Amendment to Rule G-36(c)(i) Approved by the Securities and Exchange Commission

The Securities and Exchange Commission has approved an amendment to rule G-36(c)(i) relating to official statements prepared in connection with most primary offerings exempt from Exchange Act Rule 15c2-12.

On June 21, 2000, the Securities and Exchange Commission (the “SEC”) approved an amendment to rule G-36, on delivery of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to Board or its designee.[1] The amendment modifies the existing time frame for brokers, dealers or municipal securities dealers (“dealers”) acting as underwriters of primary offerings subject to rule G-36(c)(i) (i.e., offerings exempt from Exchange Act Rule 15c2-12) to send official statements to the Municipal Securities Rulemaking Board (the “MSRB”).[2] The amendment provides that an underwriter in a primary offering subject to rule G-36(c)(i) for which an official statement in final form is prepared by the issuer must send two copies of the official statement in final form, together with two copies of Form G-36(OS), to the MSRB by the later of (i) one business day after the bond closing or (ii) one business day after receipt of the official statement from the issuer.

Rule G-36 was adopted by the MSRB for the purpose of creating a repository for official statements that would function much like a public library that stores, indexes and provides copies of official statements.[3] This library, known as the Municipal Securities Information Library® (or MSIL®) system,[4] is intended to serve as a central source for information regarding municipal securities trading in the primary and secondary markets. As originally adopted by the MSRB and approved by the SEC, rule G-36 applied to all primary offerings of municipal securities regardless of principal amount, other than primary offerings that qualified for exemption under section (d)(1) of Securities Exchange Act Rule 15c2-12.[5] The MSRB subsequently amended rule G-36 to subject to its requirements certain categories of primary offerings that are exempt under Rule 15c2-12(d)(1), thereby further extending the reach of rule G-36 beyond the scope of Rule 15c2-12.[6] The MSRB felt that, by expanding the scope of the rule to include such offerings, a more complete collection of disclosure documents would result and the overall integrity, efficiency and liquidity of the municipal securities market would be increased.

For any primary offering subject to rule G-36(c)(i), the underwriter had been required to send two copies of the official statement in final form, if one was prepared, together with two copies of Form G-36(OS), to the MSRB by the business day after the issuer delivers the municipal securities to the underwriter (the “bond closing”). The MSRB reviewed certain information included by underwriters on Forms G-36(OS) submitted to the MSIL® system in 1998, including approximately 2,000 such forms submitted in connection with primary offerings subject to rule G-36(c)(i).[7] For these offerings, the MSRB found that 96% of the official statements in final form were reported to have been delivered by issuers to underwriters within one business day after closing. The 4% of official statement deliveries by issuers to underwriters that were reported as being made more than one business day after closing and therefore too late to permit underwriters to comply with rule G-36(c)(i) constituted more than half (approximately 54%) of all underwriter failures to meet the time frame of that section.[8]

The MSRB believed that there was significant room for improvement with respect to underwriter compliance with rule G-36(c)(i) in those situations in which the official statement was received in sufficient time to send to the MSRB on a timely basis. Underwriters experiencing problems in this area should review their internal procedures for ensuring that official statements delivered by issuers are handled in a manner that permits the accurate completion of Form G-36(OS) and the prompt sending of such form and the official statement to the MSRB.

However, the MSRB was concerned that more than half of the instances in which underwriters did not met the time frame of rule G-36(c)(i) resulted from official statements that were reported to have been delivered by issuers more than one business day after closing. Of course, the MSRB has no authority to require that an issuer prepare an official statement or that any official statement that is prepared be delivered to underwriters within a specified time frame. In addition, the SEC excepted those primary offerings that are subject to rule G-36(c)(i) from Rule 15c2-12 and therefore no regulatory framework exists to compel, directly or indirectly, the preparation and delivery of an official statement in such offerings.

The MSRB noted that in approximately 36% of the offerings subject to rule G-36(c)(i), the number of business days between the sale date and the business day following closing was less than ten. As a result, for these offerings, the requirement in rule G-36(c)(i) that the underwriter send the official statement to the MSRB within one business day after the bond closing provided the underwriter with less time to comply with its official statement submission requirement than the 10 business day outside time frame of rule G-36(b)(i), were such time frame applicable to these offerings.[9] At the same time, however, issuers in these offerings generally had not contracted with underwriters to deliver official statements within seven business days of the sale date, as provided in section (b)(3) of Rule 15c2-12, since such offerings are exempt from that Rule. Thus, in more than one-third of all offerings subject to rule G-36(c)(i) during the review period, underwriters were required to act more quickly than they would under rule G-36(b)(i) even though there was no concomitant obligation on the part of issuers to deliver an official statement within any particular time frame.

As a result, the MSRB published the MSRB Notice seeking comment on, among other things, a draft amendment to rule G-36(c)(i) which the MSRB believed would address this situation. After reviewing the comments received on the MSRB Notice, the MSRB determined to adopt the draft amendment, with a minor clarifying change.[10] As amended, the rule provides that an underwriter in a primary offering subject to rule G-36(c)(i) for which an official statement in final form is prepared by the issuer must send two copies of the official statement in final form, together with two copies of Form G-36(OS), to the MSRB by the later of (i) one business day after the bond closing or (ii) one business day after receipt of the official statement from the issuer.[11] The amendment is intended solely to provide relief to underwriters that face violation of rule G-36(c)(i) as a result of circumstances beyond their control and is not intended to imply that underwriters and other dealers may ignore their continuing obligation to deliver official statements for new issue municipal securities to customers by settlement, as required under rule G-32.

The MSRB notes that one commentator had stated that the change in the timing requirement “means that underwriters and issuers could schedule closings on the basis of the needs of the transaction, rather than for the purpose of allowing a sufficient number of days to increase the odds that the official statement will be ready in time for the closing.” The MSRB strongly believes that this statement demonstrates a misunderstanding of the nature of the proposed amendment, the purpose of official statements in the municipal securities market and the other obligations of dealers with respect to delivery of official statements. In the MSRB Notice, the MSRB observed that, for new issue municipal securities, dealers typically seek, and customers generally expect, to settle their trades on the same day as the closing of the underwriting. As a result, underwriters need to receive the official statement from the issuer in sufficient time to ensure that the official statement can be delivered to customers by settlement of their transactions, as required under rule G-32. If an issuer is preparing an official statement in final form but does not deliver it to the underwriter by the bond closing, dealers would continue to be prohibited from settling their transactions with customers until they have delivered the official statement to the customers, with certain very limited exceptions.[12] Thus, other than offerings falling within the narrow exceptions provided under rule G-32, the only offerings in which “the needs of the transaction” would not include delivery of the official statement by closing would be those in which dealers expect to hold the securities in inventory until the official statement is in fact delivered and therefore made available for redelivery to customers.

The completion and delivery of an official statement by the closing of the underwriting is not a technical requirement imposed by the MSRB. If an official statement serves no purpose in an offering that is exempt from Rule 15c2-12, then the issuer need not prepare one. Unless an issuer is preparing an official statement for reasons entirely unrelated to the offering that it describes, it is difficult to understand how completion of an official statement after the underwriters and initial customers have received delivery of their securities can be rationalized.[13] The official statement delivery requirement under rule G-32 continues to provide a powerful incentive to underwriters to urge issuers to complete the official statement in final form in sufficient time to permit the underwriters and the other dealers to which they sell such new issue municipal securities to deliver the official statement to customers by settlement.

June 21, 2000

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TEXT OF AMENDMENT [14]

Rule G-36. Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee

(a) - (b) No change.

(i) Subject to paragraph (iii) below, each broker, dealer, or municipal securities dealer that acts as an underwriter in a primary offering of municipal securities not subject to Securities Exchange Act rule 15c2-12 for which an official statement in final form is prepared by or on behalf of the issuer shall send to the Board or its designee, by certified or registered mail, or some other equally prompt means that provides a record of sending, ~~within~~ by the later of one business day of after delivery of the securities by the issuer to the broker, dealer, or municipal securities dealer or one business day after receipt of the official statement in final form from the issuer or its designated agent, the following documents and written information: two copies of the official statement in final form~~, if prepared by or on behalf of the issuer~~; and~~, if an official statement in final form is prepared,~~ two copies of completed Form G-36(OS) prescribed by the Board, including the CUSIP number or numbers for the issue.

(ii) No change.

(d) - (f) No change.

ENDNOTES

[1] See Securities Exchange Act Rel. No. 42967 (June 21, 2000).

[2] Those primary offerings that are subject to rule G-36(c)(i) consist of offerings of municipal securities for which an official statement in final form has been prepared by or on behalf of the issuer and having (i) an aggregate principal amount of less than $1,000,000 (“Small Issue Securities”); (ii) authorized denominations of $100,000 or more if the securities have a maturity of nine months or less (“Short-Term Securities”); and (iii) authorized denominations of $100,000 or more if, at the option of the holder, the securities may be tendered 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 by the issuer or its agent (“Puttable Securities”).

[3] See Securities Exchange Act Rel. No. 28081 (June 1, 1990), 55 FR 23333 (June 7, 1990); “Delivery of Official Statements to the Board: Rules G-36 and G-8,” MSRB Reports, Vol. 9, No. 3 (Nov. 1989) at 3.

[4] Municipal Securities Information Library and MSIL are registered trademarks of the MSRB.

[5] In primary offerings subject to Rule 15c2-12, the underwriter is required under section (b)(3) of the Rule to contract with the issuer to receive the final official statement within seven business days after any final agreement to purchase, offer or sell the municipal securities (the “sale date”) and in sufficient time to accompany any confirmation that requests payment from any customer. Rule 15c2-12 does not apply to Small Issue Securities. In addition, section (d)(1) of the Rule exempts primary offerings of municipal securities if the securities are (i) in authorized denominations of $100,000 or more and are sold to no more than 35 persons with knowledge and experience in financial and business matters, capable of evaluating the merits and risks of the investment and not purchasing for more than one account or with a view to distribution (“Limited Offering Securities”); (ii) Short-Term Securities; or (iii) Puttable Securities. Thus, as originally adopted, rule G-36 applied to all primary offerings subject to Rule 15c2-12 as well as to Small Issue Securities for which an official statement in final form was prepared, but did not apply to Limited Offering Securities, Short-Term Securities and Puttable Securities.

[6] See Securities Exchange Act Rel. No. 32086 (March 31, 1993), 58 FR 18290 (April 8, 1993); “Delivery of Official Statements to the Board: Rule G-36,” MSRB Reports, Vol. 12, No. 3 (Sept. 1992) at 11. Thus, only primary offerings exempt from Rule 15c2-12 for which no official statement in final form is prepared and Limited Offering Securities remain exempt from rule G-36.

[7] The MSRB reviewed all Forms G-36(OS) for primary offerings having sale dates in 1998 received in acceptable form by the MSIL^® system on or prior to December 31, 1998. Excluded from this review were any Forms G-36(OS) that omitted the sale date, date of receipt by the underwriter of the official statement from the issuer or date that the underwriter sent the official statement to the MSIL^® system. Information provided by underwriters on Form G-36(OS) is not independently verified by the MSRB but is provided to the appropriate enforcement agency on a regular basis. Underwriters are required to certify that all information contained in each Form G-36(OS) submitted to the MSIL^® system is true and correct. Inaccuracies in the information reported by underwriters on Form G-36(OS) could subject such underwriter to appropriate enforcement action. The results of the MSRB’s review could be affected by any such inaccuracies. The full results of this review, including results relating to other provisions of rule G-36 and to the provisions of rule G-32 and Rule 15c2-12, were published in “Official Statement Deliveries Under Rules G-32 and G-36 and Exchange Act Rule 15c2-12,” MSRB Reports, Vol. 19, No. 3 (Sept. 1999) at 29 (the “MSRB Notice”).

[8] The remaining failures consisted of situations where the issuer was reported to have delivered the official statement to the underwriter in sufficient time for the underwriter to comply with rule G-36(c)(i) but the underwriter delayed sending the official statement to the MSRB until later than the business day after the bond closing.

[9] Section (b)(i) of rule G-36 requires the underwriter of a primary offering subject to Rule 15c2-12 to send two copies of the final official statement, together with two copies of Form G-36(OS), to the MSRB within one business day after receipt of the final official statement from the issuer but no later than 10 business days after the sale date.

[10] The change in language makes clearer the fact that section (c)(i) continues to apply to a primary offering only if an official statement in final form is prepared.

[11] In contrast, rule G-36(c)(i) previously required that the underwriter send the official statement to the MSRB by the business day after the bond closing, regardless of whether the underwriter had in fact received the official statement by such day.

[12] Commercial paper is wholly exempt from the rule G-32 customer delivery requirement and preliminary official statements may be delivered by settlement (with official statements in final form sent when they become available) for Puttable Securities.

[13] Of course, the MSRB believes that there is significant value to the secondary market in having official statements available throughout the life of the issue. Nonetheless, the MSRB sees no way of justifying the existence of an official statement based on the needs of the secondary market while ignoring the needs of the primary market.

[14] Underlining indicates additions; strikethrough indicates deletions.