MSRB NOTICE 2007-05 (JANUARY 25, 2007)

MSRB SEEKS COMMENTS ON DRAFT RULE CHANGES TO ESTABLISH AN ELECTRONIC ACCESS SYSTEM FOR OFFICIAL STATEMENTS

The Municipal Securities Rulemaking Board (the “MSRB”) is seeking comment on draft rule changes to implement an electronic system for access to primary market disclosure in the municipal securities market.  This new electronic system, to be known as the “MSIL/Access system,” would build on the MSRB’s existing Municipal Securities Information Library (“MSIL”) system to provide Internet-based access to official statements (“OSs”) and certain other documents and related information.  The immediate access to OSs for new issue customers provided through the electronic MSIL/Access system would permit significantly faster access to critical disclosure information than under the current dissemination system based historically on the physical movement of OSs by and among brokers, dealers and municipal securities dealers (“dealers”) and to customers.  The MSIL/Access system would be modeled in part on the “access equals delivery” rule for prospectus delivery for registered securities offerings adopted by the Securities and Exchange Commission (the “SEC”) in 2005.[1]

Overview of the MSIL/Access System

The MSIL/Access system would consist of two basic elements:  (i) the MSRB’s existing MSIL system, which would serve as the central collection facility through which dealers acting as underwriters, primary distributors, placement agents or remarketing agents (collectively referred to as “underwriters”) would submit OSs and certain other related documents and information to the MSIL/Access system in electronic form for virtually all primary offerings of municipal securities; and (ii) one or more Internet-based central access facilities (the “MSIL/Access portals”) through which investors, dealers and other market participants would obtain OSs and such other materials.

Once the MSIL/Access system is implemented, OSs would be freely accessible by new issue customers and other market participants through the on-line MSIL/Access portals.  By virtue of such access through the MSIL/Access system, the existing obligation of dealers to deliver OSs directly to customers under current Rule G-32, on disclosures in connection with new issues, would be deemed satisfied in connection with the sale of new issue municipal securities, other than interests in 529 college savings plans and other municipal fund securities.  A dealer selling new issue municipal securities would be required to provide to a purchasing customer, by no later than two business days after trade settlement, either a copy of the OS or written notice that the OS may be accessed through the MSIL/Access system and that a copy of the OS will be provided to the customer by the dealer upon request.  Dealers selling municipal fund securities would continue to be obligated to deliver OSs to customers as under current Rule G-32.

The requirements for underwriter submission of OSs and other related documents and information to the MSRB under Rule G-36, on delivery of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD), would be consolidated into revised Rule G-32.[2]  As revised, Rule G-32 would require all submissions by underwriters to the MSRB to be made electronically.  All OS submissions and other related documents and information would be made available on a “real-time” basis to investors and other market participants through the MSIL/Access portals.

A central MSIL/Access portal would be established by the MSRB to provide an assured Internet-based centralized source for free access to OSs and other related documents and information in connection with all new issue municipal securities to investors, other market participants and the public.  Additional MSIL/Access portals using the document collection obtained through the MSIL system could be established by other entities as parallel sources for OSs and other documents and information.

July 2006 Concept Release

In a concept release published on July 27, 2006, the MSRB sought comment on whether the establishment of an “access equals delivery” model in the municipal securities market would be appropriate and on the general parameters relating to such a model (the “Concept Release”).[3]  The Concept Release described a basic framework for instituting this model, noting two critical factors that would need to be put into place: all OSs must be available electronically, and such electronic OSs must be easily and freely available to the public.  The Concept Release described in general terms certain modifications that could be made to existing MSRB rules to implement the “access equals delivery” model.

The MSRB received comments from 29 industry participants,[4] who were very supportive of an “access equals delivery” model with only limited reservations.[5]  Based on its review of these comments, the MSRB has determined to proceed with the initial steps of adopting an “access equals delivery” model and establishing the MSIL/Access system for OS dissemination.

Draft Rule Amendments to Implement the MSIL/Access system

The MSRB is seeking comments on extensive revisions to the OS submission and dissemination requirements set forth in its rules in order to implement an “access equals delivery” model based on the MSIL/Access system.  Specifically, current Rules G-32 and G-36 would be consolidated into a single substantially revised Rule G-32, on new issue disclosure practices, and Rule G-36 would be rescinded.  Revised Rule G-32 would consist of four sections: (i) dealer disclosures to new issue customers (section (a)); (ii) underwriter submissions to the MSIL/Access system (section (b)); (iii) preparation of OSs by financial advisors (section (c)); and (iv) definitions (section (d)).  The draft amendments also would include related amendments to Rule G-8, on recordkeeping, and Rule G-9, on preservation of records.  These revisions are described briefly below.

Dealers are reminded that, in addition to their obligations under Rule G-32, they are required under Rule G-17, on fair practice, to provide to the customer, at or prior to the time of trade, all material facts about the transaction known by the dealer as well as material facts about the security that are reasonably accessible to the market.[6]  Disclosures made after the time of trade, such as by delivery of the OS or by customer access to the OS through the MSIL/Access system at or near trade settlement, do not substitute for the required material disclosures that must be made at or prior to the time of trade pursuant to Rule G-17.  In the new issue market, the preliminary official statement (“POS”), when available, often is used by dealers marketing new issues to customers and can serve as a primary vehicle for providing the required time-of-trade disclosures under Rule G-17, depending upon the accuracy and completeness of the POS as of the time of trade.[7]  The MSRB has previously emphasized the importance of making material disclosures available to customers in sufficient time to make use of the information in coming to an investment decision, such as through earlier delivery of the POS.[8]  The MSRB urges dealers to make POSs available to their potential customers in a timeframe that provides an adequate opportunity to make the appropriate assessments in coming to an investment decision.  In addition, the MSRB seeks comment on whether the MSIL/Access system should provide for voluntary submissions by underwriters of POSs to be made publicly accessible through the MSIL/Access portals.[9]

Dealer Disclosures to New Issue Customers (Rule G-32(a)).  Subsection (a)(i) of revised Rule G-32 would retain the basic OS dissemination requirements for dealers selling new issue municipal securities to customers as set forth in current Rule G-32.  However, under subsection (a)(ii), dealers selling new issue municipal securities, other than municipal fund securities, would be deemed to have satisfied this basic requirement for delivering OSs to customers by trade settlement, such OSs being made publicly available through the MSIL/Access system.  In the case of a dealer that is the underwriter for the new issue, such satisfaction would be conditioned on the underwriter having submitted the OS (or having made a good faith and reasonable effort to submit the OS and remediating as soon as practicable any failure to make a timely submission) to the MSIL/Access system.[10]  Dealers selling municipal fund securities would remain subject to the existing OS delivery requirement.

Under subsection (a)(iii), a dealer selling new issue municipal securities with respect to which the OS delivery obligation is deemed satisfied as described above would be required to provide to the customer, within two business days following trade settlement, either a copy of the OS or a written notice[11] stating that the OS is available from the MSIL/Access system, providing a web address where such OS may be obtained, and stating that a copy of the OS will be provided upon request.[12]  In addition, if the customer requests a copy of the OS, the dealer would be required to send it promptly.  Dealers would be required to honor any customer’s explicit standing request for copies of OSs for all of his or her transactions with the dealer.[13]

With respect to the notice requirement, the MSRB notes (as described below) that the MSIL/Access system could be serviced by more than one MSIL/Access portal.  The MSRB seeks comment on whether the URL included in the notice to customers should be restricted to a specific MSIL/Access portal or could be for any of the MSIL/Access portals, or whether dealers should be permitted to identify a source other than a MSIL/Access portal.[14]  Dealers would be required to include the URL assigned for the specific OS referred to in the notice, rather than to a MSIL/Access portal’s home or search page.  The MSRB seeks comment on potential technical difficulties that might result from requiring that the notice include a URL assigned to a specific OS, particularly in respect to assuring that the unique URL for each OS remains operative throughout the time such document remains publicly available.  Would it be appropriate to limit the period of time during which the URL for a specific OS is required to be maintained unchanged, such that after such period the OS could be archived and be made accessible through an on-line search function at the MSIL/Access portal?  What would be the appropriate period of time (beyond the end of the new issue disclosure period) for maintaining such URLs unchanged prior to permitting OSs to be moved to an archival collection accessible through an on-line search function?

Revised Rule G-32 would not substantially change the OS delivery obligation with respect to sales of municipal fund securities from those that currently exist.[15]  The selling dealer would be required to deliver the OS to the customer by trade settlement, provided that the dealer may satisfy this delivery obligation for its repeat customers (i.e., customers participating in periodic municipal fund security plans or non-periodic municipal fund security programs) by promptly sending any updated disclosure material to the customer as it becomes available, as set forth in paragraph (a)(iv)(A).  In addition, the dealer would be required under paragraph (a)(iv)(B) to disclose any distribution-related fee received as agent for the issuer to the extent not disclosed in the OS or trade confirmation.

One commentator suggested that issues described under Exchange Act Rule 15c2-12(d)(1)(i) (“limited offerings”) be excluded from the “access equals delivery” model, while another commentator suggested that the model be made available for such offerings on a voluntary basis.[16]  The draft amendments do not provide such an exclusion.  The MSRB seeks further comment on whether such an exclusion for limited offerings should be provided and, if so, why such an exclusion would be appropriate. Were such an exclusion to be provided, the existing OS delivery requirement would be retained for such new issue municipal securities.  If, in the alternative, an exclusion were to be provided on a voluntary basis (e.g., at the election of the underwriter, which would submit the OS to the MSIL/Access system for those issues that would qualify for the “access equals delivery” model), an assured process for communicating to dealers whether such an election has been made by the underwriter (e.g., a required information submission to the MSIL/Access system that would allow a notice to be posted at the MSIL/Access portals, particularly if the underwriter has elected not to qualify the limited offering for the “access equals delivery” model) would be necessary.  Such notice would serve the purpose of avoiding situations where a dealer might provide a notice to the customer that an OS is available from the MSIL/Access system, rather than delivering the OS directly to the customer, when in fact no such OS is available.  Finally, to the extent that some or all of these limited offerings do not qualify for the “access equals delivery” model, Rule G-32 would need to retain existing provisions regarding inter-dealer dissemination of the OS, which have been deleted from the draft amendments included in this notice.[17]  To the extent that any commentator believes that an exclusion for limited offerings (with or without the ability of the underwriter to make an election to qualify for the “access equals delivery” model) should be provided, the MSRB seeks comment on issues arising from the provisions described above that would be needed to ensure that customers are provided access to the OS.

Underwriter Submissions to the MSIL/Access System (Rule G-32(b)).  Section (b) of revised Rule G-32 would set forth the various submission requirements for underwriters.  This new section (b) would replace current Rule G-36 in its entirety.

●          Official Statements and Preliminary Official Statements (Rule G-32(b)(i)) All submissions by underwriters of OSs to the MSIL/Access system would be required to be made within one business day after receipt from the issuer but by no later than the closing date[18] for the offering.[19]  If no OS is prepared for an offering or if an OS is being prepared but is not yet available from the issuer by the closing date, the underwriter would be required to submit the POS, if any, to the MSIL/Access system by the closing date.  Once an OS becomes available, the underwriter would be required to submit the OS to the MSIL/Access system within one business day after receipt from the issuer.[20]  If no OS is prepared for an offering, the underwriter also would be required to provide notice of that fact to the MSIL/Access system.

Revised Rule G-32(b)(i) does not provide a submission exception from the MSIL/Access system for OSs relating to municipal fund securities, even though municipal fund securities do not qualify for the “access equals delivery” model under section (a) of the rule.  The MSRB believes that, particularly in the case of 529 college savings plans, there is considerable value to investors and the marketplace in general in having disclosure information centrally available on-line.  The MSRB recognizes that, in the 529 college savings plan market, issuers generally already make their OSs available freely on-line and that the College Savings Plans Network (“CSPN”) will soon launch a significant upgrade to its existing website to provide a comprehensive centralized web-based utility for this market.  This CSPN utility is expected to include, among a number of other useful resources, easy access to the OSs for all 529 college savings plans in the marketplace.  The MSRB looks forward to the launch of this valuable utility and urges dealers and other participants in the 529 college savings plan market to provide the investing public with easy access to, and to affirmatively encourage the use of, this market-wide information.  The MSRB would invite CSPN to consider operating its utility as a MSIL/Access portal for the 529 college savings plan market if the exclusion of municipal fund securities from the “access equals delivery” model is eliminated at some point in the future.

●          Advance Refunding Documents (Rule G-32(b)(ii)) Underwriters would continue to be required to submit advance refunding documents (“ARDs”) to the MSIL/Access system by no later than five business days after the closing date.  The requirement would apply whenever an ARD has been prepared in connection with a primary offering, not just for those offerings in which an OS also has been prepared as under current Rule G-36.

●          Amendments to Official Statements and Advance Refunding Documents (Rule G-32(b)(iii)) As under current Rule G-36, underwriters would continue to be required to submit OS amendments to the MSIL/Access system within one business day of receipt throughout the new issue disclosure period.  The revised rule would explicitly include amendments to ARDs within these same requirements.

●          Cancellation of Issue & Underwriting Syndicate (Rule G-32(b)(iv) and (v)) As under current Rule G-36, underwriters would be required to advise the MSIL/Access system of any cancellation of an issue for which a submission has previously been made.  Managing underwriters would be responsible for compliance on behalf of their syndicate members.

●          Submission Procedures and Form G-32 (Rule G-32(b)(vi))All OSs, POSs and ARDs, as well as any amendments thereto, must be submitted to the MSIL/Access system by electronic means in a designated electronic format.[21]  Paper submissions would no longer be accepted, with all submissions to the MSIL/Access system limited at the outset to documents in portable document format (PDF).  However, the MSIL/Access system would retain the flexibility to allow other formats that may be developed in the future, as appropriate, consistent with the need to maintain the integrity of a long-term archive of documents and the need to ensure ready availability of documents through the MSIL/Access portals to the general public, including retail investors.[22]  The MSRB seeks further comments from the industry on what parameters are important in determining the suitability of an electronic format for documents accessible through the MSIL/Access system and whether any such formats, other than PDF, currently exist or are in development.  The MSIL/Access system will be designed to accept such electronic submissions either through an upgraded version of the existing MSIL web-based interface known as the e-OS system or by upload or data stream initially using extensible markup language (XML).[23]

Current Form G-36(OS) and Form G-36(ARD), which can be completed either on paper or electronically, would be replaced by a single Form G-32 that must be completed electronically. Underwriters would be required to submit to the MSIL/Access system a Form G-32 in connection with each OS (or POS, where no OS exists), as well as in connection with each offering for which no OS or POS is to be made available through the MSIL/Access system.[24]  The MSRB anticipates that the Form G-32 submission process would be initiated by the submission of the CUSIP number information and initial offering prices for each maturity[25] shortly after the bond sale.  The MSRB notes that paragraph (a)(ii)(C) of Rule G-34, on CUSIP numbers and new issue requirements, currently requires underwriters to disseminate CUSIP information by the time of the first execution of a transaction in virtually all new issues.  The MSRB seeks comments on whether this would be the appropriate timeframe for requiring CUSIP information and initial offering prices, as well as notice that no OS or POS will be provided (if applicable), to be provided to the MSIL/Access system for public dissemination through the MSIL/Access portals.

Other items of information to be submitted through the Form G-32 submission process, including the underwriting spread, if any, and the amount of any fee received by the underwriter as agent for the issuer in the distribution of the securities (to the extent such information is not included in the OS),[26] as well as many of the items currently required on Form G-36(OS) in connection with the MSRB’s underwriting assessment under Rule A-13, would be provided by the underwriter as they become available.  In general, Form G-32 would be completed by the closing date, although for certain items that may not become available until after the closing date (e.g., ARDs, amendments to OSs or ARDs, etc.), submissions could continue to be made with respect to a Form G-32 as necessary up to the end of the new issue disclosure period.

All submissions of ARDs under subsection (b)(ii), amendments under subsection (b)(iii) and notices of issue cancellation under subsection (b)(iv) would be made by means of a Form G-32 previously initiated in connection with the related OS or offering.  In effect, a Form G-32 initiated in connection with a new issue would be a single continuous submission process for the related OS, any related ARDs or amendments, and issue-specific information that would be completed in stages beginning at or prior to the time of first execution of a transaction in such issue and ending in most cases on the closing date but in some cases extending as late as the end of the new issue disclosure period, depending on the specific features of such issue.

The specific formats and processes for making submissions would be set out in the Form G-32 Manual, which would replace the current Form G-36 Manual. Underwriters would be permitted to designate one or more submission agents to submit documents and information required under this rule.  The rule would not limit who may act as such submission agent on behalf of the underwriter but, as an agent, the underwriter would be bound by the actions of such agent.  Therefore, a failure to comply with the submission requirements by such agent would be treated as a failure by the underwriter.

Preparation of Official Statements By Financial Advisors (Rule G-32(c)).  Revised Rule G-32 would require any dealer acting as financial advisor that prepares the OS for the issuer to make the OS available to the managing or sole underwriter in electronic form promptly after it has been approved by the issuer for distribution.  This would apply to all offerings for which a dealer financial advisor prepares the OS.  The electronic OS must be in a designated electronic format acceptable for purposes of the MSIL/Access system.

Definitions (Rule G-32(d)).  The existing definitions in Rules G-32 and G-36 would be consolidated into section (d) of revised Rule G-32 and the definitions for designated electronic format and closing date (as described above), among others, would be added.  In addition, certain existing terms would be modified.  The significant modifications to these existing terms are described below:

●          “New issue municipal securities” would no longer exclude commercial paper.  The MSRB seeks comment on whether there is any justification for retaining this exclusion, given the modifications to the disclosure dissemination system that would be made.

●          “New issue disclosure period” is modified slightly to emphasize that the period ends 25 days after the final delivery by the issuer of any securities of the issue.  For traditional bond or note offerings, this final delivery would correspond to the new definition of “closing date.” However, for continuous offerings, such as for municipal fund securities, this final delivery would not occur until the end of such continuous offering (i.e., no further securities are being issued).  The new issue disclosure period would serve as the period during which dealers selling new issue municipal securities to customers would be required to send notice to customers regarding availability of the OS on-line (or to deliver a copy of the OS for municipal fund securities).  In addition, this is the period during which underwriters would remain responsible for providing OS amendments to the MSIL/Access system.

●          “Primary offering” would include specific reference to remarketings of municipal securities that the SEC views as primary offerings under Exchange Act Rule 15c2-12(f)(7), beyond those specifically enumerated in such subsection (f)(7).  The MSRB is concerned that many dealers continue to mistakenly view current Rule G-36 and Exchange Act Rule 15c2-12 as applying to remarketings only if they are accompanied by a change in either (i) the authorized denomination of the securities from $100,000 or more to less than $100,000, or (ii) the period during which the securities may be tendered from a period of nine months or less to a period of more than nine months.  The SEC has made clear that this is not the case.[27]

Recordkeeping Amendments.  Subsections (a)(xiii) and (a)(xv) of Rule G-8 currently require that records be maintained in connection with deliveries of OSs to customers and submissions of OSs, ARDs and Forms G-36(OS) and (ARD) to the MSIL facility.  The draft rule changes would modify certain of these requirements to reflect the changes to Rule G-32 and consolidate such requirements into subsection (a)(xiii).  Subsections (b)(x) and (b)(xi) of Rule G-9 relating to preservation of such records would also be modified to conform to the changes to Rule G-8.

MSIL/Access portals

In the Concept Release, the MSRB sought comment on how best to provide electronic access to OSs to investors and the marketplace, including which entities would be best positioned to provide such service.  Most commentators believed that the MSRB would be an appropriate operator of the central access facility, while many suggested that the central access facility also could be operated by an outside contractor with oversight by the MSRB pursuant to contract.  Several commentators expressed interest in operating the central access facility.  Most commentators stated that OSs should remain publicly available until maturity.  Commentators agreed that financial and operating information in OSs quickly becomes stale, although some noted that such information (even when stale) is valuable as a point of reference when reviewing secondary market financial and operating information provided to the nationally recognized municipal securities information repositories (“NRMSIRs”) under Exchange Act Rule 15c2-12(b)(5).  Most commentators stated that much of the other information in the OS, particularly relating to the terms of the securities, is useful throughout the life of a bond issue.  Other commentators countered that the current new issue disclosure period for providing OSs would be a sufficiently long time for OSs to be made available.  One such commentator stated that maintaining public access beyond this period would impair the economic interests of information vendors that currently make OSs available on a commercial basis.

The MSRB has determined that a MSIL/Access portal serving as a central access facility must post OSs and other documents and information directly on its centralized website, rather than simply providing a central directory of links to OSs and such other items at other sites.[28]  Beyond that, the MSRB believes it is premature to finalize the precise structure of the MSIL/Access portal arrangements at this time and is continuing to consider the appropriate parameters pursuant to which such MSIL/Access portals should be operated.  Some basic characteristics for a system of MSIL/Access portals are outlined below.  The MSRB is seeking further comment on such parameters and characteristics for the MSIL/Access portals.

The MSRB intends to establish its own MSIL/Access portal to provide an assured centralized source for free access to OSs and other related documents and information for all new issues to investors, other market participants and the general public. The MSRB agrees that there is value in continuous access to much of the information provided in the OS for the life of the securities and has determined that its central MSIL/Access portal will provide such access.  The MSRB anticipates that older OSs would be moved to an archive that would be accessible on-line through a search function.

The MSRB notes, however, that this MSRB MSIL/Access portal need not operate as the exclusive MSIL/Access portal. Rather, multiple entities that subscribe to the MSIL system document collection – which will be designed to provide nearly real-time access to documents as they are submitted and processed – could establish separate MSIL/Access portals designed to make available publicly the basic documents and information provided through the MSIL/Access system, together with such other documents, information and utilities (e.g., indicative data, transaction pricing data, secondary market information, analytic tools, etc.) as each such operator shall determine.  These separate MSIL/Access portals could provide these services on such commercial terms as they deem appropriate, provided that the notice under revised Rule G-32(a)(iii)(B) for dealers relying on the “access equals delivery” model would be required to provide the URL for the specific OS and any amendments thereto posted at a MSIL/Access portal for free throughout the new issue disclosure period and for a reasonable limited period of time thereafter (i.e., for a period extending beyond 25 days after the closing date).[29]  The MSRB seeks comment on the appropriate limited period of time beyond the end of the new issue disclosure period during which documents should remain publicly available through free MSIL/Access portals in order to ensure that new issue customers have had an adequate opportunity to access and retain copies of such documents.  Dealers choosing to rely on these separate MSIL/Access portals also would need to ensure that such portals make OSs available with a level of reliability comparable to that of the MSRB’s MSIL/Access portal.

The MSRB intends to continue offering subscriptions to the MSIL system collection on terms that promote the broad dissemination of disclosure information throughout the marketplace without creating a significant negative impact on the pricing of dissemination services by subscribers.  In particular, the MSRB hopes that multiple MSIL/Access portals would provide free continuous access to OSs and other documents throughout the new issue disclosure period and a reasonable limited period of time thereafter and also would provide continuing access beyond the expiration of this period on favorable terms, with due consideration for promoting access by infrequent users (e.g., retail investors) for free or at greatly reduced rates.  The MSRB’s goal in promoting the establishment of parallel MSIL/Access portals is to provide all market participants with a realistic opportunity to access OSs and other documents and information throughout the life of the securities in a non-cost prohibitive manner while encouraging market-based approaches to meeting the needs of investors and other market participants.

Straight-Through Processing

The MSRB expects to develop the new MSIL/Access system as a key component in a straight-through processing environment for new issue documents and information, permitting underwriters to designate third-party submission agents to act on their behalf and providing “real-time” access to documents and data for subscribers and the marketplace.  Underwriters could designate financial printers, financial advisors, information vendors, industry utilities or other appropriate parties to act as their designated submission agents.  Such agents could, in turn, establish data stream connections with the MSIL/Access system to submit the documents or other information that they have been designated to submit on behalf of any number of underwriters directly to the MSIL/Access system.  In particular, underwriters that currently must submit OSs to the MSRB as well as to certain information vendors or industry utilities could, subject to appropriate arrangements, designate such parties to act as submission agents who would forward such submitted OSs to the MSIL/Access system.  Conversely, the MSIL/Access system would be designed to permit an underwriter to submit the OS directly to the MSRB under revised Rule G-32 and to have such OS (upon the making of appropriate subscription and technical arrangements) redelivered to such other organizations.  Thus, the MSIL/Access system would be designed to provide underwriters with the flexibility to undertake their various submission processes in the municipal securities market in the manner best suited to their particular business plans, internal systems and vendor/contractual relationships.

Listing of Municipal Securities Business on Form G-37

Dealers that engage in municipal securities business, as defined in Rule G-37, on political contributions and prohibitions on municipal securities business, generally must report such business to the MSRB, along with certain other items of information, on a quarterly basis on Form G-37 submitted to the MSRB through the existing MSIL system.[30]  The modifications needed to establish the MSIL/Access system could potentially streamline the Form G-37 submission process as well.  In particular, by requiring that underwriters submitting Form G-32 provide information as to whether the offering was sold on a negotiated basis, together with a list of all syndicate members, such information could be used to help pre-populate Section III of Form G-37 (relating to issuers with which the dealer has engaged in municipal securities business during the calendar quarter) to be prepared and submitted by such underwriter and syndicate members.  Throughout the quarter, such information for each dealer would be compiled.  When it becomes time for dealers to submit their quarterly Forms G-37, such dealers would access these compiled lists through an upgraded version of the MSRB’s existing web-based interface for Form G-37 submissions and review such lists for accuracy and completeness.[31]  Such an automated process would require that all Form G-37 submissions be made electronically through this web-based interface, with no paper submissions permitted.

The MSRB seeks comment on the merits of partially automating the Form G-37 process through information provided on Form G-32.  In particular, would the added burden of additional information submissions by underwriters under revised Rule G-32 be outweighed by the possible benefits realized in partially automating the Form G-37 process?

* * * * *

The MSRB seeks comments on all aspects of this notice.  Comments should be submitted no later than March 12, 2007, and may be directed to Ernesto A. Lanza, Senior Associate General Counsel.  Written comments will be available for public inspection upon request and also will be posted on the MSRB web site.[32]

* * * * *

  TEXT OF DRAFT RULE CHANGES

Rule G-32.  New Issue Disclosure Practices [33]

(a) Dealer Disclosures to New Issue Customers.

(i) No dealer shall sell, whether as principal or agent, any new issue municipal securities to a customer unless such dealer delivers to the customer by no later than the settlement of the transaction a copy of the official statement or, if an official statement is not being prepared, a written notice to that effect together with a copy of a preliminary official statement, if any.

(ii) Notwithstanding the provisions of subsection (a)(i) of this rule, the delivery obligation thereunder shall be deemed satisfied if the following conditions are met:

(A) the new issue municipal securities being sold are not municipal fund securities; and

(B) the underwriter has made the submissions to the MSIL/Access system required under paragraph (b)(i)(A) or (b)(i)(B) of this rule (other than any required submission under clause (b)(i)(B)(2)(b)), or the underwriter has made a good faith and reasonable effort to make such submission and, in the event that the underwriter fails to make such submission in a timely manner, the underwriter makes such submission as soon as practicable thereafter; provided that the condition in this paragraph (B) shall apply solely to sales to customers by dealers acting as underwriters in respect of the new issue municipal securities being sold.

(iii) Any dealer that sells any new issue municipal securities to a customer with respect to which the delivery obligation under subsection (a)(i) of this rule is deemed satisfied pursuant to subsection (a)(ii) of this rule shall provide to the customer, by no later than two business days following the settlement of such transaction, either:

(A) a copy of the official statement or, if an official statement is not being prepared, a written notice to that effect together with a copy of a preliminary official statement, if any; or

(B) a notice to the effect that the official statement is available from the MSIL/Access system and that a copy of the official statement will be provided upon request, which notice shall include the uniform resource locator (URL) where the official statement may be obtained.

If a dealer provides notice to a customer pursuant to paragraph (a)(iii)(B), such dealer shall, upon request from the customer, promptly send a copy of the official statement to the customer.

(iv) In the case of a sale by a dealer of municipal fund securities to a customer, the following additional provisions shall apply:

(A) notwithstanding the provisions of subsection (a)(i) of this rule, if a customer who participates in a periodic municipal fund security plan or a non-periodic municipal fund security program has previously received a copy of the official statement in connection with the purchase of municipal fund securities under such plan or program, a dealer that sells additional shares or units of the municipal fund securities under such plan or program to the customer will be deemed to have satisfied the delivery obligation under subsection (a)(i) of this rule if such dealer sends to the customer a copy of any new, supplemented, amended or “stickered” official statement, by first class mail or other equally prompt means, promptly upon receipt thereof; provided that, if the dealer sends a supplement, amendment or sticker without including the remaining portions of the official statement, such dealer includes a written statement describing which documents constitute the complete official statement and stating that the complete official statement is available upon request; and

(B) to the extent not included in the official statement or trade confirmation, the dealer shall provide to the customer, by no later than the settlement of the transaction, written disclosure of the amount of any fee received by the dealer as agent for the issuer in the distribution of the securities.

(v) If two or more customers share the same address, a dealer may satisfy the delivery obligations set forth in this section (a) by complying with the requirements set forth in Rule 154 of the Securities Act of 1933, on delivery of prospectuses to investors at the same address.  In addition, any such dealer shall comply with section (c) of Rule 154, on revocation of consent, to the extent that the provisions of paragraph (a)(iv)(A) relating to a customer who participates in a periodic municipal fund security plan or a non-periodic municipal fund security program apply.

(b) Underwriter Submissions to MSIL/Access system.

(i) Official Statements and Preliminary Official Statements.

(A) Subject to paragraph (B) of this subsection (i), each underwriter in a primary offering of new issue municipal securities shall submit the official statement to the MSIL/Access system within one business day after receipt of the official statement from the issuer or its designated agent, but by no later than the closing date.

(B) If an official statement is not made available by the issuer or its designee to the underwriter by the closing date or if an official statement will not be prepared for an offering not subject to Securities Exchange Act Rule 15c2-12, the underwriter shall submit to the MSIL/Access system:

(1) by no later than the closing date, the preliminary official statement, if any, or, if no preliminary official statement has been prepared, notice to that effect;

(2) in the case of an offering for which an official statement is being prepared:

(a) by no later than the closing date, notice to the effect that the official statement will be provided when it becomes available; and

(b) within one business day after receipt from the issuer or its designated agent, the official statement;

(3) in the case of an offering not subject to Securities Exchange Act Rule 15c2-12 for which an official statement will not be prepared, by no later than the closing date, notice to the effect that no official statement will be prepared.

(ii) Advance Refunding Documents.  If new issue municipal securities offered in a primary offering advance refund outstanding municipal securities and an advance refunding document is prepared, each underwriter in such offering shall submit the advance refunding document to the MSIL/Access system by no later than five business days after the closing date.

 (iii) Amendments to Official Statements and Advance Refunding Documents.  In the event the underwriter for a primary offering has previously submitted to the MSIL/Access system an official statement or advance refunding document and such document is amended by the issuer during the new issue disclosure period, the underwriter for such primary offering must submit the amendment to the MSIL/Access system within one business day after receipt of the amendment from the issuer or its designated agent.

 (iv) Cancellation of Issue.  In the event an underwriter provides to the MSIL/Access system the documents and written information referred to in subsection (i), (ii) or (iii) above, but the issue is later cancelled, the underwriter shall notify the MSIL/Access system of this fact promptly as provided in the Form G-32 Manual.

(v) Underwriting Syndicate.  In the event a syndicate or similar account has been formed for the underwriting of a primary offering of new issue municipal securities, the managing underwriter shall take the actions required under the provisions of this rule and comply with the recordkeeping requirements of rule G-8(a)(xiii)(B).

(vi) Submission Procedures and Form G-32.

(A) All submissions required under this rule shall be made by means of Form G-32 and shall be submitted electronically in such format and manner, and shall include such information, as specified in the Form G-32 Manual.

(B) Form G-32 and any related documents shall be submitted by the underwriter or by any submission agent designated by the underwriter pursuant to procedures set forth in the Form G-32 Manual.  The failure of a submission agent designated by an underwriter to comply with any requirement of this rule shall be considered a failure by such underwriter to so comply.

(c) Preparation of Official Statements By Financial Advisors.  A dealer that, acting as financial advisor, prepares an official statement on behalf of an issuer with respect to any new issue municipal securities shall make the official statement available to the managing underwriter or sole underwriter in a designated electronic format promptly after the issuer approves its distribution.

(d) Definitions. For purposes of this rule, the following terms have the following meanings:

(i) The term “new issue municipal securities” shall mean municipal securities that are sold by a dealer during the issue’s new issue disclosure period.

(ii) The term “new issue disclosure period” shall mean the period commencing with the first submission to an underwriter of an order for the purchase of new issue municipal securities or the purchase of such securities from the issuer, whichever first occurs, and ending 25 days after the final delivery by the issuer of any securities of the issue to or through the underwriting syndicate or sole underwriter.

(iii) The term “primary offering” shall mean an offering defined in Securities Exchange Act Rule 15c2-12(f)(7), including but not limited to any remarketing of municipal securities that constitutes a primary offering as such subsection (f)(7) may be interpreted from time to time by the Commission.

(iv) The term “official statement” shall mean (A) for an offering subject to Securities Exchange Act Rule 15c2-12, a document or documents defined in Securities Exchange Act Rule 15c2-12(f)(3), or (B) for an offering not subject to Securities Exchange Act Rule 15c2-12, a document or documents prepared by or on behalf of the issuer that is complete as of the date delivered to the underwriter and that sets forth information concerning the terms of the proposed offering of securities.  A notice of sale shall not be deemed to be an “official statement” for purposes of this rule.

(v) The term “MSIL/Access system” shall mean the electronic municipal securities information access system for collecting and disseminating new issue documents and information.

(vi) The term “designated electronic format” shall mean an electronic format designated in the current Form G-32 Manual as an acceptable electronic format for submission or preparation of documents pursuant to section (b) or (c) of this rule.

(vii) The term “underwriter” shall mean a dealer that is an underwriter as defined in Securities Exchange Act Rule 15c2-12(f)(8).

(viii) The term "advance refunding document" shall mean the refunding escrow trust agreement or its equivalent prepared by or on behalf of the issuer.

(ix) The term “closing date” shall mean the date of first delivery by the issuer to or through the underwriter of new issue municipal securities sold in a primary offering.

(x) The term “dealer”, as used in this rule, shall include any broker, dealer or municipal securities dealer.

(xi) The term “Form G-32 Manual” shall mean the document(s) designated as such published by the Board from time to time setting forth the processes and procedures with respect to submissions to be made to the MSIL/Access system by underwriters under Rule G-32(b).

* * * * *

  Rule G-36.  Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or Its Designee

[RESCINDED]

* * * * *

Rule G-8.  Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers [34]

(a)  Description of Books and Records Required to be Made. Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

(i)-(xii) No change.

(xiii) Records Concerning New Issue Disclosure Practices. Deliveries of Official Statements.  A record of all deliveries made by the broker, dealer or municipal securities dealer to:

(A) purchasers of new issue municipal securities, of:

(1) official statements or preliminary official statements required under Rule G-32(a)(i), (a)(iii)(A) or (a)(iv)(A);

(2) notices or written disclosures required under Rule G-32(a)(iii)(B) or (a)(iv)(B); or other disclosures concerning the underwriting arrangements required under rule G-32 and,

(3) if applicable, a record evidencing compliance with subsection (a)(v) of Rule G-32. section (a)(i)(C) of rule G-32.

(B) the Board, in the capacity of underwriter in a primary offering of municipal securities (or, in the event a syndicate or similar account has been formed for the purpose of underwriting the issue, the managing underwriter), of:

(1) official statements or preliminary official statements required under Rule G-32(b)(i);

(2) advance refunding documents required under Rule G-32(b)(ii);

(3) amendments to official statements and advance refunding documents required under Rule G-32(b)(iii);

(4) Forms G-32 required under Rule G-32(b)(vi).

(xiv) No change.

(xv) [RESERVED] Records Concerning Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to the Board or its Designee. A broker, dealer or municipal securities dealer that acts as an underwriter in a primary offering of municipal securities subject to rule G-36 (or, in the event a syndicate or similar account has been formed for the purpose of underwriting the issue, the managing underwriter) shall maintain:

(A) a record of the name, par amount and CUSIP number or numbers for all such primary offerings of municipal securities; the dates that the documents and written information referred to in rule G-36 are received from the issuer and are sent to the Board or its designee; the date of delivery of the issue to the underwriters; and, for issues subject to Securities Exchange Act Rule 15c2-12, the date of the final agreement to purchase, offer or sell the municipal securities; and

(B) copies of the Forms G-36(OS) and G-36(ARD) and documents submitted to the Board or its designee along with the certified or registered mail receipt or other record of sending such forms and documents to the Board or its designee.

(xvi)-(xxii) No change.

(b)-(g) No change.

* * * * *

Rule G-9.  Preservation of Records [35]

(a) No change.

(b) Records to be Preserved for Three Years.  Every broker, dealer and municipal securities dealer shall preserve the following records for a period of not less than three years:

(i)-(ix) No change.

(x) all records relating to Rule of deliveries of rule G-32 disclosures and, if applicable, a record evidencing compliance with section (a)(i)(C) of rule G-32 required to be retained as described in rule G-8(a)(xiii);

(xi) [RESERVED] the records to be maintained pursuant to rule G-8(a)(xv);

(xii)-(xvi) No change.

(c)-(f) No change.


[1] See Securities Act Release No. 8591 (July 19, 2005), 70 FR 44722 (August 3, 2005).  The draft rule changes would incorporate (with modifications adapted to the specific characteristics of the municipal securities market) many of the key “access equals delivery” provisions in Securities Act Rule 172, on delivery of prospectus, Rule 173, on notice of registration, and Rule 174, on delivery of prospectus by dealers and exemptions under Section 4(3) of the Securities Act of 1933, as amended (the “Securities Act”).

[2] Current Rule G-36 would be deleted.

[4] Copies of the comment letters received by the MSRB on the Concept Release are available for public inspection at the MSRB website.  Some of the principal comments are described briefly throughout this notice.

[5] One commentator suggested that dealers be required to deliver both printed and electronic OSs unless the customer consents to receive only the electronic OS, while another argued that “access equals delivery” should be permitted only if actual delivery of the preliminary official statement is required.  The remaining commentators supported the “access equals delivery” model.

[6] See Rule G-17 Interpretation – Interpretive Notice Regarding Rule G-17, on Disclosure of Material Facts, March 20, 2002, reprinted in MSRB Rule Book.

[7] Dealers should note that additional or revised material information provided to the customer subsequent to the time of trade (such as in a revised POS, the final OS or through any other means) cannot cure a failure to provide the required material information at or prior to the time of trade.  However, a revised POS or other supplemental information provided to customers after delivery of the original POS but at or prior to the time of trade can be used to comply with the time-of-trade disclosure obligation under Rule G-17.

[9] The ability of the MSRB to require submission of disclosure materials prior to the bond sale is subject to Section 15B(d)(1) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

[10] These provisions are based on the provisions of sections (b) and (c) of Securities Act Rule 172 and section (h) of Securities Act Rule 174.

[11] The MSRB would view a notice provided in any form considered to be a “written communication” for purposes of Securities Act Rule 405 as meeting this requirement.

[12] This provision is based on the provisions of section (a) of Securities Act Rule 173.  Most commentators agreed that this customer notice should be provided within two business days of trade settlement, as under the SEC “access equals delivery” rule.  Dealers could, but would not be required to, provide such notice on or with the trade confirmation.  Under Rule G-15(a)(i), confirmations are required to be given or sent to customers at or prior to trade settlement.

[13] One commentator, an elderly investor, asked not to be required to request a paper copy every time he makes a purchase.  Three other commentators shared his concern for access by elderly investors.

[14] As noted in the text accompanying footnote 29 below, the MSRB believes that such notice must provide the URL for a source that provides the OS at no cost throughout the new issue disclosure period and a reasonable limited period of time thereafter.

[15] Some commentators stated that municipal fund securities should be excluded from the “access equals delivery” model in view of the SEC’s exclusion of mutual funds from its “access equals delivery” rule, while other commentators disagreed.  Although the “access equals delivery” model would not be available for municipal fund securities, electronic OSs could still be used to fulfill the OS delivery requirement under prior guidance concerning the use of electronic communications where standards for notice, access and evidence to show delivery are met.  See Rule G-32 Interpretation – Notice Regarding Electronic Delivery and Receipt of Information by Brokers, Dealers and Municipal Securities Dealers, November 20, 1998, reprinted in MSRB Rule Book.

[16] Issues under Exchange Act Rule 15c2-12(d)(1)(i) are those in which the securities have authorized denominations of $100,000 or more and are sold to no more than 35 persons who the underwriter reasonably believes:  (a) have such knowledge and experience in financial and business matters that they are capable of evaluating the merits and risks of the prospective investment, and (b) are not purchasing for more than one account or with a view to distributing the securities.

[17] Although municipal fund securities would not qualify for the “access equals delivery” model, official statements for such securities would be readily available to all dealers from the MSIL/Access portals as described below and therefore the existing inter-dealer dissemination requirements under current Rule G-32 would not be required and have been omitted from the draft rule changes.

[18] “Closing date” would be defined in revised Rule G-32(d)(ix) as the date of first delivery of the securities to the underwriter. For bond or note offerings, this would generally correspond to the traditional concept of the bond closing date.  In the case of continuous offerings, such as for municipal fund securities, the closing date would be considered to occur when the first securities are delivered.

[19] Rule G-36 currently requires the OS to be sent, for offerings subject to Exchange Act Rule 15c2-12, within one business day after receipt from the issuer but no later than ten business days after the bond sale, and for offerings exempt from Exchange Act Rule 15c2-12, by the later of one business day after receipt from the issuer or one business day after the bond closing.  Some commentators believed these existing timeframes should be retained, while others believed that all submissions should be made by the closing date.  The MSRB has determined to require all submissions by the closing date to ensure that OSs will be available from the MSIL/Access portals by first trade settlement and to simplify dealer compliance.  In addition, retaining the current timeframes rather than requiring all submissions to occur by the closing date could potentially result in OSs becoming available later under the “access equals delivery” model than is the case under current rules for those issues having a closing date that occurs less than ten business days after the bond sale.

[20] One commentator stated that, if the OS is not available by bond closing, the POS should be submitted by bond closing pending availability of the final OS.  Other commentators stated that POSs for all issues should be made publicly available.  The MSRB has determined to require POS submissions only in the limited circumstances described above but is also seeking comment on whether to permit voluntary submissions of POSs to the MSIL/Access system.  See text accompanying footnote 9 above.

[21] “Designated electronic format” would be defined in revised Rule G-32(d)(vi) as any electronic formats for OSs and other documents that are acceptable for purposes of the MSIL/Access system.

[22] Most commentators agreed that OSs should be in PDF files, which is the format currently required for submissions of OSs made to the MSIL system through its electronic interface.  Some commentators urged that the new system retain flexibility to adopt appropriate file formats that may be developed in the future.  Some commentators favored allowing multiple formats, while others opposed the use of multiple formats.

[23] Among other improvements to the current e-OS system, dealers choosing to make submissions through the data-entry interface of the upgraded e-OS system would be able to save partial forms for completion at a later time and would in many cases have information pre-populated into their forms based on the entry of one or a limited number of CUSIP numbers, rather than being required to enter all CUSIP numbers and maturity dates by hand.

[24] As described above, in cases where no OS or POS is being submitted to the MSIL/Access system, the underwriter would be required to provide notice thereof to the MSIL/Access system.  Such information would be designed in part to provide through the MSIL/Access portals notice to customers and others that no OS or POS will be available.

[25] The initial offering price information disclosure under this provision would take the place of such disclosure to customers by selling dealers under current Rule G-32.

[26] These items of information would be publicly disclosed at the MSIL/Access portals and would take the place of disclosures to customers by selling dealers required under current Rule G-32.

[27] See letter from Robert L.D. Colby, Chief Counsel, SEC, to Kathleen S. Thompson, Esq., Pillsbury, Madison & Sutro (March 11, 1991) (90-91 CCH Dec., FSLR ¶79,659).

[28] Most commentators agreed, with some noting that a highly decentralized system for posting of OSs by different issuers, underwriters, financial advisors, financial printers, information vendors and others could be problematic.

[29] See footnote 14 above.  As noted above, the MSRB’s MSIL/Access portal would maintain a permanent archive of all OSs and therefore it is anticipated that other MSIL/Access portals would not be required (but would be permitted) to maintain public access to OSs beyond the initial period described above.

[30] Municipal securities business includes negotiated underwritings, private placements and other agency offerings, financial advisory or consultant engagements and remarketing agent engagements.

[31] In particular, the information provided through the Form G-32 submissions would not be expected to include information on issues for which the dealer served as financial advisor and may not provide complete information on issues for which the dealer served as remarketing agent.  Furthermore, dealers would need to add the appropriate information regarding contributions to issuer officials and payments to state and local political parties in Sections I and II of Form G-37.

[32] All comments received will be made publicly available without change.  Personal identifying information, such as names or e-mail addresses, will not be edited from submissions.  Therefore, commentators should submit only information that they wish to make available publicly.

[33] The text of current Rule G-32 is replaced in its entirety with the text set forth above.

[34] Underlining indicates additions; strikethrough indicates deletions.

[35] Underlining indicates additions; strikethrough indicates deletions.