Timely Dissemination of Information on Advance Refunded Securities
Recently, the Municipal Securities Rulemaking Board discussed the difficulties that market participants are having in obtaining timely information about which CUSIP numbers are being refunded in advance refunded securities transactions. The Board believes that it is important for investors and other market participants to know as early as possible whether the issues they hold are advance refunded, or are subject to a plan of advance refunding. The Board also believes that, in the case of partial refunding of a maturity, investors need to know as soon as possible the portion of their holdings that have been advance refunded. This information is particularly important to bond funds because they must price securities in the portfolio accurately each day. In addition, diversification requirements for a bond fund might prevent the fund from buying an issuers securities if the fund cannot readily determine the portion of its existing securities of that issuer that have been advance refunded.
The Board believes that not all market participants recognize the importance to investors of knowing as soon as possible the information described above. This may explain why such information is sometimes delayed in reaching the market. Also, it is possible that parties responsible for ordering lotteries are unaware that investors and other market participants need lotteries to be conducted on partially pre-refunded maturities as soon as possible so that the market has adequate information to price the specific securities held by investors.
The Board is taking the opportunity to raise industry awareness of these issues by posting this notice on its Web site, publishing the notice in MSRB Reports, and providing similar letters to organizations whose members have a role in the dissemination of information on advance refunded securities. The Board believes that all industry professionals dealing with advance refunding information should be aware that the market value of outstanding securities might be affected by advance refunding activities. Therefore, market professionals in control of information about advance refunding plans should make certain that public information about the identity of issues that are targeted to be advance refunded is communicated to the market through information vendors or other means. Taking such steps will ensure that trading in the secondary market issues will be fair and will occur without unnecessary disparities in information. In particular, the Board believes that information identifying specific CUSIP numbers that are planned to be advance refunded, along with any early call dates and call prices for pre-refunded issues, should be communicated to the market as soon as possible. The Board is not aware of any reason that such information could not be provided by or at least shortly after, the date of sale of the refunding issue. The Board also believes that, if permitted by the bond resolution or trust indenture, lotteries for partially pre-refunded maturities should take place immediately after the closing of the advance refunded issue and the funding of the escrow. The Board urges the drafters of bond resolutions and trust indentures to provide for lotteries to take place on this timetable rather than requiring lotteries to be delayed until near the time of the early redemption date set by the pre-refunding.
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The Board anticipates that through improved education and communication about these issues market participants will have more timely access to information about advance refunded issues. Moreover, widespread dissemination of this information will promote efficient trading in the securities.
April 22, 1999
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