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

The Municipal Securities Rulemaking Board (“MSRB”) has adopted rules requiring brokers, dealers and municipal securities dealers (“dealers”) selling new issue municipal securities to deliver official statements to their customers by no later than settlement of their transactions and to take certain steps to disseminate the official statement to other dealers selling the securities and to the MSRB for further dissemination to the marketplace. Delivery of the issuer’s official statement, along with other required disclosures by dealers, are critical elements in ensuring that investors purchasing new issue municipal securities understand the terms of and security for the municipal securities in which they invest.

The MSRB is publishing for industry 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, intended to increase the efficiency and timeliness of official statement dissemination in the marketplace and to the ultimate customer. The draft amendments to Rule G-32 would require managing or sole underwriters to provide to requesting dealers electronic official statements if prepared and available for distribution. Similarly, dealers acting as financial advisors that prepare official statements would be required to provide to the underwriters electronic official statements if prepared and available for distribution. In addition, Rule G-32 would be amended to require managing or sole underwriters to inform purchasing dealers whether the underwriting period has ended. Finally, the draft amendments to Rule G-36 would provide alternative timeframes for complying with the official statement submission requirements for most primary offerings, based on when the issues close. The draft amendments are described more fully below. Comments are due by June 25, 2004.

Current Official Statement Delivery and Dissemination Requirements

Delivery to Customers . Rule G-32(a)(i) generally requires any dealer selling a new issue municipal security to a customer to deliver the official statement to the customer by settlement of the transaction.[1] The rule defines new issue municipal securities as municipal securities (other than commercial paper) sold during the issue’s underwriting period.[2] Once the underwriting period has ended for an issue of municipal securities, the requirements of Rule G-32 no longer apply to transactions in such municipal securities.

Delivery to Dealers . To ensure that all dealers have access to the official statement to meet their obligation to deliver it to customers on a timely basis, Rule G-32(b) requires any dealer selling a new issue municipal security to another dealer to send the official statement, if requested, to the purchasing dealer within one business day of request. Further, the managing or sole underwriter also is required under Rule G-32(c)(i) to send the official statement, if requested, to any dealer that purchases new issue municipal securities (even if the requesting dealer did not acquire the security from the managing or sole underwriter) within one business day of request. The managing or sole underwriter is required to send to the requesting dealer one additional copy of the official statement for each $100,000 par value of new issue municipal securities purchased for resale to customers. These requirements apply only so long as the issue is in its underwriting period. Finally, Rule G-32(c)(ii) obligates a dealer that, acting as financial advisor to an issuer in connection with an offering of municipal securities, prepares an official statement on behalf of the issuer to make the official statement available to the managing or sole underwriter promptly after the issuer approves its distribution.

Delivery to the MSRB . Rule G-36 generally requires the managing or sole underwriter to submit to the MSRB the official statement for primary offerings of municipal securities, along with completed Form G-36(OS). For any offering subject to Exchange Act Rule 15c2-12 adopted by the Securities and Exchange Commission (“SEC”), Rule G-36(b)(i) obligates the managing or sole underwriter to send the official statement (along with Form G-36(OS)) to the MSRB within one business day of receipt from the issuer but no later than 10 business days after any final agreement to purchase, offer or sell the municipal securities.[3] With certain exceptions, Rule G-36(c)(i) requires that such documents be sent to the MSRB for any offering exempt from SEC Rule 15c2-12 for which an official statement has been prepared by the later of one business day of receipt from the issuer or one business day after the bond closing.[4] Submissions may be made under Rule G-36 using paper versions of the submitted documents or by electronic means through the MSRB’s web-based Electronic OS/ARD Submission System (the “e-OS System”) at www.msrb.org.

The official statements submitted by underwriters to the MSRB pursuant to Rule G-36 (as well as advance refunding documents submitted by underwriters pursuant to sections (b)(ii) and (c)(ii) of Rule G-36) are compiled by the MSRB’s Municipal Securities Information Library® (MSIL®) system. Paper submissions are scanned to create imaged electronic files of such submissions, and these imaged files are combined with the electronic submissions received through the e-OS System into a comprehensive collection of submitted official statements and advance refunding documents. The MSIL system makes this document collection available to the marketplace through its public access facility in Alexandria, Virginia and electronically by subscription. Much of the official statement information made available by information vendors in the municipal securities market is derived from the MSIL system.

Use of Electronic Official Statements . The MSRB stated in a notice published in 1998 (the “e-Document Notice”) that its rules permit dealers to transmit documents electronically to customers and to other dealers, provided that such dealers adhere to certain specified standards with respect to notice, access and evidence to show delivery.[5] The MSRB noted that official statement deliveries to customers, as required under Rule G-32(a)(i), could be accomplished by electronic means, although dealers were cautioned on the importance of ensuring that the electronic version meets required standards for comparability to the paper version.[6] In addition, the MSRB stated that a managing or sole underwriter providing official statements to requesting dealers under Rule G-32(c)(i) with respect to such dealers’ redelivery obligation to customers must provide paper copies unless the requesting dealers consent to electronic delivery of the official statement in lieu of delivery of paper copies.[7]

In connection with the obligation of managing or sole underwriters to submit official statements to the MSRB under Rule G-36, the MSRB accepts electronic submissions of official statements and accompanying Form G-36(OS) through the e-OS System, as noted above. An official statement that is uploaded through the e-OS System must be in one or more Portable Document Format (“PDF”) files. The MSRB currently expects to expand the e-OS System during the summer of 2004 to allow underwriters to complete the on-line Form G-36(OS) by uploading an Extensible Markup Language (XML) file containing the required data, as an alternative to the currently required keystroke inputting of such information.[8] This expansion should make the use of the e-OS System significantly more efficient and therefore increase the level of electronic submissions of official statements to the MSRB under Rule G-36.

Availability of Official Statements by Closing

The MSRB has been collecting comprehensive data from Forms G-36(OS) submitted by underwriters in connection with their official statement submissions to the MSRB since 1998. The MSRB published a notice in 1999 that observed that over 7% of all official statements delivered by issuers to underwriters in 1998 were reported as being delivered after closing.[9] In the four years following this initial review, the incidence of reported official statement deliveries by issuers to underwriters after closing for offerings subject to SEC Rule 15c2-12 has ranged from a low of 6.3% in 2001 to a high of 7.5% in 2002.[10] The MSRB remains concerned that so many official statements are reportedly being delivered to underwriters after closing and that issuers, financial advisors, underwriters and other relevant parties have not succeeded in improving the timeliness of such deliveries. This data raises the question of whether a large number of new issue customers purchasing securities for which the official statement is not available at closing are receiving their official statements by settlement of their trades, as required under Rule G-32.

Draft Amendments to Rule G-32

The MSRB is proposing draft amendments to Rule G-32 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. In addition, the draft amendments to Rule G-32 are intended to assist non-syndicate members in determining their obligation to deliver official statements to customers in connection with their sales of recently issued municipal securities. The draft amendments to Rule G-32 are described below. The MSRB seeks comments on all aspects of the draft amendments, including comments on certain specific questions raised below.

Dissemination of Electronic Official Statements by Managing and Sole Underwriters . Rule G-32 imposes certain requirements on managing and sole underwriters to distribute official statements to dealers to ensure that official statements are available for redelivery to their new issue customers. The draft amendments to Rule G-32(c) set forth in new clause (i)(C) would require the managing or sole underwriter to provide dealers requesting copies of the official statement with a printable electronic version if one has been prepared and the issuer does not object to its distribution.[11] 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 the requirement to send paper copies under the rule.[12]

The 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 any other file formats that it may in the future accept for purposes of official statement submissions to the e-OS System as acceptable formats for purposes of the 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.

In establishing the e-OS System, the MSRB agreed with the SEC’s stated position that the paper and electronic versions of the official statement must be the same.[13] In particular, the electronic version of the official statement must include every item of information included in the paper version. For example, if any of the appendices to the official statement are not available in electronic form, a managing or sole underwriter cannot meet its obligation to send an electronic version of the official statement by sending the portions of the official statement that are available in electronic form and forwarding a paper copy of those portions that are not available in electronic form. Of course, in the case where the entire official statement is not available in electronic format, the requirement to disseminate an electronic version 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 files must be accessed in order to review the official statement in its entirety.

The draft amendments also do not specify the manner of delivery of the electronic file. For example, the managing or sole underwriter would be permitted to send the file by electronic mail or to send a copy burned on a CD-ROM. In addition, the MSRB believes that a managing or sole underwriter should be able to meet this delivery obligation by posting the electronic version at an accessible website and taking such other appropriate steps necessary to comply with the notice, access and evidence to show delivery factors described in the e-Document Notice. 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 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.[14]

The use of electronic official statements between dealers 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. Further, the MSRB has not proposed to amend section (b) of Rule G-32, pursuant to which dealers other than the managing or sole underwriter who sell new issue municipal securities to other dealers are required to send an official statement to the purchasing dealer upon request. Such selling dealers would not be required to disseminate an electronic version of the official statement since such dealer has little control over whether or when it might receive the electronic version.

• Should the draft amendment require that the issuer affirmatively consent to the distribution of the electronic version of the official statement?

• Do the factors relating to format of the electronic version set forth in the draft amendment and discussed above provide sufficient guidance for compliance with this delivery obligation? Are there other formatting issues on which the MSRB should provide guidance?

• Should the draft amendment include provisions relating to timing and method of electronic dissemination? If so, what should those provisions include?

• Should the draft amendment provide that, for any issue where an electronic version of the official statement is available for dissemination, the managing or sole underwriter only is required to disseminate the electronic version to dealers, thereby effectively requiring that all dealers be capable of handling electronic versions of the official statement?

Dissemination of Electronic Official Statements by Financial Advisors . Rule G-32 obligates a dealer that acts as the issuer’s financial advisor and that prepares the official statement for the issuer to make such official statement available to the managing or sole underwriter promptly after the issuer approves its distribution. The draft amendments to Rule G-32(c)(ii) would require the dealer financial advisor to make a printable electronic version of the official statement available to the managing or sole underwriter if one has been prepared and the issuer does not object to its distribution. The MSRB has not proposed allowing the financial advisor to make available solely an electronic version of the official statement to the managing or sole underwriter since such underwriter may itself be required to further disseminate paper versions of the official statement to purchasing dealers under Rule G-32(i)(C).

• Should the draft amendment require that a dealer acting as the issuer’s financial advisor and that prepares the official statement on the issuer’s behalf create an electronic version for dissemination?

• Should the draft amendment include provisions relating to timing and method of electronic dissemination? If so, what should those provisions include?

• Should the draft amendment provide that, for any issue where an electronic version of the official statement is available for dissemination, the dealer financial advisor only is required to disseminate the electronic version to the managing or sole underwriter?

Dissemination of Information Regarding the End of the Underwriting Period . The duties imposed on dealers by Rule G-32 only extend to municipal securities sold during the underwriting period. The date on which the underwriting period ends is often not definitively known by most market participants since the end of the underwriting period is dependent upon whether the underwriting syndicate (or the sole underwriter) has sold out the issue.[15] The MSRB has received complaints from dealers that are not members of an underwriting syndicate that they are unable to determine whether they are obligated to deliver an official statement to a customer who is purchasing a recently issued municipal security since they have no way of knowing if the underwriting period has ended. In some cases, these dealers have indicated that the managing or sole underwriter has refused to provide or has been slow in providing this information. The draft amendments in new clause (i)(D) of Rule G-32(c) would require the managing or sole underwriter of an issue, upon request, to inform promptly any dealer purchasing the securities of such issue during the underwriting period and during the 60 days following the end of the underwriting period whether the underwriting period has ended.

Managing and sole underwriters would need to establish practices and procedures that would permit them to comply with the requirement to disclose promptly whether the underwriting period has ended. For example, the required information would need to be readily available to appropriate personnel of the managing or sole underwriter, or the information could be posted electronically and requesting dealers could be referred to such posting.

• Should the draft amendment include provisions relating to timing and method of providing such information? If so, what should those provisions include?

• Should the draft amendment instead require that the managing or sole underwriter inform the marketplace at the time that the underwriting period has ended? If so, how should the managing or sole underwriter be required to disseminate such information?

• Should the draft amendment instead amend the definition of underwriting period to establish a fixed time period (e.g., 60 days after the bond closing) during which the provisions of Rule G-32 apply?

Draft Amendments to Rule G-36

The MSRB is proposing draft amendments to Rule G-36 designed to promote the availability of official statements in the marketplace in advance of bond closing and in a form that may be disseminated in a more timely and efficient manner. The draft amendments to Rule G-36 are described below. The MSRB seeks comments on all aspects of the draft amendments, including comments on certain specific questions raised below.

As noted above, for offerings subject to SEC Rule 15c2-12, compliance with the official statement submission requirement under Rule G-36 requires that the managing or sole underwriter send the official statement to the MSRB within one business day of receipt from the issuer, but sets an outside timeframe for that submission of no more than 10 business days after the issue’s sale date.[16] The draft amendments to Rule G-36 would provide alternative timeframes under new paragraph (b)(iii) for complying with the rule for these offerings based on when the issues close. Thus, a submission would be considered timely if it has been sent to the MSRB within one business day of receipt but no later than five business days prior to the bond closing.[17] This would provide ample time for the MSRB to receive the official statement, process it within the MSIL system and redistribute it to subscribers for use in the marketplace in time for the closing of the underwriting. This would also ensure that the official statement is available to the underwriter for distribution to customers and to other dealers who sell to customers in time for initial trade settlements as required under Rule G-32.

The draft amendments also would provide that if the underwriter submits the official statement to the MSRB electronically through the e-OS System, the alternative timeframe is reduced from five business days to three business days prior to the bond closing. This would still provide sufficient time to ensure orderly dissemination to the marketplace given that the submission is received instantaneously by the MSRB and the electronic submission is more easily processed by the MSRB for redistribution electronically to MSIL system subscribers. Allowing submissions of electronic versions closer to the bond closing date also would provide underwriters with an incentive for using electronic official statements, particularly for offerings where the period between the sale date and closing date may be compressed and the need for more rapid dissemination may be most pressing. Further, the existence of electronic versions of official statements would in turn trigger the provisions of the draft amendments to Rule G-32 described above designed to promote the timeliness and efficiency of inter-dealer and, ultimately, dealer-to-customer dissemination of official statements.

In addition to partially shifting the focus of Rule G-36 from the sale date to the closing date and providing an incentive for the use of electronic official statements, these alternative timeframes would permit underwriters to comply with the rule in a more orderly fashion for certain types of primary offerings that present significant difficulties for meeting a delivery timeframe based on the sale date. For example, if there is an unusually long period between the sale date and the closing (e.g., in the case of some forward financings and other issues with extended settlement), the existing requirement under Rule G-36 for the submission of the official statement to the MSRB within 10 business days of the sale date (and under SEC Rule 15c2-12 with respect to delivery by the issuer of the official statement within seven business days of the sale date) can call for an official statement to be available well in advance of when it is needed for delivery to customers.[18] This can lead to (i) an official statement becoming stale by the time it is finally used in the marketplace, (ii) an official statement being prepared simply for filing purposes, thereafter being updated or replaced when needed in the marketplace, or (iii) a Rule G-36 violation if the parties to the transaction wait to prepare the official statement at a time they believe is more appropriate for the transaction. The draft amendments would permit underwriters to meet their Rule G-36 submission obligation in a manner that makes sense for the specific financing, so long as the official statement is available the requisite number of days prior to bond closing and its first required use in the market. This should result in a lower incidence of underwriter violations under Rule G-36 without adversely affecting (and in many cases improving) the timeliness of disclosure since the alternative timeframes require completion and distribution of official statements in a manner that promotes timely delivery to customers under Rule G-32. Further, the alternative timeframes should permit underwriters and enforcement agencies to focus their compliance resources on areas that have a direct impact on investor protection.

The draft amendments do not alter the existing timeframe for the sending of the official statement to the MSRB within 10 business days of the sale date, but no later than one business day after receipt from the issuer. If the underwriter is unable to meet the alternative timeframes described above, it could still fully comply with Rule G-36 by meeting the existing 10 business day standard.[19] Further, underwriters should note that the draft amendments in no way affect their obligation under SEC Rule 15c2-12(b)(3) with respect to the contractual provision for delivery by issuers to underwriters of official statements within seven business days of the sale date. Once the underwriter receives the official statement for an offering subject to SEC Rule 15c2-12, the underwriter always is required to send the official statement to the MSRB within one business day of such receipt.

The MSRB reminds underwriters that underwrite offerings subject to SEC Rule 15c2-12 where the period between the sale date and bond closing is short (for example, where the issue closes one week after the sale date) that, even though they may still be able to comply with Rule G-36 if the official statement does not become available until after closing, dealers selling the new issue securities to customers are not permitted by Rule G-32 to settle such transactions until they deliver the official statement to the customers.

• Are the timeframes provided in the draft amendments appropriate? Are there ways to create incentives for use of electronic official statements that would be more effective than the proposal to reduce the timeframe for sending to the MSRB by two business days, while not impairing investor protection?

• Are there circumstances where the alternative timeframes would result in less timely or effective disclosure?

• Should the draft amendments delete the existing 10 business day timeframe and make compliance fully dependent upon sending the official statement to the MSRB the requisite number of days prior to closing?

* * * * *

Comments from all interested parties are welcome. Comments should be submitted no later than June 25, 2004 and may be directed to Ernesto A. Lanza, Senior Associate General Counsel. Written comments will be available for public inspection.

May 12, 2004

************

TEXT OF DRAFT AMENDMENTS [20]

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 a printable electronic version has been prepared and the issuer does not object to distribution of such version of the official statement in final form. 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 satisfy the requirements of subparagraphs (A) and (B) of this paragraph (c)(i) with respect to the official statement in final form.

(D) provide promptly to all brokers, dealers and municipal securities dealers that purchase the new issue municipal securities (and all brokers, dealers and municipal securities dealers that purchase the securities within 60 days after the end of the underwriting period) information as to whether the underwriting period has ended for any issue described in 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.

(d) 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) No change.

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

(i) Subject to paragraph (iii) below, each Each broker, dealer or municipal securities dealer that acts as underwriter in a primary offering of municipal securities subject to Securities Exchange Act rule 15c2-12 shall send to the Board or its designee, 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 final official statement and completed Form G-36(OS) prescribed by the Board, including the CUSIP number or numbers for the issue.

(ii) No change.

(iii) A broker, dealer or municipal securities dealer shall be deemed to have complied with paragraph (i) of this section (b) if it has sent the items and information required thereunder to the Board or its designee within one business day after receipt of the official statement from the issuer or its designated agent, but no later than:

(A) in the case of an official statement submitted in electronic form pursuant to paragraph (ii) of section (g), three business days prior to the date of initial delivery of the securities by the issuer to the broker, dealer or municipal securities dealer; or

(B) in the case of any other official statement, five business days prior to the date of initial delivery of the securities by the issuer to the broker, dealer or municipal securities dealer.

(c)-(g) No change.