Electronic Submission of Official Statements, Advance Refunding Documents and Forms G-36(OS) and G-36(ARD) to the MSRB

The Municipal Securities Rulemaking Board has filed a proposed rule change with the Securities and Exchange Commission to institute an optional system of electronic submissions by underwriters of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to the MSRB. The MSRB expects the electronic system to become operational on the later of January 1, 2002 or 60 days after SEC approval.

INTRODUCTION

Rule G-36 of the Municipal Securities Rulemaking Board (the “MSRB” or “Board”) requires that a broker, dealer or municipal securities dealer (a “dealer”) that acts as managing or sole underwriter for most primary offerings send the official statement and Form G-36(OS) to the MSRB’s Municipal Securities Information Library® (or MSIL®) system within certain time frames set forth in the rule.[1] In addition, if the offering is an advance refunding and an advance refunding document has been prepared, the advance refunding document and Form G-36(ARD) also must be sent to the MSIL® system by the managing or sole underwriter.[2] In an interpretive notice published in November 1998 (the “1998 MSRB Notice”), the MSRB described standards that dealers should meet in order to satisfy document delivery obligations under MSRB rules by means of electronic communications.[3] At that time, the MSRB deferred accepting electronic submissions under rule G-36 pending resolution of then on-going industry debate over electronic formatting of disclosure materials.[4]

Since publication of the 1998 MSRB Notice, the MSRB has undertaken, as one of its chief goals under its current long range plan, the role of serving as a catalyst for improving and modernizing disclosure practices in the primary and secondary municipal securities markets. In this role, the MSRB has hosted several disclosure forums and industry roundtable discussions focused both on industry-wide practices and practices in specific sectors where disclosure issues have been particularly troublesome. In addition, the MSRB and a number of industry groups have recently agreed to launch a process of long-range planning designed to further industry initiatives in the area of disclosure.

Most participants at these industry forums and roundtables have agreed that improvements in disclosure practices will be highly dependent on the establishment of reliable systems for electronic dissemination of information. In support of secondary market disclosure initiatives, the MSRB launched its current test program of electronic submission and dissemination of continuing disclosure information, known as CDINet Web Test.[5] In the primary market, in addition to making clear that dealers may meet their obligation to deliver official statements to new issue customers under rule G-32 by use of electronic media as provided in the 1998 MSRB Notice, the MSRB has remained attentive to developing industry practices (e.g., the increasing use of electronic preliminary and final official statements), attempts by industry groups to reach consensus on technical issues relating to electronic primary market disclosure (e.g., the work of the Task Force on Electronic Information Delivery of The Bond Market Association) and further interpretive guidance on the use of electronic media issued by the Securities and Exchange Commission (the “SEC”) in 2000 (the “2000 SEC Interpretation”).[6] At the same time, the MSRB has made efforts to understand the needs and desires of investors, who are the ultimate end-users of primary market disclosure.[7]

Although industry-wide consensus on certain key issues as they relate to electronic official statements continues to be elusive, the MSRB believes that it can take steps to implement an electronic system for submissions under rule G-36 without final resolution of such issues. Thus, the MSRB has filed with the SEC a proposed rule change that will implement an optional system of electronic submission by underwriters of official statements, advance refunding documents and Forms G-36(OS) and G-36(ARD) to the MSIL® system. The proposed rule change also will amend rule G-36 in order to effectuate this electronic system. The new system will allow underwriters that are prepared to make submissions electronically to do so while continuing to allow paper submissions for those who prefer that method. The MSRB expects that the electronic system will become operational on the later of January 1, 2002 or 60 days after SEC approval.

DESCRIPTION OF PROPOSED ELECTRONIC SUBMISSION SYSTEM AND RULE AMENDMENTS

Choice of Submission Method

Underwriters will not be required to make submissions electronically and the MSRB will continue to accept submissions made on paper. Underwriters that make submissions of official statements, advance refunding documents and the attendant forms on paper will continue to be required to send two copies of each such document or form to the MSIL® system by certified or registered mail, or some other equally prompt means that provides a record of sending.[8] Electronic submissions will be made as described below.[9]

Types of Submissions

Underwriters will be permitted to use the electronic system for each type of submission currently required in connection with rule G-36. These include submissions of:

• final official statements under rule G-36(b)(i) or official statements in final form under rule G-36(c)(i), together with Form G-36(OS);
  
• advance refunding documents under rule G-36(b)(ii) or (c)(ii), together with Form G-36(ARD);
  
• amended official statements under rule G-36(d), together with Form G-36(OS), or amended advance refunding documents, together with Form G-36(ARD);
  
• amended Form G-36(OS) or G-36(ARD) correcting a prior electronic submission of Form G-36(OS) or G-36(ARD);[10] and
  
• notice of the cancellation of an issue for which a submission has previously been made to MSIL® under rule G-36(e).

Method of Electronic Submission

Electronic submissions will be made by underwriters through a secured, password-protected Internet website. A password will be assigned to an underwriter prior to or at the time of first use by such underwriter of the electronic system in a manner intended to assure authentication of submitters using the system. Each underwriter will be required to submit an e-mail address for purposes of receiving electronic records of submissions as well as to provide for follow-up by MSRB staff should any submission prove to be incomplete or incorrect.

Forms G-36(OS) and G-36(ARD) will be submitted by completion of an on-line form. On-line forms will elicit the same information as paper Forms G-36(OS) and G-36(ARD) and will be in substantially the same format. Notice of cancellation of an issue also will be effected by means of on-line entry of information by the underwriter. Official statements and advance refunding documents will be submitted by underwriters by uploading through the website simultaneously with the completed on-line forms.

Format of Uploaded Files

Submissions made by an underwriter generally will require the uploading of an official statement, advance refunding document, amended official statement or amended advance refunding document. All documents submitted electronically must be in Adobe Acrobat® portable document format (“PDF”).[11] Such documents may be in either a “native” PDF file or a scanned image PDF file. However, the MSRB believes that native PDF files, as a result of their searchable nature and their significantly smaller file size (as compared to scanned image PDF files), provide the greatest benefit to the municipal securities marketplace and recommends that such files be used where possible. For scanned image PDF files, underwriters will be required to use a resolution of 300 dpi. Because many of the files which underwriters would seek to upload may be quite large, the system will require that all submissions be compressed using file compression software in order to speed transmission times.

The MSRB reminds underwriters that the SEC has stated that, “[f]or any municipal securities offering subject to Rule 15c2-12, the paper and electronic versions of each of the preliminary, deemed final and final official statement must be the same.”[12] The MSRB believes that underwriters will be best able to ensure that the electronic version of the official statement or advance refunding document does not diverge from any paper version by submitting the entire document in a single PDF file, whenever possible. Where an underwriter submits an official statement or advance refunding document in multiple PDF files, such underwriter should take steps to ensure that any user of the multiple files could effectively access the files in a manner comparable to the paper version without undue burden.[13] The MSRB believes that an electronic document that does not provide access to information comparable to the paper version generally would not meet the SEC’s standard that paper and electronic versions of documents must be the same. Thus, an electronic submission by an underwriter that would not meet this “access” standard for acceptable delivery by electronic means of an official statement set forth in the 1998 MSRB Notice generally would not constitute a satisfactory submission of an official statement for purposes of rule G-36.[14]

Underwriter’s Certification

As with paper submissions, underwriters will be required to certify that the document submitted with Form G-36(OS) or G-36(ARD) is, in fact, the final official statement, official statement in final form, amended official statement or advance refunding document, as appropriate.

Recordkeeping

The electronic system will provide an underwriter that makes an electronic submission with an electronic record of the submission by e-mail. This electronic record will include a control number assigned by the system confirming receipt of a submission and an electronic copy of the Form G-36(OS), Form G-36(ARD) or cancellation notice completed on-line by the underwriter. This electronic record, together with a copy of the electronic files submitted to the MSRB retained by the underwriter, is intended to satisfy the requirement under rule G-8(a)(xv)(B) that dealers maintain copies of Forms G-36(OS) and G-36(ARD) and records of sending such forms to the MSRB.[15]

Review of Submissions

The MSRB currently requires that any incomplete or incorrect submission be corrected by the submitter prior to the MSRB accepting the submission as in compliance with rule G-36. Thus, any submission through the electronic system will be subject to such automated and/or manual review as MSRB staff deems appropriate prior to final acceptance. The electronic record of submission sent by the system as described above should not be viewed as a record of acceptance by the MSRB.

Redelivery to Subscribers

The MSIL® system sends images of submissions under rule G-36 to subscribers on a daily basis. Although the MSIL® system currently provides subscribers with document images in tagged information file format (“TIFF”), the MSRB will provide subscribers with files in PDF format for both electronic and paper submissions upon introduction of the electronic system. Because electronic submissions will arrive at the MSRB immediately rather than after physical delivery by U.S. mail or other delivery service, subscribers should receive files of electronically submitted official statements and advance refunding documents one or more business days sooner than if they had been submitted in paper form.

DISCUSSION OF COMMENTS

On September 19, 2000, the MSRB published a notice seeking comment on the establishment of the optional system of electronic submissions by under rule G-36.[16] The notice also sought comment on draft amendments to rule G-36 to effectuate this optional electronic submission system. The MSRB received comments from four commentators. Commentators generally were supportive of the MSRB’s plans to allow electronic submissions, although certain modifications were suggested. These suggestions are discussed below.

Require paper submission in addition to optional electronic submission. One commentator suggests that underwriters submitting electronic copies should also be required to submit paper copies if they exist, arguing that some investors prefer to view official statements and advance refunding documents in paper form. The MSRB believes that no benefit would result from requiring electronic submitters to also send paper copies of submissions and that requiring delivery of paper versions would substantially eliminate any incentive for underwriters to use the proposed electronic system. During the last two years, the MSRB’s public access facility has registered approximately 200 visits (60% of which represent visits by a single securities research service). The documents available at the public access facility generally are viewed on or printed from an optical viewer rather than by physical review of a paper version. In addition, the MSIL® system already disseminates submissions to subscribers in electronic, rather than paper, form. The MSRB has not adopted this commentator’s suggested modification.

Use of PDF files. Two commentators seek to have the MSRB limit the format of electronic submissions to “native” PDF. If imaged PDF files are permitted, one commentator suggests that they be in “multi-page” format and be imaged at a resolution of 200 dpi. This commentator requested that files disseminated to subscribers not be in compressed format. The other commentator suggests that multi-part documents be merged into a single PDF file. On the other hand, a third commentator suggests that the MSRB accept electronic submissions in any format.

The MSRB believes that, based on several factors, PDF is the best suited format for purposes of an electronic submission system at this time. First, the MSRB has designed this system to accept electronic submissions of documents regardless of whether the original document is in electronic or paper form. PDF generally allows for relatively easy conversion of document files from other electronic formats to PDF as well as for the handling of imaged files created from paper documents. Documents produced in either manner generally provide a reliable and secure reproduction of the paper version, which is a significant issue for many issuers who are concerned about the vulnerability of most other formats to undetectable changes by unauthorized individuals. Also, the MSRB feels that it is preferable to restrict electronic submissions to a single format for the benefit of MSIL® subscribers, many of which already convert the imaged documents currently supplied to them by the MSRB to PDF. Finally, the SEC addressed certain concerns regarding the use of PDF files to meet securities law delivery obligations in the 2000 SEC Interpretation.[17] Based on the guidance provided by the SEC on the use of PDF files, the MSRB feels that dealers using electronic versions of official statements received from the MSIL® system (directly or through a subscriber) to make required deliveries under MSRB rules may be well situated to assure compliance with the standards set forth in the 1998 MSRB Notice.

Thus, the system will require submissions of documents solely as one or more compressed PDF files, either in native or imaged files.[18] In addition, underwriters submitting imaged files will be required to use an image resolution of 300 dpi.[19] Files that are available for viewing at the public access facility or disseminated by the MSIL® system to subscribers will not be in compressed format. The MSRB notes that this represents an initial phase in the establishment of an optional electronic system and expects that appropriate modifications will be instituted as technological innovation and changes in the marketplace dictate.

Amendments. Two commentators suggest that underwriters be permitted to submit amendments to official statements or advance refunding documents electronically even if the original documents had been submitted in paper form. As originally proposed, the system would permit electronic submission of amendments only if the original official statement or advance refunding document had been submitted electronically. The MSRB agrees that this would be an appropriate change, allowing for more expedited dissemination of amendments to official statements and advance refunding documents to the marketplace. This should help to minimize erroneous reliance on outdated documents.

Miscellaneous. One commentator suggests that the MSRB expand the definition of advance refunding document to include verification reports and defeasance opinions. Although the MSRB agrees that such documents may be important in the valuation of advance refunded securities, it does not believe that underwriters are well positioned to provide such information in many circumstances, particularly since such documents often are not delivered until well after the underwriting period has lapsed.

Another commentator states that the proposed electronic system was a “great idea” but that “those individual investors who do not have access to a PC will have problems.” This commentator apparently has confused the obligation of underwriters to submit official statements to the MSRB under rule G-36 with the obligation of dealers selling new issue municipal securities to customers to deliver official statements to such customers under rule G-32. The MSRB understands the concern expressed by this commentator and notes that paper versions of official statements are required to be delivered to customers unless the dealer meets the requirements for electronic delivery set forth in the 1998 MSRB Notice.

June 11, 2001

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TEXT OF PROPOSED AMENDMENTS [20]

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) No change.

(b) Delivery Requirements for Issues Subject to Securities Exchange Act Rule 15c2-12.

(i) Each broker, dealer or municipal securities dealer that acts as an underwriter in a primary offering of municipal securities subject to Securities Exchange Act rule 15c2-12 shall send to the Board or its designee by certified or registered mail, or some other equally prompt means that provides a record of sending, within one business day after receipt of the official statement from the issuer or its designated agent, but no later than 10 business days after any final agreement to purchase, offer, or sell the municipal securities, the following documents and written information: two copies of the final official statement; and two copies of completed Form G-36(OS) prescribed by the Board, including the CUSIP number or numbers for the issue.

(ii) If the issue advance refunds an outstanding issue of municipal securities and an advance refunding document is prepared by or on behalf of the issuer, each broker, dealer or municipal securities dealer that acts as an underwriter in such issue also shall send to the Board or its designee by certified or registered mail, or some other equally prompt means that provides a record of sending, within five business days of delivery of the securities by the issuer to the broker, dealer, or municipal securities dealer, the following documents and written information: two copies of the advance refunding documents if prepared by or on behalf of the issuer; and, if the advance refunding documents are prepared, two copies of the completed Form G-36(ARD) prescribed by the Board, including reassigned CUSIP number or numbers for the refunded issue, if any.

(c) Delivery Requirements for Issues not Subject to Securities Exchange Act Rule 15c2-12.

(i) Subject to paragraph (iii) below, each broker, dealer, or municipal securities dealer that acts as an underwriter in a primary offering of municipal securities not subject to Securities Exchange Act rule 15c2-12 for which an official statement in final form is prepared by or on behalf of the issuer shall send to the Board or its designee, by certified or registered mail, or some other equally prompt means that provides a record of sending, by the later of one business day after delivery of the securities by the issuer to the broker, dealer, or municipal securities dealer or one business day after receipt of the official statement in final form from the issuer or its designated agent, the following documents and written information: two copies of the official statement in final form; and two copies of completed Form G-36(OS) prescribed by the Board, including the CUSIP number or numbers for the issue.

(ii) if an official statement in final form and if the issue advance refunds an outstanding issue of municipal securities and both an official statement in final form and an advance refunding document are prepared by or on behalf of the issuer, each broker, dealer, or municipal securities dealer that acts as an underwriter in such issue also shall send to the Board or its designee by certified or registered mail, or some other equally prompt means that provides a record of sending, within five business days of delivery of the securities by the issuer to the broker, dealer, or municipal securities dealer, the following documents and written information: two copies of the advance refunding documents if prepared by or on behalf of the issuer; and, if the advance refunding documents are prepared, two copies of completed Form G-36(ARD) prescribed by the Board, including reassigned CUSIP number or numbers for the refunded issue, if any.

(iii) 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 sections (b) or (c), above, and the official statement is amended or "stickered" by the issuer during the underwriting period, such broker, dealer, or municipal securities dealer must send to the Board or its designee, by certified or registered mail, or some other equally prompt means that provides a record of sending, two copies of the amended official statement within one business day after of receipt of the amended official statement from the issuer, along with or its designated agent, the amended official statement and an amended Form G-36(OS) as prescribed by the Board, two copies of a statement 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)-(f) No change.

(g) Method of Submission. A broker, dealer or municipal securities dealer that submits documents or forms required to be sent to the Board or its designee pursuant to section (b), (c) or (d) above shall either:

(i) send two copies of each such document or form to the Board or its designee by certified or registered mail, or some other equally prompt means that provides a record of sending; or

(ii) submit an electronic version of each such document or form to the Board or its designee in such format and manner specified in the current Form G-36 Manual.