[Federal Register Volume 59, Number 52 (Thursday, March 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-5927]


[[Page Unknown]]

[Federal Register: March 17, 1994]


SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

Release No. 34-33742; File No. S7-5-94]
RIN 3235-AG13

 

Municipal Securities Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rulemaking.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is publishing for comment proposed amendments to Rule 
15c2-12 under the Securities Exchange Act of 1934 (``Exchange Act''), 
which would make it unlawful for a broker, dealer, or municipal 
securities dealer to act as an underwriter of an issue of municipal 
securities unless the broker, dealer, or municipal securities dealer 
has reasonably determined that the issuer or its designated agent has 
undertaken in a written agreement or contract for the benefit of the 
holders of such municipal securities to provide certain information to 
a nationally recognized municipal securities information repository; or 
to recommend the purchase or sale of a municipal security, without 
having reviewed the information the issuer of the municipal security 
has undertaken to provide. The purpose of the proposed amendments is to 
further deter fraud and manipulation in the municipal securities market 
by prohibiting the underwriting and subsequent recommendation of 
securities for which adequate information is not available.

DATES: Comments must be received on or before July 15, 1994.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549. All comment letters should refer to File No. 
S7-5-94. All comments received will be available for public inspection 
and copying in the Commission's Public Reference Room, 450 Fifth 
Street, NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Esq., Chief 
Counsel, or Janet W. Russell-Hunter, Esq., Attorney, Office of Chief 
Counsel (concerning the rule and release generally), (202) 504-2418, 
Division of Market Regulation, Securities and Exchange Commission, Mail 
Stop 7-10, 450 Fifth Street, NW., Washington, DC 20549; and Amy Meltzer 
Starr, Esq., Attorney, Division of Corporation Finance (concerning the 
definitions of ``final official statement'' and ``significant 
obligor,'' and concerning annual financial information and material 
events generally), (202) 272-3654, Division of Corporation Finance, 
Securities and Exchange Commission, Mail Stop 7-6, 450 Fifth Street, 
NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    In a recent report to Congress,\1\ the staff of the Division of 
Market Regulation (``Staff'') reviewed many aspects of the municipal 
securities market, including whether opportunities exist for 
overreaching and investor deception. The Staff found that investors 
need sufficient current information about issuers and significant 
obligors to better protect themselves from fraud and manipulation, to 
better evaluate offering prices, to decide which municipal securities 
to buy, and to decide when to sell.\2\ Moreover, the Staff found that 
the growing participation of individuals as both direct and indirect 
purchasers of municipal securities underscores the need for sound 
recommendations by brokers, dealers, and municipal securities 
dealers.\3\
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    \1\Securities and Exchange Commission, Division of Market 
Regulation, Staff Report on the Municipal Securities Market (Sept. 
1993) (``Staff Report''). The Staff Report was prepared at the 
request of the Hon. John D. Dingell, Chairman, Committee on Energy 
and Commerce, United States House of Representatives, and the Hon. 
Edward Markey, Chairman, Subcommittee on Telecommunications and 
Finance, United States House of Representatives. Among the topics 
discussed in the Staff Report were political contributions, sales 
practices, transparency, audit trails, issuer disclosure, and the 
regulatory structure for municipal securities. See Letter from Hon. 
John D. Dingell, Chairman, Committee on Energy and Commerce, and 
Hon. Edward Markey, Chairman, Subcommittee on Telecommunications and 
Finance to: Mary L. Schapiro, Acting Chairman, SEC; Christopher A. 
Taylor, Executive Director, Municipal Securities Rulemaking Board 
(``MSRB''); and Joseph R. Hardiman, President and Chief Executive 
Officer, National Association of Securities Dealers, Inc. (``NASD'') 
(May 24, 1993).
    \2\Staff Report, supra note 1 at 38.
    \3\Id. at 28.
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    Based on these findings, the Staff recommended that the Commission 
use its interpretive authority to provide guidance regarding the 
disclosure required by the antifraud provisions of the federal 
securities laws.\4\ Today, in a companion release,\5\ the Commission is 
interpreting the disclosure obligations of municipal securities 
issuers. The Companion Release also addresses the obligations under the 
antifraud provisions of brokers, dealers, and municipal securities 
dealers who underwrite and sell municipal securities, and the 
information dissemination requirements of Rule 15c2-12.\6\
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    \4\Id. at 40. Section 17(a) of the Securities Act of 1933 
(``Securities Act''), and Section 10(b) of the Exchange Act and Rule 
10b-5 promulgated thereunder, apply to ``persons,'' including 
issuers of municipal securities.
    \5\Securities Act Release No. 7049, Exchange Act Release No. 
33741, FR-42 (March 9, 1994) (``Companion Release'').
    \6\17 CFR 240.15c2-12. See Securities Exchange Act Release No. 
26100 (Sept. 22, 1988), 53 FR 37778 (``Proposing Release''); 
Securities Exchange Act Release No. 26985 (June 28, 1989), 54 FR 
28799 (``Adopting Release''). Rule 15c2-12 requires an underwriter 
of municipal securities (1) to obtain and review an issuer's 
official statement that, except for certain information, is ``deemed 
final'' by an issuer, prior to making a purchase, offer, or sale of 
municipal securities; (2) in negotiated sales, to provide the 
issuer's most recent preliminary official statement (if one exists) 
to potential customers; (3) to deliver to customers, upon request, 
copies of the final official statement for a specified period of 
time; and (4) to contract to receive, within a specified time, 
sufficient copies of the issuer's final official statement to comply 
with the rule's delivery requirement, and the requirements of MSRB 
rules. Rule 15c2-12 also contains specific exemptions for three 
types of municipal securities offerings.
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    In addition, the Staff recommended in the Staff Report that Rule 
15c2-12 be amended, or that similar rules be adopted, to prohibit 
municipal securities dealers from recommending outstanding municipal 
securities unless the issuer has committed to make available ongoing 
information regarding its financial condition.\7\ This release proposes 
to implement the Staff's recommendation.
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    \7\Staff Report, supra note 1 at 40. See also Testimony of 
Arthur Levitt, Chairman, SEC, Concerning the Municipal Securities 
Market, Before the Subcommittee on Telecommunications and Finance, 
Committee on Energy and Commerce, United States House of 
Representatives (Sept. 9, 1993) at 5-7; Remarks of Arthur Levitt, 
Chairman, SEC, The Bond Buyer Ethics in Public Finance Conference 
(Jan. 24, 1994) at 6; Remarks of Richard Y. Roberts, Commissioner, 
SEC, ``Alternatives for Improving Municipal Secondary Market 
Disclosure,'' The Southern Municipal Finance Society 13th Annual 
Fall Conference (Sept. 15, 1993) at 9-12.
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    Section 15(c)(2) of the Exchange Act prohibits municipal securities 
dealers from effecting any transaction in, or inducing or attempting to 
induce the purchase or sale of, any municipal security by means of a 
``fraudulent, deceptive, or manipulative act or practice.''\8\ This 
section specifically authorizes the Commission to promulgate rules and 
regulations to define, and prescribe means reasonably designed to 
prevent, such acts and practices. Pursuant to this authority, the 
Commission adopted Rule 15c2-12 in 1989 for the purpose of preventing 
fraud by enhancing the quality, timing, and dissemination of disclosure 
in the municipal securities market.\9\
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    \8\Exchange Act Section 15(c)(2), 15 U.S.C. 78o(c)(2).
    \9\See Adopting Release, supra note 6 at 54 FR 28800.
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    The Commission proposes to amend Rule 15c2-12 to further deter 
fraud and manipulation in the primary and secondary municipal 
securities markets by prohibiting the underwriting and subsequent 
recommendation of securities for which adequate information is not 
available.\10\ For many years, the courts and the Commission have 
emphasized that, under the antifraud provisions, a broker-dealer 
recommending securities to investors implies by its recommendation that 
it has an adequate basis for making the recommendation.\11\ In the 
Proposing Release and the Adopting Release, the Commission discussed 
broker-dealers' obligation to have a reasonable belief in the accuracy 
of statements made when underwriting securities.\12\ When 
recommendations in the secondary market are made, they must be based on 
information that is up-to-date and accessible.
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    \10\Under the antifraud provisions of the federal securities 
laws, issuer disclosure not only must be accurate in all material 
respects, but also must not omit information necessary to make the 
statements made, in light of the circumstances, not misleading. The 
proposed amendment will assist issuers in satisfying their 
obligations under the antifraud provisions by creating a mechanism 
for the dissemination of primary and secondary market disclosure. 
See Companion Release, supra note 5 at Section III.A.
    \11\See e.g. Feeney v. SEC, 564 F.2d 260 (8th Cir. 1977); 
Cortlandt Investing Corporation, 44 SEC 45 (1969); Crow, Bourman & 
Chotkin, Inc., 42 SEC 938 (1966); Shearson, Hammill & Co., 42 SEC 
811 (1965).
    \12\See Proposing Release, supra note 6 at 53 FR 37787; Adopting 
Release, supra note 6 at 54 FR 28811. See also See Sanders v. John 
Nuveen & Co., 524 F.2d 1064, 1069-70 (7th Cir. 1973) (noting 
underwriter's heightened obligation when it has an opportunity to 
require disclosure from the issuer, and when there are special 
selling pressures involved in underwriting a security), vacated and 
remanded on other grounds, 425 U.S. 929 (1976), on remand, 554 F.2d 
790 (7th Cir. 1977), reh'g denied, 619 F.2d 1222 (7th Cir. 1980), 
cert. denied 450 U.S. 1005 (1981); Donaldson, Lufkin & Jenrette 
Securities Corp., Securities Exchange Act Release No. 31207 (Sept. 
22, 1992); Hamilton Grant & Co., Securities Exchange Act Release No. 
24679 (July 7, 1987); Walston & Co., Securities Exchange Act Release 
No. 8165 (Sept. 22, 1967) (stating that it is incumbent on dealers 
participating in offerings, as well as on dealers recommending 
municipal bonds, to make a diligent inquiry as to material facts 
relating to the issuer and bearing on the issuer's ability to 
service the bonds).
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    The proposed amendments to Rule 15c2-12 will assist brokers, 
dealers, and municipal securities dealers in satisfying their 
obligations under the antifraud provisions of the federal securities 
laws, and specifically under section 15(c)(2), by conditioning the 
underwriting and recommendation of municipal securities on the 
availability of current issuer information. By providing an efficient 
and timely means of access to disclosure, the proposed amendments will 
ensure that information will be available in the future regarding 
underwritten securities. As a result, brokers, dealers, and municipal 
securities dealers will be better able to recommend municipal 
securities in the secondary market based on current issuer information. 
Fraud and manipulation in both the primary and secondary markets for 
municipal securities thus will be deterred. Furthermore, the 
availability of secondary market disclosure to all municipal securities 
market participants will assist investors in protecting themselves from 
misrepresentation or other fraudulent activities by brokers, dealers, 
and municipal securities dealers.
    For these reasons, the Commission proposes to amend Rule 15c2-12 to 
prohibit a broker, dealer, or municipal securities dealer 
(``Participating Underwriter'')\13\ from purchasing or selling 
municipal securities in connection with a primary offering of municipal 
securities with an aggregate principal amount of $1,000,000 or more 
(``Offering'')\14\ unless the Participating Underwriter has reasonably 
determined that the issuer or its designated agent has undertaken in a 
written agreement or contract for the benefit of the holders of such 
municipal securities to provide certain information to a nationally 
recognized municipal securities information repository (``NRMSIR''). 
The prohibition would apply to underwriters that have committed 
contractually to act as an underwriter in an Offering on or after the 
effective date of the rule amendment. This proposal responds, in part, 
to a suggestion in the Joint Statement on Improvements in Municipal 
Securities Market Disclosure,\15\ in which a broad spectrum of 
municipal securities market participants supported wider dissemination 
of issuer information and improved mechanisms for such dissemination, 
to assure that securities professionals have a sufficient factual basis 
on which to recommend secondary market transactions.
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    \13\See Rule 15c2-12(a).
    \14\The proposed amendments also include an exemption for small 
and infrequent issuers. See Section II.D., infra.
    \15\Joint Statement on Improvements in Municipal Securities 
Market Disclosure (Dec. 20, 1993) (``Joint Statement'') at 2-3. The 
Joint Statement was issued by twelve groups representing 
participants in all aspects of the municipal securities market. The 
groups included were the American Bankers Association's Corporate 
Trust Committee; the American Public Power Association; the 
Association of Local Housing Finance Agencies; the Council of 
Infrastructure Financing Authorities; the Government Finance 
Officers Association; the National Association of Bond Lawyers; the 
National Association of Counties; the National Association of State 
Auditors, Comptrollers and Treasurers; the National Association of 
State Treasurers; the National Council of State Housing Agencies; 
the National Federation of Municipal Analysts; and the Public 
Securities Association.
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    The Commission is proposing further to amend Rule 15c2-12 to 
require brokers, dealers, and municipal securities dealers, prior to 
recommending the purchase or sale of a municipal security, to review 
the information the issuer of the municipal security has undertaken to 
provide. This amendment would apply to municipal securities issued on 
or after the effective date of the proposed amendment discussed in the 
preceding paragraph.
    Finally, the proposed amendments would define the term 
``significant obligor,'' and amend the definition of the term ``final 
official statement'' for purposes of Rule 15c2-12.

II. Description of the Proposed Amendments to Rule 15c2-12

A. Underwriting Requirement

    One amendment proposed today would add paragraph (b)(5) to Rule 
15c2-12. This paragraph would prohibit a Participating Underwriter from 
purchasing or selling municipal securities in connection with an 
Offering, unless the Participating Underwriter has reasonably 
determined that the issuer or its designated agent has undertaken in a 
written agreement or contract for the benefit of holders of such 
municipal securities to provide certain information to a NRMSIR. In 
using the terms ``purchase'' or ``sale,'' the proposed amendment 
contemplates that, at such time as the issuer of municipal securities 
delivers the securities to the Participating Underwriters, the issuer 
will have undertaken, in a written contract or agreement for the 
benefit of holders of the municipal securities, to provide information 
to a NRMSIR.\16\
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    \16\A Participating Underwriter would need to receive assurances 
from the issuer that such undertakings would be made before agreeing 
to act as an underwriter.
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    With the exception of general obligation bonds, most offerings 
include a trust indenture which sets forth the undertakings between the 
issuer and the holders of municipal securities, and thus delineates the 
bondholders' rights. If there is no trust indenture, as in a general 
obligation bond offering, a bond resolution, ordinance, or written 
agreement or contract sets out the undertakings by the issuer for the 
benefit of the holders of the municipal securities. In order to satisfy 
its obligation under the rule, a Participating Underwriter would need 
to look to these documents for undertakings by the issuer to supply 
secondary market disclosure to a NRMSIR. A Participating Underwriter 
will have satisfied its obligation under proposed paragraph (b)(5), so 
long as it can conclude that all of the appropriate undertakings have 
been made. While the issuer's duty will be to its bondholders, all 
participants in the municipal securities market will benefit from 
having access to this information.
    Comment is requested on the use of a written agreement or contract 
for the provision of secondary market information by issuers for the 
benefit of holders of municipal securities, particularly in light of 
the provisions of proposed paragraph (c) prohibiting the recommendation 
by brokers, dealers, and municipal securities dealers of municipal 
securities when issuer information is unavailable. Comments should 
address specifically the consequences of a failure by an issuer to 
comply with its secondary market disclosure undertakings after the 
initial issuance of municipal securities. Comment is requested on 
whether the use of the issuer's undertakings is a necessary or 
appropriate approach to implementing procedures for providing 
information to the municipal securities market. Comment also is 
requested on whether, as an alternative to written undertakings, a 
statement in the final official statement of the issuer of municipal 
securities that it will provide secondary market disclosure would be 
sufficient. In addition, commenters are requested to address whether 
the use of written undertakings provides sufficient flexibility for 
issuers that, in the future, wish to change the type, timing, or 
presentation of the information, or whether some alternative mechanism 
should be used.
1. Annual Information
    Proposed paragraph (b)(5)(i)(A) would prohibit Participating 
Underwriters from purchasing or selling municipal securities in 
connection with an Offering unless the Participating Underwriter has 
reasonably determined that the issuer or its designated agent has 
undertaken to provide to a NRMSIR, at least annually, current financial 
information concerning the issuer of the municipal security and any 
significant obligors, including annual audited financial statements and 
pertinent operating information.
    Current annual financial information is an important source of 
updated information for the market. The format for presenting such 
information is not specified in the proposed amendment, and may be 
accomplished through any disclosure document, whatever its form or 
principal purpose, that includes annual audited financial statements 
and pertinent operating information. The proposed amendment 
contemplates that sequential final official statements prepared by 
frequent issuers of municipal securities may meet the standards of the 
rule. Similarly, the audited financial statements should fairly present 
the current financial condition, the results of operations, and cash 
flows of the municipal issuer and any significant obligor. Proposed 
paragraph (b)(5) also does not dictate the content of the annual 
financial information, other than the audited financial statements. 
Rather, it provides discretion to offering participants.
    The Commission recognizes that there is great diversity in the 
municipal marketplace, both in terms of the types of issuers and the 
types of issues of municipal securities. The proposed amendment is, 
therefore, intended to permit issuers the flexibility to address the 
needs of the market by specifying in the written agreement or contract 
the particular financial and operating information that is to be 
provided on an annual basis, in addition to the annual audited 
financial statements. The Commission anticipates that issuers and 
offering participants will look to various voluntary guidelines, as 
well as the guidance provided in the Companion Release, in establishing 
an appropriate level of disclosure for each municipal securities issue. 
Of course, additional information, such as unaudited quarterly 
information, also could be specified.
    Under the proposed amendment, in paragraph (b)(5)(ii), the issuer 
of the municipal security also would be required to specify what 
accounting principles will be used in the preparation of the audited 
financial statements, the time within which the annual information for 
each year will be available, and the specific operating and financial 
information that will be provided on an annual basis, in addition to 
the audited financial statements. The covenant would not limit the 
issuer in its ability to supplement the specific information, where 
necessary or appropriate.
    Proposed paragraph (b)(5)(ii) does not specify the timing of 
availability of the annual financial information in each year. Rather, 
any written contract or agreement would be required to specify the 
annual time frame in which the current financial information covering 
the previous fiscal year will be provided by the issuer of the 
municipal security and any significant obligors. As noted above, this 
permits issuers some flexibility in disseminating this information, and 
also allows investors and the marketplace to know when such information 
will be available.
    Comment is requested on whether the rule should specify the minimum 
content of the information to be provided on an annual basis. Comment 
is requested on whether audited financial statements should be 
required, and whether they should be required to be audited using GAAS. 
Comment also is requested on whether the financial statements should be 
required to conform to generally accepted accounting principles 
(``GAAP'') or should include discussions of material deviations from 
GAAP if prepared on some other basis. Further, comment is requested on 
whether the rule should specify the time frame, such as six months or 
nine months after the fiscal year end, in which the annual financial 
information should be made available in each year.
2. Material Events
    Proposed paragraph (b)(5)(i)(B) requires that Participating 
Underwriters assure themselves that issuers have undertaken to provide, 
in a timely manner, notice of any of the following events, if material:
    (1) Principal and interest payment delinquencies;
    (2) Non-payment related defaults;
    (3) Unscheduled draws on debt service reserves reflecting financial 
difficulties;
    (4) Unscheduled draws on credit enhancements reflecting financial 
difficulties;
    (5) Substitution of credit or liquidity providers, or their failure 
to perform;
    (6) Adverse tax opinions or events affecting the tax-exempt status 
of the security;
    (7) Modifications to rights of security holders;
    (8) Bond calls;
    (9) Defeasances;
    (10) Matters affecting collateral; and
    (11) Rating changes.
    This portion of the proposed amendment, like that addressing annual 
financial information, is intended to provide guidance to issuers and 
other participants in the municipal securities market regarding the 
dissemination of notices of material events. As discussed in the 
Companion Release,17 this list consists of recognized material 
events that reflect on the creditworthiness of the issuer of the 
municipal security or any significant obligor, as well as on the terms 
of the securities they issue. The issuer must determine whether 
information needs to be disseminated about a listed event in any 
particular situation, and if so, when the information dissemination 
should occur in order to be ``timely.'' For example, an issuer would be 
free to determine that a de minimis draw on a reserve fund by an issuer 
financing agency resulting from a delay by the obligor in transmitting 
a payment, where the draw is replaced immediately and is not the result 
of the obligor's financial difficulties, is not a material event 
requiring notice to the market.
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    \1\7Companion Release, supra note 5, at Section IV.B.2.
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    Comment is requested as to whether the listed items of material 
events should be expanded. Comment also is requested on whether timing, 
for example, within a certain number of days, for the dissemination of 
notice of these events should be specified as part of the undertaking.

B. Recommendations Without Specified Information

    As proposed, a new paragraph (c) would be added to the rule, which 
would prohibit any broker, dealer, or municipal securities dealer from 
recommending the purchase or sale of a municipal security unless such 
broker, dealer, or municipal securities dealer has reviewed the 
information the issuer of such municipal security has undertaken to 
provide pursuant to paragraph (b)(5).
    As noted above, broker-dealers imply by recommending securities 
that they have a reasonable basis for making such recommendations. In 
the Commission's view, most situations in which a broker, dealer, or 
municipal securities dealer brings a municipal security to the 
attention of a customer involve an implicit recommendation of the 
security to the customer.
    The proposed amendment neither specifies the form in which 
information must be reviewed, nor specifies which documents must be 
obtained.18 Rather, it requires brokers, dealers, and municipal 
securities dealers to review the information that the issuer of the 
municipal security has agreed to provide. The proposed amendment is 
intended to allow this information to be obtained and reviewed through 
any means of dissemination used by participants in the municipal 
securities market.19 While the information may be available from 
documents placed in a NRMSIR, this may not be the only source of 
information. Thus, to satisfy the requirements of the rule, brokers, 
dealers, and municipal securities dealers may obtain this information 
directly from the issuer, from professionals such as attorneys, 
accountants, or other municipal securities dealers, or from any other 
reliable source. If, in reviewing this information, they discover any 
factors that suggest that disclosure is inaccurate or incomplete, or 
that signal the need for additional investigation, brokers, dealers, 
and municipal securities dealers may need to obtain additional 
information, or seek to verify existing information.20 If, 
however, the rating is known and information placed with a NRMSIR has 
been reviewed and raises no questions, a broker, dealer, or municipal 
securities dealer would need to look no further for information about 
the security recommended. Furthermore, a broker, dealer, or municipal 
securities dealer would not be prohibited from recommending the 
purchase or sale of a municipal security solely because of the 
existence of material events of which, after its review, it has no 
knowledge. This could occur if an issuer failed to disclose the 
occurrence of a material event to a NRMSIR or to disseminate notice of 
such an occurrence in any other manner. Under paragraph (c), if the 
specified information is not available, no recommendation may be made.
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    \1\8C.f. Rule 15c2-11, 17 CFR 270.15c2-11. Rule 15c2-11 requires 
that brokers and dealers, prior to entering quotations for 
securities in a ``quotation medium'', have in their records certain 
specific information, and, based on a review of this information, 
have a reasonable basis under the circumstances for believing that 
the information is accurate in all material respects, and that the 
sources of the information are reliable. Submissions of quotations 
respecting municipal securities are exempt from the application of 
Rule 15c2-11. Rule 15c2-11(f)(4).
    \1\9Therefore, brokers, dealers, and municipal securities 
dealers could review information received through electronic 
dissemination, in response to telephone inquiries, facsimile, by 
mail, or by messenger service, so long as the information is 
complete.
    \2\0See M.G. Davis & Co., 44 SEC 153, 157-58 (1970)(broker-
dealer registration revoked because ``representations and 
predictions'' made and, market letter relied on by registrant ``were 
without reasonable basis,'' and ``registrant could not reasonably 
accept all of the statements in the [market letter] without further 
investigation''), aff'd sub nom. Levine v. SEC, 436 F.2d 88 (2d Cir. 
1971); Merrill, Lynch, Pierce, Fenner & Smith, Securities Exchange 
Act Release No. 14149 (Nov. 9, 1977) (noting that if a broker-dealer 
lacks sufficient information to make a recommendation, the lack of 
information is material and should be disclosed). See also Companion 
Release, supra note 5 at Section V (discussing the obligations of 
brokers, dealers, and municipal securities dealers to investigate 
information in order to have a reasonable basis for making a 
recommendation).
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    Comment is requested on the provisions of proposed paragraph (c). 
Specifically, comment is requested on the application of the term 
``recommend,'' and whether the requirement to review information is 
burdensome, or requires further clarification.
    In view of the importance of ensuring the secondary market 
liquidity of municipal issues, comment also is requested on whether 
market participants believe that the proposed amendments would have a 
substantial or long-lasting effect on market liquidity. Questions have 
been raised about whether municipal securities dealers will be willing 
to effect secondary market transactions in a broad range of municipal 
securities in light of the specificity with which the requirement of 
paragraph (c) is articulated. The Commission is of the view that once 
the proposed amendments are in effect, and dissemination systems are 
operating, liquidity will not be affected, and that municipal 
securities dealers will be willing and able to purchase and sell as 
broad a range of securities as before. Commenters should consider this 
analysis and suggest any factors that may have effects on liquidity, 
and what operational changes or repository arrangements, or changes to 
the proposed amendment to the rule, would reduce these effects.

C. Definitions

1. Final Official Statement
    Rule 15c2-12(e)(3) presently defines the term ``final official 
statement'' as a document or set of documents prepared by the issuer or 
its representatives setting forth information concerning the issuer and 
the securities to be issued that is complete as of the date the 
document is delivered to the Participating Underwriter. The definition 
does not prescribe the specific information required to be included in 
the documents. In order to ensure that the purposes of Rule 15c2-12 are 
met, and in light of the proposed amendment obligating Participating 
Underwriters to assure that issuers have undertaken to provide to a 
repository issuer-identified minimum annual financial information, as 
well as notices of material events, the Commission is proposing to 
amend the definition of final official statement to include an 
information requirement. The definition of final official statement 
also governs the items of information to be included in the near final 
official statement, subject to availability considerations.21 
Having a standard with which to compare the contents of near final 
official statements should assist Participating Underwriters in 
satisfying their obligation to have a reasonable basis on which to 
recommend securities.22
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    \2\1See Public Securities Association (Aug. 24, 1992) 
(interpretation regarding the information to be contained in near 
final official statement obtained and reviewed by underwriters 
pursuant to Rule 15c2-12(b)(1)).
    \2\2For a discussion of the delivery requirement of a near final 
official statement pursuant to Rule 15c2-12(b)(1), see Companion 
Release, supra note 5, at Section III.E.6.
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    The proposed amendment would define the final official statement to 
include information concerning the terms of the proposed issue of 
securities, and financial and operating information concerning the 
issuer that is adequate to provide a fair presentation of the issuer's 
current financial condition and results of operations and cash flows, 
including audited financial statements. Financial and operating 
information also would be required for any ``significant obligor'' with 
respect to the municipal security. The term ``significant obligor'' is 
defined in the proposed amendment, and is discussed below. As discussed 
in the Companion Release, reliable financial information, prepared on a 
consistent basis, that fairly presents the issuer's and any significant 
obligor's financial position, is an important component of a disclosure 
scheme designed to prevent fraud.
    Comment is requested on whether an amendment to the definition of 
final official statement is necessary. If commenters consider amendment 
necessary, comment is requested on whether audited financial statements 
should be required, whether audited financial statements should be 
required to be audited using GAAS, the number of years of audited 
financial statements that should be included, if any, and if audited 
financial statements are included, whether unaudited financial 
statements covering interim periods also should be included. Comment 
also is requested on whether the definition should be amended to 
require that the financial statements conform to GAAP, or should 
include discussions of material deviations from GAAP if prepared on 
some other basis.
    The final official statement can be composed of a set of documents. 
Comment is requested on whether a seasoned issuer should be permitted 
to incorporate previously prepared documents by reference into the 
final official statement and, if incorporation by reference is 
permitted, what limitations or requirements should be imposed. Comment 
is requested on whether seasoned issuers should be required to provide 
documents incorporated by reference upon request and at no charge, and 
on what definition should be used for ``seasoned issuers.'' For 
example, seasoned issuers could be defined as repeat issuers having in 
excess of a specified dollar amount of outstanding securities.
2. Significant Obligors
    Proposed paragraph (b)(5) of the amendment would require financial 
and operating information on ``significant obligors'' of an issuer of a 
municipal security to be provided in the final official statement and 
in annual financial information. The proposed amendments, in paragraph 
(f)(9), also would define the term ``significant obligor.''
    An obligor is any person who, directly or indirectly, under a 
lease, loan, sale, or other agreement or arrangement, is obligated to 
make payments to the issuer, which cash payments are the source of the 
cash flow servicing the obligations on municipal securities. The term 
``obligor'' is not limited to issuers of separate securities under Rule 
3b-5 under the Exchange Act and Rule 131 under the Securities 
Act.23 Under the proposed definition, an obligor would be viewed 
as ``significant'' if it is the source of 20 percent or more of the 
cash flow servicing the obligations on the municipal securities.
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    \2\3An obligor is not only an industrial or commercial 
enterprise, but may include governmental and nonprofit entities as 
well. See the definition of issuer in Rule 15c2-12(e)(4), 17 CFR 
240.15c2-12(e)(4); Rule 3b-5, 17 CFR 240.3b-5, and Rule 131, 17 CFR 
230.131, under the Securities Act.
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    This definition is designed to make available to the municipal 
securities market, at the time of issuance and on an annual basis, 
information on persons who ultimately are responsible for the cash flow 
servicing the municipal securities. The proposed definition recognizes 
that, with portfolio and concentration risk diversification, the 
``significant obligor'' of an issuer of a municipal security may not be 
constant, but may change from year to year.
    Comment is requested on whether 20 percent is an appropriate 
threshold level of cash flow to require disclosure concerning a 
significant obligor, or whether a different threshold, such as 10, 15, 
or 30 percent, should be used. Comment also is requested on whether 
this standard should differ for a final official statement and annual 
financial information. Finally, comment is requested as to whether the 
issuer's obligation to provide information concerning significant 
obligors should be conditioned on a minimum threshold, for example, 
payment obligations in excess of $1,000,000, or some other dollar 
threshold.

D. Exemptions

    Consistent with other provisions of Rule 15c2-12, the proposed 
amendments are limited in application to primary offerings of municipal 
securities with an aggregate principal amount of $1,000,000 or more.
    The proposed amendments include a new exemption in paragraph 
(d)(2), applicable to paragraph (b)(5). This new exemption would 
provide that, in addition to the $1,000,000 threshold applicable to 
Rule 15c2-12 generally, Offerings would be exempt from the operation of 
paragraph (b)(5) if, at such time as the issuer of municipal securities 
delivers the securities to the Participating Underwriter, the issuer: 
(a) will have less than $10,000,000 in aggregate amount of municipal 
securities outstanding, including the offered securities; and (b) the 
issuer will have issued less than $3,000,000 in aggregate amount of 
municipal securities in the most recent 48 months preceding the 
Offering. This exemption is designed to exclude from the application of 
paragraph (b)(5) small issuers that do not frequently issue municipal 
securities. Comment is requested on the use of these thresholds. 
Comment also is requested on whether a different or additional 
threshold should be applicable to paragraph (b)(5). Such a threshold 
could be based on the number of holders of municipal securities, or on 
the number of holders falling below a certain level at the end of a 
fiscal year, for example, 300 or 500 debt holders. Comment is requested 
on whether issuers of conduit securities that are non-governmental 
private activity bonds should be excepted from this exemption, or if 
lower or different thresholds should be used for such issuers. Comment 
also is requested on whether the exemption in proposed paragraph (d)(2) 
is appropriate for conduit financings, in light of the fact that, in 
many instances, issuing authorities are created for the sole purpose of 
issuing bonds to finance a particular facility.
    The proposed amendments also include a new exemption in paragraph 
(d)(3), exempting from the application of paragraph (c) of the rule a 
primary offering of municipal securities (1) not sold in an Offering to 
which paragraph (b)(5) applied, or (2) sold in an Offering exempt under 
paragraph (d)(1) or paragraph (d)(2). The purpose of this exemption is 
to permit the recommendation in the secondary market of securities that 
were not subject to paragraph (b)(5), either because they were sold in 
a primary offering of municipal securities with an aggregate principal 
amount of less than $1,000,000, or because they came within the 
existing exemptions under newly designated paragraph (d)(1) for limited 
placements, short-term securities, and securities with demand features, 
or within the exemption in new paragraph (d)(2) for small, infrequent 
issuers. Comment is requested on this exemption. Specifically, comment 
is requested on whether paragraph (c) of the proposed amendments should 
be made applicable to all outstanding issues of municipal securities. 
The existing transactional exemption in newly designated paragraph (d) 
would apply to the amendments.

E. Transitional Provision

    Newly designated paragraph (g) of the rule would contain a 
transitional provision for the proposed amendments. The provisions of 
paragraph (b)(5) would apply to a Participating Underwriter that had 
contractually committed to act as an underwriter in an Offering on or 
after the effective date of the rule. Comment is requested on whether 
this transitional provision is appropriate, and on whether the 
effective date of the proposed amendments should be delayed.

III. Nationally Recognized Municipal Securities Information 
Repositories

    While the term ``NRMSIR'' currently is used in paragraph (b)(4) of 
Rule 15c2-12, it is not defined in the rule. In proposing the rule, 
however, the Commission requested comment on the creation of one or 
more repositories for municipal securities disclosure documents.24 
At that time, the Commission strongly supported the development of one 
or more central repositories.25 Of the more than sixty comment 
letters that the Commission received, forty-five expressed views 
regarding the concept of repositories. Forty of the forty-five 
commenters expressed support for some form of a central 
repository.26
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    \2\4Proposing Release, supra note 6 at 54 FR 37791.
    \2\5Adopting Release, supra note 6 at 54 FR 28807. The 
Commission recognized the benefits that would accrue from the 
creation of competing private repositories. Id.
    In 1989, the MSRB announced its intention to establish and 
manage a central repository to provide for the collection and 
dissemination of official statements and refunding documents. Letter 
from John W. Rowe, Chairman, MSRB, to Jonathan G. Katz, Secretary, 
SEC (June 1, 1989). The MSRB developed its Municipal Securities 
Information Library (``MSIL'') system, which presently collects 
information and disseminates it electronically to market 
participants and information vendors. Securities Exchange Act 
Release No. 29298 (June 13, 1991), 56 FR 28194.
    In January 1993, the MSRB began operating its Continuing 
Disclosure Information pilot system (``CDI System''), which is a 
central repository for voluntarily submitted official continuing 
disclosure documents relating to outstanding municipal securities 
issues. Securities Exchange Act Release No. 30556 (April 6, 1992), 
57 FR 12534. The CDI System operates as part of MSIL, and currently 
is capable of accepting documents of three or fewer pages in length.
    Neither MSIL nor the CDI System is a NRMSIR. In considering the 
approval of MSRB rule G-36, which requires underwriters to provide 
the MSRB with copies of final official statements and certain other 
information prepared by issuers, the Commission noted that the MSRB 
did not intend to seek NRMSIR status. The Commission noted that if 
the MSRB sought NRMSIR status, it would consider the competitive 
implications of such a request. See Securities Exchange Act Release 
No. 28081 (June 1, 1990), 55 FR 23333, 23337 n.26.
    \2\6See Adopting Release, supra note 6 at 54 FR 28807.
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    NRMSIRs were discussed in the Adopting Release, where the 
Commission noted that in determining whether a particular entity is a 
NRMSIR, it would look, among other things, at whether the repository: 
(1) Is national in scope; (2) maintains current, accurate information 
about municipal offerings in the form of official statements; (3) has 
effective retrieval and dissemination systems; (4) places no limits on 
the issuers from which it will accept official statements or related 
information; (5) provides access to the documents deposited with it to 
anyone willing and able to pay the applicable fees; and (6) charges 
reasonable fees.27 The Joint Statement has further refined the 
concept to suggest the designation of state-based repositories, and the 
creation of an index, maintained by the MSRB, for market participants 
to learn of the availability of information provided to the MSRB or to 
a NRMSIR.28
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    \2\7See Adopting Release, supra note 6 at 54 FR 28808, n.65.
    \2\8The Joint Statement suggested that in order to be recognized 
as a NRMSIR, a repository should, among other things: (1) maintain 
current, accurate information about municipal securities in the form 
of annual financial reports, operating data, and other current 
information; (2) have an effective retrieval and dissemination 
system; (3) place no limits on the issuers from which it will accept 
information unless it is a single-state repository; (4) provide 
access to the documents to anyone willing and able to pay the 
applicable fee; (5) charge reasonable fees; (6) collect information 
on at least a state-wide basis; and (7) provide for timely 
notification to an MSRB index of names of issuers about which it is 
to receive information. Joint Statement, supra note 15 at Addendum.
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    The proposed amendments do not define the term NRMSIR. The 
Commission requests comment on whether NRMSIR should be defined in the 
rule, with specific standards established for NRMSIRs. If standards 
were established, the Commission believes the following standards are 
appropriate. It requests comment on these standards.
    NRMSIRs should maintain current, accurate information about 
municipal securities, including final official statements, the issuers' 
annual financial information, and issuers' notices of material events. 
Moreover, NRMSIRs should have effective systems for the timely 
collection, indexing, storage, and retrieval of these documents.
    NRMSIRs should be capable of national dissemination of final 
official statements, annual financial information, and notices of 
material events through electronic dissemination systems, in response 
to telephone inquiries, and hard copy delivery via facsimile, by mail, 
and by messenger service. Specific dissemination systems and standards 
should be delineated in order to emphasize the importance of effective 
information dissemination. Timely public availability upon receipt of 
information by a NRMSIR also is important. For example, final official 
statements and annual financial information could be made available by 
the next business day after their receipt by a NRMSIR, and notices of 
material events could be made available within fifteen minutes of their 
receipt by a NRMSIR. Comment is requested on the provision by NRMSIRs 
of electronic dissemination of information, and on the suggested timing 
requirements for availability of documents for dissemination.
    Repositories created and operated by states would be required to 
accept submissions from all issuers within their own states, and would 
not be permitted to accept documents from issuers in any other state. 
National dissemination requirements, however, would be applicable to 
single-state repositories. All other repositories would not be 
permitted to limit the issuers from which they will accept final 
official statements, annual financial information, and reports of 
material events. Comment is requested on whether state-based 
repositories can serve as an effective means to disseminate information 
to the market for a nationally traded security, so the issuer of that 
security can meet its disclosure obligations using a state-based 
repository. Comment also is requested on whether a significant number 
of states are willing to make the necessary financial commitment to 
create a state-based system. NRMSIRs would not be permitted to 
discriminate on the basis of the requestor in providing documents, and 
would be required to charge reasonable fees.
    Finally, in order to implement the indexing system suggested by the 
Joint Statement, a NRMSIR would be required to provide notice to the 
MSRB of its designation by an issuer as the repository for the issuer's 
final official statements, annual financial information, and notices of 
material events. This would allow the creation of an index by the MSRB 
for informing the municipal securities market of where an issuer is 
sending its secondary market disclosure. Comment is requested on the 
feasibility of expanding this provision to require a NRMSIR to inform 
the MSRB whenever it receives information from an issuer. Comment also 
is requested on whether documents should be required to be placed with 
the MSRB either in addition to or in lieu of a NRMSIR.29
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    \2\9See supra note 25 (regarding the competitive implications of 
the MSRB's seeking NRMSIR status).
---------------------------------------------------------------------------

    The MSRB has expressed concern that permitting issuers to place 
documents with multiple NRMSIRs may result in repositories receiving 
information at different times. This raises the issue of when the 
information becomes ``public,'' and thus when dealers are considered 
accountable for it.30 Comment is requested on these issues, and, 
in particular, on how to assure that NRMSIRs simultaneously receive 
secondary market disclosure. Comment also is requested on whether any 
proposal should require that secondary market disclosure is deposited 
with all designated NRMSIRs. In addition, comment is requested on 
whether the proposal should designate specific methods for sending 
information to NRMSIRs.
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    \3\0Letter from Christopher A. Taylor, Executive Director, MSRB, 
to Catherine McGuire, Chief Counsel, Division of Market Regulation, 
SEC (December 20, 1993).
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    Since the Commission adopted Rule 15c2-12, the Division of Market 
Regulation has issued three letters taking no-action positions 
recognizing national information vendors as NRMSIRS, based on the 
standards set out in the Adopting Release.31 The Commission 
anticipates that if standards for NRMSIRs were adopted, these NRMSIRs, 
as well as new NRMSIRs, would be required to have their operations meet 
the new standards. Comment is requested on the ability and willingness 
of both potential NRMSIRs, and those presently operating under no-
action letters, to meet the standards described. Furthermore, comment 
is requested as to whether designation by Commission order, pursuant to 
standards set out in Rule 15c2-12, is an appropriate method for 
recognizing NRMSIRs, or whether it is appropriate to continue the 
current no-action policies of the Division.
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    \3\1Letters from Richard G. Ketchum, Director, Division of 
Market Regulation, SEC, to: Joseph V. Riccobono, Executive Vice-
President, American Banker-Bond Buyer (Jan. 4, 1990); J. Kevin 
Kenny, President, Chief Executive Officer, J.J. Kenny Co. (Jan. 4, 
1990); and Michael R. Bloomberg, President, Bloomberg, L.P. (Jan. 
11, 1990).
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IV. Application of the Tower Amendment

    With the passage of the Securities Acts Amendments of 1975 (``1975 
Amendments''), Congress provided for a limited regulatory scheme for 
municipal securities.32 Prior to the passage of the 1975 
Amendments, municipal issuers were exempt from the registration and 
continuous reporting provisions of both the Securities Act and the 
Exchange Act. While municipal issuers continued to be exempt from all 
but the antifraud provisions of the federal securities laws, the 1975 
Amendments required the registration of municipal securities brokers 
and dealers,33 and established the MSRB,34 granting it the 
authority to promulgate rules governing the sale of municipal 
securities.
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    \3\2The Securities Acts Amendments of 1975, Pub. L. 94-29, 89 
Stat. 97 (June 4, 1975).
    \3\315 U.S.C. 78o-4(a)(1).
    \3\415 U.S.C. 78o-4(b)(1).
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    In so crafting the 1975 Amendments, Congress struck a balance 
between investor protection and intergovernmental comity. This concern 
is reflected in Section 15B(d)(1) of the Exchange Act, which prohibits 
the MSRB from requiring ``any issuer of municipal securities, directly 
or indirectly through a purchaser or prospective purchaser of 
securities from the issuer, to file with the Commission or the Board 
prior to the sale of such securities by the issuer any application, 
report, or document, in connection with the issuance, sale, or 
distribution of such securities.''35 While narrowly tailoring the 
authority of the MSRB to require that disclosure documents be provided 
to investors,36 Congress was careful to preserve the authority of 
the Commission under Section 15(c)(2) of the Exchange Act.37
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    \3\515 U.S.C. 78 o-4(d)(1).
    \3\6The so-called ``Tower Amendment,'' adding section 15B(d)(2), 
15 U.S.C. 78o-4(d)(2) to the Exchange Act, prohibits the MSRB from 
requiring municipal issuers, directly or indirectly, through 
municipal securities broker-dealers or otherwise, to furnish the 
MSRB or prospective investors with any documents, including official 
statements. The MSRB specifically is permitted, however, to require 
that official statements or other documents that are available from 
sources other than the issuer, such as the underwriter, be provided 
to investors.
    \3\715 U.S.C. 78o(c)(2).
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    Moreover, Section 15B(d)(2) expressly indicates that ``[n]othing in 
this paragraph shall be construed to impair or limit the power of the 
Commission under any provision of this title.''38 Thus, while 
prohibiting the Commission from requiring municipal issuers to file 
reports or documents prior to issuing securities in Section 
15B(d)(1),39 Congress expanded the Commission's authority to adopt 
rules reasonably designed to prevent fraud. The Commission believes 
that the proposed amendments to Rule 15c2-12 are consistent with its 
Congressional mandate to adopt rules reasonably designed to prevent 
fraud in the municipal securities market.40
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    \3\815 U.S.C. 78o-4(d)(2).
    \3\915 U.S.C. 78o-4(d)(1).
    \4\0Rule 15c2-12 was adopted pursuant to the Commission's 
authority under Exchange Act Sections 2, 3, 10, 15, 15B, and 23; 15 
U.S.C. 78b, 78c, 78j, 78o, 78o-4, 78q, and 78w.
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V. Effects on Competition and Regulatory Flexibility Act 
Considerations

    Section 23(a)(2) of the Exchange Act\41\ requires the Commission, 
in adopting rules under the Act, to consider the anticompetitive 
effects of those rules, if any, and to balance that impact against the 
regulatory benefits gained in terms of furthering the purposes of the 
Exchange Act. The Commission preliminarily is of the view that adoption 
of the proposed amendments to Rule 15c2-12 would not impose any burden 
on competition not necessary or appropriate in furtherance of the 
purposes of the Exchange Act. The Commission requests comment, however, 
on any competitive burdens that might result from amendment of the 
rule. Moreover, while the amendments apply equally to all brokers, 
dealers, and municipal securities dealers, the Commission is interested 
in receiving comments on the extent to which the proposed dollar 
threshold in the new exemption in paragraph (e) would burden one 
segment of the industry more than another.
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    \4\115 U.S.C. 78w(a)(2).
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    In addition, the Commission has prepared an initial regulatory 
flexibility analysis (``IRFA''), pursuant to the requirements of the 
Regulatory Flexibility Act 42 regarding the proposed amendments to 
Rule 15c2-12. The IRFA indicates that the amendments to the rule could 
impose some additional costs on small broker-dealers and municipal 
issuers. Nonetheless, the Commission is of the view that many of the 
substantive requirements of the rule amendments already are observed by 
broker-dealers and issuers as a matter of business practice, or to 
fulfill their existing obligations under the general antifraud 
provisions of the federal securities laws. The Commission requests 
comment on the extent to which current practice deviates from the 
requirements of the proposed amendments, and the extent to which 
additional costs may be imposed on small broker-dealers and municipal 
issuers if the amendments are adopted as proposed.
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    \4\25 U.S.C. 604.
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    A copy of the IRFA may be obtained from Janet W. Russell-Hunter, 
Esq., Attorney, Office of Chief Counsel, Division of Market Regulation, 
Securities and Exchange Commission, 450 Fifth Street, NW., Mail Stop 7-
10, Washington, DC 20549, (202) 504-2418.

List of Subjects in 17 CFR part 240

    Reporting and recordkeeping requirements, Securities

Text of Proposed Amendments to Rule 15c2-12

    In accordance with the foregoing, title 17, chapter II of title 17 
of the Code of Federal Regulations is proposed to be amended as 
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    2. Section 240.15c2-12 is amended by adding a Preliminary Note 
preceding paragraph (a); adding paragraph (b)(5); redesignating 
paragraph (c) through paragraph (f) as paragraph (d) through paragraph 
(g); adding paragraph (c); revising newly designated paragraph (d) and 
paragraph (f)(3); adding paragraph (f)(9); and adding one sentence to 
the end of newly designated paragraph (g) to read as follows:


Sec. 240.15c2-12  Municipal securities disclosure.

    Preliminary Note: For a discussion of disclosure obligations 
relating to municipal securities, issuers, brokers, dealers, and 
municipal securities dealers should refer to Securities Act Release 
No. 7049, Exchange Act Release No. 33741, FR-42 (March 9, 1994). For 
a discussion of the obligations of underwriters to have a reasonable 
basis for recommendations of municipal securities, brokers, dealers, 
and municipal securities dealers should refer to Securities Exchange 
Act Release No. 26100 (Sept. 22, 1988) and Securities Exchange Act 
Release No. 26985 (June 28, 1989).
* * * * *
    (b) Requirements. * * *
    (5)(i) A Participating Underwriter shall not purchase or sell 
municipal securities in connection with an Offering unless the 
Participating Underwriter has reasonably determined that the issuer or 
its designated agent has undertaken in a written agreement or contract 
for the benefit of holders of such securities, to provide to a 
nationally recognized municipal securities information repository:
    (A) At least annually, current financial information concerning the 
issuer of the municipal securities and any significant obligors, 
including annual audited financial statements and pertinent operating 
information; and
    (B) In a timely manner, notice of any of the following events, if 
material:
    (1) Principal and interest payment delinquencies;
    (2) Non-payment related defaults;
    (3) Unscheduled draws on debt service reserves reflecting financial 
difficulties;
    (4) Unscheduled draws on credit enhancements reflecting financial 
difficulties;
    (5) Substitution of credit or liquidity providers, or their failure 
to perform;
    (6) Adverse tax opinions or events affecting the tax-exempt status 
of the security;
    (7) Modifications to rights of security holders;
    (8) Bond calls;
    (9) Defeasances;
    (10) Matters affecting collateral; and
    (11) Rating changes.
    (ii) Such written agreement or contract for the benefit of holders 
of such securities shall also specify:
    (A) The accounting principles pursuant to which the audited 
financial statements will be prepared;
    (B) The financial and pertinent operating information to be 
provided on an annual basis, in addition to audited financial 
statements; and
    (C) The time within which the annual information for the preceding 
year will be provided to the repository.
    (c) Recommendations without specified information. As a means 
reasonably designed to prevent fraudulent, deceptive, or manipulative 
acts or practices, it shall be unlawful for any broker, dealer, or 
municipal securities dealer to recommend the purchase or sale of a 
municipal security unless such broker, dealer, or municipal securities 
dealer has reviewed the information the issuer of the municipal 
security has undertaken to provide pursuant to paragraph (b)(5) of this 
section.
    (d) Exemptions. (1) This section shall not apply to a primary 
offering of municipal securities in authorized denominations of 
$100,000 or more, if such securities:
    (i) Are sold to no more than thirty five persons each of whom the 
Participating Underwriter reasonably believes:
    (A) Has such knowledge and experience in financial and business 
matters that it is capable of evaluating the merits and risks of the 
prospective investment; and
    (B) Is not purchasing for more than one account or with a view to 
distributing the securities; or
    (ii) Have a maturity of nine months or less; or
    (iii) At the option of the holder thereof may be tendered to an 
issuer of such securities or its designated agent for redemption or 
purchase at par value or more at least as frequently as every nine 
months until maturity, earlier redemption, or purchase by an issuer or 
its designated agent.
    (2) Paragraph (b)(5) of this section shall not apply to an Offering 
of municipal securities if, at such time as the issuer of municipal 
securities delivers the securities to the Participating Underwriters:
    (i) The issuer will have less than $10,000,000 in aggregate amount 
of municipal securities outstanding, including the offered securities; 
and
    (ii) The issuer will have issued less than $3,000,000 in aggregate 
amount, in the 48 months preceding the Offering.
    (3) The provisions of paragraph (c) of this section shall not apply 
to a primary offering of municipal securities:
    (i) Not sold in an Offering to which paragraph (b)(5) of this 
section applied; or
    (ii) Sold in an Offering exempt under paragraph (d)(1) or paragraph 
(d)(2) of this section.
* * * * *
    (f) Definitions. * * *
    (3) The term final official statement means a document or set of 
documents prepared by the issuer of municipal securities or its 
representatives setting forth, among other matters, information 
concerning the terms of the proposed issue of securities, and financial 
and operating information adequate to provide a fair presentation of 
the issuer's and any significant obligor's current financial condition 
and results of operations, and cash flows, including audited financial 
statements, that is complete as of the date delivered to the 
Participating Underwriter.
* * * * *
    (9) The term significant obligor means any person who, directly or 
indirectly, is the source of 20 percent or more of the cash flow 
servicing the obligations on the municipal securities.
    (g) Transitional Provision. * * * Paragraph (b)(5) of this section 
shall not apply to a Participating Underwriter that has contractually 
committed to act as an underwriter in an Offering of municipal 
securities before [effective date of final rule].

    By the Commission.

    Dated: March 9, 1994.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-5927 Filed 3-16-94; 8:45 am]
BILLING CODE 8010-01-P