MSRB Seeks Comments on Application of "Access Equals Delivery" Standard to Official Statement Dissemination for New Issue Municipal Securities

The Municipal Securities Rulemaking Board (the “MSRB”) is seeking comment on the implementation of an electronic system of primary market disclosure in the municipal securities market.  This new system would be designed to promote significantly more effective and efficient delivery of material information to new issue customers and the marketplace in general than under existing requirements for physical delivery of official statements.  The system would be modeled in part on recent rule changes adopted by the Securities and Exchange Commission (the “SEC”) that instituted an “access equals delivery” model for prospectus dissemination for much of the registered securities market.[1]  However, as a result of the unique nature of the municipal securities market, including but not limited to the exemption of issuers from the registration and prospectus requirements of the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”), the MSRB believes that modifications to the SEC approach would be necessary.

This notice describes a potential framework for instituting the “access equals delivery” standard under MSRB rules and poses a number of questions related to its implementation.  Comments are welcome from all interested parties on the proposed framework and related questions, any alternatives to this framework, and any other issues touching on the application of this standard to the municipal securities market, including the potential impact of this standard on investors and issuers, as well as on brokers, dealers and municipal securities (“dealers”).

BACKGROUND

SEC’s “Access Equals Delivery” Standard for Prospectuses in Registered Offerings . In the registered securities market, issuers are required to file registration statements and prospectuses electronically through the SEC’s EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system prior to an offering.  The EDGAR system then makes electronic versions of filings available to the public at no charge on a “real-time” basis through the SEC’s website.  As a result, prospectuses are available free of charge at a centralized site (as well as through other information services, in some cases for a fee) throughout the selling process.  The “access equals delivery” standard is premised on, among other things, this immediate availability of prospectuses and other filings through the EDGAR system and other electronic sources.

The “access equals delivery” standard provides, pursuant to Securities Act Rule 172, that a broker-dealer selling a security in a registered offering need not deliver a final prospectus to the customer if the registration statement is effective and the final prospectus is filed with the SEC (or a good faith and reasonable effort to file it is made) within the required timeframe.  Under Securities Act Rule 173, a broker-dealer selling such a security must provide to the customer a notice that the security was sold in a registered offering within two business days after completion of the sale.  Customers may request printed copies of the final prospectus.  The “access equals delivery” standard also applies to aftermarket trades of newly issued securities pursuant to Securities Act Rule 174.  This standard is not available to certain classes of registered securities, including but not limited to mutual fund shares.[2]

Official Statement Deliveries Under Current MSRB Rules.  Under Rule G-32, a dealer selling a new issue municipal security to a customer during the period ending 25 days after bond closing (the “new issue disclosure period”) must deliver the official statement to the customer on or prior to trade settlement.[3]  The rule includes inter-dealer delivery requirements for new issue municipal securities to assist selling dealers to meet their customer delivery obligations.[4]

Rule G-36 requires underwriters to submit official statements to the MSRB.  For offerings subject to Exchange Act Rule 15c2-12, the official statement must be sent within one business day after receipt from the issuer but no later than ten business days after the bond sale.[5]  With limited exceptions, official statements for all other offerings must be sent by the later of one business day after receipt from the issuer or one business day after bond closing.  Submitted official statements must be accompanied by completed Form G-36(OS).  Official statements may be submitted in either paper or electronic format.  These submissions are collected into a comprehensive library for the municipal securities market.  The MSRB makes these documents available to subscribers, many of whom disseminate them (typically for a fee) or use them to obtain security-specific information to include in their data files used by dealers, investors, pricing services and others for their trading or other municipal securities market activities.

A MODEL FOR IMPLEMENTATION OF “ACCESS EQUALS DELIVERY” IN THE MUNICIPAL SECURITIES MARKET

The MSRB believes that the adoption of a modified version of the SEC’s “access equals delivery” standard would greatly enhance the timeliness and efficiency of official statement deliveries.  Such a model would provide the investing public with assured access to official statements throughout the new issue disclosure period and, in most cases, sooner than under the current physical delivery model.  In addition, the “access equals delivery” model would significantly decrease the burden and expense of dealer deliveries of official statements, which should ultimately result in reduced transaction costs for new issue customers.  The need to print significantly fewer official statements also should reduce issuance costs for issuers.

The SEC noted the significant benefits that the “access equals delivery” model would provide in the registered market, stating in the SEC Release that the rules:

are intended to facilitate effective access to information, while taking into account advancements in technology and the practicalities of the offering process.  These changes are intended to alleviate timing difficulties that may arise under the current securities clearance and settlement system, and also to facilitate the successful delivery of, and payment for, securities in a registered offering.…  [G]iven that the final prospectus delivery obligations generally affect investors only after they have made their purchase commitments and that investors and the market have access to the final prospectus upon its filing, we believe that delivery obligation should be able to be satisfied through a means other than physical delivery….  At this time, we believe that Internet usage has increased sufficiently to allow us to adopt a final prospectus delivery model for issuers and their intermediaries that relies on timely access to filed information and documents.[6]

The MSRB believes that these considerations are equally applicable to the municipal securities market.

In order to apply the “access equals delivery” standard to the municipal securities market in an effective manner, however, two critical factors would need to be addressed.  First, electronic versions of official statements would need to become the industry standard.  Second, such electronic versions would need to be made easily and freely available to the investing public.  These factors, as well as possible MSRB rule changes needed to implement an “access equals delivery” standard, are discussed below.

Electronic Official Statements.  The MSRB currently receives approximately half of all official statement submissions under Rule G-36 in electronic format.  These electronic official statements are available nearly instantaneously for further re-dissemination after the underwriter has made the submission.  In contrast, official statements submitted in paper form experience significant delays before they can ultimately be re-disseminated by the MSRB, including but not limited to the added delivery time for physical documents to be delivered from the underwriter to the MSRB and the processing time for the MSRB to scan the printed documents into digital form.  The MSRB believes that it is in the best interest of municipal securities investors and other participants in this marketplace to eliminate such delays and to require that all submissions under Rule G-36 be undertaken in electronic format by underwriters.

The MSRB believes that the availability of electronic official statements for delivery to the MSRB will continue to grow rapidly from the current level of approximately 50% through the natural evolution of the marketplace.  Indeed, it is likely that few if any official statements are currently produced by means other than the creation of electronic files.  The MSRB cannot, of course, require issuers to produce official statements in electronic format.  However, the MSRB believes that, by the time an “access equals delivery” model were to be fully implemented, the level of offerings in the municipal securities market for which electronic official statements are not already being produced by the issuer will have decreased to such a low point that it would be reasonable for the MSRB to require underwriters for such offerings to themselves image or otherwise digitize those few paper-only official statements prior to submission to the MSRB.  In the MSRB’s view, the frequency of such imaging would be quite low, the ease of such imaging will have increased, and the potential benefit to the municipal securities market will be sufficiently high to counterbalance this rather low burden imposed by such a requirement.

The MSRB seeks comment on the current availability of electronic official statements from issuers and the factors affecting future growth in such availability.  The MSRB also seeks comment on the nature and level of potential burdens of requiring that all submissions under Rule G-36 be undertaken in electronic format.  Further, the MSRB currently requires that electronic official statement submissions be made solely as portable document format (pdf) files. The MSRB requests comment on the advisability of accepting other electronic formats, what such other formats should be and whether such other formats create inappropriate risks for or burdens on issuers, dealers or investors.

Centralized Access to Electronic Official Statements.  Electronic official statements would need to be made readily available to the investing public, at no cost, for the duration of the applicable new issue disclosure period, at a minimum.  The MSRB believes that investors would be best served if such official statements were made available at a centralized Internet website, although other parties could of course make all or portions of such collection available at other websites or through other means as well.  In the alternative, a central directory of such official statements could be maintained, with the actual hosting of the electronic official statement occurring by multiple parties (such as issuers, financial advisors, underwriters, information vendors, printers, etc.) that have undertaken to maintain free ready access to such documents throughout the new issue disclosure period.  However, the MSRB observes that this second alternative would provide fewer assurances that electronic access to the official statements will in fact be maintained in a uniform manner for the required duration and likely would require third-party monitoring of these decentralized sources.

The MSRB seeks comment on whether a centralized website where all official statements for issues in their new issue disclosure period are freely available to the public would be preferable to a decentralized system in which issuers, financial advisors, underwriters, information vendors, printers and others post their respective official statements for the required period, with a central index providing hyperlinks to the official statements.  Should the MSRB itself undertake either centralizing function, or are there other market participants or vendors who could undertake such duties subject to appropriate supervision?  The MSRB also seeks comment on whether the current new issue disclosure period ending 25 days after the bond closing would be the appropriate period for purposes of maintaining free centralized access to official statements, or whether a longer period would be more appropriate.

Potential MSRB Rule Changes to Implement the “Access Equals Delivery” Model .  Under an “access equals delivery” model for the municipal securities market, Rule G-32 would be revised, eliminating the current prohibition on settling a customer transaction in new issue municipal securities if the customer has not physically received an official statement.[7]  Instead, Rule G-32 would require that a selling dealer provide notice to the customer that the official statement is available electronically.[8]  The selling dealer would be required to provide a printed version of the official statement upon request.  The current requirements of Rule G-32 regarding disclosure to customers of initial offering prices for negotiated sales would be deleted, such information to be provided to the entire marketplace at an earlier time under revised Rule G-36, as described below.  In addition, the requirements in current Rule G-32 with respect to inter-dealer distribution of official statements would be deleted as the official statements would be readily available electronically.  Finally, dealer financial advisors that prepare official statements on behalf of issuers would be required to provide electronic versions to the underwriters.

Rule G-36 also would be revised.  The rule would require underwriters of all primary offerings of municipal securities for which official statements are prepared to submit the official statements electronically to the MSRB under Rule G-36 (i.e., paper submissions would no longer be permitted).  The timeframe for submission of official statements under Rule G-36 could be simplified to require the underwriter to submit the official statement for any offering (regardless of its status under Exchange Act Rule 15c2-12) by no later than the business day following receipt from the issuer, but in no event later than the bond closing date.

Rule G-36 would continue to require underwriters to submit much of the information currently included on Form G-36(OS) but would no longer require that such information be provided simultaneously with the official statement or in a single submission.  Such information submission would be accepted solely in electronic form, either through a web-based interface or by upload or data stream using extensible markup language (xml) or other appropriate format.  In addition, underwriters would be permitted to designate submission agents (such as information vendors, printers, etc.) for both the official statement and required information submissions, although the underwriters would remain responsible for accurate and timely submissions.  The underwriter would be required to make an initial submission of information, consisting of CUSIP numbers and list offering prices of all maturities in the issue, on or prior to the first execution of a transaction in such issue.[9]  The underwriter would thereafter submit further required information and the electronic official statement as they become available.  Information submissions under Rule G-36 would be required for all new issues, even if no official statement is being produced.  If an official statement is not being produced, the underwriter would be required to report that fact.

The MSRB seeks comment on whether the “access equals delivery” model should be available on all new issues or whether certain classes of new issues should continue to be subject to a physical delivery requirement.  For example, the SEC did not make the “access equals delivery” model available for mutual fund sales.  Should this model be made available in connection with the sale of municipal fund securities, including interests in 529 college savings plans?[10]  Should issues exempt from Exchange Act Rule 15c2-12 be treated differently from those that are subject to that rule?  What responsibility should dealers have to confirm that an issue qualifies for the “access equals delivery” standard?  Should dealers be able to assume that an electronic official statement is available for a qualifying issue without inquiry, or should there be a duty to inquire (e.g., check the central website or index)?  MSRB Rule G-32 currently requires dealers to deliver official statements to customers by trade settlement, whereas Securities Act Rule 173 merely requires that notice of a registered offering must be provide to the customer within two business days of trade settlement.  Would it be appropriate to set a two-day post-settlement deadline for delivering notices to customers that matches the SEC’s notice requirement for registered offerings?

Under Rule G-36, the MSRB is seeking comment on whether a single ultimate deadline for all issues, requiring that official statements be submitted to the MSRB by no later than the bond closing, is appropriate.  In particular, is there any legitimate basis for an official statement not to be available to the underwriter by the bond closing date?  If so, would it be appropriate for the MSRB to provide an alternative for those offerings where an official statement may not be available in time, such as to require the submission of a preliminary official statement (if one exists) by settlement pending the availability from the issuer and the submission to the MSRB of the final official statement?  Does the current requirement under Rule G-36 that official statements for offerings subject to Exchange Act Rule 15c2-12 must be submitted to the MSRB no later than 10 business days after the bond sale influence the timing of issuer deliveries of official statements to the underwriters?[11]  If so, would changing the deadline to the bond closing date have an impact on the timing of such deliveries?  Finally, where a dealer financial advisor prepares the official statement, should such financial advisor be required to submit the official statement directly to the MSRB on behalf of the underwriter?

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Comments should be submitted no later than September 15, 2006, and may be directed to Ernesto A. Lanza, Senior Associate General Counsel.  Written comments will be available for public inspection.

July 27, 2006