MSRB Reminds Dealers of Limits on Redactions of SHORT System Documents
On May 16, 2011, changes to the Municipal Securities Rulemaking Board’s (“MSRB”) Rule G-34(c), on variable rate security market information, became effective that, among other things, require brokers, dealers and municipal securities dealers (collectively “dealers”) to submit to the MSRB Short-term Obligation Rate Transparency (“SHORT”) System certain documents associated with municipal Auction Rate Securities (“ARS”) and Variable Rate Demand Obligations (“VRDOs”) (together, “SHORT System Documents”). This notice reminds dealers that they may only redact information in SHORT System Documents in very limited circumstances without incurring a violation of MSRB rules.
Overview of Submission Requirement
Rule G-34(c) identifies documents dealers are required to submit to the SHORT System concerning ARS programs and VRDO liquidity facilities. ARS Program Dealers are required to submit documents defining current auction procedures and interest rate setting mechanisms. VRDO Remarketing Agents are required to submit documents related to Letter of Credit Agreements, Stand-by Bond Purchase Agreements, and any other documents that establish an obligation to provide liquidity. Dealers are required to submit any new documents or amendments to pre-existing documents, within five business days of receipt.
Redaction of Information
The MSRB has previously published a notice addressing, among other things, the limited circumstances under which dealers may redact information contained in SHORT System Documents. The MSRB noted that any redacting must be kept to a minimum and must not include those items of information that would reasonably be assumed to be used by an investor or other market participant in evaluating an ARS or VRDO. The notice provided non-exclusive examples of the types of critical information that may not be redacted by a dealer: (i) “termination provisions” detailing circumstances when the obligation for a liquidity provider to provide liquidity is no longer applicable, (ii) the “notification period” that details the length of time that may elapse between a holder of a VRDO tendering a position in the security and a liquidity provider purchasing the tendered security, and (iii) the “term out period” showing, if any, the time period that principal held with the liquidity provider (as a “bank bond”) would be amortized.
The notice also provided that a narrow category of information could be redacted by a dealer, because it was intended to remain confidential to maintain internal security or confidentiality of personal information. The notice specifically identified the following types of information that fall into this limited category: (i) the fees assessed by liquidity providers or ARS Program Dealers, (ii) staff names and contact information for making a request to use a VRDO liquidity facility, and (iii) information that could be used in a fraudulent manner, such as VRDO liquidity facility bank routing or account numbers.
In a number of cases, SHORT System Documents submitted to the MSRB have been redacted in a manner that does not comply with the guidance provided by the MSRB. In some cases, information that is critical to investors and other market participants, such as the interest rate accruing on bank bonds, has been redacted. The MSRB reminds dealers that improper redaction of SHORT System Documents by dealers may be a violation of Rule G-34(c). In addition, a dealer that encourages an issuer to redact information that the dealer could not itself redact could be found to violate MSRB Rule G-17 (on fair dealing). The submission of improperly redacted SHORT System Documents has the potential to cause investor harm and negates the transparency in the ARS and VRDO markets that Rule G-34(c) is designed to foster. Accordingly, dealers should be aware that, in the future, should it come to the attention of the MSRB that a dealer has submitted an improperly redacted SHORT System Document, it will refer the matter to the appropriate enforcement agency for resolution.
April 11, 2012
 For documents in effect prior to May 16, 2011, dealers were required to submit such documents to the SHORT System on or before September 22, 2011.
 A dealer that receives an improperly redacted SHORT System Document from another party (e.g., an issuer or a letter of credit bank) should use, and document, its best efforts to obtain another copy of the document that is not improperly redacted before submitting the document to the SHORT System.