(Volume 16, Number 3) SEPTEMBER 1996
Route To: Manager, Muni Department Underwriting Sales Operations Public Finance Compliance
Comments Requested The Board is proposing for comment a draft amendment to rule G-32, on disclosures in connection with new issues. The draft amendment changes the time an official statement is provided to customers in primary offerings subject to SEC Rule 15c2-12 and reorganizes the rule to address those offerings that are subject to Rule 15c2-12 and those that are not. For all primary offerings, the draft amendment would add a requirement for managing underwriters and selling dealers to send official statements to purchasing dealers within a specified time frame.
Comments on the draft amendment should be submitted no later than November 15, 1996, and may be directed to Marianne I. Dunaitis, Assistant General Counsel. Written comments will be available for public inspection.
Securities and Exchange Commission Rule 15c2-12 has brought about certain changes in the municipal securities industry regarding the timing of preparation of official statements. In a primary offering subject to the rule, Rule 15c2-12(b)(3) requires that the underwriter contract with the issuer to receive within seven business days after the bond purchase agreement, and on or before the date payment confirmations are sent to any customer, sufficient copies of the final official statement to comply with that Rule and Board rules. While Rule 15c2-12 requires that dealers contract to receive sufficient copies of final official statements, Board rule G-32, on disclosures in connection with new issues, specifies timing and method of delivery of official statements to customers.[1] The Board is seeking comment on a draft amendment to change certain dissemination requirements of rule G-32 to provide greater consistency with Rule 15c2-12.
Board rule G-32 currently prohibits a municipal securities dealer from selling new issue municipal securities to a customer unless the dealer delivers no later than the settlement of the transaction a copy of the official statement in final form, if one was prepared for the issue. In the case of negotiated sales, certain written information regarding the underwriting must be delivered as well. The rule also places requirements on the managing underwriter and selling dealers to provide copies of official statements to purchasing dealers.
For those primary offerings subject to Rule 15c2-12, the draft amendment to rule G-32 would move up the time that customers are provided with a final official statement. For all primary offerings, the draft amendment would add a requirement for managing underwriters and selling dealers to send official statements to purchasing dealers within a specified time frame. The draft amendment would also reorganize the rule to address separately those offerings that are subject to SEC Rule 15c2-12 and those that are not. It would also adopt definitions of certain terms provided in Rule 15c2-12, which would, in effect, extend the scope of rule G-32 to all primary offerings of municipal securities.
Dissemination of Official Statements to Customers The Board believes that, if an official statement is produced for a primary offering of municipal securities, all customers purchasing municipal securities during the underwriting period should receive the official statement. Therefore, the draft amendment continues the requirement that each dealer that sells municipal securities to a customer during the underwriting period must deliver the official statement to the customer, regardless of whether the dealer is a part of the underwriting group. The Board also believes that it is important that customers receive official statements as soon as practicable, but in no event later than settlement of their transactions. Accordingly, the draft amendment also retains the requirement that the official statement be delivered, at a minimum, by the settlement of the customer's transaction.[2]
For primary offerings that are required to have official statements under SEC Rule 15c2-12, the timing for sending official statements to customers can, in many cases, be accelerated to provide for delivery to the customer prior to settlement date, and the draft amendment is designed to accomplish this objective. Rule 15c2-12 requires that official statements be produced no later than the time that final money confirmations are sent and requires that official statements are produced in sufficient quantity to comply with Board rules. To take advantage of this requirement, the draft amendment would require, for issues subject to Rule 15c2-12, that the official statement be sent to the customer no later than the date that the final money confirmation is sent. However, the minimum requirement that the official statement be delivered prior to settlement would remain in place to address possible situations in which a final money confirmation is sent on, or just before, the settlement date of the transaction.
For primary offerings not subject to the official statement requirements of Rule 15c2-12, the draft amendment would retain the current requirement that an official statement, if one exists for the issue, be delivered no later than settlement with the customer. The draft amendment also would retain the requirement that, if an official statement in final form is not produced, a notice to that effect be delivered to the customer along with an official statement in preliminary form, if any.
Dissemination of Official Statements to Dealers Because all dealers selling new issue securities to customers must deliver the official statement to their customers, rule G-32 currently contains certain requirements designed to make official statements available to dealers that purchase the issue, but are not part of the underwriting group. The draft amendment would retain the responsibility of the managing underwriter to provide, upon request, one copy of the official statement to purchasing dealers, and the disclosure information required for negotiated offerings, and one additional official statement per $100,000 par value purchased for resale to customers. The managing underwriter has this obligation to all purchasing dealers, even where the managing underwriter did not sell the securities to the purchasing dealer.
Dealers that are not part of the underwriting group and do not purchase from the managing underwriter have indicated from time to time that there may be some difficulty obtaining official statements from managing underwriters on a timely basis. The draft amendment would add a requirement that the official statement must be sent by the managing underwriter to the purchasing dealer no later than the business day after the request or, if the official statement has not been received from the issuer or its agent, the business day after receipt. Official statements must be sent by first class mail or other equally prompt means unless the purchasing dealer arranges some other method of delivery at its own expense.
In addition, as currently required, the managing underwriter would continue to provide purchasing dealers, upon request, with instructions how to order copies of the official statement directly from the printer.[3] These requirements concerning the responsibility of the managing underwriter to provide official statements, information regarding negotiated offerings, and printing instructions to purchasing dealers would be equally applicable to offerings that are subject to SEC Rule 15c2-12 and those that are not.
Rule G-32 currently requires every dealer selling a new issue security to another dealer to promptly furnish the official statement to the purchasing dealer upon request. This provision was designed to give dealers an additional avenue to obtain official statements if they did not or could not obtain them from the managing underwriter. The draft amendment would retain the dealer-to-dealer dissemination requirement, and would include the same time and method of delivery requirement applicable to managing underwriters.
Disclosures in Connection with Negotiated Offerings The draft amendment would retain the disclosures to be made in connection with negotiated offerings whether or not subject to SEC Rule 15c2-12.[4] The draft amendment would also incorporate a longstanding interpretation of the Board regarding the initial offering price for each maturity in the issue. The Board has determined that the initial offering price must be disclosed even for maturities not reoffered because customers should be able to determine whether the price they paid for securities is substantially different from the price being paid by presale purchasers. The draft amendment would incorporate this interpretation to make clear that the initial offering price must be disclosed for maturities that are not reoffered.
Definitions and Scope of Rule The draft amendment would contain a definition of the terms used in the rule, which would in some cases affect the scope of the rule. The draft amendment would reference the definition provided in SEC Rule 15c2-12 for the term "final official statement."[5] In addition, the term "primary offering," as used in Rule 15c2-12, would replace the current reference to "new issue." This term would bring certain remarketings within the scope of rule G-32 that were not previously covered by the rule.[6]
The draft amendment would retain the definition of "underwriting period" in current rule G-32, rather than adopt the one provided in Rule 15c2-12. The underwriting period of Rule 15c2-12 may vary among each participating underwriter.[7] Under the rule G-32 definition, the underwriting period ends when the issuer delivers the securities to the syndicate, or when the syndicate no longer retains an unsold balance, whichever is later. Since rule G-32 requires any selling dealer, not just underwriters, to send an official statement to a customer during the underwriting period, the Board believes it is appropriate to retain the definition of underwriting period currently in rule G-32.
The Board seeks comments regarding the draft amendment to rule G-32. The draft amendment proposes to move up the time that a customer receives a final official statement in offerings subject to SEC Rule 15c2-12 from delivery by settlement to sending by the time a final money confirmation is sent to the customer, but with delivery in no event later than the settlement of the transaction. Are final official statements received in sufficient time to comply with this proposed requirement? Would the draft amendment effectively ensure that customers receive official statements before paying for the securities? Are there alternative methods for sending official statements to customers that should be specifically addressed in the rule? Should there be a requirement of delivery by a certain method designed to ensure receipt by the customer, e.g., by first class mail or overnight delivery?
The draft amendment provides that the managing underwriter must provide, upon request, a copy of the official statement to purchasing dealers and one additional copy of the official statement per $100,000 par value to purchasing dealers who purchase for resale to customers and instructions how to order copies of the official statement from the printer. How are dealers that are not in the underwriting group currently obtaining official statements? Are sufficient quantities of official statements available in a timely manner?
The draft amendment also retains the current requirement that selling dealers provide, upon request, purchasing dealers with a copy of the official statement. Has the alternative of obtaining the official statement from the selling dealer, rather than from the managing underwriter, been an effective method of receiving official statements for distribution to customers? Are there alternative mechanisms for providing official statements to dealers not in the underwriting group that should be explored?
The draft amendment proposes to retain the current definition of the underwriting period. Does the current definition provide for delivery of official statements for an appropriate period of time in a primary offering?
The draft amendment proposes to delete the current exemption for commercial paper because such instruments will most likely be exempt from SEC Rule 15c2-12. Should the current exemption for commercial paper be retained?
September 13, 1996
Rule G-32. *Official Statements and Other Disclosures in Connection with Primary Offerings (a) Sending Official Statements for Issues Subject to Securities Exchange Act Rule 15c2-12. (i) No broker, dealer or municipal securities dealer shall sell during the underwriting period, whether as principal or agent, any municipal securities that are part of a primary offering subject to Securities Exchange Act Rule 15c2-12(b)(3) unless such broker, dealer or municipal securities dealer sends the customer a final official statement no later than the time a confirmation is sent requesting payment from the customer, provided, however, that in no event shall delivery of the final official statement be later than the settlement of the transaction. (ii) The managing underwriter or sole underwriter of a primary offering subject to Securities Exchange Act Rule 15c2-12(b)(3), upon request, shall send all brokers, dealers and municipal securities dealers that purchase the municipal securities during the underwriting period a final official statement and other information required by paragraph (c) of this rule, and not less than one additional final official statement per $100,000 par value of the securities purchased and sold to customers, no later than the business day after the request or, if the final official statement has not been received from the issuer or its agent, no later than the business day after such receipt. Transmission shall be 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. In addition, the managing underwriter or sole underwriter shall provide, upon request, all purchasing brokers, dealers and municipal securities dealers with instructions how to order copies of the final official statement directly from the printer. (iii) Every broker, dealer or municipal securities dealer, upon request, shall send all brokers, dealers or municipal securities dealers to which it sells during the underwriting period municipal securities that are part of a primary offering a final official statement and other information required by paragraph (c) of this rule no later than the business day after the request or, if the final official statement has not been received from the issuer or its agent, no later than the business day after such receipt. Transmission shall be 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) Delivery of Official Statements for Issues not Subject to Securities Exchange Act Rule 15c2-12. (i) No broker, dealer or municipal securities dealer shall sell during the underwriting period, whether as principal or agent, any municipal securities that are part of a primary offering not subject to Securities Exchange Act Rule 15c2-12(b)(3) unless such broker, dealer or municipal securities dealer delivers to the customer an official statement in final form, if any, no later than the settlement of the transaction. In the event an official statement in final form is not prepared, a notice that no official statement in final form has been prepared and an official statement in preliminary form, if any, shall be delivered to the customer no later than settlement of the transaction. (ii) A managing underwriter or sole underwriter of a primary offering of municipal securities not subject to Securities Exchange Act Rule 15c2-12(b)(3), upon request, shall send all brokers, dealers and municipal securities dealers that purchase the municipal securities during the underwriting period an official statement in final form, if any, and other information required by paragraph (c) of this rule, and not less than one additional official statement in final form per $100,000 par value of the securities purchased and sold to customers, no later than the business day after the request or, if the official statement in final form has not been received from the issuer or its agent, no later than the business day after such receipt. Transmission shall be 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. In addition, the managing underwriter or sole underwriter shall provide, upon request, all purchasing brokers, dealers and municipal securities dealers with instructions how to order copies of the official statement in final form directly from the printer. (iii) Every broker, dealer or municipal securities dealer, upon request, shall send all brokers, dealers or municipal securities dealers to which it sells during the underwriting period municipal securities that are part of a primary offering an official statement in final form, if any, and other information required by paragraph (c) of this rule no later than the business day after the request or, if the official statement in final form has not been received from the issuer or its agent, no later than the business day after such receipt. Transmission shall be 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. (c) Disclosure Requirements for Certain Primary Offerings. (i) No broker, dealer or municipal securities dealer shall sell during the underwriting period, whether as principal or agent, any municipal securities that are part of a primary offering, except for competitively bid offerings, unless such broker, dealer or municipal securities dealer delivers to the customer the following information concerning the underwriting arrangements no later than settlement of the transaction: (A) the underwriting spread; (B) the amount of any fee received by the broker, dealer or municipal securities dealer as agent for the issuer in the distribution of the securities; (C) the initial offering price for each maturity in the primary offering that is offered or to be offered in whole or in part by the underwriters, including maturities that are not reoffered. (d) Definitions. For purposes of this rule, the following items have the following meanings: (i) The term "primary offering" shall mean an offering defined in Securities Exchange Act Rule 15c2-12(f)(7). (ii) The term "underwriting period" shall mean: (A) for securities offered on behalf of an issuer by a syndicate, the period commencing with the first submission to a syndicate of an order for the purchase of municipal securities or the purchase of such securities from the issuer, whichever 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. (B) for securities offered on behalf of an issuer by one broker, dealer or municipal securities dealer, the period commencing with the first submission to the 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 retains 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) The term "final official statement" shall mean a document or documents defined in Securities Exchange Act Rule 15c2-12(f)(3).*
[1] Rule 15c2-12 requires underwriters to disseminate the final official statement to potential customers on request until the earlier of 90 days from the end of the underwriting period or the date the final official statement is available from nationally recognized municipal securities information repositories, but no earlier than 25 days from the end of the underwriting period. Rule G-32, however, applies to all selling dealers and all customers without regard to a request for an official statement.
[2] The Board has stated that an official statement sent at least three business days prior to settlement will be presumed to have been received by the customer by settlement. MSRB Reports, Vol. 7, No. 2 (March 1987) at 12.
[3] Because Rule 15c2-12 embodies the concept that the official statement is the issuer's document, the draft amendment removes references in the current rule to the involvement of underwriters and dealers that act as financial advisors in preparing the official statement. For consistency with the structure of Rule 15c2-12, the draft amendment deletes the current exemption for commercial paper. This exemption was added in 1985 because disclosures are typically provided to investors in commercial paper on a periodic basis. Most primary offerings of municipal commercial paper will be exempt from the requirement of Rule 15c2-12 to prepare an official statement. However, if an official statement is prepared, the draft amendment would require that it be delivered to customers.
[4] For a negotiated sale of new issue municipal securities, the written information must disclose (I) the underwriting spread; (ii) the amount of any fee received by the dealer as agent for the issuer in the distribution of the securities; and (iii) the initial offering price for each maturity in the issue that is offered or to be reoffered in whole or in part by the underwriters.
[5] Rule 15c2-12 defines "final official statement" as a document or set of documents prepared by an issuer of municipal securities or its representatives that is complete as of the date delivered to the participating underwriter(s) and that sets forth information concerning the terms of the proposed issue of securities; information, including financial information or operating data, concerning such issuers of municipal securities and those other entities, enterprises, funds, accounts, and other persons material to an evaluation of the offering; and a description of certain other information required by the Rule.
[6] The definition of "primary offering" in Rule 15c2-12 means an offering of municipal securities directly or indirectly by or on behalf of an issuer of such securities, including remarketings accompanied by a change in the authorized denomination from $100,000 or more to less than $100,000 or accompanied by a change in the period during which such securities may be tendered from a period of nine months or less to a period of more than nine months.
[7] The Rule 15c2-12 underwriting period ends at the later of such time as the issuer delivers the securities to the participating underwriter or when the participating underwriter does not retain, directly or as a member or an underwriting syndicate, an unsold balance of the securities.
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