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Confirmation Disclosures: Tender Option Bonds with Adjustable Tender Fees

Confirmation disclosures: tender option bonds with adjustable tender fees. This is in response to your letter requesting a one year delay in the effective date of an October 3, 1984, interpretation of Board rules G-12 and G-15 concerning confirmation disclosure of tender option bonds with adjustable tender fees. In that interpretation, the Board stated that the interest rate shown on the confirmation for these bonds should be the interest rate noted on the bond certificate (the "stated interest rate") but that the confirmation also must include the phrase "less fee for put." The Board also stated that it is the responsibility of the selling dealer to determine the current effective interest rate applicable to these bonds taking into account the tender fee (the "net interest rate") and to disclose this to purchasers at the time of trade. In addition, the Board took the position that the yield to maturity disclosure requirement does not apply to these bonds since an accurate yield to maturity cannot be calculated for these securities because of the annual adjustments to the tender fee. Dealers must, however, include the yield to the tender option date as an alternative form of yield disclosure.

While you agree with the interpretation, you state that the automated systems currently in place are not capable of complying with the interpretation and thus you request a one year delay in the effective date of this interpretation in order for the industry to effect necessary system modifications. Your request was referred to the Committee of the Board which has responsibility for interpreting the Board’s confirmation rules. The Committee has authorized this reply.

Apparently, a problem arises when dealers include the stated interest rate in the interest rate field on the confirmation. In computing the yield on the transaction, most computer systems automatically pick up the rate in that field as the interest rate. Thus, an overstated yield based on the stated interest rate, instead of a yield based on the net interest rate, is printed on confirmations. We have been informed that certain dealers have solved this problem by including the net interest rate in the interest rate field. In this way, the computer automatically picks up the correct interest rate needed to determine the accurate yield to the tender option date. In order to solve the interest rate disclosure problem, these dealers include elsewhere in the description field of the confirmation the stated interest rate with the phrase "less fee for put." The Board believes that this method of disclosure is consistent with the Board’s confirmation disclosure requirements.

Since the Board believes that most dealers will be able to comply either with the original interpretation or this clarification utilizing their present computer systems, it has decided not to approve any delay in the effective date of this interpretation for system modifications. We note, however, that any dealer that believes its system cannot comply with this interpretation might consider requesting a no-action letter from the SEC until its system modifications are in place. MSRB interpretation of March 5, 1985.