MSRB Files Proposed Amendment to Rule G-34 Concerning the Designation of “Not Reoffered” in Connection with New Issues of Municipal Securities

On June 28, 2012 the Municipal Securities Rulemaking Board (the “MSRB”) filed with the Securities and Exchange Commission (the “SEC”) a proposed rule change consisting of amendments to MSRB Rule G-34 (on CUSIP numbers, new issue, and market information requirements) concerning the use by brokers, dealers and municipal securities dealers (“dealers”) of the designation of “not reoffered” or “NRO” in connection with new issues of municipal securities (“proposed rule change”).[1] The MSRB requested that the proposed rule change be made effective on the first calendar day of the next succeeding month beginning at least twenty-eight (28) calendar days after the date on which the proposed rule change is approved by the SEC.

SUMMARY OF PROPOSED RULE CHANGE

The proposed rule change would amend MSRB Rule G-34 to prohibit any dealer from using the term “not reoffered” or other comparable term or designation, such as the commonly used designation of “NRO,” without also including the applicable price or yield information about the securities in any of its written communications, electronic or otherwise, sent by or on behalf of the dealer.  Such prohibition would apply to any such communication occurring from and after the time of initial award of a new issue of municipal securities.  The time of initial award would be the earlier of (A) the Time of Formal Award,[2] or (B) if applicable, the time at which the issuer initially accepts the terms of a new issue of municipal securities subject to subsequent formal award, sometimes referred to as the “verbal award.”  The prohibition would not apply to communications occurring prior to the time of initial award of a new issue of municipal securities.

The proposed rule change would improve the availability of current information about initial offering prices or yields of new issues of municipal securities to market participants.  Dealers, whether acting as underwriters or in the secondary market, sometimes designate certain maturities of a new issue of municipal securities as not reoffered, or NRO, in communications about such securities, and omit the corresponding initial offering price or yield information.  While an underwriter is required to report complete information about initial offering prices or yields (including for maturities designated as NRO) pursuant to MSRB Rules G-32 and G-34 as described below, such information may not be readily available until as late as the end of the “date of first execution” of the new issue.[3] The proposed rule change would require underwriters to include such information about initial offering prices or yields in any communication they send to any party from and after the time of initial award, which occurs prior to the submission deadlines of Rules G-32 and G-34.

More timely information about initial offering prices or yields would improve new issue price discovery for issuers pricing their own same-day transactions as well as for investors and other market participants seeking more contemporaneous price information. Further, the availability of more contemporaneous price information to a larger universe of market participants would significantly reduce pricing inefficiencies in the marketplace. Currently, not all market participants have access to the same universe of price or yield information about new issues of municipal securities as they come to market and, as a result, differences in prices for similar securities may reflect in part the lack of broad access to such data useful in more accurately assessing current market values, rather than differences in intrinsic credit, structural or other features of the securities or the respective issuers. Thus, improving timely access to a larger universe of pricing data by more market participants would reduce pricing inefficiency that results from incomplete data.

CURRENTLY APPLICABLE MSRB RULES

With certain exceptions, underwriters are required, pursuant to MSRB Rule G-34(a)(ii)(C), to report to the New Issue Information Dissemination System (“NIIDS”),[4] operated by the Depository Trust and Clearing Corporation (“DTCC”), certain information about most new issues of municipal securities within two hours following the Time of Formal Award, including the initial price or yield at which each maturity of the new issue of municipal securities was sold.  Underwriters are also required, pursuant to MSRB Rule G-32(b)(vi)(C)(1)(a), to submit to the MSRB’s Electronic Municipal Market Access (EMMA®) system certain information about the new issue, including the initial offering price or yield of all maturities, on or prior to the end of the date of first execution.[5]  Under both rules, the initial offering price or yield must be provided for all maturities, including those that are not reoffered, and underwriters cannot use the designation of NRO in their submissions.  Initial offering price or yield information submitted to NIIDS is disseminated by DTCC to its subscribers, including market participants and information vendors, typically within two hours following the Time of Formal Award, while such information submitted to the EMMA system becomes available to the public on the EMMA website and through subscription services to information vendors and other market participants immediately upon submission and typically by the end of the date of first execution.[6]

AVAILABILITY OF INFORMATION ABOUT INITIAL OFFERING PRICES OR YIELDS FROM THIRD-PARTY VENDORS

Although information vendors may receive subscriptions from the MSRB or DTCC of data that includes the complete initial offering price or yield information for all maturities, including maturities that are not reoffered, they may also receive information regarding the new issue directly from underwriters or other parties on the underwriters’ behalf that may sometimes substitute the designation of NRO for the initial offering price or yield for applicable maturities.  The information vendors may then post such separately submitted information in a manner designed to highlight new issues coming to market and may otherwise repackage and distribute this information to their subscribers, including a combination of dealers, other information vendors and other market participants.  This information disseminated by third party vendors, often including the NRO designation without the applicable initial offering price or yield, is available to their subscribers shortly after submission to such vendor and frequently before the complete initial offering price or yield information becomes available through NIIDS and the EMMA system.  The proposed rule change would result in information about the initial offering prices and yields for NRO maturities to be included in any such separately submitted and disseminated information from and after the initial award.

Questions about this notice should be directed to Karen Du Brul, Associate General Counsel, at (703) 797-6600.

June 28, 2012

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TEXT OF PROPOSED RULE CHANGE[7]          

Rule G-34: CUSIP Numbers, New Issue, and Market Information Requirements

(a) New Issue Securities.

(i) Assignment of CUSIP Numbers.  No change.

(ii) Application for Depository Eligibility, CUSIP Number Affixture and Initial Communications.  No change. 

(iii) Underwriting Syndicate.  No change.

(iv) Limited Use of NRO Designation.  From and after the time of initial award of a new issue of municipal securities, a broker, dealer or municipal securities dealer may not use the term “not reoffered” or other comparable term or designation without also including the applicable price or yield information about the securities in any of its written communications, electronic or otherwise, sent by it or on its behalf.  For purposes of this subsection (iv), the “time of initial award” means the earlier of (A) the Time of Formal Award as defined in subparagraph (a)(ii)(C)(1)(a), or (B) if applicable, the time at which the issuer initially accepts the terms of a new issue of municipal securities subject to subsequent formal award.

(b) - (d)  No change.

(e) NIIDS Registration and Testing Requirements.

(i) NIIDS Registration.  No change.

(ii) NIIDS Testing.  No change.

(iii) NIIDS Start-Up.  Each broker, dealer or municipal security dealer that has acted at any time after September 30, 2007 and plans to continue to act as an underwriter for a new issue of municipal securities with nine months or greater effective maturity shall complete the requirements of this section (d) by no later than September 15, 2008.