OS/ARD Facility – Official Statement and Advance Refunding
Document system (OS/ARD) of the MUNICIPAL SECURITIES
INFORMATION LIBRARY® system or MSIL® system
In the course of its rulemaking activities, the Board has observed a critical need for an improved flow of information about municipal securities issues into the market. The municipal securities market is quite diverse. At year-end 1989, there were approximately 1.1 million outstanding issues comprising $740 billion in state and local government debt (excluding short-term notes). In 1989 alone, about 8500 issues comprising $122.5 billion in state and local debt were issued. These issues include not only general obligation bonds, but revenue and conduit bonds as well. The features of many municipal securities have become quite complex. There are a wide variety of call provisions that operate under specified conditions. In addition, put provisions often contain preconditions which the holder must satisfy prior to exercising the put. The credit structures of these securities, particularly revenue and conduit bonds, also can be complex.
Board rules require dealers to explain to a potential customer all material facts about a proposed transaction, to recommend the transaction to the customer only if it is suitable for the customer and to price the transaction correctly. These requirements are for the protection of customers and are similar or identical to the requirements placed on dealers in other securities markets. However, it has become clear that dealers do not always have ready access to information on municipal securities necessary for them to meet these standards. Such information includes the official statement or OS (the only document which provides a complete, official description of the terms of the security which applies for the up to 40 year life of the security); advance refunding documents or ARDs (information regarding a change in the credit of the security brought about by an advance refunding) and continuing disclosure information or CDI (secondary market information regarding the securities or the credit of the issuer, such as an issuer’s annual financial report or a trustee’s report on the status of a structured financing).
Information about municipal securities exists. Under SEC rule 15c2-12, issuers must prepare an OS for most issues over $1 million. OSs also generally are voluntarily prepared for many issues under $1 million. In addition, in recent years, more issuers are following the suggestions of issuer and analyst groups and providing CDI. Finally, as noted above, trustees, pursuant to trust indentures for municipal securities issues, provide information to bondholders on the status of structured issues.
Such information, however, is not being made available to the market in any organized manner. Municipal securities are exempt from any Commission filing requirement. Thus, there is no central location containing a complete set of disclosure documents. Rule G-36 will enable the Board to collect OSs for most issues. They are available, however, only for review and copying in the Board’s public access facility. OSs for issues subject to SEC Rule 15c2-12 also are being provided by underwriters to Nationally Recognized Municipal Securities Information Repositories (“NRMSIRs”) in order to limit the period of time after the end of the underwriting period underwriters must provide the information to potential customers. However, Rule 15c2-12 does not apply to issues under $1 million or certain private placements and short-term issues. Also, each NRMSIR does not necessarily have a complete set of OSs because underwriters may provide OSs to any of the three current NRMSIRs and there is no linkage among them. In addition, there is currently no central source of ARDs or CDIs. Finally, trustees often provide notice on the status of issues exclusively to bondholders, creating an opportunity for bondholders to buy or sell in advance of the news reaching the market.
The Board believes that improved access to information about municipal securities is important to the municipal securities market not only so that dealers can comply with the Board’s fair practice rules, but also to enhance the integrity and efficiency of the market in general. When information is not readily available to the market, issuers may have to pay more in order to sell their securities. So too, in the secondary market, bonds are being priced on incomplete information. It is just as important to ensure a fair price to a customer purchasing a $5,000 retirement home bond from a $900,000 issue as it is to a customer purchasing a $5,000 state general obligation bond. Such market inefficiencies are costly to all market participants – issuers, dealers, and investors.
Because of the Board’s role as the primary industry regulator, it has been asked to address a number of problems which touch on the activities of dealers, but which also relate to the municipal securities market in a more general manner. Examining these problems has involved numerous communications with diverse parties, including investors, issuers, dealers, bond trustees, bond insurance companies, registered securities clearing agencies and others. In addition to the information which comes to the Board through these channels, the dealer representatives, investor representatives, issuer representatives and other public representatives who have served on the Board also have brought their own expertise to address factors which affect the integrity and efficiency of the market. The Board has seen that market inefficiencies and other disclosure problems often result when market participants do not have ready access to official information about municipal securities issues.
The Board believes that the municipal securities market needs a central facility through which important information regarding municipal securities and their issuers is made more readily available to market participants and information vendors. Thus, the Board plans to establish and operate the Official Statement and Advance Refunding Document – Paper Submission system (OS/ARD) of the MUNICIPAL SECURITIES INFORMATION LIBRARY system or MSIL system to provide market participants and information vendors with better access to more information regarding the description of municipal securities and the issuers of these securities. The Board believes that the MSIL system will increase the efficiency and fairness of the municipal securities market and protect investors and the public interest. This increased market efficiency should result in lower costs for issuers in the primary market and fairer prices in the secondary market reflecting all available official information about the issue.
The Board, pursuant to rule G-36, currently collects and stores OSs for most municipal securities issues in paper form. In addition, the Board plans to add other documents in paper form to the MSIL system – ARDs provided by underwriters and CDI voluntarily provided by issuers and their agents. Thus, complete up-to-date information on municipal securities will be available from a central source. The Board’s role in the MSIL system will be analogous to the SEC’s role in collecting, storing, and providing access to corporate securities documents. However, it is important to emphasize that all CDI will be provided voluntarily to the MSIL system.
Through its public access facility, any interested party may review and copy OSs at the Board’s offices. The OSs are available within one business day of receipt by the Board. Because of the limited accessibility the Board’s public access facility provides and because of the inefficiencies of storing paper documents, the Board plans to store these documents (along with ARDs and CDI) electronically. The Board also plans, through the MSIL system, to make these documents available, on paper and tape. The users of the MSIL system will be value-added resellers, municipal securities professionals and individual members of the public. The MSIL system is intended to foster “value added” information products. Vendors will be able to resell the whole documents and/or information from those documents (e.g., extracts, summaries) in any format the vendor chooses (e.g., paper, CD Rom, optical disks). The daily tape can be translated into character-coded form to allow for computerized text searches of documents (as one vendor has proposed to do). Demand for new products will occur as market participants seek to ensure that they have full access to the information found in the MSIL system database and will be shaped by availability of documents in electronic format.
The Board does not intend, through its MSIL system, to be the sole source of information regarding municipal securities or to provide value-added services, rather it seeks to broaden access to existing public information through a variety of channels that are responsive to the needs of market participants. In this regard, the Board welcomes the plans of other groups to develop or serve as collectors and disseminators of municipal securities information. The Board does not believe that its efforts will inhibit the efforts of these groups to increase the availability of municipal securities information. In fact, the Board believes that the MSIL system will assist others in their important information collection and dissemination activities because of the completeness of the information in the MSIL system and its easy accessibility in a useful format.
The Board believes that it is imperative that the MSIL system start providing access to municipal securities information as soon as possible. Within approximately six months of Commission approval, the MSIL system can begin operation.
System Objectives and Overview
The MSIL system will be planned and operated under four guiding principles which define its scope and intent.
1. The purpose of the MSIL system is to collect, electronically store, and make available OSs and ARDs for municipal securities issues to improve accessibility of information about municipal securities.
2. The MSIL system will be planned and operated in a manner that will provide equal access to documents to any interested person in a non-discriminatory manner, in a manner that will not confer special or unfair economic benefit to any person, and in a cost-effective manner supported by a combination of Board funds and user fees.
3. The Board will encourage and facilitate the development of information dissemination services by private vendors, but the MSIL system will be planned and operated in a manner to preserve its flexibility to meet additional information needs, beyond dissemination of OSs and ARDs, when there is a clear and continuing failure by private sector information sources to provide information that is essential to the integrity and efficiency of the market.
4. The MSIL system will be planned and operated in a manner to ensure as much flexibility as possible in adjusting to changes in technology of document storage and dissemination and to changes in disclosure practices in the market.
The Board’s operation of the facility will be subject to several important legal and policy constraints:
1. The Board has no statutory authority to regulate the content or format of disclosure by municipal securities issuers.
2. It will not alter the substance of the documents or summarize the submissions.
3. It will not store or transmit documents in any way that would be likely to introduce errors into the data.
These restrictions require that the MSIL system be capable of accepting paper copies of OSs and ARDs, in any format, and of producing exact paper copies of these documents, upon request. The Board has concluded, after receiving the advice of its technical advisor, the MITRE Corporation, that electronic document storage by use of the digital imaging process is the best method of meeting these requirements while, at the same time, offering the best means for inexpensive long-term storage of and easy access to the documents. This has led the Board to adopt a plan to implement a system which can be expanded and improved to facilitate the purposes of the MSIL system and the guiding principles. In the system, the paper source documents submitted will be converted to digitized electronic images which can be used to print a faithful copy of the original. Two initial outputs will be produced: single printed copies of OSs and ARDs and a magnetic tape containing all documents imaged in one day.
The central computer index, discussed below, and the imaging technology have been designed to include the possibility of accepting paper copies of CDI, such as annual financial reports, submitted on a voluntary basis. The systems regarding CDI also will be operated according to the Board’s guiding principles. As noted previously, the Board will begin developing its plan for accepting voluntary submissions of paper CDI, and pricing related output, soon after the OS/ARD system is operational. This plan will be filed with the Commission for its review and approval.
The Board also intends to move rapidly to implement the capability to accept voluntary submissions of, and to provide access to, electronic submissions of certain CDI. Electronic submissions would be more efficient to accept, store and process than paper documents and would be in a better format for manipulation, transmission and production of derived information products by VARs. Of course, the MSIL system always will accept paper copies of OSs, ARDs and CDI.
The MSIL system computer index will be developed to ensure that all documents received by the Board will be tracked efficiently and accessed quickly. In addition, because a number of documents may relate to the same issue (e.g., an OS, ARD and CDI), the computer index also must record relationships between documents. The basic concept is that of an electronic “file folder” -- all documents pertaining to an issue will be related through the index. This will facilitate the identification of documents which relate to specific issues.
The computer index will, of necessity, be complex. While it will be based on the CUSIP numbering system, these numbers can change over time. Also, there are numerous relationships between documents (e.g., CDI must be related to a particular issue and that issue’s other documents) and documents may relate to one or more than one issue (e.g., refunded and refunding issues). The MSIL system computer index, however, will provide the necessary means for the Board to identify documents in a comprehensive and complete storage and access facility.
The MSIL system will be composed of subsystems which capture and disseminate documents, as well as administer the system. In the document capture subsystem, the source documents will be received, indexed, scanned, quality checked and stored. A computer index database will be built using information from the documents themselves, the Board’s Form G-36 (provided by underwriters pursuant to rule G-36), and issue identification data from the CUSIP Service Bureau. Within three business days of receipt of each new issue document, the system will have completed its processing and will make the document available in both tape and paper form. The document capture subsystem will accept current OSs and ARDs at the rate they are submitted to the MSIL system. The rate of production of these documents varies from year to year. For purposes of sizing the system, the Board used an annual estimate of 10,000 OSs and 3,000 ARDs. A backlog of OSs and ARDs produced since January 1, 1990, also will be entered. These documents, in addition to historic OSs and ARDs, if made available, will be used to maintain a level daily workload. Based on these factors, the system has been designed to accommodate easily an annual processing rate of one million pages. The priorities for entering documents into the system will be (1) new issue documents; (2) the back-log of documents from January 1, 1990 received pursuant to rule G-36; and (3) certain other OSs and ARDs which have been made available. Thus, the Board expects that new issue documents generally will be processed in the MSIL system and available on the daily tape and by request within three days of receipt and, in most cases, probably earlier. Of course, documents received by the Board will be available at its public access facility within one business day of receipt.
MSIL quality standards are intended to ensure that every document page is imaged and that the printed version is as legible as the original. Exception procedures will apply to problematic pages of documents containing poorly printed text, foldouts, the use of color, and grey or halftone artwork. In general, the imaging technology employed will store any information contained on a page with the same degree of accuracy as a photocopying machine. Additional information about quality standards is included in section 4.8 of the attached System Concept. The procedures to be followed to ensure that these standards are met will be developed by the system contractor in its Quality Assurance Plan. Paper copies of inputted documents will be retained for one year, then discarded.
The dissemination subsystem will produce a tape output with images on a daily basis and the printed document copies on request. The daily tape will contain an index of the documents included. The dissemination subsystem will include capabilities to search the computer index database to support system operators in filling individual requests for documents and to support the Board’s needs for system management information. Printed documents produced in response to individual requests received by 2:30 p.m. each business day will be mailed, express mailed or made available at the MSIL system the same day. The daily tape that includes documents made available during the day will be produced by the close of business the same day. The MSIL system customer service operation will be operated from at least 9:00 a.m. Eastern time to 4:30 p.m. Eastern time, the same hours of operation of the Board’s public access facility.
The administrative subsystem will provide customer service, billing, document tracking, and project management capabilities. It will accumulate data about the number of documents processed, their status, and the workload performed by the system.
In planning the MSIL system, the Board believed that the average annual cost of contracting with a service provider for this facility would be $.01or less per $1,000 par value of the bond based on current bond volume. The MITRE Corporation provided estimates to the Board that ranged between $700,000 and $1 million, depending on the volume of documents that were processed.
The Board has received a number of bids in response to its request for proposal. Some bids were above and some below these estimates. Since the Board will be negotiating with the potential service providers, it is not in a position to provide further details. However, based on the bids, the Board believes that these estimates are correct.
The Board plans to use general revenues of the Board for the collecting, indexing, and storing costs of MSIL system documents. The costs of providing paper copies and the daily tape will be paid for by user fees. This is consistent with the Commission’s policy to require that SRO fees be based on the expenses it incurs in providing the information, i.e., cost-based. The Board believes that this dissemination cost-based pricing plan is in the public interest because it will ensure that a complete collection of important municipal securities information will be available, at a fair price, for the life of the municipal securities.
Based on the information currently available to the Board, the Board believes that it will charge approximately $15.00 for a paper copy of an OS or an ARD. The daily tape will be provided on an annual subscription basis of approximately $12,000. Postage or delivery fees also will be added to the tape or document price. Based on an average of 25 documents per daily tape, this will result in a per document cost of less than $2.00 per OS or ARD. The Board will review the MSIL system prices annually to ensure that the MSIL system dissemination costs are paid for from user fees. The Board does not expect to make a profit from the MSIL system.
 MUNICIPAL SECURITIES INFORMATION LIBRARY and MSIL are trademarks of the Board.
 Pursuant to Board rule G-32, dealers must deliver a copy of the final OS to new issue customers by settlement.
 See, Government Finance Officer’s Association, Disclosure Guidelines for State and Local Government Securities (January 1988); National Federal of Municipal Analysts, Disclosure Handbook for Municipal Securities (January 1990); and National Council of State Housing Agencies, Quarterly Reporting Format for Housing Bonds.
 See, Municipal Disclosure Task Force Report of the National Association of Auditors, Comptrollers and Treasurers (May 25, 1990).
 In response to this problem, the American Bankers Association has proposed Draft Voluntary Disclosure Guidelines for Corporate Trustees that seek to ensure more timely dissemination of information to the municipal securities market. These Guidelines are discussed in the Board’s filing of the Continuing Disclosure Information/Electronic Submission system, SR-MSRB-90-4.
 In SR-MSRB-90-3, the Board has filed an amendment to rule G-36 to require underwriters to provide certain ARDs (i.e., escrow agreements) to the Board.
 The Board intends to develop its plans to accept paper copies of CDI voluntarily provided by issuers once the OS/ARD system is operational.
 The Board suspended its contracting schedule to await Commission approval of the MSIL system. Prior to the suspension, the Board received a number of bids from service providers.
 In a separate filing (SR-MSRB-90-4), the Board has proposed a system to electronically receive and disseminate CDI (the CDI/ES system). The Board also will examine the possibility of collecting electronic submissions of all or part of OSs and ARDs and paper submission of CDI. The Board plans for the MSIL system include a complete and comprehensive computerized index of all documents related to an issue in both systems.
 It should be noted that the MSIL System Concept, while the basis for obtaining bids from service contractors, is only an outline of the technical aspects of the MSIL system. The final MSIL system configuration, arrived at after discussion and negotiation with possible contractors, may possess different technological solutions to the issues posed in the System Concept under the same basic approach – digital imaging. A copy of the System Concept is attached. Because it includes certain revisions to the System Concept, the Request for Proposal, and Amendment No. 1, also are attached.
 See e.g., Securities Exchange Act Rel. No. 20874 (April 17, 1984) affd, NASD v. SEC, 801 F. 2d 1415 (D.C. Cir. 1986). This “cost-based” concept applies when an SRO is competing with private-sector information vendors. As discussed below, the Board does not believe that the MSIL system is competing with any such vendors. It has determined, however, to use this cost-based approach because it should result in a fair price for MSIL system services.
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Public Access to Documents
The public access facility has been discontinued. Documents previously available through the public access facility are now available through the Board’s website at www.msrb.org or through the Electronic Municipal Market Access system public website at emma.msrb.org. For members of the public without Internet access, photocopies of such documents will be provided, upon written request, for a copying charge at a rate equal to the then-current Commission copying charge under its schedule of fees for records services as published on the Commission website at www.sec.gov.
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Optional Procedure for Electronic Submissions
Consistent with the Board’s stated objectives to pursue collection of electronic submissions of official statements and advance refunding documents, the Board is implementing an optional procedure for electronic submission by underwriters of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD), together with amendments thereto, to the MSIL® system. Underwriters are not required to make submissions electronically and the Board will continue to accept submissions made on paper. The Board expects the optional procedure for electronic submissions to become operational on the later of January 1, 2002 or 60 days after Commission approval.
Electronic submissions will be made by underwriters through a secured, password-protected Internet website. Forms G-36(OS) and G-36(ARD) will be submitted by completion of an on-line form. On-line forms will elicit the same information as paper Forms G-36(OS) and G-36(ARD) and will be in substantially the same format. Notice of cancellation of an issue also will be effected by means of on-line entry of information by the underwriter. Official statements and advance refunding documents will be submitted by underwriters by uploading through the website simultaneously with the completed on-line forms. Underwriters will receive electronic records of submissions.
All official statements, advance refunding documents and amendments submitted electronically must be in Adobe Acrobat® portable document format (“PDF”). Such documents may be in either a “native” PDF file or a scanned image PDF file. For scanned image PDF files, underwriters are required to use a resolution of 300 dpi. Underwriters may be required to compress submissions using file compression software in order to speed transmission times.
Documents submitted electronically will be included in the daily and back-log collections currently produced by the MSIL® system and also will be available for viewing and printing at the public access facility. Upon the electronic system becoming operational, the Board will disseminate new submissions (whether submitted electronically or in paper form) as PDF files.
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OS and ARD Submissions to Electronic Municipal Market Access System
Notwithstanding any other provision of this facility, upon the Electronic Municipal Market Access system’s primary market disclosure service becoming operational, the OS/ARD system of the MSIL system shall no longer accept submissions of OSs and ARDs, and all OSs and ARDs submitted to the MSRB shall thereafter be submitted to the Electronic Municipal Market Access system.