Rule G-36

Submission of Official Statements to the MSRB Under Rule G-36 in Connection With Certain Remarketings of Outstanding Issues

March 25, 2008

The MSRB has been monitoring recent conditions in certain volatile sectors of the municipal securities market, including the municipal auction rate security market.1  The MSRB understands that some issuers are seeking to convert all or a portion of their outstanding auction rate securities either to another form of adjustable rate debt or to fixed rate bonds.  In many instances, this conversion may be accomplished through a refunding of the outstanding debt with a new issue of municipal securities.  In other cases, the bond documents may permit the issuer to effect a conversion of the interest rate mode in conjunction with an issuer-initiated tender of the securities by the current holders of the securities and a subsequent remarketing of the securities in the new interest rate mode.  The MSRB is publishing this notice to remind brokers, dealers and municipal securities dealers (“dealers”) that serve as remarketing agents in connection with interest rate mode conversions that they may, depending on the nature of the conversion, be subject to the same obligations with respect to submissions under MSRB Rule G-36, on delivery of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to the MSRB, as are dealers that underwrite new issues of municipal securities.

Rule G-36 Requirements

MSRB Rule G-36 requires underwriters to submit official statements to the MSRB, accompanied by completed Form G-36(OS), for most primary offerings of municipal securities. Official statements are collected into a comprehensive library for the municipal securities market and will be made available through the MSRB’s new Electronic Municipal Market Access system (EMMA) scheduled for launch on a pilot basis on March 31, 2008.2

For offerings subject to Exchange Act Rule 15c2-12, MSRB Rule G-36 requires that the underwriter submit the official statement to the MSRB within one business day after receipt from the issuer but by no later than ten business days after the final agreement to purchase, offer, or sell the municipal securities (the “bond sale”).  For these offerings, Rule 15c2-12(b)(3) requires the underwriter to contract with the issuer to receive the official statement within seven business days after the bond sale and in sufficient time to accompany money confirmations sent to customers.

With limited exceptions, for primary offerings exempt from Rule 15c2-12, MSRB Rule G-36 requires underwriters to send the official statement, if one is prepared, to the MSRB by the later of one business day after receipt from the issuer or one business day after bond closing.  Thus, if an official statement is prepared, the underwriter must submit such official statement to the MSRB under Rule G-36 for the following types of offerings exempt from Rule 15c2-12:

● any primary offering with a principal amount of less than $1,000,000;

● any primary offering sold in authorized denominations of $100,000 or more if the securities mature in nine months or less; or

● any primary offering sold in authorized denominations of $100,000 or more if the holder may exercise an option to tender the securities to the issuer or its agent for redemption or purchase at par value or more at least as frequently as every nine months until maturity, earlier redemption, or purchase.

However, MSRB Rule G-36 does not require an underwriter to submit an official statement, even if one has been prepared, for the following types of offerings exempt from Rule 15c2-12:

● any primary offering sold in authorized denominations of $100,000 or more if the securities are sold to no more than thirty-five persons each of whom the 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

● commercial paper sold in authorized denominations of $100,000 or more if the securities mature in nine months or less and if the official statement has previously been submitted to the MSRB and has not subsequently been amended.

Application of Rule G-36 to Remarketings Constituting Primary Offerings

A dealer serving as a remarketing agent in the context of an interest rate mode conversion should be cognizant of the definitions of “primary offering” and “underwriter” under Exchange Act Rule 15c2-12, which definitions also apply to MSRB Rule G-36.  Depending on the specific facts and circumstances of a particular conversion, the remarketing of the bonds in the new interest rate mode may be considered a primary offering of municipal securities, and the remarketing agent may be considered an underwriter of such bonds,3 under both Exchange Act Rule 15c2-12 and MSRB Rule G-36, thereby triggering the respective requirements of such rules.  The MSRB has previously noted:4

Rule G-36 defines primary offering as an offering defined in SEC Rule 15c2-12(f)(7), which is an offering of municipal securities directly or indirectly by or on behalf of an issuer of such securities, including any remarketing of municipal securities (i) that is accompanied by a change in the authorized denomination of such securities from $100,000 or more to less than $100,000, or (ii) that is accompanied by a change in the period during which such securities may be tendered to an issuer of such securities or its designated agent for redemption or purchase from a period of nine months or less to a period of more than nine months.  The SEC has stated that the two examples of remarketings in the rule language are illustrative and are not the exclusive circumstances in which a remarketing would be considered a primary offering [emphasis added], noting that for purposes of Rule 15c2-12, a “primary offering” is distinguished from a typical secondary market transaction by the fact that it is “directly or indirectly by or on behalf of an issuer of such securities.”^[1]  Thus, remarketing agents for outstanding issues must consider whether any remarketing of such securities will trigger any of the obligations arising under either SEC Rule 15c2-12 or MSRB Rule G-36.

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^[1]         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).

A dealer serving as remarketing agent in connection with an interest rate mode conversion must review, among other things, whether the remarketing of the converted securities is considered a primary offering for purposes of Exchange Act Rule 15c2-12 and MSRB Rule G-36 in determining whether the dealer must submit to the MSRB any remarketing circular or other official statement prepared by the issuer in connection with such conversion and remarketing.  In undertaking such review, the dealer should not focus exclusively on the nature of the change in features of the securities caused by the conversion.  The dealer may instead wish to consider whether a new issue of municipal securities having the same terms as the converted securities would be subject to Exchange Act Rule 15c2-12 and MSRB Rule G-36 in determining whether the remarketing of the securities on such terms also should be treated as a primary offering for purposes of these rules.

If a dealer is required to make a submission under MSRB Rule G-36(OS) in connection with any such remarketing, the dealer should ensure that the information provided on Form G-36(OS) accompanying the submission of a remarketing circular or other official statement reflects the terms of the securities being remarketed after the conversion to the new interest rate mode.  For purposes of completing Form G-36(OS), such submissions generally should be treated as final official statements for primary offerings rather than as amendments to any previously submitted materials for the initial issuance of the securities.

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