Request for Comments on Revised Draft Amendments Relating to Official Statement Delivery Requirements Under Rule G-32, Rule G-36 and Rule G-11

On May 12, 2004, the Municipal Securities Rulemaking Board (“MSRB”) published for comment draft amendments to Rule G-32, on disclosures in connection with new issues, and Rule G-36, on delivery of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to the MSRB (the “2004 Notice”). [1]   The draft amendments were intended to increase the efficiency and timeliness of official statement dissemination among brokers, dealers and municipal securities dealers (“dealers”) and to the ultimate customer.  After reviewing the comments received in connection with the 2004 Notice, the MSRB has determined to seek further industry comment on revised draft amendments to Rules G-32 and G-36, as well as to Rule G-11, on sales of new issue municipal securities during the underwriting period.  Comments are due by March 18, 2005.

 

Description of Revised Draft Amendments

The revised draft amendments are designed to improve the efficiency and timeliness of dissemination of official statements to underwriters and other dealers, which in turn should similarly improve the efficiency and timeliness of dealer-to-customer dissemination of official statements.  The MSRB believes that the revised draft amendments would be an appropriate first step toward the ultimate goal of having electronic versions of official statements generally available and routinely used for more rapid dissemination of disclosure in the marketplace.  The revised draft amendments also address the concerns of commentators regarding the potential burdens entailed in a transition to an electronic-based dissemination system.  The revised draft amendments are described more fully below.  The changes made in the revised draft amendments from the original draft amendments published in the 2004 Notice are described in the discussion of industry comments that follows.

Dissemination of Electronic Official Statements by Managing and Sole Underwriters.  The revised draft amendments to Rule G-32(c) set forth in new clause (i)(C) would require the managing or sole underwriter for new issues of municipal securities to provide a printable electronic version of the official statement (if an electronic version has been prepared and the issuer does not object to its distribution) to any dealer that requests an electronic version and provides an e-mail address or other delivery instructions acceptable to the managing or sole underwriter.  This obligation would be in addition to the managing or sole underwriter’s obligation to send paper copies of the official statement in the required quantities (i.e., one printed copy plus not less than one additional printed copy per $100,000 par value purchased by the dealer for sale to customers).  However, if the requesting dealer consents, the managing or sole underwriter would be permitted to provide such dealer solely with the electronic official statement in lieu of paper copies otherwise required under the rule. [2]

Dissemination of Electronic Official Statements by Financial Advisors.  Revised Rule G-32(c)(ii) would obligate a dealer that acts as the issuer’s financial advisor and that prepares the official statement for the issuer to make available to the managing or sole underwriter, in addition to a printed version of the official statement, a printable electronic version of the official statement (if an electronic version has been prepared and the issuer does not object to its distribution) upon request for such an electronic version if the underwriter provides an e-mail address or other delivery instructions acceptable to the financial advisor.  However, if the managing or sole underwriter consents, the dealer financial advisor would be permitted to provide such underwriter solely with the electronic official statement in lieu of paper copies otherwise required under the rule.

Dissemination of Official Statements During New Issue Disclosure Period.  The revised draft amendments would delete the definition of “underwriting period” in Rule G-32(d)(ii) and would replace it with the new term “new issue disclosure period.”  The new issue disclosure period would be defined as the period commencing with the first submission to an underwriter of an order for the purchase of new issue municipal securities or the purchase of such securities from the issuer, whichever first occurs, and ending 25 days after the final delivery by the issuer of the securities to or through the underwriting syndicate or sole underwriter.  The definition of “new issue municipal securities” in Rule G-32(d)(i) would be revised to mean municipal securities (other than commercial paper) that are sold by a dealer during the issue’s new issue disclosure period.

The revised draft amendments would make related changes to Rules G-36 and G-11.  Clause (a)(iv) would be added to Rule G-36 to include a reference to the definition of new issue disclosure period in Rule G-32(d)(ii) and section (d) of Rule G-36 would be revised to provide that amendments to official statements made by the issuer during the new issue disclosure period must be sent to the MSRB by the underwriter within the required timeframe.  The definition of underwriting period would be removed from section (a) of Rule G-11 and the title of the rule would be revised to more accurately reflect the subject of the rule.

Discussion of Comments and Revisions to Draft Amendments

The MSRB received comment letters on the 2004 Notice from four commentators.  Three commentators opposed the draft amendments, while the fourth answered several questions posed in the 2004 Notice without stating a position on most portions of the draft amendments.

Dissemination of Electronic Official Statements Under Rule G-32.  The original draft amendments published in the 2004 Notice would have required managing or sole underwriters to provide copies of both the paper and electronic version of the official statement to any dealers purchasing new issue municipal securities that request copies of the official statement. The draft amendments also would have required dealers acting as financial advisors that prepare official statements to provide to the underwriters both paper and electronic versions of the official statement.  These obligations to provide electronic versions would arise only if an electronic version had been prepared and the issuer did not object to its distribution.  These obligations would not have been conditioned on a request having been made to receive the official statement in electronic form.

Three commentators opposed these requirements.  One commentator stated that, as a small dealer underwriting issues for small issuers, requiring dissemination of electronic versions of the official statement in addition to paper copies would “make our costs unruly and would cut into our profits.”  In addition, it stated that passing the cost on to the firm’s small issuer clients would be a burden.  Another commentator also stated that the draft amendments would have been “unduly burdensome” to managing or sole underwriters.  It observed that the MSRB’s 1998 notice on electronic delivery of documents (the “e-Document Notice”) [3] sets forth “strict requirements for effective electronic delivery to dealers, customers and issuers . . . [that are] more arduous than those for paper delivery, and require extra controls on electronic delivery such as tracking confirmation of receipt.  Also, email addresses for all dealers are not readily accessible.”  This commentator suggested instead that electronic versions, if available, be required to be sent to a dealer only if the dealer specifically requests to receive one, in which case the requesting dealer can provide an e-mail address for delivery.  This commentator requested that the MSRB review the e-Document Notice “in light of technological advances in order to reduce the extra burdens on electronic delivery of documents over paper delivery and to further encourage use of electronic communications.”

One commentator stated that it is already the accepted practice for dealer financial advisors to provide electronic versions of official statements to the underwriters and that the MSRB should not impose a regulatory requirement to this effect.  This commentator stated that this would create a new burden of “necessary recordkeeping for compliance purposes” without furthering the goals of the draft amendments.

The MSRB observes that the proposed requirements would not have obligated any dealer to create an electronic version of the official statement but instead would have merely required the dissemination of any such electronic official statement already created by or on behalf of the issuer.  As such, dealers would not have been burdened with costs of production, although some minimal costs may have been entailed with respect to the transmittal of such documents and with ensuring that the sender’s method of transmittal was compatible with the recipient’s method of receipt, depending on the method chosen.

In addition, the MSRB notes that the e-Document Notice generally permits a dealer to fulfill a regulatory delivery obligation electronically if the dealer provides adequate notice of delivery, the electronic means provides access to information comparable to the paper version, and the dealer has reason to believe that electronic delivery will be effective.  As noted in the e-Document Notice, this three-part requirement is not the only method by which legal delivery by electronic means can be accomplished.  In particular, where MSRB rules provide different requirements for undertaking electronic communications, the e-Document Notice concluded that compliance with those rule-based requirements would satisfy the rule requirement even if the three-part test of the e-Document Notice is not fully met.

On balance, the MSRB believes that modifying the draft amendments to require delivery to dealers of electronic official statements only if the dealer explicitly requests an electronic version would be an appropriate first step toward the ultimate goal of having electronic versions generally available and routinely used for more rapid dissemination of disclosure in the marketplace.  The revised draft amendments would require a requesting dealer to provide an e-mail address to which the electronic version could be sent or other instructions acceptable to the managing or sole underwriter for electronic delivery.  Similarly, we believe that modifying the draft amendments to require dealer financial advisors to provide to the underwriters electronic official statements only if the managing or sole underwriter explicitly requests an electronic version and provides an e-mail address or instructions acceptable to the dealer financial advisor for electronic delivery would be appropriate.  Neither provision would require the dealer to create an electronic version for purposes of meeting these requirements if the issuer has not produced an electronic version. [4]   In both cases, compliance with the revised draft amendment provisions would fully satisfy the inter-dealer delivery requirement for purposes of the e-Document Notice, subject to the guidance set forth below.

The revised draft amendments do not specify a particular file format for the electronic version of the official statement, other than that the electronic version be printable.  The MSRB views PDF files (and, in the future, any other file formats that it may hereafter accept for purposes of official statement submissions to the MSRB’s web-based Electronic OS/ARD Submission System (the “e-OS System”) established under Rule G-36) as acceptable formats for purposes of the revised draft amendment, so long as such files are printable.  In addition, the MSRB believes that other file formats that are printable using commercially available software then in common usage in the municipal securities industry, or with software that is bundled with such files, also would be acceptable so long as the dealer that makes the delivery promptly delivers a substitute paper version of the official statement if the recipient of the electronic file so requests and a paper version has not previously been sent to such recipient.

The electronic version of the official statement must include every item of information included in the paper version.  For example, if a dealer were to consent to receiving solely an electronic version of the official statement pursuant to clause (c)(i)(C) of revised draft Rule G-32 but portions of the official statement are not available in electronic form, a managing or sole underwriter could not discharge its obligation to deliver paper versions of the official statement under clause (c)(i)(A) by sending the portions of the official statement available in electronic form and separately forwarding a paper copy of those portions not available in electronic form.  In the case where the entire official statement is not available in electronic format, the requirement to disseminate an electronic version upon request under clauses (c)(ii) and (c)(i)(C) would not apply.  The MSRB generally would view an electronic version of an official statement to be available only where the issuer has prepared, authorized and delivered the version as a single electronic file, or where multiple files delivered as a single unit are clearly interconnected by hyperlinks or other clear method of organization that ensures that an investor viewing one file would be put on adequate notice that additional accompanying files must be accessed in order to review the official statement in its entirety.

The revised draft amendments also do not limit the manner of delivery of the electronic file.  For example, the rule language permits the requesting dealer under clause (c)(i)(C) or an underwriter under clause (c)(ii) to provide an e-mail address or instructions for other forms of electronic delivery.  The MSRB believes that an underwriter or dealer financial advisor should be able to meet this electronic delivery obligation in a number of different ways, including by posting the electronic version at an accessible website.  At a minimum, any such form of passive delivery of the electronic version of the official statement must provide the recipient with timely notice that the official statement has been posted (e.g., by e-mail notice to the e-mail address provided by the requesting dealer), allow access to the document at no cost, permit the recipient to print and re-transmit the document (i.e., re-transmit a downloaded file of the document or permit the original recipient to forward to another dealer the information necessary to allow such other dealer to have access to the document equivalent to the access afforded to the original recipient), and ensure continued accessibility throughout the “new issue disclosure period” described below.  The MSRB believes that best practice would entail transmission of the electronic version in a manner that would take advantage of the ability to make electronic files available substantially instantaneously or otherwise on demand, although the MSRB acknowledges that certain technological limitations and variations among users would need to be taken into consideration in determining the best method for disseminating a particular document. [5]

Although the revised draft amendments would permit the underwriter to forego delivering a paper version of the official statement to a dealer if the dealer consents, this provision would not affect the obligation of a dealer selling a new issue municipal security to a customer to deliver a paper copy of the official statement to the customer unless the dealer has taken the necessary steps described in the e-Document Notice in connection with the delivery of the electronic version to customers.  Where delivery in paper form to a customer is required, the selling dealer would either need to obtain a paper copy of the official statement or would need to print a copy from its electronic version.  Furthermore, the revised draft amendments also would permit a dealer financial advisor to make available solely an electronic version of the official statement to the managing or sole underwriter with such underwriter’s consent.  Underwriters that agree to receive only an electronic version of the official statement from the dealer financial advisor and that become obligated to deliver a paper version to another dealer or to a customer would need to print a copy from their electronic version.

The MSRB notes that the e-Document Notice was based on an interpretive release published by the SEC in 1996. [6]   The e-Document Notice provided guidance on the use of electronic media to satisfy document delivery requirements under MSRB rules in a manner consistent with how other sectors of the securities markets handle delivery of required information through electronic media. The MSRB will take the request to review the e-Document Notice under advisement, particularly in light of the recent publication by the SEC of its securities offering reform proposal that includes significant modifications to the SEC’s approach to the use of electronic media under its rules. [7]

Dissemination of Official Statements During New Issue Disclosure Period.  Under current Rule G-32, the underwriting period for a new issue generally ends when the underwriting syndicate (or the sole underwriter) has sold out the issue, but no earlier than the issuer’s delivery of the issue to the underwriters.  The duties imposed on dealers by current Rule G-32 (including but not limited to the obligation to deliver official statements to new issue customers) only extend to municipal securities sold during the underwriting period, the duration of which may not be definitively known by most market participants since underwriters currently do not always inform the marketplace of when the issue has been sold out.  The original draft amendments to Rule G-32 published in the 2004 Notice would have included a new clause (i)(D) requiring the managing or sole underwriter of a new issue of municipal securities to inform promptly, upon request, any dealer purchasing such securities during the underwriting period and during the 60 days following the end of the underwriting period whether the underwriting period has ended.  In the 2004 Notice, the MSRB also sought comment on whether the draft amendments should instead amend the definition of underwriting period to establish a fixed time period (e.g., 60 days after bond closing) during which the provisions of Rule G-32 apply.

Two commentators agreed that a formulation based on a fixed number of days after the bond closing date would better achieve the goal of improved compliance. [8]   One of these commentators stated that a period of 60 days after closing is appropriate.  The other commentator suggested a time period of 30 days after the closing, noting that “[m]aking the end of the underwriting period a readily ascertainable date calculated from the issue date of the securities will not only make it easier for brokers, dealers and municipal securities dealers to ensure compliance with Rule G-32, but will also simplify audits on and enforcement of Rule G-32.”

The MSRB believes that establishing a fixed end date for the obligations arising under Rule G-32 would be appropriate since this would provide an unambiguous timeframe for delivery of new issue disclosures to customers.  The revised draft amendments would provide in Rule G-32(d)(ii) that this obligation would end 25 days after the final delivery by the issuer of new issue municipal securities to or through the underwriters. [9]

In conjunction with this change, the revised draft amendments would discontinue the use of the term “underwriting period” under MSRB rules and replace it with the term “new issue disclosure period.”  This change would more clearly reflect the actual usage of the term under MSRB rules and would help to eliminate certain ambiguities regarding the use of the term underwriting period within the municipal securities industry. [10]    Currently, the underwriting period is defined in two separate rules – Rules G-11 and G-32 – depending upon whether there is a syndicate or a sole underwriter.  The revised draft amendments would delete the definition of underwriting period in Rule G-11(a)(ix) [11] and would replace the definition of underwriting period in Rule G-32(d)(ii) with the new definition of new issue disclosure period.  “New issue disclosure period” would mean the period commencing with the first submission to an underwriter of an order for the purchase of new issue municipal securities or the purchase of such securities from the issuer, whichever first occurs, and ending 25 days after the final delivery by the issuer of the securities of the issue to or through the underwriting syndicate or sole underwriter (i.e., 25 days after the closing). [12]   Rule G-36 would be amended to replace the current reference to underwriting period with a reference to the new issue disclosure period in section (d) and to add a cross-reference to the new definition in clause (a)(iv).

In virtually all cases, the newly defined “new issue disclosure period” would extend the period during which official statements are required to be delivered to customers beyond the period currently required under the existing definition of underwriting period.  The amendment also would have an impact on the application of Rule G-36(d) in that the period during which stickers or amendments to official statements must be submitted by the underwriter to the MSRB would be similarly modified.

Submission of Official Statements to the MSRB Under Rule G-36.  The original draft amendments to Rule G-36 published in the 2004 Notice would have provided alternative timeframes for complying with the official statement submission requirements for primary offerings subject to SEC Rule 15c2-12, based on when the issues close.  Thus, an underwriter would have been permitted to comply with Rule G-36 by sending the official statement to the MSRB by no later than five business days prior to the bond closing (or three business days prior to closing if submitted electronically through the e-OS System).  Even if an underwriter were to fail to meet the proposed new timeframes, it would still comply with Rule G-36 if it met the original timeframe of ten business days after the sale date, but no later than one business day after receipt from the issuer, as provided under Rule G-36(b)(i).  This draft amendment was designed to promote the availability of official statements in the marketplace in advance of bond closing and to encourage the use of electronic means for disseminating official statements in a more timely and efficient manner while at the same time reducing the incidence of technical rule violations that did not raise investor protection concerns.

One commentator supported the amendment, stating, “The idea of changing the requirement to define submission no later than five or three days prior to the settlement date as timely is appropriate.”  This commentator also suggested eliminating the existing timeframe for compliance based on submission of official statements within 10 business days of the sale date.

Another commentator stated it was against the rule, while a third commentator stated that, although it “applauds the MSRB’s efforts to promote the availability of official statements in the marketplace,” it suggested that the MSRB not amend Rule G-36 at this time.  This commentator stated that it is “concerned that these alternative timeframes will serve to frustrate good faith efforts to comply with Rule G-36” and believed that they would “cause unnecessary confusion amongst dealers.”  The commentator noted that “time periods between sale and issue dates appear to have been decreasing.  It is not uncommon to have an issue date be the very day after the sale date, particularly for variable rate issues.  Therefore the use of this proposed alternative timeframe is likely to be low.” [13]   This commentator concluded that “[t]he current uniform rule based on sale date covering both paper and electronic delivery of official statements is easier for compliance and audit purposes.”

The MSRB has determined not to take action on the original draft amendments to Rule G-36 at this time but will continue to closely monitor the official statement dissemination process.

* * * * *

Comments from all interested parties are welcome.  Comments should be submitted no later than March 18, 2005 and may be directed to Ernesto A. Lanza, Senior Associate General Counsel.  Written comments will be available for public inspection.

January 21, 2005

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TEXT OF REVISED DRAFT AMENDMENTS [14]

Rule G-32.  Disclosures in Connection with New Issues

(a)-(b) No change.

(c) Responsibility of Managing Underwriters, Sole Underwriters and Financial Advisors.

(i) Managing Underwriters and Sole Underwriters.  When an official statement in final form is prepared by or on behalf of an issuer, the managing underwriter or sole underwriter, upon request, shall:

(A) send to all brokers, dealers and municipal securities dealers that purchase the new issue municipal securities an official statement in final form and other information required by paragraph (a)(ii) of this rule and not less than one additional official statement in final form per $100,000 par value of the new issue purchased by the broker, dealer or municipal securities dealer and sold to customers.  Such items shall be sent no later than the business day following the request or, if an official statement in final form is being prepared but has not been received from the issuer or its agent, no later than the business day following such receipt.  Such items shall be sent by first class mail or other equally prompt means, unless the purchasing broker, dealer or municipal securities dealer arranges some other method of delivery and pays or agrees to pay for such delivery.

(B) In addition, the managing underwriter or sole underwriter, upon request, shall provide all purchasing brokers, dealers and municipal securities dealers with instructions on how to order additional copies of the official statement in final form directly from the printer.

(C) provide promptly to all brokers, dealers and municipal securities dealers that purchase the new issue municipal securities a printable electronic version of the official statement in final form, but only if:  (1) a printable electronic version has been prepared and the issuer does not object to distribution of such electronic version; and (2) the broker, dealer or municipal securities dealer requests to receive an electronic version and provides the managing underwriter or sole underwriter with an electronic mail address or other instructions acceptable to the managing underwriter or sole underwriter for electronic delivery of such version.  With the consent of the purchasing broker, dealer or municipal securities dealer, sending of a printable electronic version of the official statement in final form to the purchasing broker, dealer or municipal securities dealer as provided in this subparagraph (C) shall fully satisfy the requirements of subparagraphs (A) and (B) of this paragraph (c)(i) with respect to the official statement in final form.

(ii) Financial Advisors.  A broker, dealer or municipal securities dealer that, acting as financial advisor, prepares an official statement in final form on behalf of an issuer, shall make the official statement in final form available to the managing underwriter or sole underwriter promptly after the issuer approves its distribution.  If a printable electronic version of the official statement in final form has been prepared and the issuer does not object to its distribution, such printable electronic version shall also be made available to the managing underwriter or sole underwriter promptly upon request and delivery to the financial advisor of an electronic mail address or other instructions acceptable to the financial advisor for electronic delivery of such version.  With the consent of the managing underwriter or sole underwriter, such printable electronic version shall fully satisfy the requirement of this paragraph (c)(ii) with respect to the official statement in final form to be made available by the financial advisor.

(d) Definitions.  For purposes of this rule, the following terms have the following meanings:

(i) The term “new issue municipal securities” shall mean municipal securities that are sold by a broker, dealer or municipal securities dealer during the issue’s new issue disclosure underwriting period, but shall not include commercial paper.

(ii) The term “new issue disclosure underwriting period” shall mean: the period commencing with the first submission to an underwriter of an order for the purchase of new issue municipal securities or the purchase of such securities from the issuer, whichever first occurs, and ending 25 days after the final delivery by the issuer of the securities of the issue to or through the underwriting syndicate or sole underwriter.

(A) for securities purchased from an issuer by a syndicate, the period defined in paragraph (a)(ix) of rule G-11, on sales of new issue municipal securities during the underwriting period; and

(B) for securities purchased from an issuer by one broker, dealer or municipal securities dealer, the period commencing with the first submission to broker, dealer or municipal securities dealer of an order for the purchase of the securities or the purchase of such securities from the issuer, whichever first occurs, and ending at such time as the following two conditions both are met:  (1) the issuer delivers the securities to the broker, dealer or municipal securities dealer, and (2) the broker, dealer or municipal securities dealer no longer retain an unsold balance of the securities purchased from the issuer or 21 calendar days elapse after the date of the first submission of an order for the securities, whichever first occurs.

(iii)-(iv) No change.

* * * * * * * * * *

Rule G-36.  Delivery of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to Board or its Designee

(a) Definitions.  For purposes of this rule, the following items have the following meanings:

(i)-(iii) No change.

(iv) The term “new issue disclosure period” shall mean the period defined in Rule G-32(d)(ii).

(b)-(c) No change.

(d) Amended Official Statements.  In the event a broker, dealer, or municipal securities dealer provides to the Board or its designee an official statement pursuant to section (b) or (c) above, and the official statement is amended or “stickered” by the issuer during the new issue disclosure underwriting period, such broker, dealer, or municipal securities dealer must send to the Board or its designee, within one business day after receipt of the amended official statement from the issuer or its designated agent, the amended official statement and an amended Form G-36(OS) as prescribed by the Board, including: the CUSIP number or numbers for the issue; the fact that the official statement previously had been sent to the Board or its designee and that the official statement has been amended.

(e)-(g) No change.

* * * * * * * * * *

Rule G-11.  Sales of New Issue Syndicate Practices Municipal Securities During the Underwriting Period

(a) Definitions.  For purposes of this rule, the following terms have the following meanings:

(i)-(viii) No change.

(ix) The term “underwriting period” means the period commencing with the first submission to a syndicate of an order for the purchase of new issue municipal securities or the purchase of such securities from the issuer, which first occurs, and ending at such time as the issuer delivers the securities to the syndicate or the syndicate no longer retains an unsold balance of securities, whichever last occurs.

(ix) (x) The term “qualified note syndicate” means any syndicate formed for the purpose of purchasing and distributing a new issue of municipal securities that matures in less than two years where:

(A)-(B) No change.

(b)-(h) No change.

 

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