Notice on Upcoming Changes to Rule G-34(c) to Require Dealer Submission of ARS and VRDO Documents to the SHORT System

On May 16, 2011, changes to Municipal Securities Rulemaking Board’s (MSRB) Rule G-34(c), on variable rate security market information, become effective that, among other things, will 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”).[1]  This notice addresses several questions related to the document submission requirement that have been raised as preparations have begun for this May 16, 2011 rule change. 

Overview of Rule Change

The rule change identifies documents dealers will be required to submit to the SHORT System concerning ARS programs and VRDO liquidity facilities.  ARS Program Dealers will be required to submit documents defining current auction procedures and interest rate setting mechanisms.  VRDO Remarketing Agents will be 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.  For documents in effect prior to May 16, 2011, dealers will be required to submit such documents to the SHORT System on or before September 22, 2011, which is ninety business days after the May 16, 2011 effective date of the rule change (“transition period documents”).[2]  On an ongoing basis, dealers will be required to submit any new documents or amended versions of transition period documents created on or after May 16, 2011 within five business days of receipt.  Submissions of documents to the SHORT System will require dealers to identify the CUSIP numbers to which the documents relate, whether the document represents a transition period document and, if not, the date the document was received, and for VRDOs, the type of liquidity facility to which the document relates. 

Documents Required to be Submitted

The purpose of the rule change is to provide a centralized source of documents that define critical aspects of VRDO liquidity provisions and ARS auction procedures and interest rate setting mechanisms.  Such critical aspects of VRDO liquidity provisions include, but are not limited to, “termination provisions” detailing circumstances when the obligation for a liquidity provider to provide liquidity is no longer applicable, the “notification period” that details the length of time that may lapse between a holder of a VRDO tendering a position in the security and a liquidity provider purchasing the tendered security, and 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 MSRB recognizes that for many ARS and VRDOs, this critical information may not be contained in one document.  For example, certain key information and defined terms may be included in a trust indenture.  In these cases, all documents containing critical information will be required to be submitted to the SHORT System.  The SHORT System will permit the submission of multiple documents.  Thus, a dealer making a submission to the SHORT System of a VRDO Letter of Credit Agreement composed of, for example, two documents – a reimbursement agreement and the letter of credit – would need to submit both documents to the SHORT System as a single submission so that it is clear that the collection of documents relate to the same Letter of Credit Agreement.[3]  The MSRB reminds dealers that the changes to Rule G-34(c) will require the submission of documents and that summaries of documents, such as those contained in official statements, will not satisfy the submission requirement.

While the MSRB anticipates that the majority of VRDO liquidity facilities either are Letter of Credit Agreements or Standby Bond Purchase Agreements, Rule G-34(c) includes a third VRDO liquidity facility document category, which provides for “any other documents that establish an obligation to provide liquidity.”  This category is intended to be used to categorize those documents that represent a liquidity facility that is other than a Letter of Credit Agreement or Standby Bond Purchase Agreement.  This category is not intended to include, using the above example, submissions of the reimbursement agreement or other relevant document (such as the remarketing agreement) that relate to a Letter of Credit Agreement.  One example of a liquidity facility that would be appropriately classified under this category would be documents pertaining to an issuer, conduit borrower or affiliate that provides “self liquidity.”

Redaction of Non-Public Information

Concerns have been raised that certain ARS and VRDO documents contain information that was not intended to be made public.  Such information that was intended to remain confidential to maintain internal security or confidentiality of personal information may include the fees assessed by liquidity providers or ARS Program Dealers as well as staff names and contact information for making a request to use a VRDO liquidity facility, as well as information that could be used in a fraudulent manner, such as VRDO liquidity facility bank routing or account numbers. 

The fact that a document identified in Rule G-34(c) for submission to the SHORT System contains information that was not intended to be made public does not exempt a dealer from submitting such a document to the SHORT System.  However, the MSRB recognizes the concerns with having information intended to remain confidential to maintain internal security or confidentiality of personal information publicly available and acknowledges that such information would be of limited, if any, value to investors.  Accordingly, the MSRB would view a dealer electing to perform a limited amount of redacting of such confidential information or items of information that could be used in a fraudulent manner, such as VRDO liquidity facility bank routing or account numbers, as an acceptable means of safeguarding against improper use of those items of information.  The MSRB notes 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, including the types of critical information described in this notice.

Amendments/Supplements to SHORT System Documents

Some documents that will be required to be submitted to the SHORT System typically are entered into for a limited period of time and are subject to renewal over the life of the security.  This would typically occur for VRDO Letter of Credit Agreements.  In these cases, the documents pertaining to a renewal (such as a renewal letter or amended letter of credit) confirming that the agreement to provide liquidity has been renewed typically is produced. 

Dealers will be required to submit VRDO Letter of Credit Agreement renewal documents as well as any other types of amendments or supplements to documents previously submitted to the SHORT System.  A VRDO Letter of Credit Agreement renewal document would provide a clear indication that the liquidity facility remains operative.  When making a submission of a VRDO Letter of Credit Agreement renewal document to the SHORT System, such renewal document must be included with the related liquidity facility documents by resubmitting all associated documents along with the renewal document as a new submission or updating an existing submission to add the renewal document, at the election of the dealer.[4]

Portable Document Format (PDF) Submission Requirement

All documents submitted to the SHORT System must be portable document format (“PDF”) files.  Since January 1, 2010, all documents submitted to the MSRB’s Electronic Municipal Market Access (“EMMA”) web portal have been required to be word-searchable PDF files.  While this same requirement generally will apply to the submission of documents to the SHORT System, the MSRB acknowledges that some of the transition period documents are likely to be older documents that may not be available in electronic format or in a format that would permit a dealer to readily produce a word-searchable PDF file of the document.  Accordingly, transition period documents will not be required to be word-searchable.  However, any new or amended versions of documents produced after the effective date of the rule change will be required to be in word-searchable format.[5]

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

February 23, 2011