The Board has filed an amendment to rule G-32, on disclosures in connection with new issues, relating to delivery of official statements to customers purchasing new issue VRDOs
On March 25, 1998, the Board filed with the Securities and Exchange Commission ("SEC") an amendment to rule G-32, on disclosures in connection with new issues.(1) The amendment would permit brokers, dealers and municipal securities dealers ("dealers") selling variable rate demand obligations qualifying for the exemption provided under subparagraph (d)(1)(iii) of Securities Exchange Act Rule 15c2-12 ("Rule 15c2-12") to customers during the underwriting period to deliver to such customers by no later than settlement a preliminary official statement and to send the official statement in final form within one business day of receipt from the issuer.
Background
Rule G-32 provides that no dealer shall sell any new issue municipal securities to a customer unless such dealer delivers to the customer no later than the settlement of the transaction a copy of the official statement in final form or, if an official statement in final form is not being prepared, a written notice to that effect together with an official statement in preliminary form, if any.(2) The rule is designed to ensure that a customer who purchases new issue municipal securities is provided with all available information relevant to his or her investment decision by settlement of the transaction.
The structure of rule G-32 as currently in effect is premised on the standard industry practice of issuers delivering the securities to the underwriters two or more weeks after the sale date for the securities (hereinafter referred to as the "Bond Delivery Period").(3) The rule was originally adopted by the Board in 1977(4) and was amended to substantially the current form in 1985.(5) Subsequently, in 1989 the SEC promulgated Rule 15c2-12,(6) which requires underwriters in primary offerings subject to the rule, among other things, to contract with issuers to receive final official statements within seven business days after any final agreement to purchase, offer or sell municipal securities and in sufficient time to accompany any confirmation that requests payment from any customer. As in the case of the official statement delivery obligation imposed under rule G-32, the timing requirement imposed by this provision of Rule 15c2-12 was of necessity premised at least in part on the industry's standard Bond Delivery Period of two or more weeks.(7)
The Board has previously sought to make rule G-32 consistent with the provisions of Rule 15c2-12. In 1996, the Board published a notice requesting comments on a draft amendment to rule G-32 that, among other things, would have moved up the time that customers are provided with a final official statement for primary offerings subject to Rule 15c2-12 to the date of delivery of final money confirmations, as opposed to settlement as now required.(8) The draft amendment was based on the requirement under Rule 15c2-12 that underwriters contract with issuers to receive final official statements in sufficient time to accompany any confirmation that requests payment from any customer. However, the Board decided not to proceed with the draft amendment primarily due to commentators' complaints that frequent delays in obtaining the final official statement from the issuer would often make compliance with the accelerated time frame impossible or unduly expensive and burdensome.(9)
In the meantime, the Board had launched a review of the underwriting process which focused on, among other things, the manner and timeliness of delivery of official statements from issuers to underwriters under Rule 15c2-12 and from underwriters to the Board under rule G-36.(10) The Board found that, in some instances, issuers do not meet their contractual obligation entered into with underwriters pursuant to Rule 15c2-12 to deliver official statements within seven business days after the date of final agreement to purchase, offer or sell the municipal securities. The Board noted that, if issuers are not meeting the current delivery requirement under Rule 15c2-12, it is possible that final official statements also are not being prepared in time to deliver to customers by settlement as required under rule G-32. Thus, to assist the agencies charged with enforcing rules G-32 and G-36 and to provide additional information to the Board in considering the effectiveness of such rules, the Board proposed certain revisions to Forms G-36(OS) and G-36(ARD) that would require that underwriters indicate, among other things, the date that final official statements are received from the issuer and the expected date of closing on the underwriting. The revised forms went into effect as of January 1, 1998 and are currently in use by underwriters.(11) The Board expects that information obtained through the revised forms, as well as through dialogue with industry participants, will assist it in assessing the effectiveness of rule G-32 in the municipal marketplace as it has evolved since 1985 and particularly since promulgation of Rule 15c2-12.
Proposed Amendment
In promulgating Rule 15c2-12 and in response to concerns raised by commentators that applying the provisions of the rule to variable rate demand obligations "might unnecessarily hinder the operation of this market,"(12) the SEC provided an exemption to the rule for any such obligations that can be tendered by the holders thereof for purchase by the issuer or its agent at least as frequently as every nine months and that are in authorized denominations of $100,000 or more ("Exempt VRDOs"). The decision by the SEC to exclude Exempt VRDOs from the operation of Rule 15c2-12 was consistent with the fundamental structural differences between such securities and most of the traditional market for municipal securities. In most variable rate demand obligation issues, particularly those that fall within the Exempt VRDO category, the purchase contract is not executed until the issue closing date or the immediately preceding day.(13) Thus, in the vast majority of such issues, the Bond Delivery Period - the period between the purchase date and the closing date - is at most only one business day. Since issuers typically do not authorize the printing of the official statement in final form until the execution of the purchase contract, underwriters usually do not receive the official statement in final form until the closing date at earliest and in many instances the printed version is not available until after the closing date, at which point the issuer has already delivered the Exempt VRDOs to the underwriters.
The Board has determined that, because the Bond Delivery Period for Exempt VRDOs is at most one business day, it is often not possible for dealers to settle with customers - who expect to receive delivery of their securities on the issue date - without causing a violation of the requirement that they deliver the official statement in final form to such customers by settlement. As a result, the Board is proposing an amendment to rule G-32 that would permit a dealer selling new issue Exempt VRDOs to deliver the official statement in preliminary form to the customer by settlement, together with a written notice that the official statement in final form will be sent to the customer within one business day of receipt, and thereafter send to the customer the official statement in final form within one business day of receipt. If no official statement in preliminary form is being prepared, the dealer would only be obligated to deliver by settlement the written notice regarding the official statement in final form and to send the official statement in final form upon receipt.(14) The proposed amendment offers an alternative method of compliance with rule G-32 in the case of Exempt VRDOs. Thus, in those limited circumstances where dealers may in fact receive the official statement in final form in sufficient time to deliver it to customers by settlement (e.g., if an issuer approves completion of the official statement in final form prior to execution of the purchase contract), dealers would have the option of complying with the existing provision of the rule by delivering the official statement in final form to the customer by settlement.
March 25, 1998
Text of Amendment to Rule G-32(15)
Rule G-32. Disclosures in Connection with New Issues
(a) Disclosure Requirements. No broker, dealer or municipal securities dealer shall sell, whether as principal or agent, any new issue municipal securities to a customer unless such broker, dealer or municipal securities dealer delivers to the customer no later than the settlement of the transaction:
(i) a copy of the official statement in final form prepared by or on behalf of the issuer or, if an [a final] official statement in final form is not being prepared by or on behalf of the issuer, a swritten notice to that effect together with a copy of an official statement in preliminary form, if any; provided, however, that if an official statement in final form is being prepared for new issue municipal securities issued in a primary offering that qualifies for the exemption set forth in paragraph (iii) of section (d)(1) of Securities Exchange Act Rule 15c2-12, a broker, dealer or municipal securities dealer may sell such new issue municipal securities to a customer if such broker, dealer or municipal securities dealer:
(A) delivers to the customer no later than the settlement of the transaction a copy of an official statement in preliminary form, if any, and written notice that the official statement in final form will be sent to the customer within one business day following receipt thereof by the broker, dealer or municipal securities dealer, and
(B) sends to the customer a copy of the official statement in final form, by first class mail or other equally prompt means, no later than the business day following receipt thereof by the broker, dealer or municipal securities dealer; and
(ii) No change.
[In the event an official statement in final form will not be prepared by
or on behalf of the issuer, an official statement in preliminary form, if any, shall be
sent to the customer with a notice that no final official statement is being prepared.]
Every broker, dealer or municipal securities dealer shall promptly furnish the documents
and information referred to in this section (a) to any broker, dealer or municipal
securities dealer to which it sells new issue municipal securities, upon the request of
such broker, dealer or municipal securities dealer.
(b) No change.
(c) Definitions [of New Issue Municipal Securities and Official Statement].
For purposes of this rule, the following terms have the following meanings:
(i)-(iii) No change.
(iv) The term "primary offering" shall mean an offering defined in Securities Exchange Act Rule 15c2-12(f)(7).
ENDNOTES
1. File No. SR-MSRB-98-4. Comments submitted to the SEC should refer to this file number.
2. The rule applies to all municipal securities (other than commercial paper) that are sold by a dealer during the issue's underwriting period, as such term is defined under Board rules.
3. The Bond Market Association states that "[i]t usually takes about one month from the sale date for the bonds to be actually ready to be delivered to investors." Public Securities Association, Fundamentals of Municipal Bonds, Fourth Edition (1990).
4. File No. SR-MSRB-77-12 (September 20, 1977). The SEC approved rule G-32 in SEC Release No. 34-15247 (October 19, 1978), 43 FR 50525 (1978).
5. File No. SR-MSRB-85-11 (March 11, 1985). The SEC approved this amendment in SEC Release No. 34-22374 (August 30, 1985), 50 FR 36505 (1985). Subsequent amendments have been limited to providing a definition of "underwriting period" and clarifying the exemption for commercial paper. In addition, the Board has filed with the SEC a proposed amendment that relates primarily to dealer-to-dealer dissemination of official statements. See File No. SR-MSRB-97-14 (December 22, 1997, as amended March 12, 1998).
6. SEC Release No. 34-26985 (June 28, 1989), 54 FR 28799 (1989).
7. For example, the seven business day time frame of paragraph (b)(3) of Rule 15c2-12 presumably anticipated a typical Bond Delivery Period of at least one and one-half weeks since the final official statement is generally expected to be available at least by closing of the underwriting transaction.
8. 8 See MSRB Reports, Vol. 16, No. 3 (Sept. 1996) at 19-23.
9. See MSRB Reports, Vol. 17, No. 2 (June 1997) at 23-24.
10. 10 See MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.
11. File No. SR-MSRB-97-10 (November 26, 1997). See SEC Release No. 34-39545 (January 13, 1998), 63 FR 3368 (1998).
12. See SEC Release No. 34-26985 (June 28, 1989), 54 FR 28799 (1989).
13. This compressed time frame arises as a result of the fact that, as securities bearing short-term yields sold at par, the market dictates that pricing - i.e., the setting of the interest rate borne by the securities during the initial rate period - and settlement occur on a same-day or next-day basis.
14. As in the current rule, if no official statement in final form is being prepared, such dealer would deliver to the customer by settlement the official statement in preliminary form, if any, and written notice to the effect that an official statement in final form is not being prepared. If neither a final nor a preliminary official statement is being prepared, the dealer would only be obligated to deliver by settlement the written notice to the effect that no official statement in final form is being prepared.
15. Underlining indicates new language; brackets denote deletions.
