Dissemination of Official Statements and Advance Refunding Documents By Issuers and Dealers from 1998 to 2000

Rule G-32 of the Municipal Securities Rulemaking Board (the “MSRB”) requires any dealer selling a new issue municipal security to a customer to deliver the final official statement to the customer by no later than settlement of that transaction.[1] This obligation arises from the MSRB’s long-standing determination that a customer who purchases new issue municipal securities needs to be provided with material information relating to the securities within a time frame that makes such information relevant to the customer’s investment decision, particularly where the issuer has provided such information in the official statement precisely for this purpose.

To further this goal of providing timely delivery of official statements to investors and the marketplace, both the MSRB and the Securities and Exchange Commission (the “SEC”) have adopted rules that establish a regulatory infrastructure for such deliveries from issuers to underwriters to the marketplace. Securities Exchange Act Rule 15c2-12 requires that the underwriter of most primary offerings of municipal securities contract with the issuer to receive final official statements within seven business days of the offering’s sale date and in sufficient time to accompany money confirmations.[2] MSRB rule G-36, in turn, requires that the underwriter send the official statement to the MSRB within one business day of receipt from the issuer but no later than 10 business days after the offering’s sale date.[3] The MSRB further provided in rule G-36 that the underwriter of an offering that advance refunds an outstanding issue must send a copy of the escrow deposit agreement or other functionally equivalent document (the “advance refunding document”), if any, to the MSRB within five business days after the new issue closing. The official statements and advance refunding documents collected by the MSRB are made available to the marketplace.

Since 1998, the MSRB has been reviewing data included by underwriters on Forms G-36(OS) and G-36(ARD) with submissions of official statements and advance refunding documents. This review has provided the MSRB with insight on the extent and possible causes of delayed deliveries of these documents to the marketplace under rule G-36 and of delayed deliveries of official statements to customers under rule G-32. The MSRB published some of its principal findings in 1999 with respect to data for the preceding year.[4] The MSRB recently has completed a review of such data for the three-year period from 1998 through 2000. The principal results of this review for issues subject to Rule 15c2-12 are discussed in this notice.[5]

Delivery of Official Statements to Underwriters Under Rule 15c2-12 Contract Provision . Issuers reportedly failed to deliver official statements to the underwriters within seven business days after the offering’s sale date for approximately 12.8% of the issues sold in 2000. This represents a reduction of one-third from the level of late deliveries (18.9%) reported for issues sold in 1998. The MSRB is pleased with this improvement but continues to believe that the level of non-compliance with the contractual provision entered into with underwriters under Rule 15c2-12 is too high. The MSRB urges issuers to redouble their efforts to meet their Rule 15c2-12 contractual obligation and underwriters to assist issuers in making timely delivery.[6]

Submission of Official Statements to the MSRB Under Rule G-36 . Underwriters reported failing to submit official statements to the MSRB within one business day after receipt from the issuer but no later than 10 business days after the sale date, as required under rule G-36, for approximately 6.1% of the issues sold in 2000.[7] This represents a reduction by approximately one-third from the level of late submissions (9.1%) previously reported for issues sold in 1998, mirroring the reduction in late issuer deliveries to underwriters from 1998 to 2000. Approximately one-third of all underwriter failures to meet the rule G-36 time frame arose solely because the issuer did not deliver the official statement to the underwriter within 10 business days of the sale date, therefore making compliance by the underwriter with rule G-36 impossible.

The MSRB reminds underwriters that they should institute procedures to ensure that they take adequate steps to comply with rule G-36. Recognizing that an underwriter may sometimes be forced into a violation of rule G-36 as a result of the failure by an issuer to deliver an official statement in a timely manner, the SEC has stated that it expects that the appropriate enforcement agencies will “take into consideration whether the underwriter has taken adequate steps to meet the time frame in rule G-36.”[8] The MSRB believes that such steps might include, but are not limited to, communicating clearly with the issuer regarding the underwriter’s need to meet the time frame of rule G-36, ensuring that the underwriter’s own tasks needed to allow completion of the official statement are undertaken in a timely manner, and providing such assistance to the issuer and its agents in completing the official statement as is reasonable under the circumstances.

The MSRB found that more than half of underwriters’ failures to submit official statements under rule G-36 in a timely manner resulted solely from underwriters not submitting them to the MSRB within one business day of receipt, even though they were submitted within the 10 business day time frame. Underwriters are reminded that, for issues subject to Rule 15c2-12, they are always obligated to send the official statement to the MSRB within one business day of receipt and are not entitled to wait until the tenth business day after the sale date.

The MSRB notes that it has observed a significant divergence in the level of underwriter compliance with rule G-36 for offerings sold on a competitive basis as compared to those sold on a negotiated basis. Over the three-year period reviewed by the MSRB, underwriters of negotiated offerings have tended to be twice as likely to violate rule G-36 as have underwriters of competitive offerings. For example, in 2000, underwriters failed to meet the rule’s time frame in 8.1% of negotiated offerings as compared to 3.6% of competitive offerings, in spite of the fact that the delivery rates for official statements by issuers to underwriters in both categories were substantially equivalent. Underwriters of issues sold on a negotiated basis need to ascribe a higher priority to the proper handling of the official statement than appears currently to be the case. The MSRB would be interested in receiving comment on why this divergence in performance may exist and what steps can be taken to improve the level of compliance for negotiated offerings.

Delivery of Official Statements to Customers Under Rule G-32 . Data gathered on Form G-36(OS) on the timing of issuer delivery of the official statement to the underwriter provide indirect evidence of the ability of dealers to comply with their obligation to deliver official statements to customers. Thus, for example, any sale to a customer settled prior to the date on which the official statement first became available to the underwriter would presumably represent a violation of rule G-32 since the selling dealer would not yet have received the official statement for redelivery to the customer by that date. Since dealers typically seek, and customers generally expect, to settle transactions in new issue municipal securities on the same day as the closing of the underwriting, the timing of the delivery of official statements by the issuer to the underwriters vis-à-vis the closing date can provide an indication of the ability of dealers to redeliver official statements to customers.

Issuers were reported as failing to deliver official statements to the underwriters by the closing date in approximately 7.2% of the issues sold in 2000. This result is virtually unchanged from the 7.6% figure found for 1998. In these cases, settlement with customers on the closing date could not possibly have occurred without violation of rule G-32. Of course, even if the official statement is delivered by the issuer to the underwriters by the closing date, the underwriters and other dealers selling the new issue to customers still need time to redeliver the document to the customers by settlement. The MSRB has previously observed that delivery of the official statement by the issuer to the underwriters by the third business day prior to the closing typically constitutes the latest date on which an issuer can make such delivery so that the official statement can be redelivered to customers in an orderly manner (i.e., delivered when required without incurring avoidable additional expense).[9] Issuers were reported as delivering official statements to the underwriters at least three business days prior to the closing date in approximately two-thirds of the issues sold in 2000; that is, in one-third of the 2000 offerings, an orderly distribution of official statements was not likely. These figures do not differ significantly from the results found for 1998 (70% delivered by the third business day prior to closing, or 30% not distributed in an orderly manner).

The divergence in performance between competitive and negotiated offerings noted above with respect to underwriter compliance with rule G-36 also appeared with respect to the timing of issuer deliveries to the underwriter vis-à-vis the issue closing. Broken down by manner of sale, 9.6% of negotiated offerings in 2000 saw official statement deliveries occurring after closing, while post-closing deliveries occurred in only 4.3% of competitive offerings. Further, 39.4% of negotiated offerings and 22.3% of competitive offerings in 2000 saw official statements being delivered by issuers too late for orderly redistribution to customers (i.e., fewer than three business days prior to closing).

Over the past three years, the MSRB has observed an increasing compression of the period between the sale date and the closing. This compression, of necessity, shortens the period available for an issuer to deliver official statements to underwriters within a time frame that would permit orderly redelivery to customers. Whereas in 1998, the typical negotiated offering closed 10 business days after the sale date and the typical competitive offering closed 13 business days after the sale date, in 2000 those periods had become compressed to 9 business days for negotiated offerings and 11 business days for competitive offerings. Thus, by 2000, an issuer of a typical offering sold on a negotiated basis that fully met the seven business day deadline for delivery of the official statement to the underwriters under the Rule 15c2-12 contractual obligation still would not be allowing sufficient time for an orderly redistribution of the official statement to customers.

Based on this data, the MSRB believes that one factor that may contribute to the higher level of late official statement deliveries in negotiated offerings as compared to competitive offerings is the relatively shorter period available in negotiated offerings between the sale and closing dates. This does not fully explain this divergence, however, since the MSRB noted that negotiated offerings having the same closing period as competitive offerings were still more likely to have later delivery of the official statement than for the comparable competitive offerings. One possible cause for this difference between comparable negotiated and competitive offerings may be that negotiated offerings can have, in many cases, more complicated structures or greater credit risks, thereby requiring a higher degree of effort on the part of the financing group members to bring the issue to closing. If in fact negotiated offerings tend to be more complex than competitive offerings, the greater difficulty in completing the tasks required for closing, including preparation of the official statement, is further compounded by the fact that issuers provide less time to complete those tasks in negotiated offerings than in competitive offerings.

Thus, the MSRB urges issuers and underwriters to consider carefully the nature of the various tasks that must be undertaken and completed in the process of moving an underwriting from sale to closing. In particular, the MSRB believes that a financing schedule must provide all parties with adequate time and opportunity to fully and professionally complete their assigned tasks. Among the principal tasks would be, in the MSRB’s view, the preparation of an official statement that provides adequate disclosure of material information and the distribution of the official statement to investors on a timely basis.

Submission of Advance Refunding Documents to the MSRB Under Rule G-36 . Underwriters reported failing to submit advance refunding documents to the MSRB within five business days after the issue closing, as required under rule G-36, in approximately 13.2% of the issues sold in 2000. This represents greater than a 25% increase in the level of late submissions (10.4%) seen in 1998. Underwriters report that of these late submissions, approximately 70% were caused by issuers not providing them with copies of the advance refunding document until after the rule G-36 deadline for submissions. In the MSRB’s view, these levels of non-compliance by underwriters and late deliveries by issuers are unacceptable. The MSRB seeks comment on what circumstances could warrant the advance refunding document not being completed five full business days after the issue closing.

The MSRB further observed that, throughout the period from 1998 through 2000, issuers apparently did not deliver to the closing (and underwriters apparently were willing to leave the closing table without receiving) a copy of the advance refunding document in 40% to 45% of all advance refunding issues.[10] Issuers and underwriters are reminded that the escrow arrangements in advance refundings are critical to current and potential investors in the refunded securities and can also have a significant impact on investors in the refunding new issue securities.[11] It is important that issuers, underwriters and other participants in the offering ensure that the refunding is properly effectuated and that information in this regard be made available to the marketplace expeditiously. Awaiting the receipt of the advance refunding document until well after closing slows the process of disseminating this information and increases the possibility that the refunded securities will be traded between parties having significantly different levels of knowledge regarding this type of material information. The MSRB will continue to monitor closely performance in this area.

July 11, 2001