Request for Comment on Concept Proposal to Require Underwriters to Submit Preliminary Official Statements to the MSRB’S Electronic Municipal Market Access (EMMA®) System

The Municipal Securities Rulemaking Board (the “MSRB”) is requesting comment on a concept proposal to require brokers, dealers and municipal securities dealers (“dealers”), acting as underwriters (“underwriters”) of new issues of municipal securities, to submit an issuer’s preliminary official statement relating to such new issue and all supplements thereto, if any such documents have been prepared by or on behalf of the issuer, to the MSRB’s Electronic Municipal Market Access (EMMA®) system.[1]  The concept proposal is intended to elicit comment and input from interested parties on the benefits and burdens of this potential requirement, which will assist the MSRB in determining whether to consider undertaking formal rulemaking to propose this requirement on underwriters of new issues of municipal securities as described herein.

Comments should be submitted no later than February 8, 2013, and may be submitted in electronic or paper form.  Comments may be submitted electronically by clicking here.  Comments submitted in paper form should be sent to Ronald W. Smith, Corporate Secretary, Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, VA 22314.  All comments will be available for public inspection on the MSRB’s website.[2]

Questions about this notice should be directed to Karen Du Brul, Associate General Counsel, at 703-797-6600.

BACKGROUND

Under the MSRB’s fair dealing rule, Rule G-17, dealers selling municipal securities to a customer are required to disclose, at or prior to the time of trade, all material facts about the transaction known by the dealer, as well as material facts about the security that are reasonably accessible to the market.  In the case of investors purchasing new issue municipal securities in a primary offering, this disclosure obligation is often met through the delivery to the customer, prior to the customer committing to purchase the securities, of a preliminary official statement (if one has been prepared) containing information about the issuer and the securities, together with pricing and other information omitted from the preliminary official statement and any other material information required to be disclosed under MSRB Rule G-17.[3]

However, the broader universe of potential investors for new issues of municipal securities, particularly retail investors, frequently do not have an efficient way to access timely information about new offerings of municipal securities available in the market at the time they are considering whether to make an investment and which investment to make.  Because of the provisions of Section 15B(d) of the Securities Exchange Act of 1934 (the so-called “Tower Amendment”), MSRB rules cannot require issuers to post either a preliminary official statement[4] or a final official statement to EMMA for access by investors and the general public.  Further, although underwriters are required to post final official statements to EMMA for access by investors and the general public after the initial bond sale under MSRB Rule G-32, the final official statement normally is not available during the initial order period for a new issue.

If an issuer has prepared a preliminary official statement for a new issue of municipal securities, it will typically make it available to the market by various methods, including posting it electronically on an issuer’s website or a commercial site, or by making it available electronically (or in hard copy) through its financial advisor or directly to investors upon request.  Typically, preliminary official statements posted electronically are made available to syndicate and selling group members by access to an internet link and in some cases a password.  A dealer may then access the preliminary official statement, download it as a portable document format (PDF) file and transmit it to other non-syndicate member dealers or to a dealer’s own clients.  Alternatively, a dealer may direct interested persons to the link itself.  However, while preliminary official statements may be available electronically either directly from a posting site or through a dealer, potential investors are frequently unaware of this availability.

Current SEC and MSRB Rules Relating to Preliminary Official Statements

SEC Rule 15c2-12.  Rule 15c2-12 of the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, requires an underwriter, prior to the time it bids for, purchases or sells municipal securities in a primary offering subject to the rule, to obtain and review an official statement “deemed final” by the issuer, which may omit certain information (generally, certain financial and pricing information).  SEC Rule 15c2-12 also requires an underwriter to determine if the issuer or obligated person (as defined in the rule) has contracted to provide certain information about subsequent events concerning the issuer, the obligated person or the security, and to contract with the issuer for delivery of the final official statement within seven business days of the purchase date and in sufficient time to accompany a customer confirmation for payment and to comply with delivery requirements under the rule and MSRB rules.  SEC Rule 15c2-12 does not require that a preliminary official statement be prepared; only that an underwriter send a preliminary official statement, if one is available and until a final official statement is available, to a potential investor upon request.

MSRB Rule G-32.  Under current MSRB Rule G-32, an underwriter is required to post to EMMA an official statement within one business day of receipt from the issuer, but no later than the closing date.  Rule G-32 does not require the underwriter to post a preliminary official statement to EMMA unless (i) an official statement was not submitted to EMMA in accordance with Rule G-32, or the offering is exempt under SEC Rule 15c2-12; and (ii) a preliminary official statement has been prepared.  In such cases, a preliminary official statement must be submitted to EMMA by no later than the closing date.

Voluntary Submissions to EMMA of Preliminary Official Statements

In its efforts to improve the scope of information about issuers in the primary market, the MSRB introduced enhancements to EMMA to permit issuers, on a voluntary basis, to submit preliminary official statements, related pre-sale documents and certain other disclosure documents and information to the MSRB for display on EMMA.  Voluntary dissemination of preliminary official statements through EMMA, particularly if made available prior to the time of formal award to an underwriter, provides more timely access for potential investors and other market participants to key information useful in making an investment decision.  When the MSRB was considering voluntary submission of preliminary official statements, some industry participants, in addition to supporting the concept, also suggested the MSRB explore making the requirement to submit a preliminary official statement mandatory.  While issuers of municipal securities are encouraged to voluntarily post their preliminary official statement and other pre-sale documents on EMMA, only a limited number of issuers have chosen to do so to date.[5]

Concept Proposal

The MSRB is considering whether to require an underwriter of a new issue of municipal securities to submit an issuer’s preliminary official statement relating to such new issue and all supplements thereto, if such documents have been prepared, to the MSRB for display on EMMA.  To ensure the widest possible access at the earliest possible time, any such requirement would provide for the underwriter to submit the preliminary official statement and supplements to EMMA by the end of the day on which it receives the preliminary official statement or supplement from the issuer.  However, in light of the provisions of the Tower Amendment, an underwriter for a new issue for which the issuer restricts the posting of the preliminary official statement or supplement on EMMA prior to the bond sale would instead be required to submit the preliminary official statement and all supplements thereto by no later than the time of first execution of trades in the new issue after the bond sale.[6]  Thereafter, the underwriter would also be required to submit to EMMA any additional supplements to the preliminary official statement, if prepared, by the end of the day on which it receives such supplement.  This requirement would be independent of the requirement under SEC Rule 15c2-12 that an underwriter send a preliminary official statement, if one is available and until a final official statement is available, to a potential investor upon request, and of the requirement under MSRB Rule G-17 that a dealer selling municipal securities to a customer provide material disclosures at or prior to the time of trade.  The concept proposal would not require, directly or indirectly, that a preliminary official statement or supplement be prepared and would leave full discretion with the issuer as to whether any preliminary official statement or supplement it does prepare may be posted on EMMA by the underwriter prior to the bond sale.  Once the final official statement becomes available, the underwriter would be required to post such document to EMMA as currently provided for under MSRB Rule G-32.[7]

The concept proposal would advance the MSRB’s long-standing goal of making information useful for an investment decision more easily available to all participants in the municipal securities market on an equal basis through a centralized, searchable, internet based repository.  The MSRB articulated this goal when it proposed establishing a continuing disclosure service on EMMA.[8]  Commenters, in providing near universal support for this proposal, suggested the MSRB also accept voluntary submissions of material information about issuers and their securities beyond what was required under SEC Rule 15c2-12, including preliminary official statements.  The MSRB subsequently added features to EMMA to accept voluntary submissions of material from issuers, including preliminary official statements and other pre-sale documents, and this concept proposal represents a potential next step in further increasing the ready accessibility of material information about municipal securities to the marketplace.

Broad access to disclosure documents, including a mandatory requirement to submit preliminary official statement and supplements to EMMA, is consistent with the MSRB’s statutory mandate to protect investors and would aid in preventing fraudulent and manipulative acts and practices by improving the opportunity for investors, in both the primary and secondary market, to access material information about issuers and their securities in a more timely and complete manner. Notwithstanding the information contained in periodic continuing disclosure submissions, a preliminary official statement may be the most current source of information about an issuer and its proposed and outstanding securities. This source of information would benefit both investors who have indicated an interest in purchasing a new issue of securities and existing holders who will receive current information about the issuer and new debt that may affect their holdings.

Further, the MSRB believes that there is considerable value in providing a means for centralized access to preliminary official statements prior to the time a final official statement is available, both for investors and issuers. Timely access to preliminary official statements under the current distribution system is often difficult and inefficient for both retail and institutional investors.  Requiring the posting of a preliminary official statement on EMMA would provide centralized access, improve the timely flow of information, allow investors more time for a careful review of the offering and potentially attract a broader base of investors to the offering.

REQUEST FOR COMMENT

The MSRB seeks public comment on the following questions, as well as any other comments on the concept proposal, to assist it in determining whether to consider proposing the requirements as described herein.  If the MSRB determines to proceed with rulemaking in this area after reviewing the comments received on this concept proposal, it would publish a request for comment seeking further industry input on specific requirements intended to achieve the goals enunciated herein before making a final decision whether to file such a proposal with the SEC for its approval.

• Would implementation of such a proposal help protect individual investors and promote informed investment decisions? 
• Do retail investors have ready access to preliminary official statements posted on an issuer’s website or through commercial vendors?  Are they notified of new postings or supplements? 
• Would this potential requirement have any negative effects on the protection of investors and the public interest, or on the fair and efficient operation on the municipal market?  If so, please describe in detail. 
• Are there alternative methods that the MSRB should consider to provide the information sought under this concept proposal that would be more effective and efficient for investors and/or less costly or burdensome to underwriters? 
• Will posting preliminary official statements for lower credit offerings encourage investors to consider investments that may not be suitable for such investors? Are there other investor protection concerns associated with reaching new categories of investors, particularly retail investors? 
• Would this potential requirement have any effect, positive or negative, on private commercial vendors currently providing access to preliminary and final official statements?  If so, please describe in detail. 
• What would be the additional, incremental burden to underwriters resulting from the submission requirements set forth in the concept proposal?  What would be the incremental cost to dealers, both within and outside the syndicate, in implementing this proposal? Would those costs be outweighed by centralized access to preliminary official statements and supplements early in the offering process? Please quantify your response if possible.
• For those preliminary official statements distributed through commercial vendors, should underwriters be required to post/publish the electronic link to such documents to all persons (not only syndicate members) requesting the preliminary official statement?
• Would implementation of such a proposal encourage more voluntary submissions of information to EMMA?
• What, if any, provisions should be included concerning the ability of underwriters to remove a preliminary official statement or supplemental material from EMMA after posting if such information becomes stale? 
• Would implementation of such a proposal result in improved pricing for issuers, since there might be a broader base of interested investors? 
• Would implementation of such a proposal hinder the market for small issuers or more complicated credit offerings?  Would implementation result in less dealer interest in underwriting such issues? 
• Should there be an exception for “small” issuers, and if so, how should a “small” issuer be defined? 
• Following finalization of the definition of municipal advisor, if an issuer has engaged a municipal advisor to advise it in connection with a transaction, should the municipal advisor be required to post the preliminary official statement to EMMA rather than the underwriter? 
• For competitively bid transactions, who should be required to post the preliminary official statement?  Should a financial advisor, if one had been appointed, be required to post the preliminary official statement to EMMA unless restricted by the issuer? 
• In those instances where a preliminary official statement has not been prepared, should the underwriter be required to post a notice on EMMA to that effect? 
• Would an industry-led initiative to develop a “best practice” be an acceptable alternative to implementation of this proposal, and if so, why? Please discuss how a “best practice” would achieve the objective of this proposal.

December 12, 2012

[1]  EMMA is a registered trademark of the MSRB.