-------------------- BEGINNING OF PAGE #1 -------------------
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.
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 240.15c2-12(c) which is effective on January 1,
1996.
Compliance Date: 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 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,
N.W., Washington, D.C. 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
-[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
(continued...)
-------------------- BEGINNING OF PAGE #2 -------------------
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 15c2-12-[3]- 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
-[1]-(...continued)
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
(continued...)
-------------------- BEGINNING OF PAGE #3 -------------------
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
-[5]-(...continued)
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 inter-dealer 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.
-------------------- BEGINNING OF PAGE #4 -------------------
is difficult to come by even for professional municipal analysts,
to say nothing of retail investors."-[8]-
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.
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
-[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.
-[9]- Securities Act Release No. 7049 (March 9, 1994), 59 FR
12748.
-[10]- Securities 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 broker, 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).
-------------------- BEGINNING OF PAGE #5 -------------------
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.
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.
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
-[13]- Participating 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.
-[14]- Among 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.
-[15]- The 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.
-------------------- BEGINNING OF PAGE #6 -------------------
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]-
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.
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
-[16]- The 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.
-[17]- See 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").
-[18]- See, 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").
-------------------- BEGINNING OF PAGE #7 -------------------
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
-[19]- See Rule 15c2-12(a).
-[20]- The amendments also include an exemption for small and
infrequent issuers. See Section II.D.1., infra.
-[21]- Rule 15c2-12(b)(5)(i).
-[22]- These concepts are discussed in Section II.A.1.b.,
infra.
-------------------- BEGINNING OF PAGE #8 -------------------
information and event notices to various information
repositories.-[23]-
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]-
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]-
-[23]- Information repositories are discussed in Section
II.C., infra.
-[24]- See Letter of Merrill Lynch, Pierce, Fenner & Smith
("Merrill Lynch").
-[25]- As 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.
-[26]- See 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.
-[27]- In 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
(continued...)
-------------------- BEGINNING OF PAGE #9 -------------------
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]-
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
-[27]-(...continued)
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.
-[28]- Information 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).
-[29]- Whether 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)
-[30]- As 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).
-------------------- BEGINNING OF PAGE #10 -------------------
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."
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
-[31]- See 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).
-[32]- See, 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").
-------------------- BEGINNING OF PAGE #11 -------------------
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]-
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).
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]-
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.
As the Commission recognized in the Interpretive
Release,-[37]- the extensive voluntary guidelines issued by the
-[33]- See, 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.
-[34]- See Rule 15c2-12(f)(3).
-[35]- See, 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").
-[36]- See 1989 Release.
-[37]- Interpretive 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.
-------------------- BEGINNING OF PAGE #12 -------------------
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.
(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]-
-[38]- See note 31, supra.
-[39]- See Interpretive Release at Section III.A.
-[40]- See Joint Response.
-[41]- See 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").
-[42]- See Letter of Mudge Rose; Letter of New York Dormitory
Authority.
-[43]- See Letter of ABA Urban Law Section; Letter of Kutak
Rock; Letter of Texas Public Finance Authority.
-[44]- See, 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.
-------------------- BEGINNING OF PAGE #13 -------------------
The definition of final official statement has been revised
to make explicit-[45]- 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.
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.
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
-[45]- See 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).
-[46]- Rule 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.
-[47]- Participating 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.
-[48]- See, e.g., Letter of New York Dormitory Authority;
Letter of the Treasurer of the State of Connecticut.
-------------------- BEGINNING OF PAGE #14 -------------------
about these parties is made available to the repositories or, if
a reporting company, filed with the Commission.-[49]-
(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 Release-[51]- 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.
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]-
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
-[49]- See, 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.
-[50]- Rule 15c2-12(f)(3).
-[51]- See Interpretive Release at Section III.C.4.
-[52]- See, e.g., Letter of Chemical Securities, Inc.
("Chemical Securities"); Letter of Ferris Baker Watts;
Letter of National Federation of Municipal Analysts
("NFMA").
-[53]- See Rule 15c2-12(f)(3).
-[54]- See Letter of PSA.
-------------------- BEGINNING OF PAGE #15 -------------------
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]-
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.
(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
-[55]- Paragraph (b)(5)(i)(A) of the Proposed Amendments.
-[56]- See, 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.
-[57]- See, 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.
-[58]- See, 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").
-[59]- 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. See Section II.A.1.b.(1). infra.
-------------------- BEGINNING OF PAGE #16 -------------------
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]-
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,
-[60]- See, e.g., Letter of American Municipal Power -- Ohio,
Inc. ("AMP -- Ohio"); Letter of Gilmore & Bell; Letter
of Treasurer of the State of California.
-[61]- See, e.g., Letter of Financial Guaranty Insurance
Company ("FGIC"); Letter of Goldman Sachs; Letter of
Hawkins Delafield & Wood; Letter of Thacher Proffitt &
Wood.
-[62]- See, e.g., Letter of Kutak Rock.
-[63]- See, e.g., Letter of ABA Urban Law Section; Letter of
Kutak Rock; Letter of State of Washington, Office of
the Treasurer.
-[64]- See, e.g., Letter of APPA; Letter of George K. Baum &
Co.; Letter of CDFA; Letter of Eaton Vance Management;
Letter of NCHFFA.
-[65]- See, 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.
-[66]- See, 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.
-[67]- See, 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
(continued...)
-------------------- BEGINNING OF PAGE #17 -------------------
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]-
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.
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
-[67]-(...continued)
taxpayers, having no connection to or responsibility in
connection with the financing would not inadvertently
be swept within the scope of the definition.
-[68]- See, 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.
-[69]- See, e.g., Letter of ABA Business Law Section; Letter
of ALHFA; Letter of PSA.
-[70]- See, e.g., Letter of FGIC; Joint Response; Letter of
NABL; Letter of PSA.
-[71]- See Rule 15c2-12(f)(10).
-[72]- See, e.g., Letter of Bose McKinney & Evans; Letter of
Mudge Rose; Letter of New York Dormitory Authority;
Letter of Orrick Herrington.
-[73]- See, e.g., Letter of Bose McKinney & Evans; Letter of
Goldman Sachs; Letter of Indiana Bond Bank; Letter of
Hawkins Delafield & Wood.
-[74]- For 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
(continued...)
-------------------- BEGINNING OF PAGE #18 -------------------
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.
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
-[74]-(...continued)
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.
-[75]- 17 CFR 239.131.
-[76]- 17 CFR 240.3b-5
-[77]- See, e.g., Letter of Fidelity Management and Research
Company; Letter of Mudge Rose; Letter of NABL; Letter
of Texas Public Finance Authority.
-[78]- See Rule 15c2-12(b)(5)(i).
-------------------- BEGINNING OF PAGE #19 -------------------
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.
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]-
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
-[79]- Under 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.
-[80]- Guidelines 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.
-[81]- Although 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.
-------------------- BEGINNING OF PAGE #20 -------------------
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]-
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
-[82]- See Rule 15c2-12(b)(5)(ii).
-[83]- See, 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.
-------------------- BEGINNING OF PAGE #21 -------------------
upon request or in public reports that have been submitted to
appropriate regulatory authorities.-[84]-
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.
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.
-[84]- See, 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.
-[85]- See, 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.
-------------------- BEGINNING OF PAGE #22 -------------------
(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 securities-[86]- 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]-
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,
-[86]- The term "issuer of municipal securities," as defined
in Rule 15c2-12, includes issuers of separate
securities as well.
-[87]- See, 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.
-[88]- See, e.g., Letter of ABA Urban Law Section; Letter of
ALHFA; Letter of Kutak Rock; Letter of NABL.
-------------------- BEGINNING OF PAGE #23 -------------------
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.
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.
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
-[89]- See, e.g., Letter of Bond Investors Association; Letter
of PSA; Letter of Texas Public Finance Authority.
-[90]- See, e.g., Letter of Bank One Corporation; Letter of
Reliance Trust Company; Letter of State Street Bank and
Trust Company.
-[91]- Rule 15c2-12(f)(9).
-[92]- See, 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.
-------------------- BEGINNING OF PAGE #24 -------------------
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.
(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]-
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
-[93]- See, e.g., Letter of Dain Bosworth, Inc.; Letter of
First Albany Corporation; Letter of MSRB; Letter of
NFMA; Letter of Standish, Ayer & Wood, Inc.
-[94]- See, e.g., Letter of CDFA; Letter of Chapman and
Cutler; Letter of CIFA; Joint Response; Letter of H.M.
Quackenbush; Letter of NABL.
-[95]- See, e.g. Letter of Texas Water Development Board;
Letter of State of Washington, Office of the Treasurer.
-[96]- See, e.g., Letter of City of Barling; Letter of Dain
Bosworth, Inc.; Letter of Friday, Eldridge & Clark.
-[97]- See, 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.
-[98]- See, e.g., Letter of AMP -- Ohio; Letter of Washington
Finance Officers Association.
-[99]- See, 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").
-------------------- BEGINNING OF PAGE #25 -------------------
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]-
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]-
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]-
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
-[100]- See, e.g., Letter of Treasurer of the State of North
Carolina; Letter of Texas Office of the State Auditor.
-[101]- See, e.g., Letter of the Treasurer of the State of
North Carolina; Letter of Texas Office of the State
Auditor.
-[102]- See, 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.
-[103]- See Letter of ABA Urban Law Section.
-[104]- See, 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.
-[105]- See, e.g., Letter of the Treasurer of the State of
North Carolina; Letter of Washington Finance Officers
Association.
-------------------- BEGINNING OF PAGE #26 -------------------
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.
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]-
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]-
(3) Operating Data
The Proposed Amendments-[111]- 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
-[106]- See Rule 15c2-12(b)(5)(i)(B).
-[107]- See Rule 15c2-12(b)(5)(ii)(B).
-[108]- See 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.
-[109]- See Rule 15c2-12(b)(5)(ii)(B).
-[110]- Of 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.
-[111]- Paragraph (b)(5)(i)(A) of the Proposed Amendments.
-------------------- BEGINNING OF PAGE #27 -------------------
Participating Underwriters would have with respect to such
evaluation.-[112]-
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.
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
-[112]- See, e.g., Letter of APPA; Letter of Fidelity
Management and Research Company; Letter of Hawkins
Delafield & Wood.
-[113]- See, e.g., Letter of Chapman and Cutler; Joint
Response; Letter of Kutak Rock.
-------------------- BEGINNING OF PAGE #28 -------------------
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.
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]-
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
-[114]- See Rule 15c2-12(b)(5)(iii).
-[115]- See 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.
-[116]- See, e.g., Letter of Chemical Securities; Letter of
Goldman Sachs; Letter of George K. Baum; Letter of PSA.
-[117]- See, 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.
-[118]- See, 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.
-[119]- The 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).
-------------------- BEGINNING OF PAGE #29 -------------------
occurrence of one of the specified events will, if material,
create an obligation to send a notice to the repository.
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]-
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,
-[120]- See, e.g., Letter of NAST; Letter of the Treasurer of
State of California.
-[121]- Several 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.
-[122]- See, 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.
-------------------- BEGINNING OF PAGE #30 -------------------
substitution, or sale of property securing repayment of the
securities being offered.-[123]-
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.
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.
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 amendments-[126]- 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
-[123]- See Rule 15c2-12(b)(5)(i)(C)(10).
-[124]- See, e.g., Letter of ABA Urban Law Section; Letter of
Kutak Rock; Letter of Orrick Herrington.
-[125]- See, 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.
-[126]- See Rule 15c2-12(b)(5)(i)(D).
-------------------- BEGINNING OF PAGE #31 -------------------
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.
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]-
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
-[127]- See, e.g., Letter of Gust & Rosenfeld.
-[128]- See, 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.
-[129]- See 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.
-[130]- See e.g., Letter of Mudge Rose.
-------------------- BEGINNING OF PAGE #32 -------------------
of a third party beneficiary theory, the availability of which
may vary from state to state.-[131]-
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]-
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
-[131]- See 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").
-[132]- Some 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).
-[133]- See, e.g., Letter of Chemical Securities; Letter of
Dain Bosworth, Inc.; Letter of Dillon, Read & Co., Inc.
-------------------- BEGINNING OF PAGE #33 -------------------
satisfy the terms of Rule 15c2-12(b)(5) because they would not
create a contract enforceable on behalf of bondholders.
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.
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.
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
-[134]- Commenters 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.
-[135]- See paragraph (c) of the Proposed Amendments.
-[136]- See Letter of PSA (noting that paragraph (c) would
require dealers to create records showing that they had
reviewed municipal securities).
-[137]- See, 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).
-------------------- BEGINNING OF PAGE #34 -------------------
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]-
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]-
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
-[138]- See, e.g., Joint Response; Letter of PSA; Letter of
Gabriel, Hueglin & Cashman.
-[139]- See, e.g., Joint Response; Letter of PSA.
-[140]- Letter 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.
-[141]- See, 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).
-[142]- See, 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).
-------------------- BEGINNING OF PAGE #35 -------------------
event notices that issuers produce, thus enabling them to have an
adequate basis on which to recommend-[143]- municipal securities.
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]-
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,
-[143]- As 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.
-[144]- See, 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.
-[145]- Letter 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).
-[146]- See Rule 15c2-12(b)(5)(i)(D).
-[147]- See 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.
-------------------- BEGINNING OF PAGE #36 -------------------
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.
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]-
-[148]- Under 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.
-[149]- Since 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.
-[150]- NRMSIRs 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
(continued...)
-------------------- BEGINNING OF PAGE #37 -------------------
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]-
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
-[150]-(...continued)
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.
-[151]- See, 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).
-[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
(continued...)
-------------------- BEGINNING OF PAGE #38 -------------------
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:
(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;
(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.
-[153]-(...continued)
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.
-[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.
-------------------- BEGINNING OF PAGE #39 -------------------
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]-
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.
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
-[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.
-[159]- Letter of Bloomberg L.P.; Letter of J.J. Kenny Co.;
Letter of The Bond Buyer.
-[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.
-------------------- BEGINNING OF PAGE #40 -------------------
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]-
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.
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
-[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.
-[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.
-[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
(continued...)
-------------------- BEGINNING OF PAGE #41 -------------------
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.
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]-
-[167]-(...continued)
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.
-[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).
-------------------- BEGINNING OF PAGE #42 -------------------
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.
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
-[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.
-[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.
-------------------- BEGINNING OF PAGE #43 -------------------
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.
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.
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]-
-[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.
-[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".
-[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
(continued...)
-------------------- BEGINNING OF PAGE #44 -------------------
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]-
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]-
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
-[179]-(...continued)
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.
-[180]- See, 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.
-[181]- See, e.g., Letter of NAST; Letter of SIA.
-[182]- See, 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.
-[183]- See, e.g., Letter of APPA; Letter of The Bank of New
York; Joint Response.
-[184]- See Rule 15c2-12(d)(2).
-------------------- BEGINNING OF PAGE #45 -------------------
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.
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]-
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
-[185]- See 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.
-[186]- See Letter of The Bond Buyer.
-[187]- See 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.
-------------------- BEGINNING OF PAGE #46 -------------------
these statistics demonstrate, the exemption should exclude a
large percentage of small infrequent issuers.
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]-
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
-[188]- See, e.g., Letter of ABA Urban Law Section; Letter of
CIFA; Letter of Colorado Municipal Bond Supervision
Advisory Board.
-[189]- See, e.g., Letter of ALHFA; Letter of CDFA; Letter of
Hawkins Delafield & Wood.
-[190]- See, e.g., Letter of Alaska Municipal Bond Bank;
Letter of Bose, McKinney & Evans; Letter of CDFA;
Letter of Oregon Economic Development Department.
-[191]- See, e.g., Letter of ABA Business Law Section; Letter
of Chapman and Cutler; Letter of NABL.
-------------------- BEGINNING OF PAGE #47 -------------------
governmental issuer could not avoid aggregation of its securities
by restricting repayment to separate revenue streams.-[192]-
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]-
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.
A variety of other comments were raised relating to
exemptions, and a number of alternative exemptions were proposed,
including exemptions based on the type of issuer or the existence
of an investment grade rating.-[196]- Commenters also believed
that an exemption should be available for securities covered by
bond insurance or other credit enhancement, such as bank letters
-[192]- Significant 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.
-[193]- See, 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.
-[194]- See, e.g., Letter of ABA Business Law Section; Letter
of Kutak Rock; Letter of Mudge Rose; Letter of National
League of Cities.
-[195]- See, e.g., Letter of Bank One Corporation; Letter of
Reliance Trust Company.
-[196]- See, e.g., Letter of ICI; Letter of McDonald & Company
Securities; Letter of NABL; Letter of National League
of Cities; Letter of NFMA; Letter of New York Dormitory
Authority; Letter of Putnam Investment Management;
Letter of State of Utah, Office of the State Treasurer;
Letter of State of Washington, Office of the State
Treasurer.
-------------------- BEGINNING OF PAGE #48 -------------------
of credit.-[197]- Except as described above, the exemptions have
not been revised to adopt these suggestions. Commenters,
including some bond insurance providers,-[198]- expressed the
view that the existence of credit enhancement does not
necessarily eliminate the need for information regarding the
underlying credit.
A number of commenters also argued that new exemptions
should be added that would mirror exemptions under the Securities
Act.-[199]- Some commenters argued that exemptions should be
included for non-profit entities that would have their own
exemption from registration under the Securities Act.-[200]- The
Commission is not including any exclusion in the amendments for
any such issuers. Issuers accessing the tax-exempt public
securities markets have obligations to promote the integrity and
efficiency of those markets. As the Commission noted in the
Interpretive Release, the high level of defaults in sectors such
as healthcare, lifecare, retirement homes and multifamily
housing, relative to other market sectors,-[201]- and the past
problems with the sufficiency of information in many of these
sectors, weighs heavily against adopting such exclusions.
2. Exemption from the Annual Financial Information
Requirement for Short-term Securities
A new exemption has been added to exempt from the
requirement for an undertaking calling for annual financial
information, Offerings of securities with an 18 month or shorter
maturity.-[202]- The new exemption is in response to comments
suggesting that the rule not require annual financial information
in situations where the securities would mature shortly after, or
possibly even before, the annual financial information would be
-[197]- See, e.g., Letter of Delaware County Industrial
Development Authority; Letter of Financial Security
Assurance; Letter of McNair & Sanford; Letter of Smith,
Gambrell & Russell.
-[198]- As some commenters indicated, the existence of credit
enhancement or other programmatic enhancement features
does not eliminate the need for information on
underlying obligated persons, particularly where there
is a long term guarantee, because of the potential
impact of a default on the pricing of the securities.
See Letter of Kutak Rock on behalf of Financial
Guaranty Insurers; Letter of FGIC; Letter of Prudential
Investment Corp. See also Securities and Exchange
Commission, Report by the Securities and Exchange
Commission on the Financial Guaranty Market: The Use of
the Exemption In Section 3(a)(2) of the Securities Act
for Securities Guaranteed by Banks and the Use of
Insurance Policies to Guarantee Debt Securities (August
28, 1987).
-[199]- See, e.g., Letter of ABA Business Law Section; Letter
of Goldman Sachs; Letter of Morgan Stanley; Letter of
Mudge Rose; Letter of Thacher Proffitt & Wood.
-[200]- See, e.g., Letter of Morgan Stanley; Letter of Mudge
Rose; Letter of New York Dormitory Authority.
-[201]- Interpretive Release at Section III.D. See also Letter
of The Bond Buyer.
-[202]- Rule 15c2-12(d)(3).
-------------------- BEGINNING OF PAGE #49 -------------------
due.-[203]- The provisions of the amended rule relating to
notices of material events, however, would apply to these
Offerings absent some other Rule 15c2-12 exemption.
3. Exemptions from the Recommendation Prohibition
The Proposed Amendments also included a new
exemption,-[204]- which would have permitted the recommendation
in the secondary market of securities that were not subject to
the underwriting prohibition, either because they were sold in a
primary offering-[205]- of municipal securities with an aggregate
principal amount of less than $1,000,000, or came within the
existing exemptions for limited placements, short-term
securities, and securities with demand features,-[206]- or within
the new exemption for small, infrequent issuers.-[207]- This
exemption has been adopted as proposed,-[208]- with the exception
that securities sold in an exempt Offering that is subject to the
limited undertaking condition,-[209]- are not exempt from the
application of the recommendation prohibition. Pursuant to this
element of the small issuer exemption, dealers must have in place
procedures to receive notices of material events.-[210]-
4. Transactional Exemption
The existing Rule 15c2-12 transactional exemption-[211]-
permits the Commission to exempt any Participating Underwriter
from any requirement of the rule. Because Rule 15c2-12, as
amended, places requirements on brokers, dealers, and municipal
securities dealers in the secondary market, the transactional
exemption has been amended to clarify that the Commission has
exemptive authority with respect to both Participating
Underwriters, in connection with Offerings, and with respect to
-[203]- See, e.g., Letter of ABA Urban Law Section; Letter of
Chemical Securities; Letter of Day, Berry & Howard;
Letter of Kutak Rock; Letter of Maryland Department of
Economic and Employment Development.
-[204]- See paragraph (d)(3) of the Proposed Amendments.
-[205]- This exemption has been modified to clarify that the
recommendation prohibition will not apply to primary or
secondary market trading where municipal securities are
exempt at the time of their original issuance. Several
commenters noted that the inclusion of the term "a
primary offering of" created confusion, based on the
stated purpose of the exemption in the Proposing
Release. See, e.g., Letter of Kutak Rock; Letter of
ABA Urban Law Section; Letter of Colorado Municipal
Bond Supervision Advisory Board; Letter of Day, Berry &
Howard. The exemption has been modified to delete that
term, thus giving the exemption its intended meaning.
-[206]- See paragraph (d)(1) of the Proposed Amendments.
-[207]- See paragraph (d)(2) of the Proposed Amendments.
-[208]- Rule 15c2-12(d)(4).
-[209]- See Rule 15c2-12(d)(2)(ii).
-[210]- See Rule 15c2-12(b)(5)(i)(C).
-[211]- Former paragraph (d) of Rule 15c2-12.
-------------------- BEGINNING OF PAGE #50 -------------------
brokers, dealers, and municipal securities dealers recommending
transactions in the secondary market.-[212]-
E. Transitional Provision
The rule as amended contains a transitional provision for
the amendments to Rule 15c2-12.-[213]- The underwriting
prohibition applies to a Participating Underwriter that has
contractually committed to act as an underwriter in an Offering
on or after the effective date of the rule, July 3, 1995;
provided that issuers need not undertake to provide annual
financial information for fiscal years ending prior to January 1,
1996. The recommendation prohibition will become effective on
January 1, 1996. The Commission is of the view that this delay
of six months beyond the effective date of the amendment relating
to the underwriting of municipal securities is sufficient to
permit participants in the municipal securities market to design
procedures for compliance with the provisions of Rule 15c2-12.
Brokers, dealers and municipal securities dealers must,
therefore, have procedures in place to comply with the
recommendation prohibition on or before January 1, 1996.
Finally, the limited undertaking condition to the small issuer
exemption need not be satisfied for offerings commencing prior to
January 1, 1996.
III. Effects on Competition and Regulatory Flexibility Act
Considerations
Section 23(a)(2) of the Exchange Act-[214]- requires the
Commission, in adopting rules under the Act, to consider the
anticompetitive effects of those rules, if any, and to balance
that impact against the regulatory benefits gained in terms of
furthering the purposes of the Exchange Act. The Commission has
considered the amendments to Rule 15c2-12 in light of the
standard cited in Section 23(a)(2) and believes the adoption of
the amendments will not impose any burden on competition not
necessary or appropriate in furtherance of the Exchange Act.
In addition, the Commission has prepared a final regulatory
flexibility analysis ("FRFA"), pursuant to the requirements of
the Regulatory Flexibility Act-[215]- regarding the proposed
amendments to Rule 15c2-12. The Commission requested comment on
the extent to which current practice deviates from the
requirements of the proposed amendments, and the extent to which
additional costs may be imposed on small issuers, brokers,
dealers, and municipal securities dealers if the amendments are
adopted as proposed. The FRFA indicates that the amendments to
the rule could impose some additional costs on small broker-
dealers and municipal issuers. Nonetheless, the Commission is of
the view that many of the substantive requirements of the
amendments already are observed, absent access to the continuing
information provided by the amendments, by issuers, brokers,
dealers, and municipal securities dealers as a matter of business
practice, or to fulfill their existing obligations under the
antifraud provisions of the federal securities laws. To the
extent that the Proposed Amendments would have imposed additional
costs on small issuers, brokers, dealers, and municipal
securities dealers, in response to commenters' concerns, the
Commission has modified the amendments as described.
-[212]- The transactional exemption also has been redesignated
as paragraph (e) of Rule 15c2-12.
-[213]- See Rule 15c2-12(g).
-[214]- 15 U.S.C. 78w(a)(2).
-[215]- 5 U.S.C. 604.
-------------------- BEGINNING OF PAGE #51 -------------------
A copy of the FRFA may be obtained from Janet W. Russell-
Hunter, Attorney, Office of Chief Counsel, Division of Market
Regulation, Securities and Exchange Commission, 450 Fifth Street,
N.W., Mail Stop 7-10, Washington, D.C. 20549, (202) 942-0073.
-------------------- BEGINNING OF PAGE #52 -------------------
List of Subjects in 17 CFR Part 240
Reporting and recordkeeping requirements, securities.
Text of Amendments to Rule 15c2-12
In accordance with the foregoing, Title 17, Chapter II of
Title 17 of the Code of Federal Regulations is amended as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE
ACT
OF 1934
1. The authority citation for Part 240 continues to read
in part as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n,
78o, 78p, 78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23,
80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
2. Section 240.15c2-12 is amended by adding a Preliminary
Note preceding paragraph (a); revising paragraph (a); adding
paragraph (b)(5); redesignating paragraph (c) through paragraph
(f) as paragraph (d) through paragraph (g); adding paragraph (c);
revising newly designated paragraph (d), paragraph (e), and
paragraph (f)(3); adding paragraph (f)(9) and paragraph (f)(10);
and adding four sentences to the end of newly designated
paragraph (g) to read as follows:
240.15c2-12 Municipal securities disclosure.
Preliminary Note: For a discussion of disclosure obligations
relating to municipal securities, issuers, brokers, dealers, and
municipal securities dealers should refer to Securities Act
Release No. 7049, Securities Exchange Act Release No. 33741, FR-
42 (March 9, 1994). For a discussion of the obligations of
underwriters to have a reasonable basis for recommending
municipal securities, brokers, dealers, and municipal securities
dealers should refer to Securities Exchange Act Release No. 26100
(Sept. 22, 1988) and Securities Exchange Act Release No. 26985
(June 28, 1989).
(a) General. As a means reasonably designed to prevent
fraudulent, deceptive, or manipulative acts or practices, it
shall be unlawful for any broker, dealer, or municipal securities
dealer (a "Participating Underwriter" when used in connection
with an Offering) to act as an underwriter in a primary offering
of municipal securities with an aggregate principal amount of
$1,000,000 or more (an "Offering") unless the Participating
Underwriter complies with the requirements of this section or is
exempted from the provisions of this section.
* * * * *
(b) Requirements. * * *
(5)(i) A Participating Underwriter shall not purchase or
sell municipal securities in connection with an Offering unless
the Participating Underwriter has reasonably determined that an
issuer of municipal securities, or an obligated person for whom
financial or operating data is presented in the final official
statement has undertaken, either individually or in combination
with other issuers of such municipal securities or obligated
persons, 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:
(A) To each nationally recognized municipal securities
information repository and to the appropriate state information
depository, if any, annual financial information for each
obligated person for whom financial information or operating data
is presented in the final official statement, or, for each
obligated person meeting the objective criteria specified in the
undertaking and used to select the obligated persons for whom
financial information or operating data is presented in the final
-------------------- BEGINNING OF PAGE #53 -------------------
official statement, except that, in the case of pooled
obligations, the undertaking shall specify such objective
criteria;
(B) If not submitted as part of the annual financial
information, then when and if available, to each nationally
recognized municipal securities information repository and to the
appropriate state information depository, audited financial
statements for each obligated person covered by paragraph
(b)(5)(i)(A) of this section;
(C) In a timely manner, to each nationally recognized
municipal securities information repository or to the Municipal
Securities Rulemaking Board, and to the appropriate state
information depository, if any, notice of any of the following
events with respect to the securities being offered in the
Offering, if material:
(1) Principal and interest payment delinquencies;
(2) Non-payment related defaults;
(3) Unscheduled draws on debt service reserves reflecting
financial difficulties;
(4) Unscheduled draws on credit enhancements reflecting
financial difficulties;
(5) Substitution of credit or liquidity providers, or their
failure to perform;
(6) Adverse tax opinions or events affecting the tax-exempt
status of the security;
(7) Modifications to rights of security holders;
(8) Bond calls;
(9) Defeasances;
(10) Release, substitution, or sale of property securing
repayment of the securities;
(11) Rating changes; and
(D) In a timely manner, to each nationally recognized
municipal securities information repository or to the Municipal
Securities Rulemaking Board, and to the appropriate state
information depository, if any, notice of a failure of any person
specified in paragraph (b)(5)(i)(A) of this section to provide
required annual financial information, on or before the date
specified in the written agreement or contract.
(ii) The written agreement or contract for the benefit of
holders of such securities also shall identify each person for
whom annual financial information and notices of material events
will be provided, either by name or by the objective criteria
used to select such persons, and, for each such person shall:
(A) Specify, in reasonable detail, the type of financial
information and operating data to be provided as part of annual
financial information;
(B) Specify, in reasonable detail, the accounting principles
pursuant to which financial statements will be prepared, and
whether the financial statements will be audited; and
(C) Specify the date on which the annual financial
information for the preceding fiscal year will be provided, and
to whom it will be provided.
(iii) Such written agreement or contract for the benefit of
holders of such securities also may provide that the continuing
obligation to provide annual financial information and notices of
events may be terminated with respect to any obligated person, if
and when such obligated person no longer remains an obligated
person with respect to such municipal securities.
(c) Recommendations. As a means reasonably designed to
prevent fraudulent, deceptive, or manipulative acts or practices,
it shall be unlawful for any broker, dealer, or municipal
securities dealer to recommend the purchase or sale of a
municipal security unless such broker, dealer, or municipal
securities dealer has procedures in place that provide reasonable
-------------------- BEGINNING OF PAGE #54 -------------------
assurance that it will receive prompt notice of any event
disclosed pursuant to paragraph (b)(5)(i)(C), paragraph
(b)(5)(i)(D), and paragraph (d)(2)(ii)(B) of this section with
respect to that security.
(d) Exemptions. (1) This section shall not apply to a
primary offering of municipal securities in authorized
denominations of $100,000 or more, if such securities:
(i) Are sold to no more than thirty-five persons each of
whom the Participating Underwriter reasonably believes:
(A) Has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and
risks of the prospective investment; and
(B) Is not purchasing for more than one account or with a
view to distributing the securities; or
(ii) Have a maturity of nine months or less; or
(iii) At the option of the holder thereof may be tendered to
an issuer of such securities or its designated agent for
redemption or purchase at par value or more at least as
frequently as every nine months until maturity, earlier
redemption, or purchase by an issuer or its designated agent.
(2) Paragraph (b)(5) of this section shall not apply to an
Offering of municipal securities if, at such time as an issuer of
such municipal securities delivers the securities to the
Participating Underwriters:
(i) No obligated person will be an obligated person with
respect to more than $10,000,000 in aggregate amount of
outstanding municipal securities, including the offered
securities and excluding municipal securities that were offered
in a transaction exempt from this section pursuant to paragraph
(d)(1) of this section;
(ii) An issuer of municipal securities or obligated person
has undertaken, either individually or in combination with other
issuers of municipal securities or obligated persons, in a
written agreement or contract for the benefit of holders of such
municipal securities, to provide:
(A) Upon request to any person or at least annually to the
appropriate state information depository, if any, financial
information or operating data regarding each obligated person for
which financial information or operating data is presented in the
final official statement, as specified in the undertaking, which
financial information and operating data shall include, at a
minimum, that financial information and operating data which is
customarily prepared by such obligated person and is publicly
available; and
(B) In a timely manner, to each nationally recognized
municipal securities information repository or to the Municipal
Securities Rulemaking Board, and to the appropriate state
information depository, if any, notice of events specified in
paragraph (b)(5)(i)(C) of this section with respect to the
securities that are the subject of the Offering, if material; and
(iii) the final official statement identifies by name,
address, and telephone number the persons from which the
foregoing information, data, and notices can be obtained.
(3) The provisions of paragraph (b)(5) of this section,
other than paragraph (b)(5)(i)(C) of this section, shall not
apply to an Offering of municipal securities, if such municipal
securities have a stated maturity of 18 months or less.
(4) The provisions of paragraph (c) of this section shall
not apply to municipal securities:
(i) Sold in an Offering to which paragraph (b)(5) of this
section did not apply, other than Offerings exempt under
paragraph (d)(2)(ii) of this section; or
(ii) Sold in an Offering exempt from this section under
paragraph (d)(1) of this section.
-------------------- BEGINNING OF PAGE #55 -------------------
(e) Exemptive Authority. The Commission, upon written
request, or upon its own motion, may exempt any broker, dealer,
or municipal securities dealer, whether acting in the capacity of
a Participating Underwriter or otherwise, that is a participant
in a transaction or class of transactions from any requirement
of this section, either unconditionally or on specified terms and
conditions, if the Commission determines that such an exemption
is consistent with the public interest and the protection of
investors.
(f) Definitions. * * *
(3) The term final official statement means a document or
set of documents prepared by an issuer of municipal securities or
its representatives that is complete as of the date delivered to
the Participating Underwriter(s) and that sets forth information
concerning the terms of the proposed issue of securities;
information, including financial information or operating data,
concerning such issuers of municipal securities and those other
entities, enterprises, funds, accounts, and other persons
material to an evaluation of the Offering; and a description of
the undertakings to be provided pursuant to paragraph (b)(5)(i),
paragraph (d)(2)(ii), and paragraph (d)(2)(iii) of this section,
if applicable, and of any instances in the previous five years in
which each person specified pursuant to paragraph (b)(5)(ii) of
this section failed to comply, in all material respects, with any
previous undertakings in a written contract or agreement
specified in paragraph (b)(5)(i) of this section. Financial
information or operating data may be set forth in the document or
set of documents, or may be included by specific reference to
documents previously provided to each nationally recognized
municipal securities information repository, and to a state
information depository, if any, or filed with the Commission. If
the document is a final official statement, it must be available
from the Municipal Securities Rulemaking Board.
* * * * *
(9) The term annual financial information means financial
information or operating data, provided at least annually, of the
type included in the final official statement with respect to an
obligated person, or in the case where no financial information
or operating data was provided in the final official statement
with respect to such obligated person, of the type included in
the final official statement with respect to those obligated
persons that meet the objective criteria applied to select the
persons for which financial information or operating data will be
provided on an annual basis. Financial information or operating
data may be set forth in the document or set of documents, or may
be included by specific reference to documents previously
provided to each nationally recognized municipal securities
information repository, and to a state information depository, if
any, or filed with the Commission. If the document is a final
official statement, it must be available from the Municipal
Securities Rulemaking Board.
(10) The term obligated person means any person, including
an issuer of municipal securities, who is either generally or
through an enterprise, fund, or account of such person committed
by contract or other arrangement to support payment of all, or
part of the obligations on the municipal securities to be sold in
the Offering (other than providers of municipal bond insurance,
letters of credit, or other liquidity facilities).
* * * * *
(g) Transitional Provision. * * * Paragraph (b)(5) of this
section shall not apply to a Participating Underwriter that has
contractually committed to act as an underwriter in an Offering
of municipal securities before July 3, 1995; except that
paragraph (b)(5)(i)(A) and paragraph (b)(5)(i)(B) shall not apply
-------------------- BEGINNING OF PAGE #56 -------------------
with respect to fiscal years ending prior to January 1, 1996.
Paragraph (c) shall become effective on January 1, 1996.
Paragraph (d)(2)(ii) and paragraph (d)(2)(iii) of this section
shall not apply to an Offering of municipal securities commencing
prior to January 1, 1996.
By the Commission.
Jonathan G. Katz
Secretary
Dated: November 10, 1994