchase the bonds, or the first sale of
bonds. See Mudge Rose Guthrie Alexander & Ferdon (April 4, 1990);
Interpretive Release at Section III.C.6.
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The amendments to the definition of final official statement will
affect the obligations of Participating Underwriters under Rule 15c2-
12. Rule 15c2-12(b)(1) requires that a Participating Underwriter, prior
to bidding for, purchasing, offering, or selling municipal securities,
obtain and review a DFOS.28 The Commission expects that
Participating Underwriters will review the DFOS with a view to
ascertaining that it contains information satisfying the definition of
final official statement in Rule 15c2-12.29 The Commission further
expects that the quality of disclosure in the DFOS will improve in a
manner that is commensurate with the changes in final official
statement disclosure.30
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\2\8Information regarding the offering price, interest rate,
selling compensation, aggregate principal amount, principal amount
per maturity, delivery dates, any other terms or provisions required
by an issuer of such securities to be specified in a competitive
bid, ratings, other terms of the securities depending on such
matters, and the identity of the underwriters, may be omitted from
the official statement reviewed by the Participating Underwriter for
purposes of Rule 15c2-12(b)(1).
\2\9Whether information is in fact known or not reasonably
ascertainable at the time the Participating Underwriter must obtain
and review the DFOS pursuant to the rule is best determined in the
context of each offering by the issuer, the Participating
Underwriter, and their respective counsel. See Public Securities
Association (May 29, 1992)
\3\0As a practical matter, the DFOS and the preliminary official
statement (``POS'') are often the same document. See Mudge Rose
Guthrie Alexander & Ferdon (April 4, 1990).
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Rule 15c2-12(b)(2) requires, for all except competitively bid
offerings, from the time a Participating Underwriter has reached an
understanding with an issuer of municipal securities that it will act
as a Participating Underwriter, until the final official statement is
available, that the Participating Underwriter send, to any potential
customer, no later than the next business day, a copy of the most
recent POS, if any. The Commission expects that the Participating
Underwriters' obligations with respect to dissemination of the POS will
not change.
1. Determining the Required Scope of the Undertaking to Provide
Secondary Market Disclosure
Under the amendments as adopted, the financial information and
operational data to be provided on an annual basis pursuant to the
undertaking will mirror the financial information and operating data
contained in the final official statement with respect to both the
issuers and obligated persons that will be the subject of the ongoing
disclosure, and the type of information provided. The amendments govern
the core financial and operational data to be provided. It does not
address the textual disclosure typically provided in annual reports,
leaving the scope of that disclosure to market practice.31 To
clarify the intended quantitative focus of the rule, as adopted, the
rule uses the term ``financial information and operating data.''
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\3\1See Association of Local Housing Finance Agencies,
Guidelines for Information Disclosure to the Secondary Market
(1992); Government Finance Officers Association, Disclosure
Guidelines for State and Local Government Securities (Jan. 1991);
Healthcare Financial Management Association, Principles and
Practices Board, Statement Number 18--Public Disclosure of Financial
and Operating Information by Healthcare Providers (May 1994);
National Council of State Housing Agencies, Quarterly Reporting
Format for State Housing Finance Agency Single Family Housing Bonds
(1989) and Multi-family Disclosure Format (1991); National
Federation of Municipal Analysts, Disclosure Handbook for Municipal
Securities 1992 Update (Nov. 1992).
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a. The Starting Point--Definition of Final Official Statement--(1)
Information Concerning Persons Material to an Evaluation of the
Offering. The Proposed Amendments would have revised the definition of
final official statement to require that financial and operating
information, including audited annual financial statements, regarding
the issuer and any significant obligor be included in order to provide
a fair presentation of the issuer's and significant obligor's financial
condition, results of operations, and cash flow.
Commenters objected to various aspects of the proposed definition,
including the general requirement that financial and operating
information be presented in the final official statement.32
Commenters also objected that the use of the term ``the issuer,'' in
specifying whose financial information should be included in the final
official statement, failed to take into account a variety of situations
in which the governmental issuer does not have any repayment
obligations on the municipal securities (as with conduit issuers), as
well as other situations (such as revenue bonds) in which the payments
will be derived from entities, enterprises, funds and accounts that do
not prepare separate financial statements. Some commenters took the
position that in certain instances, inclusion of the financial
statements of the general municipal issuer of which the enterprise is a
part may be misleading.33
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\3\2See, e.g., Letter of Indiana Bond Bank; Letter of Kutak
Rock; Letter of NABL; Letter of Texas Public Finance Authority;
Letter of Goldman Sachs & Co. (``Goldman Sachs'').
\3\3See, e.g., Letter of Department of Community Trade and
Economic Development, State of Washington; Letter of American Public
Power Association (``APPA''); Letter of Municipal Treasurer's
Association; Letter of Orrick Herrington.
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In view of these comments, the definition of final official
statement has been revised to require that financial information and
operating data be provided for those persons, entities, enterprises,
funds, and accounts that are material to an evaluation of the
offering.34 Thus, the definition eliminates the reference to
``the'' issuer. In addition, the definition no longer requires that the
official statement provide information about specific ``significant
obligors.'' It leaves to the parties (including the issuer and
Participating Underwriters) the determination of whose financial
information is material to the offering (including, without limitation,
the credit supporting the securities being offered).
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\3\4See Rule 15c2-12(f)(3).
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The definition does not set its own form and content requirements
on the financial information and operating data to be included; in
particular, the proposed requirement for audited financial statements
has not been adopted. Instead, it provides the flexibility that many
commenters asserted is necessary in determining the content and scope
of the disclosed financial information and operating data, given the
diversity among types of issuers, types of issues, and sources of
repayment.35
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\3\5See, e.g., Letter of Association of Local Housing Financing
Agencies (``ALHFA''); Letter of Treasurer, State of Connecticut
Office of the Treasurer (``Treasurer of the State of Connecticut'');
Letter of Council of Development Finance Agencies (``CDFA''); Joint
Response; Letter of Securities Industry Association (``SIA'');
Letter of Morgan Stanley & Co., Inc. (``Morgan Stanley'').
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The fact that the amendments rely on the final official statement
to set the standard for ongoing disclosure should not serve as an
incentive for issuers to reduce existing disclosure practices in the
preparation of the final official statement. Market discipline and
regulatory requirements should ensure that those practices continue at
current or improved levels. While issuers remain primarily responsible
for the content and accuracy of their disclosures,36 as noted,
Participating Underwriters must review the DFOS in a manner consistent
with their obligations.
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\3\6See 1989 Release.
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As the Commission recognized in the Interpretive Release,37
the extensive voluntary guidelines issued by the Government Finance
Officers' Association, and the industry specific guidelines published
by industry groups such as the National Federation of Municipal
Analysts, are followed widely in the preparation of official
statements.38 The Commission anticipates that such sound practices
will continue and develop beyond that mandated by the amendments.
Although those guidelines are not mandatory, the Commission encourages
market participants to continue to refer to those voluntary guidelines
and the Commission's Interpretive Release in preparing disclosure
documents. In addition, as noted in the Interpretive Release,39
final official statements are subject to the prohibition against false
or misleading statements of material facts, including the omission of
material facts necessary to make the statements made, in light of the
circumstances in which they are made, not misleading.
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\3\7Interpretive Release at Section III.B. The Interpretive
Release is cited in the Preliminary Note to Rule 15c2-12 as a source
of guidance as to the disclosure obligations of issuers of municipal
securities, as well as the role of brokers, dealers, and municipal
securities dealers.
\3\8See note 31, supra.
\3\9See Interpretive Release at Section III.A.
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(2) Use of cross references to publicly available information. The
Proposing Release requested comment on the appropriateness of
satisfying disclosure needs through a reference to other externally
prepared and located documents. In response, a number of commenters
stated that the concept of incorporation of information should be
explicitly included in the rule,40 and that the ability to
incorporate information should not be conditioned on a minimum dollar
amount of securities in the hands of the public--commonly known as
``public float.''41 Some commenters also suggested that any
limitation of this practice to ``seasoned issuers'' should include all
investment grade issuers.42 Some commenters further noted that the
final official statement should not have to set forth information that
has been filed with the Commission in accordance with its periodic
reporting requirements.43 The commenters suggested one significant
prerequisite for permitting cross referencing--the availability of the
information in some public repository.44
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\4\0See Joint Response.
\4\1See Letter of ABA Urban Law Section; Letter of Bose McKinney
& Evans; Joint Response; Letter of Mudge Rose Guthrie Alexander &
Ferdon (``Mudge Rose''); Letter of Dormitory Authority of the State
of New York (``New York Dormitory Authority'').
\4\2See Letter of Mudge Rose; Letter of New York Dormitory
Authority.
\4\3See Letter of ABA Urban Law Section; Letter of Kutak Rock;
Letter of Texas Public Finance Authority.
\4\4See, e.g., Letter of Bose McKinney & Evans; Joint Response.
One commenter also stated that if cross referencing was permitted,
there should be a delay between the distribution of the official
statement and the offering. The delay would enable potential
purchasers and others to obtain any materials that were referenced
in the official statement and make an informed investment decision.
See Letter of Prudential Investment Corp.
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The definition of final official statement has been revised to make
explicit45 that a final official statement may include financial
information and operating data either by setting forth the information
in the document or set of documents composing the final official
statement, or by including a specific reference to documents already
prepared and previously made publicly available.46 For purposes of
the amendments, documents will be considered to be publicly available
if they have been submitted to each NRMSIR and to the appropriate state
information depository or, if the information concerns a reporting
company, filed with the Commission. If the document is a final official
statement, it must be available from the MSRB.
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\4\5See 1989 Release (discussing the definition of ``final
official statement'' in Rule 15c2-12 as originally adopted, and
stating that the definition recognizes that the issuer's final
official statement may be composed of one or more documents).
\4\6Rule 15c2-12(f)(3). To avoid confusion with the technical
aspects of incorporation by reference for registrants under the
Commission's registration rules, the amended rule does not use that
term.
At least two states, New York and Texas, have prepared a
standard disclosure document for state information.
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If cross referencing is used, for purposes of determining the
appropriate scope of the ongoing information undertaking, the final
official statement will be deemed to include all information and
documents that have been cross referenced.47 The amendment does
not place limitations on the type of issuer that may use cross
referencing. This approach is consistent with the goal of making the
repositories the principal source of information concerning municipal
securities. Once received by a repository, the referenced information
should be readily available regardless of the nature of the issuer.
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\4\7Participating Underwriters and other market participants
must keep in mind their obligations under the rule with respect to
the DFOS and final official statement, and under the antifraud
provisions of the federal securities laws. To the extent that cross
references are used, the DFOS should be disseminated in sufficient
time for review by Participating Underwriters, and the POS should be
made available in time to enable prospective purchasers to make
informed investment decisions based upon the referenced materials.
See Interpretive Release at Section III.C.6.
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As commenters noted, permitting cross referencing to other
externally prepared and available information should result in official
statements that are clear and concise, yet provide information material
to the Offering.48 Moreover, the use of cross referencing also
should ease some expressed apprehension about the ability of some
issuers to obtain information about parties not within their control,
to the extent that information about these parties is made available to
the repositories or, if a reporting company, filed with the
Commission.49
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\4\8See, e.g., Letter of New York Dormitory Authority; Letter of
the Treasurer of the State of Connecticut.
\4\9See, e.g., Letter of Fieldman, Rolapp & Associates; Letter
of State of Florida, Office of Auditor General; Letter of San
Francisco International Airport; Letter of Texas Water Development
Board; Letter of State of Washington, Office of the Treasurer.
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(3) Description of information undertakings. The definition of
final official statement also has been changed from the Proposed
Amendments to include a requirement that the undertakings provided
pursuant to the rule be described in the final official
statement.50 As the Commission recognized in the Interpretive
Release51 and a number of commenters echoed,52 it is
important for investors and the market to know the scope of any ongoing
disclosure. By including a description of the undertaking in the final
official statement, market participants will know the identity of the
entities about which information will be provided, and the type of
information to be provided. By reviewing the final official statement,
investors in the secondary market will be able to ascertain the scope
of that undertaking and whether it has been satisfied.
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\5\0Rule 15c2-12(f)(3).
\5\1See Interpretive Release at Section III.C.4.
\5\2See, e.g., Letter of Chemical Securities, Inc. (``Chemical
Securities''); Letter of Ferris Baker Watts; Letter of National
Federation of Municipal Analysts (``NFMA'').
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Critical to any evaluation of a covenant is the likelihood that the
issuer or obligated person will abide by the undertaking. The
definition of final official statement thus has been modified to
require disclosure of all instances in the previous five years in which
any person providing an undertaking failed to comply in all material
respects with any previous informational undertakings called for by the
amendments.53 This information is important to the market, and
should, therefore, be disclosed in the final official statement. The
requirement should provide an additional incentive for issuers and
obligated persons to comply with their undertakings to provide
secondary market disclosure, and will ensure that Participating
Underwriters and others are able to assess the reliability of
disclosure representations.54
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\5\3See Rule 15c2-12(f)(3).
\5\4See Letter of PSA.
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The amendments do not prohibit Participating Underwriters from
underwriting an Offering of municipal securities if an issuer or
obligated person has failed to comply with previous undertakings to
provide secondary market disclosure. However, if a failure to comply
with such previous undertakings has not been remedied as of the start
of the Offering, or if the party has a history of persistent and
material breaches, it is doubtful whether a Participating Underwriter
could form a reasonable basis for relying on the accuracy of the
issuer's or obligated person's ongoing disclosure representations.
b. Entities about which information must be provided to the
secondary market. It is critical that current financial information and
operating data is provided to the secondary market about the persons
that would be important to investors in evaluating the security. The
Proposed Amendments would have required the Participating Underwriter
to determine that the issuer had committed to provide, at least
annually, current financial information concerning the issuer of the
municipal securities and any significant obligor.55 The identity
of persons about which information should be provided to the secondary
market was the subject of a substantial number of comment
letters.56 As with the proposed definition of final official
statement, a large number of commenters expressed particular concern
about the provision of information on a continuing basis for conduit
issuers who have no ongoing liability for repayment of municipal
securities.57 There also were a significant number of comments
received critiquing the concept of significant obligor.58
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\5\5Paragraph (b)(5)(i)(A) of the Proposed Amendments.
\5\6See, e.g., Letter of Fidelity Management and Research
Company; Letter of First Albany Corporation; Letter of Maine
Municipal Bond Bank; Letter of NABL; Letter of National Council of
Health Facilities Finance Authorities (``NCHFFA''); Letter of
Realvest Capital Corporation; Letter of South Carolina Economic
Developers Association, Inc.
\5\7See, e.g., Letter of ABA Urban Law Section; Letter of
Gilmore & Bell, P.C. (``Gilmore & Bell''); Letter of New York State
Housing Finance Agency, State of New York Mortgage Agency, New York
State Medical Care Facilities Finance Agency (``New York State
Housing Finance Agency''); Letter of Orrick Herrington.
\5\8See, e.g., Letter of Section of Business Law, American Bar
Association (``ABA Business Law Section''); Letter of Treasurer of
the State of California (``Treasurer of the State of California'');
Letter of Goldman Sachs; Letter of IDS Financial Corporation; Joint
Response; Letter of Kutak Rock; Letter of Morgan Stanley; Letter of
National Association of State Treasurers (``NAST'').
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Under the amendments as revised, the identity of the persons for
which information must be provided on an annual basis is determined by
the information included in the final official statement. If the final
official statement includes financial information or operating data on
a person, information about that person must continue to be provided to
the secondary market if the person is committed by contract or other
arrangement to support payment of the obligations on the municipal
securities.59 Thus, the obligation to provide ongoing information
relates to those persons for which financial information or operating
data is included in the final official statement and that have a
contractual or other connection to repayment of the municipal
obligations.
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\5\9Providers of bond insurance, letters of credit, and
liquidity facilities have been excepted from the definition of
obligated person to eliminate the need to separately obtain and
disseminate annual information about such providers. See Section
II.A.1.b.(1). infra.
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(1) The obligated person concept. The Proposed Amendments defined a
significant obligor as ``any person who, directly or indirectly, is the
source of 20 percent or more of the cash flow servicing the obligations
on the municipal security.'' The proposed definition generated a
significant amount of comment, including concerns that it could be
interpreted to include significant taxpayers and customers,60
credit enhancers (including banks that are letter of credit providers
and insurers providing bond insurance),61 providers of guaranteed
investment contracts,62 as well as state and federal governments
that provide revenue sharing, grant, state and local aid and other
cofinancing arrangements.63 Commenters raised technical concerns
as to the appropriate percentage of repayment obligation necessary to
trigger inclusion in the definition of significant obligor,64 and
when the percentages were to be measured.65 Some commenters also
expressed concern that, in the bond pool context, the definition of
significant obligor may not have permitted sufficient flexibility in
determining which obligors in a pool would be the subject of the
requirement to provide information on an ongoing basis.66
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\6\0See, e.g., Letter of American Municipal Power--Ohio, Inc.
(``AMP--Ohio''); Letter of Gilmore & Bell; Letter of Treasurer of
the State of California.
\6\1See, e.g., Letter of Financial Guaranty Insurance Company
(``FGIC''); Letter of Goldman Sachs; Letter of Hawkins Delafield &
Wood; Letter of Thacher Proffitt & Wood.
\6\2See, e.g., Letter of Kutak Rock.
\6\3See, e.g., Letter of ABA Urban Law Section; Letter of Kutak
Rock; Letter of State of Washington, Office of the Treasurer.
\6\4See, e.g., Letter of APPA; Letter of George K. Baum & Co.;
Letter of CDFA; Letter of Eaton Vance Management; Letter of NCHFFA.
\6\5See, e.g., Letter of ABA Business Law Section; Letter of
Electricities, Inc.; Letter of Hawkins Delafield & Wood; Letter of
Kutak Rock; Letter of Mudge Rose; Letter of San Francisco
International Airport.
\6\6See, e.g., Letter of ABA Urban Law Section; Letter of A.G.
Edwards & Sons, Inc.; Letter of Council of Infrastructure Financing
Authorities (``CIFA''); Letter of Hawkins Delafield & Wood; Letter
of Program Administration Services, Inc.
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Commenters suggested a number of modifications to the significant
obligor concept. First, a number of commenters indicated that the
definition of significant obligor should include a requirement that a
contractual relationship exist between the obligor and the repayment of
the obligation before a continuing information obligation is
imposed.67 Second, commenters recommended modifying the definition
to include different percentages of cash flow, ranging from a low of no
threshold to a high of 50% of cash flow.68 Third, some commenters
suggested replacing the entire definition of significant obligor with
the concept of materiality, in which the issuer and the other offering
participants would determine, on a continuing basis, whose information
would be provided.69
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\6\7See, e.g., Letter of ABA Business Law Section; Letter of
APPA; Letter of City of Everett, Washington; Letter of Goldman
Sachs; Letter of Hawkins Delafield & Wood; Letter of Merrill Lynch;
Letter of Morgan Stanley; Letter of Mudge Rose; Letter of Orrick
Herrington. Certain of these commenters noted that by including a
contractual or similar relationship between the entity making
payments and the financing, customers and taxpayers, having no
connection to or responsibility in connection with the financing
would not inadvertently be swept within the scope of the definition.
\6\8See, e.g., Letter of APPA; Letter of George K. Baum & Co.;
Letter of City of Everett, Washington; Letter of IDS Financial
Corporation; Letter of Standish, Ayer & Wood, Inc.
\6\9See, e.g., Letter of ABA Business Law Section; Letter of
ALHFA; Letter of PSA.
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As suggested by a number of commenters, the amendments eliminate
the reference to significant obligor.70 Instead, the amendments
include a definition of ``obligated person,'' which means a person
(including an issuer of separate securities) that is committed by
contract or other arrangement structured to support payment of all or
part of the obligations on the municipal securities.71 By
including a nexus to the financing through a commitment that is
structured to support the payment obligations, the amendments address
concerns raised by many commenters that the term ``source of cash
flow'' in the definition of significant obligor was overbroad and could
encompass persons with no relationship to the financing.72 The
requirement for a contractual or other arrangement will assist
Participating Underwriters in identifying the persons for which
information should be provided pursuant to an undertaking.
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\7\0See, e.g., Letter of FGIC; Joint Response; Letter of NABL;
Letter of PSA.
\7\1See Rule 15c2-12(f)(10).
\7\2See, e.g., Letter of Bose McKinney & Evans; Letter of Mudge
Rose; Letter of New York Dormitory Authority; Letter of Orrick
Herrington.
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Some commenters recommended that the commitment with respect to
payment of the obligation on the securities consist of a contractual
obligation to and enforceable by bondholders.73 Instead, the
definition includes a broader notion of a contract or arrangement that
is structured to ``support payment,'' without specifying that it run to
bondholders. The definition is intended to include contracts or
arrangements where payments are made either to bondholders, to issuers
to be used to pay obligations on municipal securities, or through
conduit structures.74 Similarly, the reference to ``obligations on
municipal securities'' is intended to be broad enough to cover debt
obligations, lease payments and any other repayment obligation on or
resulting from the municipal securities.
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\7\3See, e.g., Letter of Bose McKinney & Evans; Letter of
Goldman Sachs; Letter of Indiana Bond Bank; Letter of Hawkins
Delafield & Wood.
\7\4For example, if all or a portion of a project financed by
bonds is used by a party that has committed, by contract or other
arrangement (written or oral) to pay for such use, and such payments
support payment of debt service on the bonds (as structured at the
time of issuance), continuing information on the party would be
appropriate. Accordingly, parties that support debt service through
payments under a lease, loan, installment sale agreement, or other
contract relating to use of a project are included in the
definition, regardless of whether the financing is a conduit
arrangement (such as a non-recourse loan to a manufacturer to
finance acquisition of a new facility or to a hospital to acquire
equipment) or system or project financing (such as a lease to a
particular carrier of a terminal in an airport system or sale of the
output of a facility pursuant to a take-or-pay (or take-and-pay)
contract). Major customers purchasing power from a municipal light
department that, in turn, is under a take-or-pay contract with a
joint action public power agency would not be included in the
definition, although the municipal light department would likely be
included in the definition. Similarly, major taxpayers in a
municipal general obligation issue would not be included in the
definition; however, an undertaking covering a developer that is the
sole landowner in a development district assessment financing in
which the future collection of assessments to service the borrowing
is dependent upon the developer as part of the structure of the
financing may be appropriate.
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As was the case with the proposed significant obligor concept, the
term ``obligated persons'' includes, but is broader than, the concept
of issuers of separate securities under Rule 131 pursuant to the
Securities Act of 1933 (``Securities Act'')75 and Exchange Act
Rule 3b-5.76 Also, in response to comments raised that the terms
``issuer'' or ``significant obligor'' do not sufficiently address
financings in which the source of repayment is not a separate person or
entity, but a dedicated revenue stream from a specified project,
segregated tax revenues or other enterprise, fund or account,77
the definition includes persons which are obligated generally, such as
with full recourse to the person, or, in a more limited manner, such as
through an enterprise, fund or account of such person, including a
dedicated revenue stream. As noted above, the obligation to provide
information must cover all such enterprises, funds or accounts, whether
or not there is a separate entity. In such a case, the information
undertaking could be provided by the governmental unit or financing
authority of which the enterprise, fund or account is a part.78
For example, a Participating Underwriter could accept an information
undertaking from a state issuing bonds secured solely by funds
collected under a special tax, to report financial information relating
to the special tax; for issues supported both by contracts of
assistance of separate authorities or funds in addition to the issuer's
own revenues, undertakings from the separate authorities, as well as
the issuer could be provided. Accordingly, although the definition of
significant obligor has been eliminated, that modification does not
reflect a change in the Commission's assessment of the importance of
ongoing information concerning the ultimate sources of payment on the
securities.
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\7\517 CFR 239.131.
\7\617 CFR 240.3b-5
\7\7See, e.g., Letter of Fidelity Management and Research
Company; Letter of Mudge Rose; Letter of NABL; Letter of Texas
Public Finance Authority.
\7\8See Rule 15c2-12(b)(5)(i).
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Unlike the significant obligor concept in the Proposed Amendments,
there is no need to include a specified percentage of payment in the
definition of obligated person, because the issuer and other
participants will determine at the time of preparation of the final
official statement which obligated persons are material to an
Offering.79 In making that materiality determination, the parties
to a financing will evaluate the facts of the Offering.80
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\7\9Under the revised amendments, the concerns of some
commenters that the definition of significant obligor failed to take
into account short term arrangements (i.e. the arrangements with
persons providing cash flow were shorter than the term of the
securities) is also alleviated in two ways. First, the issuer
determines at the outset if an obligated person is material to the
offering. Second, assuming an obligated person is included in the
final official statement, the undertaking to continue to provide
information on such obligated person may be terminated once it no
longer has liability for any obligation on or relating to repayment
of the municipal securities. See Rule 15c2-12(b)(5)(iii); Letter of
APPA; Letter of Hawkins Delafield & Wood.
\8\0Guidelines and practices that have developed in other
contexts may be useful in analyzing both the materiality of an
obligated person to the municipal financing and the appropriate
level of disclosure relating to such obligated person. For example,
in connection with securitization of non-recourse commercial
mortgage loans, the 10 percent and 20 percent property assets
concentration tests described in Staff Accounting Bulletins 71 and
71A are applied. These percentages are applied by analogy in other
asset-backed financings.
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Determining the obligated persons in pooled financings requires
more flexibility, because the composition of the pool may vary over
time. Rather than identifying the specific persons for which
information will be provided on a continuing basis, under the
amendments, bond pools must describe in their official statements, and
the undertaking, the objective criteria (presumably including
percentage of payment support) they will apply consistently, both in
the final official statement and on a continuing basis, in determining
whether information concerning an obligated person will be
provided.81 The amendments permit, but do not require this
approach for non-pooled issuers. The objective criteria approach
ensures that financial information and operating data will be provided
about those persons that, at the time of disclosure, meet the objective
standards described in the undertakings. Obligated persons could commit
to the issuer, at the time of initial participation in a pooled
financing, through an undertaking to provide information when and if
they satisfy that criteria. Obligated persons that no longer meet the
objective criteria will no longer need to provide ongoing information.
In order to ensure that the selection method is incorporated into the
undertaking, the amendments require that Participating Underwriters
reasonably determine that the undertakings identify those persons for
which the information will be provided, either by name or by the
objective criteria to be used to select such persons.82
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\8\1Although the amendments do not specify the scope of the
objective criteria, the criteria description should be clear as to
when and how they are applied.
\8\2See Rule 15c2-12(b)(5)(ii).
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Commenters were divided on whether providers of bond insurance,
letters of credit, and other liquidity facilities, should be excluded
from the definition of significant obligor.83 The concept of
``obligated person'' encompasses these entities because they are
committed, at least conditionally, to support payment of principal and
interest obligations. Moreover, these persons normally are material to
an understanding of the security, and, therefore, official statements
should contain financial information concerning such persons either
directly or by reference to publicly available materials. A number of
commenters stated, however, that it would be inappropriate to put the
onus on the issuer to provide information on such providers on an
annual basis, particularly where that information is otherwise
available to investors either upon request or in public reports that
have been submitted to appropriate regulatory authorities.84
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\8\3See, e.g., Letter of ABA Urban Law Section; Letter of
Blackwell Industrial Authority, Blackwell, Oklahoma; Letter of Davis
Polk & Wardwell; Letter of IDS Financial Corporation; Letter of
Kutak Rock; Letter of Oregon Economic Development Department; Letter
of Realvest Capital Corporation; Letter of Thacher Proffitt & Wood.
Some commenters also were concerned as to whether the definition
would encompass providers of guaranteed investment contracts and
other investments. See, e.g., Letter of ABA Urban Law Section;
Letter of Kutak Rock, on behalf of AMBAC Indemnity Corporation,
Capital Markets Assurance Corporation, Capital Reinsurance Company,
Enhance Reinsurance Company, Financial Guaranty Insurance Company,
Financial Security Assurance, Inc., and Municipal Bond Investors
Assurance Corporation (``Kutak Rock on behalf of Financial Guaranty
Insurers''). A functional approach determines whether providers of
investments should provide ongoing information. For example, if the
proceeds of an Offering are invested in guaranteed investment
contracts (``GICs''), and the income from the GICs is the
predominant source of revenue to repay the obligations on the
securities, information about the provider may be material to the
Offering, including on an ongoing basis. If, however, other sources
of revenue are committed to support payment of the obligations, the
relative importance of the provider of the GIC to investors may be
diminished.
\8\4See, e.g., Letter of ABA Urban Law Section; Letter of Smith,
Gambrell & Russell; Letter of Texas Water Development Board. Some
commenters noted difficulty in obtaining information from credit
enhancers. See Letter of Association of Bay Area Governments; Letter
of New York State Housing Finance Agency; Letter of State of
Washington, Office of the Treasurer.
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Commenters indicated a willingness by providers of bond insurance,
letters of credit, and other liquidity facilities to deposit publicly
available reports in a repository, or otherwise note where such reports
may be easily obtained.85 The issuer or other obligated person
providing the undertaking may then refer to such reports in their
annual financial information and indicate the location where any such
current annual reports can be obtained. Based upon such
representations, providers of bond insurance, letters of credit, and
liquidity facilities have been excepted from the definition of
obligated person to eliminate the need to separately obtain and
disseminate annual information about such providers.
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\8\5See, e.g., Memorandum of August 10, 1994 Meeting with Davis,
Polk and Wardwell and Various Banks; Letter of Kutak Rock on Behalf
of Financial Guaranty Insurers. One commenter recommended that bond
insurers and banks providing letters of credit, who are not subject
to periodic reporting requirements of the federal securities laws,
send publicly available reports to the repositories. See Letter of
ABA Urban Law Section.
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The Commission encourages industry participants to work together to
adopt appropriate disclosure practices, both with respect to
information concerning the provider contained in primary offering
materials and on an ongoing basis in the annual financial information.
The Commission will monitor developments in this area regarding the
nature and quality of information made available about credit enhancers
and liquidity providers, and the manner in which information is made
available to determine whether further steps are necessary to assure
access to this important body of information.
(2) Who must undertake. A related question to whose information
must be given is who must provide the information undertaking; the
person providing the undertaking may not necessarily be the person
about which the information relates. The Proposed Amendments would have
required that the continuing information undertaking be provided by the
issuer. A significant number of commenters raised concerns about which
of potentially several persons that could be considered an issuer of
municipal securities86 would be expected to provide the
undertaking and who would make that determination.87 This was a
particular concern in light of the potential liability of the issuer
providing the undertaking for the provision and the content of
information regarding other issuers and significant obligors--persons
not necessarily under their control. Commenters made a number of
suggestions to address these perceived ambiguities, including requiring
that each issuer of a municipal security and each significant obligor
undertake to provide the information only with respect to
itself.88
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\8\6The term ``issuer of municipal securities,'' as defined in
Rule 15c2-12, includes issuers of separate securities as well.
\8\7See, e.g., Letter of ALHFA; Letter of Hawkins Delafield &
Wood; Letter of Kutak Rock; Letter of National State Auditors
Association; Letter of the Treasurer of the State of North Carolina.
\8\8See, e.g., Letter of ABA Urban Law Section; Letter of ALHFA;
Letter of Kutak Rock; Letter of NABL.
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In response to these concerns, and consistent with the general
approach to affording underwriting participants significant
flexibility, the undertaking provision has been revised to provide that
the undertaking may be made by any issuer of the municipal securities
being offered, or by any obligated person for which information is
provided in the final official statement. An issuer of a municipal
security may provide the undertaking, regardless of whether it is
obligated on the municipal security. In addition, obligated persons may
provide the undertaking regardless of whether they are deemed an issuer
of municipal securities. These obligated persons may be the main, if
not the only, credit source for repayment of the obligations on the
municipal securities. This approach should allow the governmental
issuer to shift to the obligated person the responsibility to provide
information on a continuing basis.
Thus, a Participating Underwriter need only reasonably determine
that an issuer of municipal securities or an obligated person for which
financial information or operating data is presented in the final
official statement has agreed to provide the information called for by
the rule; it will not be necessary to obtain an undertaking from all
possible issuers and obligated persons. Moreover, to respond to the
expressed concern that separate undertakings should be permitted, the
amendments have been revised to recognize that undertakings may be
provided in combination with other issuers and other obligated persons.
In all cases, however, the undertakings, either individually or
collectively, must constitute a commitment to provide information with
respect to all the persons about which information must be provided on
an annual basis.
The amendments have been revised to clarify that dissemination
responsibilities may be delegated to designated agents or to indenture
trustees. As commenters pointed out, there are circumstances in which
third parties may be effective in assisting issuers and obligated
persons in disseminating the information.89 Moreover, indenture
trustees have expressed concerns about being considered ``designated
agents'' in performing any dissemination role, based on the scope of,
and standards affecting, their responsibilities as indenture
trustees.90 The language has been revised in response to clarify
that, in addition to designated agents, issuers or obligated persons
may contractually empower indenture trustees to disseminate information
that an issuer or obligated person has agreed to provide. The parties
may authorize an indenture trustee to provide certain information
through specific instruction or on its own initiative upon becoming
aware of particular facts.
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\8\9See, e.g., Letter of Bond Investors Association; Letter of
PSA; Letter of Texas Public Finance Authority.
\9\0See, e.g., Letter of Bank One Corporation; Letter of
Reliance Trust Company; Letter of State Street Bank and Trust
Company.
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c. Scope of financial information and operating data to be provided
on an annual basis--(1) Definition of annual financial information. The
amendments provide a definition of the term ``annual financial
information,''91 a concept that was used, without definition, in
the Proposed Amendments. 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 to the
repositories. If financial information or operating data concerning an
obligated person (or category of obligated persons in the case of
financings using the objective criteria approach) is included in the
final official statement, then annual financial information would
consist of the same type of financial information or operating data.
For example, if anticipated cash flow information is provided in the
final official statement for a revenue bond financing, cash flow data
reflecting actual operations must continue to be provided on an annual
basis. Only the annual financial information called for by the
undertakings need be sent to the repositories; other types of financial
information and reports that may be prepared by the issuer or obligated
persons are not subject to the rule's dissemination provisions.
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\9\1Rule 15c2-12(f)(9).
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Many commenters addressed the issue of whether the rule should
specify form and content of the information that should be provided on
an annual basis, as well as for event specific information.92 Some
commenters argued that the rule should include specified formats for
information to be provided, including financial statements and certain
industry reporting formats,93 while other commenters contended
that no form or content should be specified and that the parties should
be permitted to make determinations based on materiality alone.94
As discussed below, the flexibility afforded by the concept of annual
financial information addresses these concerns by providing a minimum
standard for ongoing disclosure, but allowing the parties to define
that standard with respect to each Offering of municipal securities.
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\9\2See, e.g., Letter of Dean Witter Reynolds, Inc. (``Dean
Witter''); Letter of National League of Cities; Letter of NFMA;
Joint Response; Letter of PSA; Letter of Tillinghast, Collins &
Graham; Letter of the Treasurer of the State of Connecticut.
\9\3See, e.g., Letter of Dain Bosworth, Inc.; Letter of First
Albany Corporation; Letter of MSRB; Letter of NFMA; Letter of
Standish, Ayer & Wood, Inc.
\9\4See, e.g., Letter of CDFA; Letter of Chapman and Cutler;
Letter of CIFA; Joint Response; Letter of H.M. Quackenbush; Letter
of NABL.
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(2) Financial information. The proposal to mandate audited
financial statements produced considerable comment. As with the
proposed definition of final official statement, commenters expressed
concern with the availability of audited financial statements on an
annual basis, as well as the relevance of financial statements for
certain types of financings.
Some commenters indicated that some municipalities were not
required by law to have independently audited financial statements, and
any such requirement would impose a significant new expense.95 A
number of commenters also expressed doubt as to whether audited
financial information could be delivered on an annual basis, because
audits may not be completed for a number of years following the close
of the fiscal year.96 Commenters noted that in some cases,
financial statements for certain types of entities were audited every
year, and in other cases every 2-3 years.97 Therefore, some of
these commenters argued that the requirement for annual audited
financial statements would have an adverse impact on an issuer's
ability to access the public securities markets or increase its costs
of financing.98
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\9\5See, e.g. Letter of Texas Water Development Board; Letter of
State of Washington, Office of the Treasurer.
\9\6See, e.g., Letter of City of Barling; Letter of Dain
Bosworth, Inc.; Letter of Friday, Eldridge & Clark.
\9\7See, e.g., Letter of AMP--Ohio; Letter of State of Indiana,
State Board of Accounts; Letter of State of Montana, Department of
Natural Resources and Conservation; Letter of Washington Finance
Officers Association.
\9\8See, e.g., Letter of AMP--Ohio; Letter of Washington Finance
Officers Association.
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A number of commenters also raised concerns regarding the
availability of full financial statements for certain issuers, whether
or not audited.99 As examples, commenters noted that some issuing
entities do not have their own financial statements and may be included
in the financial statements of a larger issuer or entity.100
Commenters from two states indicated that governmental units of the
states may be encompassed in the state's comprehensive annual financial
report and that there may be only supplemental schedules that described
the governmental units.101
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\9\9See, e.g., Letter of ABA Business Law Section; Letter of
Florida Division of Bond Finance; Letter of Gust & Rosenfeld; Letter
of Office of the State Auditor, Texas (``Texas Office of the State
Auditor'').
\1\00See, e.g., Letter of Treasurer of the State of North
Carolina; Letter of Texas Office of the State Auditor.
\1\01See, e.g., Letter of the Treasurer of the State of North
Carolina; Letter of Texas Office of the State Auditor.
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Some commenters raised the point that financial statements of a
general governmental unit may not necessarily be relevant in certain
project and structured financings.102 As an example, one commenter
noted that in some asset backed financings, information about the
governmental issuer may be relevant only with respect to its experience
in managing programs of loan pools.103
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\1\02See, e.g., Letter of ABA Urban Law Section; Letter of APPA;
Letter of Goldman Sachs; Letter of Gust & Rosenfeld; Letter of The
Hospital & Higher Education Facilities Authority of Philadelphia;
Letter of Morgan Stanley; Letter of NABL; Letter of New York State
Housing Finance Agency.
\1\03See Letter of ABA Urban Law Section.
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Commenters proposed a number of alternatives to the requirement to
provide annual audited financial statements. Among the alternatives was
a suggestion that financial statements be required in the form
customarily prepared by the issuer promptly upon becoming available and
that audited financial statements be provided to the extent
available.104 Other suggestions included limiting the requirement
to those entities required by state or federal law to have audited
financial statements.105
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\1\04See, e.g., Letter of ABA Business Law Section; Letter of
Association of Bay Area Governments; Letter of North East
Independent School District; Letter of PSA; Letter of Washington
Finance Officers Association.
\1\05See, e.g., Letter of the Treasurer of the State of North
Carolina; Letter of Washington Finance Officers Association.
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In view of the comments received, the 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 continue to 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. While it is anticipated that full financial
statements will be provided for entities with ongoing revenues and
operating expenses, it is possible that in the case of dedicated
revenue streams and certain types of structured financings, other types
of special purpose financial statements, project operating statements
or reports may be used to reflect the financial position of the credit
source for the financing. 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.106 Thus, as suggested by a number of commenters, the
undertaking must include audited financial statements only in those
cases where they otherwise are prepared.
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\1\06See Rule 15c2-12(b)(5)(i)(B).
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The amendments adopt the proposed requirement that the undertaking
specify the accounting principles pursuant to which the financial
information provided as part of the annual financial information will
be prepared.107 As discussed in the Proposing Release, it is
important that financial information be prepared on a consistent basis
to enable market participants to evaluate results and perform year to
year comparisons.108 The undertaking also must specify whether
audited financial statements will be provided as part of the annual
financial information.109
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\1\07See Rule 15c2-12(b)(5)(ii)(B).
\1\08See Proposing Release. A number of commenters responded to
the request for comment on specification of the use of generally
accepted accounting principles (``GAAP'') and generally accepted
auditing standards (``GAAS''). See, e.g., Letter of Comptroller of
the State of California; Letter of Government Accounting Standards
Board (``GASB''); Letter of NAST; Letter of National State Auditors
Association; Letter of Prudential Investment Corp. The amendments as
adopted do not mandate the use of either GAAP or GAAS.
\1\09See Rule 15c2-12(b)(5)(ii)(B).
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The amendments do not establish a standardized format for
presentation of financial information, or any specification of the
content of the information, other than by reference to the final
official statement. The annual financial information may be presented
through any disclosure document or set of documents, whatever their
form or principal purpose, that include the necessary information. The
amendments, as adopted, contemplate that sequential final official
statements prepared by frequent issuers may meet the standards of the
rule. As in the case of final official statements, annual financial
information submitted to a repository also may reference other
information already submitted to repositories or the MSRB, or filed
with the Commission.110
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\1\10Of course, any required information must be the subject of
an undertaking, and if the information cross referenced has not been
submitted to a repository or the MSRB, or filed with the Commission,
the undertaking will not have been complied with.
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(3) Operating data. The Proposed Amendments111 would have
required that the undertaking call for pertinent operating information,
and that the parties specify the pertinent operating information to be
provided on an annual basis. The basic concern of commenters regarding
this provision, in addition to issues of specification of form and
content discussed above, was that the use of the term ``pertinent'' did
not provide sufficient guidance as to who would determine what was
pertinent and what independent obligations Participating Underwriters
would have with respect to such evaluation.112
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\1\11Paragraph (b)(5)(i)(A) of the Proposed Amendments.
\1\12See, e.g., Letter of APPA; Letter of Fidelity Management
and Research Company; Letter of Hawkins Delafield & Wood.
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The amendments have been modified to respond to these comments. The
phrase ``pertinent'' has been deleted from the reference to operating
information and the word ``data'' is used to emphasize the intended
quantitative nature of the information. Operating data is included as a
subset of annual financial information, and the operating data to be
provided annually also is determined by reference to the type of
operating data presented in the final official statement. Thus, the
parties will determine at the outset, presumably with the assistance of
applicable industry guidelines, what operating data will be provided
both initially and on an ongoing basis. For example, in a conduit
health care financing, under current industry practice, an official
statement typically provides information relating to the obligated
party--the hospital--in an appendix. In addition to a discussion
describing the hospital, its administration and management, economic
base and service area, and capital plan, operating statistics such as
bed utilization, admissions and type, patient days, and payor
utilization often is provided. Under the amendments, in this type of
transaction, parties at the outset of a transaction will determine
which operating data will be included in the hospital appendix; such
information, in turn, will be the type of ``operating data'' to be
provided annually.
Some commenters expressed concern that the Proposed Amendments were
not sufficiently flexible to permit parties to address changing
conditions because the undertaking would have to describe the financial
and pertinent operating information to be provided in the
future.113 Nonetheless, the requirement that the undertaking
specify in reasonable detail the type of data that will be provided on
an ongoing basis, including the identity of the persons (or category of
persons) about which the information will relate has been retained. As
is the case with financial information, the intent of the amendments is
to give investors and market participants the ability to evaluate the
security through comparisons of the quantitative operating data
provided. Contrary to the suggestion of some commenters, the
undertaking would be meaningless if issuers and obligated persons could
unilaterally determine that certain types of information were no longer
necessary or meaningful to investors.
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\1\13See, e.g., Letter of Chapman and Cutler; Joint Response;
Letter of Kutak Rock.
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Because the amendments require that the undertaking specify only
the general type of information to be supplied, there should be
sufficient flexibility to accommodate subsequent developments that may
require adjustments in the financial information and operating data
that should be provided annually. Of course, nothing in the undertaking
will prevent a party from providing additional information,
particularly where such disclosure may be necessary to avoid liability
under the antifraud provisions of the federal securities laws.
Similarly, the amendments make specific provision for adjusting the
persons about which information is provided. As required in the case of
pooled financings, parties may identify the persons covered by
reference to objective selection criteria that will be applied on a
consistent basis between the offering statements and with regard to
annual financial information. Moreover, the party providing the
undertaking need not continue to provide information concerning persons
that are no longer obligated persons with respect to the municipal
securities.
A new provision has been added to the amendments which permits the
written agreement or contract to have a termination provision with
respect to any obligated person that is no longer directly or
indirectly liable for repayment of any of the obligations on the
municipal securities.114 Once an obligated person no longer has
any liability for repayment of the municipal securities, whether
through termination or expiration of its commitment to support payment,
or as a result of a defeasance of the municipal securities with no
remaining liability, then the obligation to provide annual financial
information and notices of events may terminate.
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\1\14See Rule 15c2-12(b)(5)(iii).
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2. Notice of Material Events
Commenters generally agreed that issuers and obligors should be
subject to an undertaking to provide event information to the
market.115 Brokers, dealers and municipal securities dealers
supported these provisions of the Proposed Amendments, because the use
of a list provides guidance as to what events should be
covered.116 Other commenters, however, felt that the list should
be deleted from the rule and that the concept of materiality should be
relied upon to determine what events should be the subject of
notices.117 Some commenters believed that the list of eleven
events should be expanded to include a provision that would cover any
other event that might reasonably be expected to have a material
adverse effect on the holders of the bonds.118
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\1\15See paragraph (b)(5)(i)(B) of the Proposed Amendments. See
also, Letter of A.G. Edwards; Letter of Chemical Securities; Letter
of J.J. Kenny Co., Inc. (``J.J. Kenny Co.''); Letter of MSRB.
\1\16See, e.g., Letter of Chemical Securities; Letter of Goldman
Sachs; Letter of George K. Baum; Letter of PSA.
\1\17See, e.g., Letter of CDFA; Letter of Gust & Rosenfeld;
Joint Response; Letter of Municipal Treasurers Association; Letter
of Rauscher Pierce Refsnes, Inc.; Letter of Standish Ayer & Wood,
Inc.
\1\18See, e.g., Letter of Chemical Securities; Letter of Edward
D. Jones & Co.; Letter of Finance Authority of Maine; Letter of
Ferris Baker Watts; Letter of Norwest Investment Services, Inc.;
Letter of Prudential Investment Corp.
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The list of eleven events has been retained in the
amendments.119 As indicated in the Proposing Release, the list of
eleven events was proposed in response to requests for guidance to
issuers and other participants in the municipal securities markets as
to those events that normally would reflect on the credit supporting
the municipal securities, as well as on the terms of the securities
that they issue, and thus normally would be considered material. Under
the amendments, only the occurrence of one of the specified events
will, if material, create an obligation to send a notice to the
repository.
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\1\19The introduction to the list also has been clarified to
indicate that the events relate specifically to the securities being
offered. See Rule 15c2-12(b)(5)(i)(C).
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The determination of whether other events also should be the
subject of notification pursuant to the information undertaking is left
to the parties. For example, some commenters requested that the list of
events be expanded to address circumstances when the notified events
have been cured or rectified, as well as other favorable
developments.120 The parties would be free to add such matters to
the undertaking. Issuers also may wish to send information regarding
material developments to the repositories, to ensure equal access to
that information by all investors and participants in the market,
regardless of whether the particular development is subject to the
undertaking.121
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\1\20See, e.g., Letter of NAST; Letter of the Treasurer of State
of California.
\1\21Several commenters have expressed concern that statements
by various elected officials made in a political context relating to
an issuer must now be included in information provided to a
repository. The amendments contain no such requirement. Moreover,
these concerns appear to be based upon a misunderstanding of the
reminder to issuers in the Interpretive Release that investors may
rely on a variety of formal and informal sources for continuing
information on municipal issuers, including public statements and
press releases concerning an entity's fiscal affairs made by
municipal officials, particularly in the absence of a more
standardized mechanism for disseminating information about the
municipal issuer to the market as a whole. The caution contained in
the Interpretive Release that the antifraud provisions may apply to
releases of information to the public reasonably expected to reach
investors and the trading market does not mean, as some commenters
inferred, that such statements are per se material; nor do the
amendments require that such statements, even where material, be
provided to the repositories.
---------------------------------------------------------------------------
Some commenters were concerned that permitting issuers and obligors
to send any notices or information they wished would flood the
repositories. Given the fact that event notices generally are short, it
appears that the repositories would be able to handle the flow of
notices. The Commission will, however, monitor developments in this
area.
Some commenters expressed concern that the event described as
``matters affecting collateral'' was too broad.122 In response to
such observations, that reference has been revised to reflect more
clearly the types of events relating to collateral that could affect
the creditworthiness of the security being offered. For instance, the
item was not intended to require disclosure in the event of a drop in
revenues or receipts securing payment. Rather, as more clearly
indicated in the revised amendments, it is intended to encompass the
release, substitution, or sale of property securing repayment of the
securities being offered.123
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\1\22See, e.g., Letter of ABA Business Law Section; Letter of
ABA Urban Law Section; Letter of NABL; Letter of NCHFFA; Letter of
New York State Housing Finance Agency; Letter of Orrick Herrington.
\1\23See Rule 15c2-12(b)(5)(i)(C)(10).
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Commenters also questioned whether the event relating to adverse
tax opinions or events affecting the tax-exempt status of the security
would include events not specific to an issuer, such as tax law changes
which may affect a multitude of issuances and which are broadly
reported.124 They argued that there is no need for each issuer to
make that disclosure, which may overwhelm the repositories. The
amendments do not include a uniform requirement for notification of
events having widespread impact that are widely reported. Frequently,
individual issuer disclosure may not affect the total ``mix'' of
information available to investors, for example where Congress amends
tax rates or alternative minimum tax rules that could affect an
investor's yield. On the other hand, it may not be clear, absent
individual disclosure, which classes of outstanding securities are
affected by the general events, for example, where the tax law change
affects a particular type of municipal security or financing structure.
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\1\24See, e.g., Letter of ABA Urban Law Section; Letter of Kutak
Rock; Letter of Orrick Herrington.
---------------------------------------------------------------------------
It is possible that an ``event'' affecting the tax-exempt status of
the security may include the commencement of litigation and other legal
proceedings, including an audit by the Internal Revenue Service, when
an issuer determines, based on the status of the proceedings and their
likely impact on holders of the municipal securities, among other
things, that such events may be material to investors.
Commenters expressed concern that the party providing the
undertaking may not have knowledge of the occurrence of events
affecting other parties that might be called for by the provisions of
the rule.125 This concern should be addressed by the revised
approach of enabling the parties to the transaction to determine who
will provide the undertakings. For example, in the conduit context, the
covenant could be provided by the person that is committed by contract
or other arrangement to support payment of debt service, rather than
the conduit issuer.
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\1\25See, e.g., Letter of First Southwest Company; Letter of New
York Dormitory Authority; Letter of the Treasurer of the State of
North Carolina; Letter of City of Pullman, Washington.
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The timing for providing the notification has not been changed from
the Proposed Amendments, which required that the notice be provided on
a ``timely'' basis. The amendments do not establish a specific time
frame as ``timely,'' because of the wide variety of events and issuer
circumstances. In general, this determination must take into
consideration the time needed to discover the occurrence of the event,
assess its materiality, and prepare and disseminate the notice.
A new paragraph has been added to the amendments126 that would
require a Participating Underwriter to reasonably determine that the
undertaking includes an agreement to notify the appropriate repository
if the annual financial information is not provided in the stated time
frame. Given the expressed concerns of some commenters regarding the
difficulty that they would face in determining whether an issuer or
other person was in compliance with any of its undertakings,127
this provision will help inform market participants if annual financial
information for such persons has not been made available in the agreed
upon time frame.
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\1\26See Rule 15c2-12(b)(5)(i)(D).
\1\27See, e.g., Letter of Gust & Rosenfeld.
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3. Location of Undertaking in a Written Agreement or Contract
The Proposed Amendments called for the undertaking to be contained
in a written agreement or contract for the benefit of holders of
municipal securities. Commenters provided a variety of views as to
where the undertakings should be memorialized, who should be parties to
such undertakings, and the need for flexibility to modify undertakings
in the future. Commenters suggested, for instance, that the
undertakings could be included in the trust indenture, bond resolution,
ordinance, or other legislation, a separate written agreement, or the
underwriting agreement or bond purchase agreement.
As discussed in the Proposing Release, many offerings of municipal
securities are issued pursuant to a trust indenture setting out the
covenants of the issuer for the benefit of the holders of the municipal
securities. If there is no trust indenture as part of an offering, as
is the case with general obligation and certain other types of bonds,
there may be a bond resolution, ordinance, or other legislation. Most
commenters addressing this issue considered the trust indenture, bond
resolution, ordinance, or other legislation to be appropriate for
undertakings to provide secondary market disclosure, because they would
create a direct obligation by issuers to bondholders.128
Commenters also suggested the use of a separate written agreement
between the issuer and the trustee as an appropriate method of
memorializing undertakings.129
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\1\28See, e.g., Letter of Merrill Lynch. Certain commenters
considered that undertakings in a trust indenture could prove
inflexible, as well as difficult to modify if they became
inappropriate in the future. Letter of ABA Business Law Section.
Other commenters considered that the issue of flexibility could be
addressed through careful drafting. Letter of Morgan Stanley; Letter
of Rauscher, Pierce, Refsnes, Inc.
\1\29See Letter of Chapman and Cutler (suggesting that an
agreement could be made between an issuer and a trustee or between
the issuer and a NRMSIR); Letter of Rauscher, Pierce, Refsnes, Inc.
These commenters noted that such agreements provide flexibility for
the future modification of the type, timing, or presentation of
secondary market disclosure, as well as remedies in the event of a
breach of the agreement.
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Several commenters suggested that the inclusion of the undertakings
in an underwriting agreement or bond purchase agreement would be
sufficient for purposes of Rule 15c2-12,130 though another
commenter suggested that a promise running to the benefit of the
underwriter, whether in a bond purchase agreement or in a separate
agreement, would be enforceable by existing and future bondholders only
on the basis of a third party beneficiary theory, the availability of
which may vary from state to state.131
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\1\30See e.g., Letter of Mudge Rose.
\1\31See Letter of Morgan Stanley. Morgan Stanley also suggested
that an underwriting agreement was an unsatisfactory vehicle for
undertakings to provide secondary market disclosure because an
underwriter of a specific bond issue should not be the recipient of
a long-term contract of this type. See Letter of Morgan Stanley.
Other commenters agreed that undertakings should be for the benefit
of holders of municipal securities, and that there should be no
requirement that undertakings be made for the benefit of
Participating Underwriters. See, e.g., Letter of Merrill Lynch
(noting that ``the holders of the securities have the greatest
interest in enforcing the covenant to provide information and are in
the best position to evaluate whether affirmative efforts to enforce
the covenant should be undertaken'').
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Because commenters were supportive of leaving the determination of
the location of the undertaking to the parties, the relevant language
of the Proposed Amendments, requiring a Participating Underwriter to
look to ``undertakings in a written agreement or contract for the
benefit of holders of such securities'' has been adopted as proposed.
Therefore, undertakings may be included in a trust indenture, bond
resolution or other legislation, or a separate written agreement.
Undertakings also may be included in the bond form itself. This general
requirement will create a direct obligation to bondholders, yet will be
flexible to address variations in state law, as well as the wide
variety of types and structures of offerings in the municipal
securities market.
The Commission also recognizes that an issuer's ability to contract
may be limited under state law. To the extent that issuers are
restricted by statute from entering into long-term contractual
arrangements, the undertaking may include a qualifier to its
obligation, such as that it is subject to appropriation.132
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\1\32Some commenters were concerned that in some jurisdictions,
an issuer's ability to agree to provide information beyond a one
year period might be restricted by state law. To address such
concerns, inclusion of a condition subsequent in the covenant, such
as subject to appropriation, might be appropriate. It is
anticipated, however, that should funds that would enable the issuer
to provide the agreed upon information not be appropriated,
disclosure of such fact would be made by notice to the repositories
pursuant to Rule 15c2-12(b)(5)(i)(D).
---------------------------------------------------------------------------
Commenters generally took the view that, while a statement in the
final official statement describing any undertakings to provide
secondary market disclosure would be an important addition to
undertakings in a written agreement or contract, in order to make clear
that the undertaking is an obligation of the issuer or obligated person
that is enforceable on behalf of bondholders, the undertaking should be
in a writing signed by the issuer or obligated person.133
Statements regarding an issuer's or obligated person's provision of
secondary market disclosure made exclusively in an official statement
would not satisfy the terms of Rule 15c2-12(b)(5) because they would
not create a contract enforceable on behalf of bondholders.
---------------------------------------------------------------------------
\1\33See, e.g., Letter of Chemical Securities; Letter of Dain
Bosworth, Inc.; Letter of Dillon, Read & Co., Inc.
---------------------------------------------------------------------------
Commenters addressing the inclusion of undertakings in various
documents were concerned that the failure to provide continuing
disclosure pursuant to the undertakings could be deemed a potential
event of default on the securities.134 Though a failure to comply
with the undertaking would be a breach of contract, the rule does not
specify the consequences of an issuer's breach of its undertakings to
provide secondary market disclosure. As called for by the Joint
Response, as well as other commenters, remedies for breach of any
undertaking under applicable state law are a subject for negotiation
between the parties to the Offering. To avoid uncertainties of
enforcement, the parties to a transaction are encouraged to enumerate
the consequences in the undertaking, including the available remedies,
for breach of the information undertaking.
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\1\34Commenters argued that an issuer's failure to comply with
undertakings to provide secondary market disclosure should not
result in an event of default. See, e.g., Letter of ABA Urban Law
Section; Letter of State of Washington, Office of the Treasurer;
Letter of Colorado Municipal Bond Supervision Advisory Board.
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B. Recommendation of Transactions in Municipal Securities
The Proposed Amendments would have prohibited any broker, dealer,
or municipal securities dealer from recommending the purchase or sale
of a municipal security unless it had specifically reviewed the
information the issuer of such municipal security had undertaken to
provide.135 The purpose of this provision of the Proposed
Amendments was to assist dealers in satisfying their obligation to have
a reasonable basis to recommend municipal securities by requiring them
to consider the most current information before making a
recommendation.
---------------------------------------------------------------------------
\1\35See paragraph (c) of the Proposed Amendments.
---------------------------------------------------------------------------
In view of the importance of secondary market liquidity in
municipal issues, the Commission requested comment on whether the
Proposed Amendments would have a substantial or long-lasting effect on
market liquidity. This request for comment was based on concerns raised
about whether municipal securities dealers would be willing to effect
secondary market transactions in a broad range of municipal securities
if review was required on a recommendation by recommendation basis.
Many commenters strongly criticized this provision of the Proposed
Amendments. The majority of commenters responded that requiring the
review of information prior to making a recommendation on the purchase
or sale of a municipal security would create substantial compliance
burdens for dealers.136 Commenters also noted that the specific
requirement to review information either would impel dealers to hire
larger research and analysis staffs,137 or, more likely, would
cause dealers to restrict the issuers whose municipal securities they
would trade to a smaller number of large and frequent issuers.138
Commenters predicted that, as a result, liquidity for all but the
largest and most frequent issuers would be reduced.139
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\1\36See Letter of PSA (noting that paragraph (c) would require
dealers to create records showing that they had reviewed municipal
securities).
\1\37See, e.g., Letter of Chapman and Cutler (brokers with fewer
analysts will be at a competitive disadvantage); Letter of Morgan
Stanley (noting that in order to comply with paragraph (c) as
proposed, reliance on third-party service providers for information
analysis would be required).
\1\38See, e.g., Joint Response; Letter of PSA; Letter of
Gabriel, Hueglin & Cashman.
\1\39See, e.g., Joint Response; Letter of PSA.
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Commenters proposed alternatives to the recommendation prohibition,
including basing the type of review of a municipal security, and
disclosure about such review, on whether the investor was an
institutional or retail investor,140 or on the type of municipal
security recommended.141 Other commenters suggested the continued
reliance on the reasonable basis standard inherent in the MSRB's
suitability rule, G-19, and the antifraud provisions, as discussed by
the Commission in the 1988 and 1989 Releases proposing and adopting
Rule 15c2-12, as well as the Interpretive Release.142
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\1\40Letter of Investment Company Institute (``ICI''). See also
Letter of MSRB; Letter of NABL. NABL suggested disclosure by dealers
as to whether a party has committed to provide secondary market
disclosure, and if not, the consequences of investing in the
securities.
\1\41See, e.g., Letter of Edward D. Jones & Co. (suggesting
application of the Proposed Amendments only to non-rated or special
assessment bonds); Letter of NABL (suggesting exemptions from the
amendments to Rule 15c2-12 for issuers that obtain and maintain an
investment grade rating, and for general obligation bonds and
revenue bonds issued to finance essential government purposes).
\1\42See, e.g., Letter of PSA; Letter of A.G. Edwards & Sons,
Inc. (reviewing issuer's disclosure is not the only way to form the
basis for a recommendation).
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As adopted, this provision has been modified in a number of
respects to respond to concerns expressed by commenters. In particular,
the amendments replace the proposed review standard with a requirement
that dealers have procedures in place that provide reasonable assurance
that they will receive promptly any notices of material events
regarding the securities that they recommend. The events are any of the
eleven events disclosed as described in Rule 15c2-12(b)(5)(i)(C), or
the notice of failure to provide annual financial information in
accordance with an undertaking as described in Rule 15c2-12(b)(5)(i)(D)
with respect to that security. Many dealers currently subscribe to
electronic reporting systems that give notice of significant events
made public by municipal issuers. To comply with the rule's
requirement, these dealers should make certain that these systems
receive, directly or indirectly, material event notices for issues the
dealer recommends. In addition, dealers should develop procedures to
ensure that notices of such events will be available to the staff
responsible for making recommendations.
In the Commission's view, the recommendation provision, as
modified, should substantially reduce the concerns of commenters with
respect to compliance burdens and effects on liquidity. It also will
help ensure that dealers will consider the material event notices that
issuers produce, thus enabling them to have an adequate basis on which
to recommend143 municipal securities.
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\1\43As noted in the Proposing Release, most situations in which
a dealer brings a municipal security to the attention of a customer
involve an implicit recommendation of the security to the customer.
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Moreover, even though the amendments do not require that dealers
directly review an issuer's ongoing disclosure before making each
recommendation, the Commission agrees with those commenters that said
that additional information made available by issuers will be taken
into account by dealers making recommendations regarding that security,
under the MSRB's fair dealing and suitability rules, and the antifraud
provisions.144 In addition to the Commission's past
interpretations of the responsibilities of dealers to have a reasonable
basis for their recommendations, the MSRB repeatedly has emphasized
that secondary market disclosure information publicized by issuers must
be taken into account by dealers to meet the investor protection
standards imposed by its investor protection rules. Specifically, MSRB
rule G-17 requires dealers to disclose material facts of a transaction
to the customer; MSRB rule G-19 requires dealers to ensure that any
transaction recommended to the customer is suitable for that customer;
and MSRB rule G-30 requires dealers to ensure that the prices set for
customer transactions are fair and reasonable. In its comment letter,
the MSRB noted that ``[i]f a dealer is not aware of major financial and
other material developments affecting an issuer's securities, it is
difficult or impossible for the dealer to comply with these
requirements.''145
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\1\44See, e.g., Letter of MSRB (emphasizing that, in the Board's
view, dealers would be responsible for continuing disclosure
information available in NRMSIRs even without the specific
``review'' requirement); Letter of Paine Webber.
\1\45Letter of MSRB (noting the requirements of the MSRB's rules
in commenting that the Proposed Amendment's requirement to review
periodic information is not a practical option for dealers).
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For example, if a dealer reviews an electronic reporting system for
material events relating to a security, and finds that an issuer has
submitted a notice that it has failed to provide annual financial
information on or before the date specified in the written agreement or
contract,146 that fact would be a significant factor to be taken
into account when the dealer formulates the basis for a recommendation
of such securities. While the dealer would not be prohibited per se
from recommending such municipal securities, notice that the issuer has
failed to provide annual financial information would be the type of
material information required to be disclosed to the customer pursuant
to MSRB rule G-17.147 Such a notice also would trigger a further
inquiry by the dealer to assure itself that it is cognizant of the
condition of the issuer or obligated persons, despite the absence of
promised information. This also would be true if a dealer attempts to
obtain an issuer's annual financial information, finds that it has not
been submitted to any repository, and the dealer had no record of the
issuer submitting a notice to this effect. In such cases, further
research may be necessary or advisable prior to making a recommendation
in the issuer's securities.
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\1\46See Rule 15c2-12(b)(5)(i)(D).
\1\47See MSRB Manual (CCH) 3581.30 (interpreting MSRB rule G-17
to require that a dealer disclose, at or prior to a sale, all
material facts concerning the transaction, including a complete
description of the security). See also 1988 Release at n. 50 and
accompanying text.
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C. Information Repositories
1. Background
Under Rule 15c2-12, as adopted in 1989, NRMSIRs essentially serve
the function of disseminators of official statements on behalf of
Participating Underwriters.148 The option of Participating
Underwriters to transfer their final official statement delivery
obligations to NRMSIRs has encouraged the development of
NRMSIRs.149 The three existing NRMSIRs are private vendors that
gather and disseminate final official statements pursuant to Rule 15c2-
12. In addition, although not required under existing provisions of the
rule, they provide other current information about municipal issuers to
the primary and secondary municipal securities markets.150
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\1\48Under Rule 15c2-12(b)(4), underwriters must deliver final
official statements to potential customers for a 90 day period after
the close of the underwriting period. The underwriters' 90 day
delivery obligation is shortened to 25 days if the final official
statement can be obtained from a NRMSIR.
\1\49Since the Commission adopted Rule 15c2-12, the Division of
Market Regulation issued three no-action letters recognizing
national information vendors as NRMSIRS, based on the standards set
out in the July 1989 Release. See Letters from Richard G. Ketchum,
Director, Division of Market Regulation to: Joseph V. Riccobono,
Executive Vice-President, American Banker-Bond Buyer (Jan. 4, 1990);
J. Kevin Kenny, President, Chief Executive Officer, J.J. Kenny Co.
(Jan. 4, 1990); and Michael R. Bloomberg, President, Bloomberg, L.P.
(Jan. 11, 1990). Recently, the Commission has received inquiries
from additional information vendors desiring to be recognized as
NRMSIRs.
\1\50NRMSIRs are not the only source of information in the
municipal market. The MSRB has developed its Municipal Securities
Information Library (``MSIL'') system, which presently collects
information and disseminates it to market participants and
information vendors. The Official Statement and Advance Refunding
Document-Paper Submission System (``OS/ARD'') of the MSIL collects
and makes available on magnetic tape and on paper official
statements and advance refunding notices. Securities Exchange Act
Release No. 29298 (June 13, 1991), 56 FR 28194. As a part of the
MSIL system, the MSRB commenced operation of its Continuing
Disclosure Information (``CDI'') pilot system in January, 1993. The
CDI system is a central repository for voluntarily submitted
official continuing disclosure documents relating to outstanding
municipal securities issues. Securities Exchange Act Release No.
30556 (April 6, 1992) 57 FR 12534. Neither the MSIL OS/ARD system
nor the CDI system is a NRMSIR; the Commission has previously
indicated that it would consider the competitive implications of a
MSRB request for NRMSIR status. See Securities Exchange Act Release
No. 28081 (June 1, 1990), 55 FR 23333, 23337 n.26.
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As a result of the amendments, NRMSIRs will play an expanded role
in the collection and dissemination of secondary market information. In
addition to the collection and dissemination of final official
statements, they will collect and disseminate annual financial
information, as well as notices of material events. The Commission is
sensitive to the need of NRMSIRs for flexibility, especially with
respect to the timing requirements for the dissemination of notices of
material events. The Commission will monitor developments in the
municipal securities market as participants adapt to the changes in
Rule 15c2-12, and fully expects that the current and potential NRMSIRs
are capable of adjusting to their expanded role. The Commission is of
the view that NRMSIRs, as private information vendors, will have
sufficient economic incentives to serve their expanded functions
resulting from the amendments to Rule 15c2-12, even in the absence of
the more specific review requirement of the recommendation prohibition
of the Proposed Amendments.151
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\1\51See, e.g., Letter of PSA (noting that the suggestion made
by some market participants that municipal securities dealers will
not utilize information they have long sought is implausible),
Letter of Ferris Baker Watts (information will be used if it is
available).
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2. Definition of Nationally Recognized Municipal Securities Information
Repository
The Commission requested comment on whether the term ``NRMSIR''
should be defined in Rule 15c2-12, and whether specific standards
should be established for NRMSIRs. If standards were to be established
in the rule, the Commission requested comment on whether proposed
standards set forth in the release were adequate.\152\ The majority of
state-based information gatherers and disseminators, and other NRMSIRs
that addressed the issue of defining the term ``NRMSIR'' supported
maintaining the guidelines already established by the Commission in the
1989 Release.\153\ After reviewing the comment letters, the Commission
has determined that the guidance established in the 1989 Release for
NRMSIRs should be modified only as necessary to reflect the amendments
to Rule 15c2-12. In determining whether a particular entity is a NRMSIR
the Commission will now consider, among other things, whether the
repository:
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\152\The Commission suggested that NRMSIRs (a) maintain current,
accurate information about municipal securities, including final
official statements, the issuer's annual final information, and
issuer's notices of material events; (b) have effective systems for
the timely collection, indexing, storage and retrieval of these
documents; and (c) be capable of national dissemination of final
official statements, annual financial information, and notices of
material events through electronic dissemination systems, in
response to telephone inquiries, and hard copy delivery via
facsimile, by mail and by messenger service. The Commission also
stressed the importance of timely public availability upon receipt
of information by a NRMSIR.
\153\See, e.g., Letter of Bloomberg L.P.; Letter of Cypress
Capital Corp. (a dealer chosen by the Louisiana Municipal
Association to assist it in developing a repository to collect and
disseminate information on Louisiana issuers of municipal
securities). In discussing NRMSIRs in the 1989 Release, the
Commission noted that in determining whether a particular entity is
a NRMSIR, it would look, among other things, at whether the
repository: (1) is national in scope; (2) maintains current,
accurate information about municipal offerings in the form of
official statements; (3) has effective retrieval and dissemination
systems; (4) places no limit on the issuers from which it will
accept official statements or related information; (5) provides
access to the documents deposited with it to anyone willing and able
to pay the applicable fees; and (6) charges reasonable fees. See
1989 Release at n. 65.
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(1) Is national in scope;
(2) Maintains\154\ current, accurate\155\ information about
municipal offerings in the form of official statements, and annual
financial information, notices of material events, and notices of a
failure to provide annual financial information undertaken to be
provided in accordance with Rule 15c2-12;
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\154\In the past, the Division of Market Regulation has required
that each NRMSIR maintain copies of all disclosure documents. In
view of recent requests from information collectors and
disseminators, the Division of Market Regulation will review, on a
case by case basis, NRMSIR proposals to satisfy the requirement to
maintain copies of disclosure documents through a contract with
another entity (including the MSRB) that will maintain copies. See
Letters from Laurence M. Landau, Vice President, Dow Jones Telerate,
to Elizabeth MacGregor, Division of Market Regulation, SEC, (July
18, 1994) and to Gautam S. Gujral, Division of Market Regulation,
SEC (August 4, 1994). See also Letter of Storch & Brenner (on behalf
of R.R. Donnelly Financial). This flexible approach, requested by
industry participants, may allow NRMSIRs to reduce the cost at which
they can collect and disseminate disclosure information to broker-
dealers and investors.
\155\It should be noted that NRMSIRs are not being required to
verify the accuracy of the information provided them. NRMSIRs are
required to accurately convey the information provided to them.
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(3) Has effective retrieval and dissemination systems;
(4) Places no limits on the persons from which it will accept
official statements, and annual financial information, notices of
material events, and notices of a failure to provide annual financial
information undertaken to be provided in accordance with Rule 15c2-12;
(5) Provides access to the documents deposited with it to anyone
willing and able to pay the applicable fees; and
(6) Charges reasonable fees.
While NRMSIRs may charge reasonable fees\156\ for the dissemination
of information, they may not charge issuers for accepting information
provided by issuers in accordance with Rule 15c2-12.\157\ In response
to concerns raised by commenters, the Commission also notes that giving
preferential treatment to certain brokers, dealers, and municipal
securities dealers by giving them market information before it is made
available to all customers would be wholly inconsistent with
recognition as a NRMSIR.\158\
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\156\See 1989 Release.
\157\See, e.g., Letter of Maine Municipal Bond Bank; Letter of
National Association of Independent Public Financial Advisers
(NRMSIR users, not issuers, should pay the NRMSIR costs).
\158\See, e.g., Letter of Colonial Management Associates, Inc.
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Comment also was requested on the ability and willingness of both
potential NRMSIRs, and those presently operating under no-action
letters, to meet the dissemination standards discussed in the Proposing
Release. NRMSIRs responded that they can meet these standards.\159\ In
order to implement these standards, the Commission has determined that
existing NRMSIRs should reapply for recognition from the Commission
under the revised criteria to continue to function as NRMSIRs.
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\159\Letter of Bloomberg L.P.; Letter of J.J. Kenny Co.; Letter
of The Bond Buyer.
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3. State Information Depositories
The Commission also requested comment on whether a state-based
depository could serve as an effective means to disseminate information
to the market for a nationally traded security, thus enabling the
appropriate parties to fulfill their disclosure obligations using a
state-based depository. Commenters expressed divergent views on this
issue.\160\ No state responded directly in response to the Commission's
request for comment on whether states are willing to make the necessary
financial commitment to create a state-based system. The Comptroller of
the State of New York pointed out, however, that his office already
collects financial data from local governments, and that there ``is an
appropriate and important function which the states may perform in the
secondary market disclosure process.''\161\ A number of third party
state-based information collectors also stated that they were in the
process of creating state-based repositories.\162\ Other such third
party state-based information collectors pointed out that they already
had working depositories in place.\163\
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\160\With one notable exception, national information vendors
generally did not see a need for state-based repositories and argued
that state-based repositories would indeed add to the complexity of
collecting and disseminating information. See, e.g., Letter of J.J.
Kenny Co. Some state-based information gatherers and disseminators,
however, argued that they already had created mechanisms for the
collection and dissemination of information, and their systems are
working well. The National Association of State Auditors,
Comptrollers and Treasurers (``NASACT'') pointed out that issuers
and other obligors will probably file with state-based repositories,
with whom they are accustomed to working and with whom they
typically must file in any event for regulatory purposes unrelated
to secondary market disclosure. NASACT argued that while the state
repositories do not wish to compete with NRMSIRs, state-based
repositories can serve an important role in enhancing the
accessibility of disclosure information for repackaging by the
NRMSIRs. See Letter of NASACT.
\161\See Letter of the Office of the State Comptroller, State of
New York.
\162\See, e.g., Letter of Cypress Capital Corporation (Louisiana
Municipal Security Disclosure Board ``intends to be in a position to
comply with the standards developed by the Commission for
NRMSIRs'').
\163\See Letter of Municipal Advisory Council of Texas; Letter
of Ohio Municipal Advisory Council.
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Based on these comments, and in light of existing disclosure
mechanisms and recent legislation in several states designed to enhance
secondary market disclosure,\164\ it appears that states can play a
beneficial role in enhancing disclosure in the municipal securities
market.\165\ State-based depositories will be in a special relationship
with filers of disclosure information to provide for convenient and
efficient dissemination. The Commission therefore encourages states to
develop state-based depositories.
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\164\South Carolina recently enacted legislation requiring
issuers to agree in a bond indenture to file an annual independent
audit within a specified number of days of the issuer's receipt
thereof and certain event information with a central repository.
South Carolina Senate Bill 1182, (effective September 1, 1994) to be
codified in S.C. Code Ann. Chapter 1, Title 11, Section 11-1-85
(1976). Similarly, Tennessee recently adopted legislation
authorizing the adoption of rules to facilitate secondary market
disclosure by any public entity, including the form and content of
that disclosure. Tenn. Code Ann. Sec. 9-21-151 (a) and (b)(2).
\165\See, e.g., Letter of the Office of the State Comptroller,
State of New York.
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To encourage the development of state-based depositories, the
Commission has amended Rule 15c2-12 to require that Participating
Underwriters reasonably determine that the information undertaken to be
provided, in addition to being submitted to the NRMSIRs, or, in some
cases, to the MSRB, will be submitted to a state information depository
(``SID''), if an appropriate SID has been established in that state.
Further, as discussed below,\166\ an exemption conditioned on making
annual financial information available upon request or to a SID, and
providing notices of material events to each NRMSIR or the MSRB, and to
a SID, has been adopted. An appropriate SID would be a depository
operated or designated\167\ by the state that receives information from
all issuers within the state, and makes this information available
promptly to the public on a contemporaneous basis.\168\ The Commission
staff is prepared to provide guidance in particular instances regarding
a SID's qualification for purposes of the rule.
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\166\See Section II.D.1. infra.
\167\There is no requirement that SIDs be instrumentalities of a
state. A number of private organizations already function as state-
based repositories, at times at no cost to the taxpayer. The
Commission defers to each state's determination whether to have a
private or public entity be its SID.
\168\As with NRMSIRs, for a SID to give preferential treatment
to a NRMSIR by giving it market information before it is made
available to other NRMSIRs would be wholly inconsistent with
functioning as a SID.
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4. Information Delivery Requirements
The Proposing Release asked to whom the required information should
be delivered. It also requested comment on the feasibility of requiring
NRMSIRs to inform the MSRB when they receive disclosure information
from issuers, and whether such information also should be required to
be placed with the MSRB, in addition to or in lieu of a NRMSIR. The
NRMSIRs did not address the issue of requiring them to inform the MSRB
whenever they received disclosure information from an issuer, although
one commenter argued that designating the MSRB as a repository only
would add an unnecessary layer to the dissemination process.\169\ Other
commenters suggested designating a single central repository.\170\
Similarly, some commenters suggested imposing a requirement that
disclosure information be delivered to all NRMSIRs,\171\ while others
suggested that NRMSIRs be required to share the information received
with other NRMSIRs,\172\ and a third group preferred the establishment
of a central index.\173\ State-based information gatherers and
disemminators had diverging views on this issue.\174\
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\169\Letter of Bloomberg L.P.
\170\See, e.g., Artemis Capital Group, Ltd. (proposing that the
Commission designate the MSRB's MSIL system as the single central
repository); Letter of Chapman and Cutler (there should be one
central source of information).
\171\See, e.g., Letter of J.J. Kenny Co.; Letter of National
Association of Independent Public Financial Advisers.
\172\See, e.g., Letter of MSRB; Letter of Richard A. Ciccarone.
\173\Letter of Storch & Brenner (on behalf of R.R. Donnelly
Financial); Letter of The Bond Buyer.
\174\The Ohio Municipal Advisory Council stated that it is
feasible to require repositories to inform the MSRB as to which
issuers have released information to it. Under Cypress Capital
Corporation's proposal, the indexing party would receive
descriptions of all materials received by the Louisiana Repository.
But see, Letter of NASACT (requirement that a repository be required
to notify a central index each time an item of information is
received by the repository is unduly burdensome and unnecessary).
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Based on these comments, the Commission has determined to require
that annual financial information undertaken to be provided be
deposited with each NRMSIR and the appropriate SID in the issuer's
state. Any audited financial statements submitted in accordance with
the undertakings also must be delivered to each NRMSIR and to the SID
in the issuer's state, if such a depository has been established. The
requirement to have annual financial information and audited financial
statements delivered to all NRMSIRs and the appropriate SID is a
modification of the Proposed Amendments. This modification will ensure
that all NRMSIRs receive disclosure information directly. It also
permits the Commission to adopt the amendments without a delay for the
creation of a central index or a system of information sharing among
NRMSIRs.\175\ The requirement to send information to all NRMSIRs rather
than a single NRMSIR of the issuer's or obligated person's choice,
should not impose significant burdens or costs, other than duplication
and mailing costs. Furthermore, this requirement to deliver disclosure
to the NRMSIRs and the appropriate SID also allays the anti-competitive
concerns raised by the creation of a single NRMSIR.
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\175\Some commenters expressed an interest in creating a central
index and an information sharing system. Letter of Storch & Brenner
(on behalf of R.R. Donnelly Financial); Letter of Dow Jones
Telerate, Inc. The Commission is prepared to review such mechanisms
for centralized collection and dissemination if requested to do so.
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In contrast to annual financial information, under the amendments,
notices of material events, as well as notices of a failure by an
issuer or other obligated person to provide annual financial
information must be delivered to each NRMSIR or the MSRB, and the
appropriate SID. The Commission is of the view that permitting issuers
and obligated persons to file such notices either with each NRMSIR or
with the MSRB (as well as the appropriate SID) will facilitate prompt
and wide disclosure. The amendments reflect the preference of some
commenters for filing such notices in one central place, such as the
MSRB, rather than having to file with multiple NRMSIRs. The Commission
expects that if notices are filed with the MSRB, the MSRB will make
these notices available to all NRMSIRs on a prompt and contemporaneous
basis.
5. Timing of Dissemination
Due to the time sensitive nature of notices of material event and
failures to provide annual financial statements, it is important that
such notices are disseminated quickly. These market requirements will
dictate that disseminators have a system in place by which information
vendors can make such notices available to broker-dealers and investors
quickly and contemporaneously.
NRMSIRs and other information vendors have indicated in their
comment letters that under certain circumstances a 15 minute
turnaround\176\ time for notices of material events, and a 24 hour
turnaround period for annual financial information may be feasible,
and, in some instances, already is in place.\177\ Nonetheless, because
the ultimate scope of the information undertakings was not known to the
existing and potential NRMSIRs at the time they submitted their
comments, the Commission intends to discuss with the NRMSIRs during the
recognition process appropriate and practicable turnaround standards
for information re-dissemination. Because SIDs are alternative sources
of information for every type of disclosure, the Commission does not
intend to impose strict turnaround times for SIDs. Instead, SIDs should
provide the Commission and users with a clear statement of turnaround
times that they will meet consistently.
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\176\The Commission considers ``turnaround time'' or
``turnaround period'' to mean the time between which a NRMSIR
initially receives information, and the time when such information
is made available to the public. NRMSIRs will be required to make
available the full text of notices of material events, and post the
receipt and availability of other documents within the designated
turnaround time period.
\177\The Bond Buyer stated that it broadcasts, through its
Munifacts News product, material events and time critical
announcements within 15 minutes of their receipt to municipal market
participants throughout the country. It stated that it also posts
documents within 24 hours of a document's receipt to the Bond
Buyer's On-line Index which is updated throughout the day. Letter of
The Bond Buyer. Similarly, Dow Jones Telerate stated that electronic
dissemination will allow the turnaround time of 24 hours for an
official statement and 15 minutes for secondary disclosure documents
on material events to be feasible. Letter of Dow Jones Telerate.
Material information is electronically disseminated on a ``real
time'' basis by Bloomberg L.P. Letter of Bloomberg L.P.
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6. Technological Considerations
The Commission also received many suggestions from information
gatherers and vendors on streamlining the filing of disclosure
information. These suggestions included requiring electronic filing of
disclosure information, providing filings on computer disks and
providing information to NRMSIRs as images of original source documents
rather than exclusively as coded text.\178\ Rather than dictate
standards, the Commission encourages municipal securities market
participants to coordinate their requirements and preferences on an
industry-wide basis.
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\178\J.J. Kenny Co. requested that documents be required to be
filed as images of original source documents rather than exclusively
as coded text. Dow Jones Telerate requested that Official statements
be filed along with one electronic disk copy of the original Word
Processing/Desktop publishing file with the label marked as to which
software and version was used. For secondary market disclosure
documents, Telerate advises using the NFMA proposed worksheets. The
Bond Buyer stated that ``collection would be most efficient if
documents were in ASCII and a common word processing or publishing
format''.
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D. Exemptions
The Proposed Amendments contained two new exemptions, which are
being adopted with certain modifications. A third new exemption from
the annual financial information requirement, for short-term
securities, also is being adopted. In addition, Rule 15c2-12's
limitation to primary offerings of municipal securities with an
aggregate principal amount of $1,000,000 or more, and its existing
exemptions, also apply to the amendments.\179\
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\179\Former paragraph (c) of Rule 15c2-12 was proposed to be,
and has been redesignated as paragraph (d)(1). This paragraph
exempts primary offerings of municipal securities in authorized
denominations of $100,000 or more, if such securities: (1) are sold
to no more than 35 investors, each of whom the underwriter
reasonably believes is capable of evaluating the investment and who
is not purchasing with a view to distribution; (2) have a maturity
of nine months or less or; (3) at the option of the holder may be
tendered to an issuer at least as frequently as every nine months.
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1. Small Issuer Exemption
The Proposed Amendments would have exempted from the provisions of
the undertaking and recommendation prohibitions of the rule municipal
securities issued in Offerings by issuers that had (i) less than
$10,000,000 in principal amount of securities outstanding, including
the offered securities and (ii) issued less than $3,000,000 in
aggregate amount of municipal securities in the most recent 48 months
preceding the offering.
A number of commenters discussed the appropriateness of the
proposed dollar exemption, with comments ranging from a call for
increased thresholds to no thresholds at all.180 Some commenters
believed that the thresholds should be increased, because many small
municipalities would exceed these thresholds if they delay their
financings in order to issue a greater amount of bonds at one time. The
commenters argued that these are small, infrequent issuers with limited
trading in the secondary market and the cost of compliance would
outweigh the benefits received from improved secondary market
disclosure.181
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\1\80See, e.g. Letter of ALHFA; Letter of CDFA; Letter of NFMA;
Letter of National Association of Independent Public Finance
Advisors; Letter of Prudential Investment Corp.; Letter of PSA;
Letter of Washington State Auditor.
\1\81See, e.g., Letter of NAST; Letter of SIA.
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Other commenters took exception to the proposed thresholds because
they were too high. These commenters argued that the exemption as
proposed would exclude from coverage of the rule the types of issuers
who have historically had deficient disclosure practices and
disproportionate numbers of defaults.182 A number of commenters
also argued that the $3 million/48 month component of the threshold was
too complex.183
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\1\82See, e.g. Letter of Chemical Securities; Letter of Eaton
Vance Management; Letter of Edward D. Jones & Co.; Letter of Morgan
Stanley; Letter of National Association of Independent Public
Finance Advisors; Letter of Norwest Investment Services.
\1\83See, e.g., Letter of APPA; Letter of The Bank of New York;
Joint Response.
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As adopted,184 the exemption retains the aggregate $10,000,000
limitation, but eliminates the $3,000,000 threshold. Instead, in
addition to falling under the $10,000,000 in outstanding securities
threshold, the exemption is conditioned upon an issuer or obligated
person providing a limited disclosure undertaking. Under this
undertaking, financial information and operating data concerning each
obligor for which financial information or operating data is presented
in the final official statement, must be provided upon request to any
person, or be provided at least annually to the appropriate SID. The
undertaking would specify the type of financial information and
operating data that will be made available annually, which must include
financial information and operating data that is customarily prepared
by the obligated person and is publicly available. The final official
statement must describe where and how the financial information and
operating data can be obtained.
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\1\84See Rule 15c2-12(d)(2).
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Financial information and operating data of governmental issuers
generally are subject to freedom of information laws, and thus would be
publicly available for purposes of this condition of the exemption.
Conduit borrowers generally provide annual financial information to
trustees, credit enhancers, or the financing agency that issued the
municipal securities, and thus would have no difficulty complying with
this standard if that information is made publicly available. To the
extent that an obligated person does not currently publicly disclose
that information, they are free to specify the type of information they
are undertaking to provide on an ongoing basis, but they must agree to
provide some information. That information need not be the same type of
information presented in the official statement. Nor would these exempt
persons have to release their audited financial statements, unless they
otherwise customarily prepare and make their audited financial
statements publicly available. Moreover, the limited disclosure
undertaking need only cover those obligors for which financial
information or operating data is provided in the official statement.
In addition to providing financial information and operating data
annually, notices of material events must be sent to each NRMSIR or to
the MSRB, and the appropriate SID. This public information condition
has been adopted in response to comments highlighting the need for
information regarding small issuers accessing the public debt
market.185
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\1\85See Joint Response. A number of other commenters expressed
concern about the lack of information on issuers in market segments
in which the higher proportion of defaults have occurred. See note
182, supra and accompanying text. The effective date for this
information undertaking condition on the small issuer exemption will
be delayed until January 1, 1996. See Section II.E., infra.
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The threshold of $10,000,000 has been retained, notwithstanding
comments that it was too high or too low. According to statistics
provided by one commenter,186 in 1993, 71% of the approximately
52,000 municipal issuers had under $10,000,000 in outstanding municipal
securities. Accordingly, the amendments as proposed already provided
significant exemptive relief for small issuers. Indeed, the fact that a
majority of issuers fall below that threshold supports conditioning the
exemption on a commitment to provide a limited amount of secondary
market information from exempt issuers. Even with that condition, a
significant percentage of offerings would remain totally exempt from
the amendments as adopted, because over 20% of the total issuances in
1993 were under $1,000,000.187 As these statistics demonstrate,
the exemption should exclude a large percentage of small infrequent
issuers.
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\1\86See Letter of The Bond Buyer.
\1\87See Letter of The Bond Buyer. The requirements of Rule
15c2-12, as amended, may not be avoided by breaking up an offering
into several offerings of less than $1,000,000, where the offerings
are of the same class of securities and are for the same purpose.
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Commenters also questioned how the aggregate thresholds were
measured, including whose securities would be included and whether the
exemption applied only to outstanding securities that were sold in
Offerings subject to the rule.188 Many commenters indicated that
the thresholds should be separately applied to each issuer of municipal
securities and each underlying obligor.189 Thus, in the case of
conduit issuers that have no liability on the municipal securities,
commenters argued that the thresholds should be determined by reference
to the persons who are the beneficiaries of the financing.190 Some
commenters argued that those issuers that had different types of
financings that relied on separate revenue streams for repayment, such
as dedicated tax revenues, should not be foreclosed from relying on the
small issuer exemption for each financing.191
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\1\88See, e.g., Letter of ABA Urban Law Section; Letter of CIFA;
Letter of Colorado Municipal Bond Supervision Advisory Board.
\1\89See, e.g., Letter of ALHFA; Letter of CDFA; Letter of
Hawkins Delafield & Wood.
\1\90See, e.g., Letter of Alaska Municipal Bond Bank; Letter of
Bose, McKinney & Evans; Letter of CDFA; Letter of Oregon Economic
Development Department.
\1\91See, e.g., Letter of ABA Business Law Section; Letter of
Chapman and Cutler; Letter of NABL.
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To address the first of these concerns, the amendments have been
revised to clarify that the availability of the exemption turns on the
amount of outstanding municipal securities for which an issuer or
obligated person also is an obligated person. An issuer of municipal
securities would need to satisfy the threshold only if it were an
obligated person with respect to the security being offered. Under this
approach, if a financing agency that is offering obligations that have
some recourse to the agency, only those outstanding securities of the
agency that likewise are recourse would count toward the threshold. If
the financing agency does not issue recourse securities, the exemption
will be unavailable only if a conduit borrower obligated on the
municipal securities being offered is an obligated person with respect
to more than $10,000,000 in outstanding municipal securities. If any
one obligated person in an Offering exceeds the threshold, then the
entire Offering, including all obligated persons, will be subject to
the rule. Subsequent non-recourse offerings by the financing agency
would not be affected, but would be subject to a similar test.
With respect to the second concern, however, the amendments require
that an obligated person aggregate all its outstanding obligations,
even if some are payable from separate dedicated revenue sources. For
example, a city or county that issues securities for a number of
different purposes could not qualify as a small and infrequent issuer
merely because its outstanding securities are payable from separate
revenue streams. Thus, while a governmental issuer's outstanding
obligations need not be aggregated with that of non-governmental
obligated persons, a governmental issuer could not avoid aggregation of
its securities by restricting repayment to separate revenue
streams.192
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\1\92Significant indicia of whether an issuer in a revenue-type
financing is in fact a part of a larger municipality would be
whether the issuer's accounts are reflected in the municipality's
financial statements and whether the municipality's officials or
personnel manage the separate financing programs.
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Commenters also discussed a related issue of what securities would
be included in the calculation. Commenters contended that only publicly
offered securities should be included in the calculation. Other
commenters questioned how short term obligations such as bond
anticipation notes, refunded bonds and installment/lease purchase
agreements would be treated. Several commenters suggested that the
threshold should be measured only against publicly offered, long-term
bonds.193
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\1\93See, e.g., Letter of ABA Business Law Section; Letter of
Day Berry & Howard; Joint Response; Letter of Kutak Rock; Letter of
the Treasurer of the State of North Carolina.
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The amendments have been clarified in this respect to exclude from
the threshold calculation securities that were offered in transactions
exempt from Rule 15c2-12 because they were otherwise exempt as private
placements and short term financings. In addition, to the extent that
an issuer or obligated person is no longer liable for repayment on
bonds, as with certain defeased bonds, then such bonds would not be
included in the calculation of the threshold for such issuer or
obligated person.
A number of commenters indicated that an exemption should be
available based on the number of holders of the municipal
securities.194 However, in accordance with concerns voiced by
other commenters regarding the difficulty in ascertaining the number of
holders due to the fact that most municipal securities are held in
street name through a very limited number of depositories,195 the
amendments do not adopt any exemption based on the number of holders of
the municipal securities.
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\1\94See, e.g., Letter of ABA Business Law Section; Letter of
Kutak Rock; Letter of Mudge Rose; Letter of National League of
Cities.
\1\95See, e.g., Letter of Bank One Corporation; Letter of
Reliance Trust Company.
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