MSRB Amends Proposal To Increase Transparency of Variable Rate Demand Obligations

On January 2, 2009, the Municipal Securities Rulemaking Board (MSRB) filed with the Securities and Exchange Commission (SEC) an amendment to a recently filed proposed rule change[1] to increase transparency of municipal Auction Rate Securities (“ARS”) and municipal Variable Rate Demand Obligations (“VRDO”).[2]  This amendment provides that the proposed amendments to Rule G-34 that relate to VRDO, consisting of subsection (c)(ii) thereof, that were originally proposed to become effective on January 30, 2009 would become effective on April 1, 2009.  The January 30, 2009 effective date for the proposed amendments to Rule G-34 that relate to ARS, consisting of subsection (c)(i) thereof, remains unchanged.

This amendment addresses concerns raised by commentators that the originally proposed January 30, 2009 effective date would not provide enough time to implement and test automated systems for reporting data about both ARS and VRDO to the MSRB’s planned Short-term Obligation Rate Transparency (“SHORT”) System.[3]  While the MSRB acknowledges that some brokers, dealers and municipal securities dealers (“dealers”) may need additional time to perform and test system changes to report data to the MSRB using an automated system, the MSRB believes that dealers will be able to report information about ARS to the MSRB manually using the SHORT System Web User Interface[4] if those system changes are not able to be fully implemented by January 30, 2009, particularly since the number of ARS issues is relatively small as compared to VRDO issues.  In addition, since ARS are primarily a retail product, the MSRB believes it is important to provide transparency of ARS as early as practicable.  Accordingly, the MSRB does not believe that a change to the proposed January 30, 2009 effective date for ARS is warranted.

While the SHORT System allows data to be reported manually using the SHORT System Web User Interface, the MSRB agrees with commentators that manual submission of data for VRDO would be impractical in many cases due to the high number of VRDO securities and the frequency with which VRDO interest rates reset.  Therefore, the MSRB believes that a revised effective of date of April 1, 2009 would allow additional time for dealers to implement automated systems to submit data about VRDO to the SHORT System and should address commentators concerns.

The MSRB has previously noted that the current transparency proposal represents the first phase of a plan for increasing the information available for ARS and VRDO.[5]  The MSRB plans to file with the SEC in the near future one or more additional proposals to provide for the submission of further relevant information and documents relating to ARS and VRDO.  Such proposals will build on existing SHORT and/or EMMA system components to minimize the need for extensive additional programming by dealers and other relevant market participants.  The MSRB will work with the relevant parties to ensure a rapid and smooth transition to the full transparency program for ARS and VRDO over the coming months.

Questions about this notice may be directed to Justin R. Pica, Director, Uniform Practice Policy, at 703-797-6716.

January 2, 2009