[Federal Register Volume 59, Number 221 (Thursday, November 17, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-28448]


[[Page Unknown]]

[Federal Register: November 17, 1994]


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Part V





Securities and Exchange Commission





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17 CFR Part 240




Municipal Securities Disclosure; Final Rule
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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-34961; File No. S7-5-94]
RIN 3235-AG13

 
Municipal Securities Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Final Rule.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting amendments to Rule 15c2-12 under the 
Securities Exchange Act of 1934 (``Exchange Act'') to 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. The amendments prohibit a 
broker, dealer, or municipal securities dealer (``Participating 
Underwriter'') from purchasing or selling municipal securities unless 
the Participating Underwriter has reasonably determined that an issuer 
of municipal securities or an obligated person has undertaken in a 
written agreement or contract for the benefit of holders of such 
securities to provide certain annual financial information and event 
notices to various information repositories; and prohibit a broker, 
dealer, or municipal securities dealer from recommending the purchase 
or sale of a municipal security unless it has procedures in place that 
provide reasonable assurance that it will receive promptly any event 
notices with respect to that security.

DATES: Effective Date: This rule is effective on July 3, 1995 except 
for Sec. 240.15c2-12(c) which is effective on January 1, 1996.
    Compliance Date: Sections 240.15c2-12(b)(5)(i)(A) and 240.15c2-
12(b)(5)(i)(B) shall not apply with respect to fiscal years ending 
prior to January 1, 1996; and Secs. 240.15c2-12(d)(2)(ii) and 240.15c2-
12(d)(2)(iii) shall not apply to an Offering of municipal securities 
commencing prior to January 1, 1996.

FOR FURTHER INFORMATION CONTACT: Catherine McGuire, Chief Counsel, 
Janet W. Russell-Hunter, Attorney, or Paula R. Jenson, Senior Counsel 
(concerning the rule and release generally), (202) 942-0073, Office of 
Chief Counsel, Division of Market Regulation, Mail Stop 7-10; Gautam S. 
Gujral, Attorney (concerning information repositories) (202) 942-0175, 
Office of Market Supervision, Division of Market Regulation, Mail Stop 
5-1, and David A. Sirignano, Senior Legal Adviser to the Director (202) 
942-2870, or Amy Meltzer Starr, Attorney (concerning annual financial 
information, obligated persons, and material events generally), (202) 
942-1875, Division of Corporation Finance, Mail Stop 7-6 Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

I. Introduction and Summary

    The Commission has long been concerned with disclosure in both the 
primary and secondary markets for municipal securities.1 As part 
of the Securities Acts Amendments of 1975, Congress established a 
limited regulatory scheme for the municipal securities market. This 
limited regulatory scheme included mandatory registration of municipal 
securities brokers and dealers, and the creation of the Municipal 
Securities Rulemaking Board (``MSRB''). In 1989, acting in response to 
consistently slow dissemination of information in connection with 
primary offerings of municipal securities, the Commission, pursuant to 
its authority under Exchange Act Section 15(c)(2),2 adopted Rule 
15c2-123 and an accompanying interpretation concerning the due 
diligence obligations of underwriters of municipal securities.4 In 
1993, the Commission's Division of Market Regulation conducted a 
comprehensive review of many aspects of the municipal securities 
market, including secondary market disclosure.5 Findings in the 
September, 1993 Staff Report on the Municipal Securities Market 
(``Staff Report'') regarding the growing participation of individual 
investors, who may not be sophisticated in financial matters, as well 
as the proliferation of complex derivative municipal securities, 
underscored the need for improved disclosure practices in both the 
primary and secondary municipal securities markets.6 Information 
about the issuer and other obligated persons is as critical to the 
secondary market,7 where little information about municipal 
issuers and obligated persons is regularly disseminated, as it is in 
primary offerings, where, as a general matter, good disclosure 
practices exist. As one industry group testified, today ``secondary 
market information is difficult to come by even for professional 
municipal analysts, to say nothing of retail investors.''8
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    \1\Both the Securities Act and the Exchange Act were enacted 
with broad exemptions for municipal securities from all of their 
provisions except the antifraud provisions of the Securities Act 
Section 17(a) and Exchange Act Section 10(b). Municipal securities 
received special exemptions not only based on considerations of 
federal-state comity, but also due to the lack of perceived abuses, 
at the time of enactment, in the municipal securities market as 
compared with the corporate market. Furthermore, until recently, the 
typical purchasers of municipal securities were institutional 
investors with financial expertise.
    \2\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,'' and authorizes the Commission, by rules and regulations, 
to define and prescribe means reasonably designed to prevent such 
acts and practices. Exchange Act Section 15(c)(2), 15 U.S.C. 
78o(c)(2). Rule 15c2-12 also was adopted pursuant to the 
Commission's authority under Exchange Act Section 2, 3, 10, 15, 15B, 
and 23; 15 U.S.C. 78b, 78c, 78j, 78o, 78o-4, 78q, and 78w.
    \3\17 CFR 240.15c2-12. Rule 15c2-12 was proposed for adoption in 
1988, and adopted in 1989. See Securities Exchange Act Release No. 
26100 (Sept. 22, 1988), 53 FR 37778 (``1988 Release''); Securities 
Exchange Act Release No. 26985 (June 28, 1989), 54 FR 28799 (``1989 
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 the rules of the MSRB.
    \4\The 1989 Release also stated that issuers are primarily 
responsible for the content of their disclosure documents, and may 
be held primarily liable under the federal securities laws for 
misleading disclosure. See 1989 Release at n. 84.
    \5\Since September, 1993, other initiatives related to the 
municipal securities market have been taken. On April 7, 1994, the 
Commission approved changes to MSRB rule G-19 concerning suitability 
of recommendations, and rule G-8 concerning recordkeeping. 
Securities Exchange Act Release No. 33869 (April 7, 1994), 59 FR 
17632. These changes are designed to ensure that dealers, before 
making recommendations to customers, take appropriate steps to 
determine that the transaction is suitable. Concurrently, the 
Commission approved MSRB rule G-37 relating to the linkage between 
political contributions and the municipal securities business. 
Securities Exchange Act Release No. 33868 (April 7, 1994), 59 FR 
17621. The rule seeks to end ``pay to play'' abuses in the municipal 
securities market by prohibiting dealers from conducting certain 
types of business with an issuer within two years after any 
contribution by the dealer or certain affiliated persons of the 
issuer who could influence the awarding of municipal securities 
business. On June 20, 1994, the MSRB filed with the Commission a 
proposal to amend MSRB rule G-14 concerning reports of sales or 
purchases, and procedures for reporting inter-dealer transactions. 
Securities Exchange Act Release No. 34458 (July 28, 1994), 59 FR 
39803. The proposed rule change is a first step to increase 
transparency in the municipal securities market by collecting and 
disseminating information on interdealer transactions. On December 
19, 1993, the Commission issued a release proposing for public 
comment amendments to the rule regulating money market funds, Rule 
2a-7 under the Investment Company Act of 1940. Investment Company 
Act Release No. 19959 (Dec. 28, 1993), 58 FR 68585.
    \6\By 1993, individual investors, including those holding 
through mutual funds and money market funds, held approximately 76% 
of municipal debt outstanding, as compared with 44% in 1983. The 
Bond Buyer, ``Holders of Municipal Debt,'' (July 1, 1994) at 5.
    \7\The municipal securities market is not the only market for 
debt securities that suffers from information inefficiencies. For 
that reason, the Commission also is exploring means to increase the 
amount of information concerning issuers of corporate debt 
securities. See Securities Exchange Act Release No. 34139 (June 7, 
1994), 59 FR 29453.
    \8\Statement of Gerald McBride, Chairman, Municipal Securities 
Division, Public Securities Association, Before the House Committee 
on Energy and Commerce, Telecommunications and Finance Subcommittee 
(October 7, 1993) at 5.
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    Notwithstanding voluntary industry initiatives to improve 
disclosure, particularly primary market disclosure, the Staff Report 
recommended that the Commission use its interpretive authority to 
provide guidance regarding the disclosure obligations of municipal 
securities participants under the antifraud provisions of the federal 
securities laws, and that the Commission amend Rule 15c2-12 to prohibit 
municipal securities dealers from recommending outstanding municipal 
securities unless the issuer has committed to make available ongoing 
information regarding its financial condition. In order to assist 
issuers, brokers, dealers, and municipal securities dealers in meeting 
their obligations under the antifraud provisions, in March, 1994, the 
Commission published the Statement of the Commission Regarding 
Disclosure Obligations of Municipal Securities Issuers and Others 
(``Interpretive Release''),9 which outlined its views with respect 
to the disclosure obligations of market participants under the 
antifraud provisions of the federal securities laws in connection with 
both primary and secondary market disclosure.
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    \9\Securities Act Release No. 7049 (March 9, 1994), 59 FR 12748.
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    Concurrent with the publication of the Interpretive Release, the 
Commission published Securities Exchange Act Release No. 33742 
(``Proposing Release''),10 which requested comment on amendments 
to Rule 15c2-12 (``Proposed Amendments'') designed to enhance the 
quality, timing, and dissemination of disclosure in the municipal 
securities market by placing certain requirements on brokers, dealers, 
and municipal securities dealers. In proposing the amendments, the 
Commission intended to further deter fraud by preventing the 
underwriting and recommendation of transactions in municipal securities 
about which little or no current information exists. Brokers, dealers, 
and municipal securities dealers serve as the link between the issuers 
whose securities they sell and the investors to whom they recommend 
securities. Investors, especially individual investors, place their 
reliance on these securities professionals for their recommendations of 
municipal securities.
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    \1\0Securities Exchange Act Release No. 33742 (March 9, 1994), 
59 FR 12759. Also on March 9, the Commission published Securities 
Exchange Act Release No. 33743, which proposed the adoption of Rule 
15c2-13. Proposed Rule 15c2-13 would have required brokers, dealers, 
and municipal securities dealers to disclose mark-up information in 
riskless principal transactions in municipal securities; and to 
disclose when a particular municipal security is not rated by a 
nationally recognized statistical rating organization (``NRSRO''). 
Due to the recent development of proposals by the MSRB and market 
participants to make pricing information available to investors, the 
Commission has determined to defer the riskless principal mark-up 
proposal for six months. In addition, the portion of proposed Rule 
15c2-13 that would require disclosure if a municipal security is not 
rated by an NRSRO has been deferred, and will be withdrawn if the 
MSRB acts to adopt similar amendments to its confirmation rule, Rule 
G-15. See Securities Exchange Act Release No. 34962 (November 10, 
1994).
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    The amendments to Rule 15c2-12 ensure that brokers, dealers, and 
municipal securities dealers will review the secondary market 
disclosure practices of issuers and other obligated persons at the time 
of an offering of municipal securities.13 This scrutiny at the 
time of initial issuance of municipal securities will result in the 
dissemination of important information by issuers and other obligated 
persons throughout the term of the municipal securities. As a result of 
the amendments, brokers, dealers, and municipal securities dealers will 
be better able to satisfy their obligation under the federal securities 
laws to have a reasonable basis on which to recommend municipal 
securities, as well as their obligations under the rules of the MSRB.
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    \1\3Participating Underwriters generally maintain a market in an 
issue of municipal securities in the period following an offering. 
Failure by a Participating Underwriter to receive assurances with 
respect to undertakings to provide secondary market disclosure will 
increase the difficulty of its formulation of a reasonable basis on 
which to recommend a municipal security during this period of 
secondary market trading.
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    The availability of secondary market disclosure to all municipal 
securities market participants will enable investors to better protect 
themselves from misrepresentation or other fraudulent activities by 
brokers, dealers, and municipal securities dealers. A lack of 
consistent secondary market disclosure impairs investors' ability to 
acquire information necessary to make intelligent, informed investment 
decisions, and thus, to protect themselves from fraud.
    In the Proposing Release, comment was requested on each aspect of 
the Proposed Amendments, as well as on standards for recognition of 
nationally recognized municipal securities information repositories 
(``NRMSIRs''). In response to the request for comments, the Commission 
received over 390 comment letters representing over 475 groups and 
individuals. The commenters represented all types of participants in 
the municipal securities market, including issuers, underwriters, 
investors, counsel, analysts, financial advisers, banks, insurance 
providers, disclosure services, and the MSRB.14 The comment 
letters presented a variety of thoughtful views on the issues raised by 
the Proposing Release.15 The Commission has determined to adopt 
amendments to Rule 15c2-12, with certain modifications that are 
designed to address concerns expressed by commenters.16 In 
addition, the suggestions of a group of industry participants that 
cooperated to assist the Commission in its efforts to improve 
disclosure in the municipal securities market have been 
valuable.17
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    \1\4Among others, the Commission received 232 letters 
representing the views of 242 issuers and issuer associations; 52 
letters representing the views of 57 brokers, dealers, and municipal 
securities dealers; and 8 letters representing the views of 8 
investors and investor associations.
    \1\5The Commission has given consideration to the views of some 
commenters who questioned the Commission's authority to adopt the 
amendments to Rule 15c2-12. See, e.g., Letter of ABA Business Law 
Section; Letter of Hawkins Delafield & Wood; Letter of NABL. The 
Commission believes that it has ample authority to adopt the 
amendments.
    \1\6The comment letters and a summary of the comment letters 
prepared by Commission staff are contained in Public File No. S7-5-
94. See also Public File No. S7-4-94.
    \1\7See Joint Response to the Securities Exchange Commission on 
Releases Concerning Municipal Securities Market Disclosure prepared 
by American Bankers Association's Corporate Trust Committee, 
American Public Power Association, Association of Local Housing 
Finance Agencies, Council of Infrastructure Financing Authorities, 
Government Finance Officers Association, National Association of 
Counties, National Association of State Auditors, Comptrollers and 
Treasurers, National Council of State Housing Agencies, National 
Federation of Municipal Analysts, Public Securities Association 
(``Joint Response'').
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    Commenters across a broad range of market participants supported 
the goal of improved secondary market disclosure for the municipal 
securities market, but emphasized that flexibility is necessary, given 
the diversity that exists in the municipal securities market.18 As 
adopted, the amendments to Rule 15c2-12 will further that goal by 
prohibiting underwritings unless there are commitments to provide 
ongoing disclosure, while, at the same time, providing issuers with 
significant flexibility to determine the appropriate nature of that 
disclosure. The amendments retain the requirement that a Participating 
Underwriter ascertain that an issuer or obligated person has undertaken 
to provide secondary market disclosure, including notices of material 
events, to information repositories, but rely on the parties to the 
transaction to establish who will provide secondary market disclosure, 
and what information is material to an understanding of the security 
being offered.
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    \1\8See, e.g., Joint Response; Letter of Chapman and Cutler; 
Letter of Florida Division of Bond Finance of the State Board of 
Administration; Letter of J.P. Morgan Securities, Inc.; Letter of 
National Association of Bond Lawyers (``NABL''); Letter of Orrick, 
Herrington & Sutcliffe (``Orrick Herrington''); Letter of Public 
Securities Association (``PSA'').
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    The amendments build upon and reinforce current market practices 
that have provided, as a general matter, good quality disclosure in 
official statements, and extend those practices to the secondary 
market. As is currently the practice, under the amendments, the 
participants in an underwriting would continue to determine which 
persons are material to an understanding of the Offering. Information 
concerning those persons would be included in the final official 
statement. Financial information and operating data that is material to 
an offering at the outset generally remains material throughout the 
life of the securities. Under the amendments, that information would be 
provided on an annual basis. Put simply, the amendments reflect the 
belief that purchasers in the secondary market need the same level of 
financial information and operating data in making investment decisions 
as purchasers in the underwritten offering.
    The Proposed Amendments would have prohibited a broker, dealer, or 
municipal securities dealer from recommending the purchase or sale of a 
municipal security, unless it had reviewed the annual and event 
information provided pursuant to the undertaking. Commenters 
anticipated that such a prohibition would have a considerable negative 
impact on secondary market liquidity. Furthermore, brokers, dealers, 
and municipal securities dealers considered the proposed recommendation 
prohibition to be problematic from a compliance perspective. The 
Commission has modified this provision to require instead that brokers, 
dealers, and municipal securities dealers recommending municipal 
securities in the secondary market have procedures to obtain material 
event notices. Because under existing law brokers, dealers, and 
municipal securities dealers are required to use information 
disseminated into the marketplace in forming a reasonable basis for 
recommending securities to investors, the rule does not impose 
mechanical review requirements on a trade-by-trade basis.
    The amendments contain an exemption to minimize the effect on small 
issuers. Offerings in which neither the issuer nor any obligor is 
obligated with respect to more than $10 million dollars in municipal 
securities outstanding following an offering will be exempt from the 
amendments, on the condition that there is a limited undertaking to 
provide upon request, or annually to a state information depository, at 
least the financial information or operating data they customarily 
prepare, and that is publicly available. In addition, the undertaking 
must meet the amendment's requirement regarding notices of material 
events.

II. Description of Amendments To Rule 15c2-12

A. Amendments With Respect to the Underwriting of Municipal Securities

    Under the amendments to Rule 15c2-12, a broker, dealer, or 
municipal securities dealer (``Participating Underwriter'')19 will 
be prohibited, subject to certain exemptions, 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''),20 unless the Participating Underwriter has 
made certain determinations.21 Specifically, the Participating 
Underwriter must reasonably determine that an issuer of municipal 
securities or an obligated person, either individually or in 
combination with other issuers of such municipal securities or other 
obligated persons,22 has undertaken in a written agreement or 
contract for the benefit of holders of such securities, to provide, 
either directly or indirectly through an indenture trustee or a 
designated agent, certain annual financial information and event 
notices to various information repositories.23
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    \1\9See Rule 15c2-12(a).
    \2\0The amendments also include an exemption for small and 
infrequent issuers. See Section II.D.1., infra.
    \2\1Rule 15c2-12(b)(5)(i).
    \2\2These concepts are discussed in Section II.A.1.b., infra.
    \2\3Information repositories are discussed in Section II.C., 
infra.
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    The ``reasonable determination'' required by the amendments to Rule 
15c2-12 must be made by the Participating Underwriter prior to its 
purchasing or selling municipal securities in connection with an 
Offering. A Participating Underwriter would, therefore, need to receive 
assurances from the issuer or obligated persons that such undertakings 
would be made before agreeing to act as an underwriter. A dealer could 
look to provisions in the underwriting agreement or bond purchase 
agreement that describe the undertakings for the benefit of bondholders 
made elsewhere, such as in a trust indenture, bond resolution, or 
separate written agreement.24 In a competitively bid offering, 
such assurances also might be found in a notice of sale. Of course, 
representations concerning commitments to provide secondary market 
disclosure, like any other key representations by an issuer, are 
subject to specific verification, such that a Participating Underwriter 
has a reasonable basis to believe that such representations are true 
and accurate. Thus, investigation of an issuer's or obligated person's 
undertakings to provide secondary market disclosure would be an element 
of the Participating Underwriter's professional review of offering 
documents.25
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    \2\4See Letter of Merrill Lynch, Pierce, Fenner & Smith 
(``Merrill Lynch'').
    \2\5As noted in the 1988 Release, the obligations of managing 
underwriters and underwriters participating in an offering differ. 
An underwriter participating in an offering need not duplicate the 
efforts of the managing underwriter, but must satisfy itself that 
the managing underwriter reviewed the accuracy of the information in 
the official statement in a professional manner and therefore had a 
reasonable basis for its recommendation. Underwriters participating 
in offerings, however, have a duty to notify the managing 
underwriter of any factors that suggest inaccuracies in disclosure, 
or signal the need for additional investigation. See 1988 Release at 
n. 87.
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    Because the amendments prohibit Participating Underwriters from 
purchasing or selling securities in the absence of undertakings in a 
written agreement or contract, such agreement or contract would have to 
be in place at the time the issuer delivers the securities to the 
Participating Underwriter.26 As discussed below, in conditioning 
the closing of an Offering on the existence of an agreement or 
contract, this provision of the amendments permits flexibility as to 
where undertakings for continuing disclosure are memorialized.27
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    \2\6See Letter of Kutak Rock; Letter of Section of Urban, State 
and Local Government Law, American Bar Association (``ABA Urban Law 
Section''); Letter of Colorado Municipal Bond Supervisory Board.
    \2\7In contrast to the requirement in Rule 15c2-12(b)(5) that 
Participating Underwriters reasonably determine that issuers or 
obligated persons have undertaken to provide secondary market 
disclosure prior to the time they ``purchase or sell'' municipal 
securities, Rule 15c2-12(b)(1) requires Participating Underwriters 
to obtain and review an official statement deemed final by the 
issuer (``DFOS'') prior to the time they ``bid for, purchase, offer, 
or sell'' securities. Thus, under Rule 15c2-12(b)(1), in a 
competitive underwriting, a Participating Underwriter must obtain 
and review the DFOS prior to placing a bid on an issue of municipal 
securities. Because the term ``offer'' encompasses the distribution 
of a preliminary official statement, as well as oral solicitations 
of indications of interest, in a negotiated underwriting, a 
Participating Underwriter is required to obtain and review the DFOS 
prior to the time it distributes the preliminary official statement 
to potential investors. If no offers are made, the Participating 
Underwriter is required to obtain and review the DFOS by the earlier 
of the time it agrees (whether in principle or by signing the bond 
purchase agreement) to purchase the bonds, or the first sale of 
bonds. See Mudge Rose Guthrie Alexander & Ferdon (April 4, 1990); 
Interpretive Release at Section III.C.6.
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    The amendments to the definition of final official statement will 
affect the obligations of Participating Underwriters under Rule 15c2-
12. Rule 15c2-12(b)(1) requires that a Participating Underwriter, prior 
to bidding for, purchasing, offering, or selling municipal securities, 
obtain and review a DFOS.28 The Commission expects that 
Participating Underwriters will review the DFOS with a view to 
ascertaining that it contains information satisfying the definition of 
final official statement in Rule 15c2-12.29 The Commission further 
expects that the quality of disclosure in the DFOS will improve in a 
manner that is commensurate with the changes in final official 
statement disclosure.30
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    \2\8Information regarding the offering price, interest rate, 
selling compensation, aggregate principal amount, principal amount 
per maturity, delivery dates, any other terms or provisions required 
by an issuer of such securities to be specified in a competitive 
bid, ratings, other terms of the securities depending on such 
matters, and the identity of the underwriters, may be omitted from 
the official statement reviewed by the Participating Underwriter for 
purposes of Rule 15c2-12(b)(1).
    \2\9Whether information is in fact known or not reasonably 
ascertainable at the time the Participating Underwriter must obtain 
and review the DFOS pursuant to the rule is best determined in the 
context of each offering by the issuer, the Participating 
Underwriter, and their respective counsel. See Public Securities 
Association (May 29, 1992)
    \3\0As a practical matter, the DFOS and the preliminary official 
statement (``POS'') are often the same document. See Mudge Rose 
Guthrie Alexander & Ferdon (April 4, 1990).
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    Rule 15c2-12(b)(2) requires, for all except competitively bid 
offerings, from the time a Participating Underwriter has reached an 
understanding with an issuer of municipal securities that it will act 
as a Participating Underwriter, until the final official statement is 
available, that the Participating Underwriter send, to any potential 
customer, no later than the next business day, a copy of the most 
recent POS, if any. The Commission expects that the Participating 
Underwriters' obligations with respect to dissemination of the POS will 
not change.
1. Determining the Required Scope of the Undertaking to Provide 
Secondary Market Disclosure
    Under the amendments as adopted, the financial information and 
operational data to be provided on an annual basis pursuant to the 
undertaking will mirror the financial information and operating data 
contained in the final official statement with respect to both the 
issuers and obligated persons that will be the subject of the ongoing 
disclosure, and the type of information provided. The amendments govern 
the core financial and operational data to be provided. It does not 
address the textual disclosure typically provided in annual reports, 
leaving the scope of that disclosure to market practice.31 To 
clarify the intended quantitative focus of the rule, as adopted, the 
rule uses the term ``financial information and operating data.''
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    \3\1See Association of Local Housing Finance Agencies, 
Guidelines for Information Disclosure to the Secondary Market 
(1992); Government Finance Officers Association, Disclosure 
Guidelines for State and Local Government Securities (Jan. 1991); 
Healthcare Financial Management Association, Principles and 
Practices Board, Statement Number 18--Public Disclosure of Financial 
and Operating Information by Healthcare Providers (May 1994); 
National Council of State Housing Agencies, Quarterly Reporting 
Format for State Housing Finance Agency Single Family Housing Bonds 
(1989) and Multi-family Disclosure Format (1991); National 
Federation of Municipal Analysts, Disclosure Handbook for Municipal 
Securities 1992 Update (Nov. 1992).
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    a. The Starting Point--Definition of Final Official Statement--(1) 
Information Concerning Persons Material to an Evaluation of the 
Offering. The Proposed Amendments would have revised the definition of 
final official statement to require that financial and operating 
information, including audited annual financial statements, regarding 
the issuer and any significant obligor be included in order to provide 
a fair presentation of the issuer's and significant obligor's financial 
condition, results of operations, and cash flow.
    Commenters objected to various aspects of the proposed definition, 
including the general requirement that financial and operating 
information be presented in the final official statement.32 
Commenters also objected that the use of the term ``the issuer,'' in 
specifying whose financial information should be included in the final 
official statement, failed to take into account a variety of situations 
in which the governmental issuer does not have any repayment 
obligations on the municipal securities (as with conduit issuers), as 
well as other situations (such as revenue bonds) in which the payments 
will be derived from entities, enterprises, funds and accounts that do 
not prepare separate financial statements. Some commenters took the 
position that in certain instances, inclusion of the financial 
statements of the general municipal issuer of which the enterprise is a 
part may be misleading.33
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    \3\2See, e.g., Letter of Indiana Bond Bank; Letter of Kutak 
Rock; Letter of NABL; Letter of Texas Public Finance Authority; 
Letter of Goldman Sachs & Co. (``Goldman Sachs'').
    \3\3See, e.g., Letter of Department of Community Trade and 
Economic Development, State of Washington; Letter of American Public 
Power Association (``APPA''); Letter of Municipal Treasurer's 
Association; Letter of Orrick Herrington.
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    In view of these comments, the definition of final official 
statement has been revised to require that financial information and 
operating data be provided for those persons, entities, enterprises, 
funds, and accounts that are material to an evaluation of the 
offering.34 Thus, the definition eliminates the reference to 
``the'' issuer. In addition, the definition no longer requires that the 
official statement provide information about specific ``significant 
obligors.'' It leaves to the parties (including the issuer and 
Participating Underwriters) the determination of whose financial 
information is material to the offering (including, without limitation, 
the credit supporting the securities being offered).
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    \3\4See Rule 15c2-12(f)(3).
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    The definition does not set its own form and content requirements 
on the financial information and operating data to be included; in 
particular, the proposed requirement for audited financial statements 
has not been adopted. Instead, it provides the flexibility that many 
commenters asserted is necessary in determining the content and scope 
of the disclosed financial information and operating data, given the 
diversity among types of issuers, types of issues, and sources of 
repayment.35
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    \3\5See, e.g., Letter of Association of Local Housing Financing 
Agencies (``ALHFA''); Letter of Treasurer, State of Connecticut 
Office of the Treasurer (``Treasurer of the State of Connecticut''); 
Letter of Council of Development Finance Agencies (``CDFA''); Joint 
Response; Letter of Securities Industry Association (``SIA''); 
Letter of Morgan Stanley & Co., Inc. (``Morgan Stanley'').
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    The fact that the amendments rely on the final official statement 
to set the standard for ongoing disclosure should not serve as an 
incentive for issuers to reduce existing disclosure practices in the 
preparation of the final official statement. Market discipline and 
regulatory requirements should ensure that those practices continue at 
current or improved levels. While issuers remain primarily responsible 
for the content and accuracy of their disclosures,36 as noted, 
Participating Underwriters must review the DFOS in a manner consistent 
with their obligations.
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    \3\6See 1989 Release.
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    As the Commission recognized in the Interpretive Release,37 
the extensive voluntary guidelines issued by the Government Finance 
Officers' Association, and the industry specific guidelines published 
by industry groups such as the National Federation of Municipal 
Analysts, are followed widely in the preparation of official 
statements.38 The Commission anticipates that such sound practices 
will continue and develop beyond that mandated by the amendments. 
Although those guidelines are not mandatory, the Commission encourages 
market participants to continue to refer to those voluntary guidelines 
and the Commission's Interpretive Release in preparing disclosure 
documents. In addition, as noted in the Interpretive Release,39 
final official statements are subject to the prohibition against false 
or misleading statements of material facts, including the omission of 
material facts necessary to make the statements made, in light of the 
circumstances in which they are made, not misleading.
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    \3\7Interpretive Release at Section III.B. The Interpretive 
Release is cited in the Preliminary Note to Rule 15c2-12 as a source 
of guidance as to the disclosure obligations of issuers of municipal 
securities, as well as the role of brokers, dealers, and municipal 
securities dealers.
    \3\8See note 31, supra.
    \3\9See Interpretive Release at Section III.A.
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    (2) Use of cross references to publicly available information. The 
Proposing Release requested comment on the appropriateness of 
satisfying disclosure needs through a reference to other externally 
prepared and located documents. In response, a number of commenters 
stated that the concept of incorporation of information should be 
explicitly included in the rule,40 and that the ability to 
incorporate information should not be conditioned on a minimum dollar 
amount of securities in the hands of the public--commonly known as 
``public float.''41 Some commenters also suggested that any 
limitation of this practice to ``seasoned issuers'' should include all 
investment grade issuers.42 Some commenters further noted that the 
final official statement should not have to set forth information that 
has been filed with the Commission in accordance with its periodic 
reporting requirements.43 The commenters suggested one significant 
prerequisite for permitting cross referencing--the availability of the 
information in some public repository.44
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    \4\0See Joint Response.
    \4\1See Letter of ABA Urban Law Section; Letter of Bose McKinney 
& Evans; Joint Response; Letter of Mudge Rose Guthrie Alexander & 
Ferdon (``Mudge Rose''); Letter of Dormitory Authority of the State 
of New York (``New York Dormitory Authority'').
    \4\2See Letter of Mudge Rose; Letter of New York Dormitory 
Authority.
    \4\3See Letter of ABA Urban Law Section; Letter of Kutak Rock; 
Letter of Texas Public Finance Authority.
    \4\4See, e.g., Letter of Bose McKinney & Evans; Joint Response. 
One commenter also stated that if cross referencing was permitted, 
there should be a delay between the distribution of the official 
statement and the offering. The delay would enable potential 
purchasers and others to obtain any materials that were referenced 
in the official statement and make an informed investment decision. 
See Letter of Prudential Investment Corp.
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    The definition of final official statement has been revised to make 
explicit45 that a final official statement may include financial 
information and operating data either by setting forth the information 
in the document or set of documents composing the final official 
statement, or by including a specific reference to documents already 
prepared and previously made publicly available.46 For purposes of 
the amendments, documents will be considered to be publicly available 
if they have been submitted to each NRMSIR and to the appropriate state 
information depository or, if the information concerns a reporting 
company, filed with the Commission. If the document is a final official 
statement, it must be available from the MSRB.
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    \4\5See 1989 Release (discussing the definition of ``final 
official statement'' in Rule 15c2-12 as originally adopted, and 
stating that the definition recognizes that the issuer's final 
official statement may be composed of one or more documents).
    \4\6Rule 15c2-12(f)(3). To avoid confusion with the technical 
aspects of incorporation by reference for registrants under the 
Commission's registration rules, the amended rule does not use that 
term.
    At least two states, New York and Texas, have prepared a 
standard disclosure document for state information.
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    If cross referencing is used, for purposes of determining the 
appropriate scope of the ongoing information undertaking, the final 
official statement will be deemed to include all information and 
documents that have been cross referenced.47 The amendment does 
not place limitations on the type of issuer that may use cross 
referencing. This approach is consistent with the goal of making the 
repositories the principal source of information concerning municipal 
securities. Once received by a repository, the referenced information 
should be readily available regardless of the nature of the issuer.
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    \4\7Participating Underwriters and other market participants 
must keep in mind their obligations under the rule with respect to 
the DFOS and final official statement, and under the antifraud 
provisions of the federal securities laws. To the extent that cross 
references are used, the DFOS should be disseminated in sufficient 
time for review by Participating Underwriters, and the POS should be 
made available in time to enable prospective purchasers to make 
informed investment decisions based upon the referenced materials. 
See Interpretive Release at Section III.C.6.
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    As commenters noted, permitting cross referencing to other 
externally prepared and available information should result in official 
statements that are clear and concise, yet provide information material 
to the Offering.48 Moreover, the use of cross referencing also 
should ease some expressed apprehension about the ability of some 
issuers to obtain information about parties not within their control, 
to the extent that information about these parties is made available to 
the repositories or, if a reporting company, filed with the 
Commission.49
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    \4\8See, e.g., Letter of New York Dormitory Authority; Letter of 
the Treasurer of the State of Connecticut.
    \4\9See, e.g., Letter of Fieldman, Rolapp & Associates; Letter 
of State of Florida, Office of Auditor General; Letter of San 
Francisco International Airport; Letter of Texas Water Development 
Board; Letter of State of Washington, Office of the Treasurer.
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    (3) Description of information undertakings. The definition of 
final official statement also has been changed from the Proposed 
Amendments to include a requirement that the undertakings provided 
pursuant to the rule be described in the final official 
statement.50 As the Commission recognized in the Interpretive 
Release51 and a number of commenters echoed,52 it is 
important for investors and the market to know the scope of any ongoing 
disclosure. By including a description of the undertaking in the final 
official statement, market participants will know the identity of the 
entities about which information will be provided, and the type of 
information to be provided. By reviewing the final official statement, 
investors in the secondary market will be able to ascertain the scope 
of that undertaking and whether it has been satisfied.
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    \5\0Rule 15c2-12(f)(3).
    \5\1See Interpretive Release at Section III.C.4.
    \5\2See, e.g., Letter of Chemical Securities, Inc. (``Chemical 
Securities''); Letter of Ferris Baker Watts; Letter of National 
Federation of Municipal Analysts (``NFMA'').
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    Critical to any evaluation of a covenant is the likelihood that the 
issuer or obligated person will abide by the undertaking. The 
definition of final official statement thus has been modified to 
require disclosure of all instances in the previous five years in which 
any person providing an undertaking failed to comply in all material 
respects with any previous informational undertakings called for by the 
amendments.53 This information is important to the market, and 
should, therefore, be disclosed in the final official statement. The 
requirement should provide an additional incentive for issuers and 
obligated persons to comply with their undertakings to provide 
secondary market disclosure, and will ensure that Participating 
Underwriters and others are able to assess the reliability of 
disclosure representations.54
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    \5\3See Rule 15c2-12(f)(3).
    \5\4See Letter of PSA.
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    The amendments do not prohibit Participating Underwriters from 
underwriting an Offering of municipal securities if an issuer or 
obligated person has failed to comply with previous undertakings to 
provide secondary market disclosure. However, if a failure to comply 
with such previous undertakings has not been remedied as of the start 
of the Offering, or if the party has a history of persistent and 
material breaches, it is doubtful whether a Participating Underwriter 
could form a reasonable basis for relying on the accuracy of the 
issuer's or obligated person's ongoing disclosure representations.
    b. Entities about which information must be provided to the 
secondary market. It is critical that current financial information and 
operating data is provided to the secondary market about the persons 
that would be important to investors in evaluating the security. The 
Proposed Amendments would have required the Participating Underwriter 
to determine that the issuer had committed to provide, at least 
annually, current financial information concerning the issuer of the 
municipal securities and any significant obligor.55 The identity 
of persons about which information should be provided to the secondary 
market was the subject of a substantial number of comment 
letters.56 As with the proposed definition of final official 
statement, a large number of commenters expressed particular concern 
about the provision of information on a continuing basis for conduit 
issuers who have no ongoing liability for repayment of municipal 
securities.57 There also were a significant number of comments 
received critiquing the concept of significant obligor.58
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    \5\5Paragraph (b)(5)(i)(A) of the Proposed Amendments.
    \5\6See, e.g., Letter of Fidelity Management and Research 
Company; Letter of First Albany Corporation; Letter of Maine 
Municipal Bond Bank; Letter of NABL; Letter of National Council of 
Health Facilities Finance Authorities (``NCHFFA''); Letter of 
Realvest Capital Corporation; Letter of South Carolina Economic 
Developers Association, Inc.
    \5\7See, e.g., Letter of ABA Urban Law Section; Letter of 
Gilmore & Bell, P.C. (``Gilmore & Bell''); Letter of New York State 
Housing Finance Agency, State of New York Mortgage Agency, New York 
State Medical Care Facilities Finance Agency (``New York State 
Housing Finance Agency''); Letter of Orrick Herrington.
    \5\8See, e.g., Letter of Section of Business Law, American Bar 
Association (``ABA Business Law Section''); Letter of Treasurer of 
the State of California (``Treasurer of the State of California''); 
Letter of Goldman Sachs; Letter of IDS Financial Corporation; Joint 
Response; Letter of Kutak Rock; Letter of Morgan Stanley; Letter of 
National Association of State Treasurers (``NAST'').
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    Under the amendments as revised, the identity of the persons for 
which information must be provided on an annual basis is determined by 
the information included in the final official statement. If the final 
official statement includes financial information or operating data on 
a person, information about that person must continue to be provided to 
the secondary market if the person is committed by contract or other 
arrangement to support payment of the obligations on the municipal 
securities.59 Thus, the obligation to provide ongoing information 
relates to those persons for which financial information or operating 
data is included in the final official statement and that have a 
contractual or other connection to repayment of the municipal 
obligations.
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    \5\9Providers of bond insurance, letters of credit, and 
liquidity facilities have been excepted from the definition of 
obligated person to eliminate the need to separately obtain and 
disseminate annual information about such providers. See Section 
II.A.1.b.(1). infra.
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    (1) The obligated person concept. The Proposed Amendments defined a 
significant obligor as ``any person who, directly or indirectly, is the 
source of 20 percent or more of the cash flow servicing the obligations 
on the municipal security.'' The proposed definition generated a 
significant amount of comment, including concerns that it could be 
interpreted to include significant taxpayers and customers,60 
credit enhancers (including banks that are letter of credit providers 
and insurers providing bond insurance),61 providers of guaranteed 
investment contracts,62 as well as state and federal governments 
that provide revenue sharing, grant, state and local aid and other 
cofinancing arrangements.63 Commenters raised technical concerns 
as to the appropriate percentage of repayment obligation necessary to 
trigger inclusion in the definition of significant obligor,64 and 
when the percentages were to be measured.65 Some commenters also 
expressed concern that, in the bond pool context, the definition of 
significant obligor may not have permitted sufficient flexibility in 
determining which obligors in a pool would be the subject of the 
requirement to provide information on an ongoing basis.66
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    \6\0See, e.g., Letter of American Municipal Power--Ohio, Inc. 
(``AMP--Ohio''); Letter of Gilmore & Bell; Letter of Treasurer of 
the State of California.
    \6\1See, e.g., Letter of Financial Guaranty Insurance Company 
(``FGIC''); Letter of Goldman Sachs; Letter of Hawkins Delafield & 
Wood; Letter of Thacher Proffitt & Wood.
    \6\2See, e.g., Letter of Kutak Rock.
    \6\3See, e.g., Letter of ABA Urban Law Section; Letter of Kutak 
Rock; Letter of State of Washington, Office of the Treasurer.
    \6\4See, e.g., Letter of APPA; Letter of George K. Baum & Co.; 
Letter of CDFA; Letter of Eaton Vance Management; Letter of NCHFFA.
    \6\5See, e.g., Letter of ABA Business Law Section; Letter of 
Electricities, Inc.; Letter of Hawkins Delafield & Wood; Letter of 
Kutak Rock; Letter of Mudge Rose; Letter of San Francisco 
International Airport.
    \6\6See, e.g., Letter of ABA Urban Law Section; Letter of A.G. 
Edwards & Sons, Inc.; Letter of Council of Infrastructure Financing 
Authorities (``CIFA''); Letter of Hawkins Delafield & Wood; Letter 
of Program Administration Services, Inc.
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    Commenters suggested a number of modifications to the significant 
obligor concept. First, a number of commenters indicated that the 
definition of significant obligor should include a requirement that a 
contractual relationship exist between the obligor and the repayment of 
the obligation before a continuing information obligation is 
imposed.67 Second, commenters recommended modifying the definition 
to include different percentages of cash flow, ranging from a low of no 
threshold to a high of 50% of cash flow.68 Third, some commenters 
suggested replacing the entire definition of significant obligor with 
the concept of materiality, in which the issuer and the other offering 
participants would determine, on a continuing basis, whose information 
would be provided.69
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    \6\7See, e.g., Letter of ABA Business Law Section; Letter of 
APPA; Letter of City of Everett, Washington; Letter of Goldman 
Sachs; Letter of Hawkins Delafield & Wood; Letter of Merrill Lynch; 
Letter of Morgan Stanley; Letter of Mudge Rose; Letter of Orrick 
Herrington. Certain of these commenters noted that by including a 
contractual or similar relationship between the entity making 
payments and the financing, customers and taxpayers, having no 
connection to or responsibility in connection with the financing 
would not inadvertently be swept within the scope of the definition.
    \6\8See, e.g., Letter of APPA; Letter of George K. Baum & Co.; 
Letter of City of Everett, Washington; Letter of IDS Financial 
Corporation; Letter of Standish, Ayer & Wood, Inc.
    \6\9See, e.g., Letter of ABA Business Law Section; Letter of 
ALHFA; Letter of PSA.
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    As suggested by a number of commenters, the amendments eliminate 
the reference to significant obligor.70 Instead, the amendments 
include a definition of ``obligated person,'' which means a person 
(including an issuer of separate securities) that is committed by 
contract or other arrangement structured to support payment of all or 
part of the obligations on the municipal securities.71 By 
including a nexus to the financing through a commitment that is 
structured to support the payment obligations, the amendments address 
concerns raised by many commenters that the term ``source of cash 
flow'' in the definition of significant obligor was overbroad and could 
encompass persons with no relationship to the financing.72 The 
requirement for a contractual or other arrangement will assist 
Participating Underwriters in identifying the persons for which 
information should be provided pursuant to an undertaking.
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    \7\0See, e.g., Letter of FGIC; Joint Response; Letter of NABL; 
Letter of PSA.
    \7\1See Rule 15c2-12(f)(10).
    \7\2See, e.g., Letter of Bose McKinney & Evans; Letter of Mudge 
Rose; Letter of New York Dormitory Authority; Letter of Orrick 
Herrington.
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    Some commenters recommended that the commitment with respect to 
payment of the obligation on the securities consist of a contractual 
obligation to and enforceable by bondholders.73 Instead, the 
definition includes a broader notion of a contract or arrangement that 
is structured to ``support payment,'' without specifying that it run to 
bondholders. The definition is intended to include contracts or 
arrangements where payments are made either to bondholders, to issuers 
to be used to pay obligations on municipal securities, or through 
conduit structures.74 Similarly, the reference to ``obligations on 
municipal securities'' is intended to be broad enough to cover debt 
obligations, lease payments and any other repayment obligation on or 
resulting from the municipal securities.
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    \7\3See, e.g., Letter of Bose McKinney & Evans; Letter of 
Goldman Sachs; Letter of Indiana Bond Bank; Letter of Hawkins 
Delafield & Wood.
    \7\4For example, if all or a portion of a project financed by 
bonds is used by a party that has committed, by contract or other 
arrangement (written or oral) to pay for such use, and such payments 
support payment of debt service on the bonds (as structured at the 
time of issuance), continuing information on the party would be 
appropriate. Accordingly, parties that support debt service through 
payments under a lease, loan, installment sale agreement, or other 
contract relating to use of a project are included in the 
definition, regardless of whether the financing is a conduit 
arrangement (such as a non-recourse loan to a manufacturer to 
finance acquisition of a new facility or to a hospital to acquire 
equipment) or system or project financing (such as a lease to a 
particular carrier of a terminal in an airport system or sale of the 
output of a facility pursuant to a take-or-pay (or take-and-pay) 
contract). Major customers purchasing power from a municipal light 
department that, in turn, is under a take-or-pay contract with a 
joint action public power agency would not be included in the 
definition, although the municipal light department would likely be 
included in the definition. Similarly, major taxpayers in a 
municipal general obligation issue would not be included in the 
definition; however, an undertaking covering a developer that is the 
sole landowner in a development district assessment financing in 
which the future collection of assessments to service the borrowing 
is dependent upon the developer as part of the structure of the 
financing may be appropriate.
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    As was the case with the proposed significant obligor concept, the 
term ``obligated persons'' includes, but is broader than, the concept 
of issuers of separate securities under Rule 131 pursuant to the 
Securities Act of 1933 (``Securities Act'')75 and Exchange Act 
Rule 3b-5.76 Also, in response to comments raised that the terms 
``issuer'' or ``significant obligor'' do not sufficiently address 
financings in which the source of repayment is not a separate person or 
entity, but a dedicated revenue stream from a specified project, 
segregated tax revenues or other enterprise, fund or account,77 
the definition includes persons which are obligated generally, such as 
with full recourse to the person, or, in a more limited manner, such as 
through an enterprise, fund or account of such person, including a 
dedicated revenue stream. As noted above, the obligation to provide 
information must cover all such enterprises, funds or accounts, whether 
or not there is a separate entity. In such a case, the information 
undertaking could be provided by the governmental unit or financing 
authority of which the enterprise, fund or account is a part.78 
For example, a Participating Underwriter could accept an information 
undertaking from a state issuing bonds secured solely by funds 
collected under a special tax, to report financial information relating 
to the special tax; for issues supported both by contracts of 
assistance of separate authorities or funds in addition to the issuer's 
own revenues, undertakings from the separate authorities, as well as 
the issuer could be provided. Accordingly, although the definition of 
significant obligor has been eliminated, that modification does not 
reflect a change in the Commission's assessment of the importance of 
ongoing information concerning the ultimate sources of payment on the 
securities.
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    \7\517 CFR 239.131.
    \7\617 CFR 240.3b-5
    \7\7See, e.g., Letter of Fidelity Management and Research 
Company; Letter of Mudge Rose; Letter of NABL; Letter of Texas 
Public Finance Authority.
    \7\8See Rule 15c2-12(b)(5)(i).
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    Unlike the significant obligor concept in the Proposed Amendments, 
there is no need to include a specified percentage of payment in the 
definition of obligated person, because the issuer and other 
participants will determine at the time of preparation of the final 
official statement which obligated persons are material to an 
Offering.79 In making that materiality determination, the parties 
to a financing will evaluate the facts of the Offering.80
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    \7\9Under the revised amendments, the concerns of some 
commenters that the definition of significant obligor failed to take 
into account short term arrangements (i.e. the arrangements with 
persons providing cash flow were shorter than the term of the 
securities) is also alleviated in two ways. First, the issuer 
determines at the outset if an obligated person is material to the 
offering. Second, assuming an obligated person is included in the 
final official statement, the undertaking to continue to provide 
information on such obligated person may be terminated once it no 
longer has liability for any obligation on or relating to repayment 
of the municipal securities. See Rule 15c2-12(b)(5)(iii); Letter of 
APPA; Letter of Hawkins Delafield & Wood.
    \8\0Guidelines and practices that have developed in other 
contexts may be useful in analyzing both the materiality of an 
obligated person to the municipal financing and the appropriate 
level of disclosure relating to such obligated person. For example, 
in connection with securitization of non-recourse commercial 
mortgage loans, the 10 percent and 20 percent property assets 
concentration tests described in Staff Accounting Bulletins 71 and 
71A are applied. These percentages are applied by analogy in other 
asset-backed financings.
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    Determining the obligated persons in pooled financings requires 
more flexibility, because the composition of the pool may vary over 
time. Rather than identifying the specific persons for which 
information will be provided on a continuing basis, under the 
amendments, bond pools must describe in their official statements, and 
the undertaking, the objective criteria (presumably including 
percentage of payment support) they will apply consistently, both in 
the final official statement and on a continuing basis, in determining 
whether information concerning an obligated person will be 
provided.81 The amendments permit, but do not require this 
approach for non-pooled issuers. The objective criteria approach 
ensures that financial information and operating data will be provided 
about those persons that, at the time of disclosure, meet the objective 
standards described in the undertakings. Obligated persons could commit 
to the issuer, at the time of initial participation in a pooled 
financing, through an undertaking to provide information when and if 
they satisfy that criteria. Obligated persons that no longer meet the 
objective criteria will no longer need to provide ongoing information. 
In order to ensure that the selection method is incorporated into the 
undertaking, the amendments require that Participating Underwriters 
reasonably determine that the undertakings identify those persons for 
which the information will be provided, either by name or by the 
objective criteria to be used to select such persons.82
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    \8\1Although the amendments do not specify the scope of the 
objective criteria, the criteria description should be clear as to 
when and how they are applied.
    \8\2See Rule 15c2-12(b)(5)(ii).
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    Commenters were divided on whether providers of bond insurance, 
letters of credit, and other liquidity facilities, should be excluded 
from the definition of significant obligor.83 The concept of 
``obligated person'' encompasses these entities because they are 
committed, at least conditionally, to support payment of principal and 
interest obligations. Moreover, these persons normally are material to 
an understanding of the security, and, therefore, official statements 
should contain financial information concerning such persons either 
directly or by reference to publicly available materials. A number of 
commenters stated, however, that it would be inappropriate to put the 
onus on the issuer to provide information on such providers on an 
annual basis, particularly where that information is otherwise 
available to investors either upon request or in public reports that 
have been submitted to appropriate regulatory authorities.84
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    \8\3See, e.g., Letter of ABA Urban Law Section; Letter of 
Blackwell Industrial Authority, Blackwell, Oklahoma; Letter of Davis 
Polk & Wardwell; Letter of IDS Financial Corporation; Letter of 
Kutak Rock; Letter of Oregon Economic Development Department; Letter 
of Realvest Capital Corporation; Letter of Thacher Proffitt & Wood. 
Some commenters also were concerned as to whether the definition 
would encompass providers of guaranteed investment contracts and 
other investments. See, e.g., Letter of ABA Urban Law Section; 
Letter of Kutak Rock, on behalf of AMBAC Indemnity Corporation, 
Capital Markets Assurance Corporation, Capital Reinsurance Company, 
Enhance Reinsurance Company, Financial Guaranty Insurance Company, 
Financial Security Assurance, Inc., and Municipal Bond Investors 
Assurance Corporation (``Kutak Rock on behalf of Financial Guaranty 
Insurers''). A functional approach determines whether providers of 
investments should provide ongoing information. For example, if the 
proceeds of an Offering are invested in guaranteed investment 
contracts (``GICs''), and the income from the GICs is the 
predominant source of revenue to repay the obligations on the 
securities, information about the provider may be material to the 
Offering, including on an ongoing basis. If, however, other sources 
of revenue are committed to support payment of the obligations, the 
relative importance of the provider of the GIC to investors may be 
diminished.
    \8\4See, e.g., Letter of ABA Urban Law Section; Letter of Smith, 
Gambrell & Russell; Letter of Texas Water Development Board. Some 
commenters noted difficulty in obtaining information from credit 
enhancers. See Letter of Association of Bay Area Governments; Letter 
of New York State Housing Finance Agency; Letter of State of 
Washington, Office of the Treasurer.
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    Commenters indicated a willingness by providers of bond insurance, 
letters of credit, and other liquidity facilities to deposit publicly 
available reports in a repository, or otherwise note where such reports 
may be easily obtained.85 The issuer or other obligated person 
providing the undertaking may then refer to such reports in their 
annual financial information and indicate the location where any such 
current annual reports can be obtained. Based upon such 
representations, providers of bond insurance, letters of credit, and 
liquidity facilities have been excepted from the definition of 
obligated person to eliminate the need to separately obtain and 
disseminate annual information about such providers.
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    \8\5See, e.g., Memorandum of August 10, 1994 Meeting with Davis, 
Polk and Wardwell and Various Banks; Letter of Kutak Rock on Behalf 
of Financial Guaranty Insurers. One commenter recommended that bond 
insurers and banks providing letters of credit, who are not subject 
to periodic reporting requirements of the federal securities laws, 
send publicly available reports to the repositories. See Letter of 
ABA Urban Law Section.
---------------------------------------------------------------------------

    The Commission encourages industry participants to work together to 
adopt appropriate disclosure practices, both with respect to 
information concerning the provider contained in primary offering 
materials and on an ongoing basis in the annual financial information. 
The Commission will monitor developments in this area regarding the 
nature and quality of information made available about credit enhancers 
and liquidity providers, and the manner in which information is made 
available to determine whether further steps are necessary to assure 
access to this important body of information.
    (2) Who must undertake. A related question to whose information 
must be given is who must provide the information undertaking; the 
person providing the undertaking may not necessarily be the person 
about which the information relates. The Proposed Amendments would have 
required that the continuing information undertaking be provided by the 
issuer. A significant number of commenters raised concerns about which 
of potentially several persons that could be considered an issuer of 
municipal securities86 would be expected to provide the 
undertaking and who would make that determination.87 This was a 
particular concern in light of the potential liability of the issuer 
providing the undertaking for the provision and the content of 
information regarding other issuers and significant obligors--persons 
not necessarily under their control. Commenters made a number of 
suggestions to address these perceived ambiguities, including requiring 
that each issuer of a municipal security and each significant obligor 
undertake to provide the information only with respect to 
itself.88
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    \8\6The term ``issuer of municipal securities,'' as defined in 
Rule 15c2-12, includes issuers of separate securities as well.
    \8\7See, e.g., Letter of ALHFA; Letter of Hawkins Delafield & 
Wood; Letter of Kutak Rock; Letter of National State Auditors 
Association; Letter of the Treasurer of the State of North Carolina.
    \8\8See, e.g., Letter of ABA Urban Law Section; Letter of ALHFA; 
Letter of Kutak Rock; Letter of NABL.
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    In response to these concerns, and consistent with the general 
approach to affording underwriting participants significant 
flexibility, the undertaking provision has been revised to provide that 
the undertaking may be made by any issuer of the municipal securities 
being offered, or by any obligated person for which information is 
provided in the final official statement. An issuer of a municipal 
security may provide the undertaking, regardless of whether it is 
obligated on the municipal security. In addition, obligated persons may 
provide the undertaking regardless of whether they are deemed an issuer 
of municipal securities. These obligated persons may be the main, if 
not the only, credit source for repayment of the obligations on the 
municipal securities. This approach should allow the governmental 
issuer to shift to the obligated person the responsibility to provide 
information on a continuing basis.
    Thus, a Participating Underwriter need only reasonably determine 
that an issuer of municipal securities or an obligated person for which 
financial information or operating data is presented in the final 
official statement has agreed to provide the information called for by 
the rule; it will not be necessary to obtain an undertaking from all 
possible issuers and obligated persons. Moreover, to respond to the 
expressed concern that separate undertakings should be permitted, the 
amendments have been revised to recognize that undertakings may be 
provided in combination with other issuers and other obligated persons. 
In all cases, however, the undertakings, either individually or 
collectively, must constitute a commitment to provide information with 
respect to all the persons about which information must be provided on 
an annual basis.
    The amendments have been revised to clarify that dissemination 
responsibilities may be delegated to designated agents or to indenture 
trustees. As commenters pointed out, there are circumstances in which 
third parties may be effective in assisting issuers and obligated 
persons in disseminating the information.89 Moreover, indenture 
trustees have expressed concerns about being considered ``designated 
agents'' in performing any dissemination role, based on the scope of, 
and standards affecting, their responsibilities as indenture 
trustees.90 The language has been revised in response to clarify 
that, in addition to designated agents, issuers or obligated persons 
may contractually empower indenture trustees to disseminate information 
that an issuer or obligated person has agreed to provide. The parties 
may authorize an indenture trustee to provide certain information 
through specific instruction or on its own initiative upon becoming 
aware of particular facts.
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    \8\9See, e.g., Letter of Bond Investors Association; Letter of 
PSA; Letter of Texas Public Finance Authority.
    \9\0See, e.g., Letter of Bank One Corporation; Letter of 
Reliance Trust Company; Letter of State Street Bank and Trust 
Company.
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    c. Scope of financial information and operating data to be provided 
on an annual basis--(1) Definition of annual financial information. The 
amendments provide a definition of the term ``annual financial 
information,''91 a concept that was used, without definition, in 
the Proposed Amendments. The definition of annual financial information 
specifies both the timing of the information--that is, once a year--
and, by referring to the final official statement, the type of 
financial information and operating data that is to be provided to the 
repositories. If financial information or operating data concerning an 
obligated person (or category of obligated persons in the case of 
financings using the objective criteria approach) is included in the 
final official statement, then annual financial information would 
consist of the same type of financial information or operating data. 
For example, if anticipated cash flow information is provided in the 
final official statement for a revenue bond financing, cash flow data 
reflecting actual operations must continue to be provided on an annual 
basis. Only the annual financial information called for by the 
undertakings need be sent to the repositories; other types of financial 
information and reports that may be prepared by the issuer or obligated 
persons are not subject to the rule's dissemination provisions.
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    \9\1Rule 15c2-12(f)(9).
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    Many commenters addressed the issue of whether the rule should 
specify form and content of the information that should be provided on 
an annual basis, as well as for event specific information.92 Some 
commenters argued that the rule should include specified formats for 
information to be provided, including financial statements and certain 
industry reporting formats,93 while other commenters contended 
that no form or content should be specified and that the parties should 
be permitted to make determinations based on materiality alone.94 
As discussed below, the flexibility afforded by the concept of annual 
financial information addresses these concerns by providing a minimum 
standard for ongoing disclosure, but allowing the parties to define 
that standard with respect to each Offering of municipal securities.
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    \9\2See, e.g., Letter of Dean Witter Reynolds, Inc. (``Dean 
Witter''); Letter of National League of Cities; Letter of NFMA; 
Joint Response; Letter of PSA; Letter of Tillinghast, Collins & 
Graham; Letter of the Treasurer of the State of Connecticut.
    \9\3See, e.g., Letter of Dain Bosworth, Inc.; Letter of First 
Albany Corporation; Letter of MSRB; Letter of NFMA; Letter of 
Standish, Ayer & Wood, Inc.
    \9\4See, e.g., Letter of CDFA; Letter of Chapman and Cutler; 
Letter of CIFA; Joint Response; Letter of H.M. Quackenbush; Letter 
of NABL.
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    (2) Financial information. The proposal to mandate audited 
financial statements produced considerable comment. As with the 
proposed definition of final official statement, commenters expressed 
concern with the availability of audited financial statements on an 
annual basis, as well as the relevance of financial statements for 
certain types of financings.
    Some commenters indicated that some municipalities were not 
required by law to have independently audited financial statements, and 
any such requirement would impose a significant new expense.95 A 
number of commenters also expressed doubt as to whether audited 
financial information could be delivered on an annual basis, because 
audits may not be completed for a number of years following the close 
of the fiscal year.96 Commenters noted that in some cases, 
financial statements for certain types of entities were audited every 
year, and in other cases every 2-3 years.97 Therefore, some of 
these commenters argued that the requirement for annual audited 
financial statements would have an adverse impact on an issuer's 
ability to access the public securities markets or increase its costs 
of financing.98
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    \9\5See, e.g. Letter of Texas Water Development Board; Letter of 
State of Washington, Office of the Treasurer.
    \9\6See, e.g., Letter of City of Barling; Letter of Dain 
Bosworth, Inc.; Letter of Friday, Eldridge & Clark.
    \9\7See, e.g., Letter of AMP--Ohio; Letter of State of Indiana, 
State Board of Accounts; Letter of State of Montana, Department of 
Natural Resources and Conservation; Letter of Washington Finance 
Officers Association.
    \9\8See, e.g., Letter of AMP--Ohio; Letter of Washington Finance 
Officers Association.
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    A number of commenters also raised concerns regarding the 
availability of full financial statements for certain issuers, whether 
or not audited.99 As examples, commenters noted that some issuing 
entities do not have their own financial statements and may be included 
in the financial statements of a larger issuer or entity.100 
Commenters from two states indicated that governmental units of the 
states may be encompassed in the state's comprehensive annual financial 
report and that there may be only supplemental schedules that described 
the governmental units.101
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    \9\9See, e.g., Letter of ABA Business Law Section; Letter of 
Florida Division of Bond Finance; Letter of Gust & Rosenfeld; Letter 
of Office of the State Auditor, Texas (``Texas Office of the State 
Auditor'').
    \1\00See, e.g., Letter of Treasurer of the State of North 
Carolina; Letter of Texas Office of the State Auditor.
    \1\01See, e.g., Letter of the Treasurer of the State of North 
Carolina; Letter of Texas Office of the State Auditor.
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    Some commenters raised the point that financial statements of a 
general governmental unit may not necessarily be relevant in certain 
project and structured financings.102 As an example, one commenter 
noted that in some asset backed financings, information about the 
governmental issuer may be relevant only with respect to its experience 
in managing programs of loan pools.103
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    \1\02See, e.g., Letter of ABA Urban Law Section; Letter of APPA; 
Letter of Goldman Sachs; Letter of Gust & Rosenfeld; Letter of The 
Hospital & Higher Education Facilities Authority of Philadelphia; 
Letter of Morgan Stanley; Letter of NABL; Letter of New York State 
Housing Finance Agency.
    \1\03See Letter of ABA Urban Law Section.
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    Commenters proposed a number of alternatives to the requirement to 
provide annual audited financial statements. Among the alternatives was 
a suggestion that financial statements be required in the form 
customarily prepared by the issuer promptly upon becoming available and 
that audited financial statements be provided to the extent 
available.104 Other suggestions included limiting the requirement 
to those entities required by state or federal law to have audited 
financial statements.105
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    \1\04See, e.g., Letter of ABA Business Law Section; Letter of 
Association of Bay Area Governments; Letter of North East 
Independent School District; Letter of PSA; Letter of Washington 
Finance Officers Association.
    \1\05See, e.g., Letter of the Treasurer of the State of North 
Carolina; Letter of Washington Finance Officers Association.
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    In view of the comments received, the amendments do not adopt the 
proposal to mandate audited financial statements on an annual basis 
with respect to each issuer and significant obligor. Instead, the 
amendments continue to require annual financial information, which may 
be unaudited, and may, where appropriate and consistent with the 
presentation in the final official statement, be other than full 
financial statements. While it is anticipated that full financial 
statements will be provided for entities with ongoing revenues and 
operating expenses, it is possible that in the case of dedicated 
revenue streams and certain types of structured financings, other types 
of special purpose financial statements, project operating statements 
or reports may be used to reflect the financial position of the credit 
source for the financing. However, if audited financial statements are 
prepared, then when and if available, such audited financial statements 
will be subject to the undertaking and must be submitted to the 
repositories.106 Thus, as suggested by a number of commenters, the 
undertaking must include audited financial statements only in those 
cases where they otherwise are prepared.
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    \1\06See Rule 15c2-12(b)(5)(i)(B).
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    The amendments adopt the proposed requirement that the undertaking 
specify the accounting principles pursuant to which the financial 
information provided as part of the annual financial information will 
be prepared.107 As discussed in the Proposing Release, it is 
important that financial information be prepared on a consistent basis 
to enable market participants to evaluate results and perform year to 
year comparisons.108 The undertaking also must specify whether 
audited financial statements will be provided as part of the annual 
financial information.109
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    \1\07See Rule 15c2-12(b)(5)(ii)(B).
    \1\08See Proposing Release. A number of commenters responded to 
the request for comment on specification of the use of generally 
accepted accounting principles (``GAAP'') and generally accepted 
auditing standards (``GAAS''). See, e.g., Letter of Comptroller of 
the State of California; Letter of Government Accounting Standards 
Board (``GASB''); Letter of NAST; Letter of National State Auditors 
Association; Letter of Prudential Investment Corp. The amendments as 
adopted do not mandate the use of either GAAP or GAAS.
    \1\09See Rule 15c2-12(b)(5)(ii)(B).
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    The amendments do not establish a standardized format for 
presentation of financial information, or any specification of the 
content of the information, other than by reference to the final 
official statement. The annual financial information may be presented 
through any disclosure document or set of documents, whatever their 
form or principal purpose, that include the necessary information. The 
amendments, as adopted, contemplate that sequential final official 
statements prepared by frequent issuers may meet the standards of the 
rule. As in the case of final official statements, annual financial 
information submitted to a repository also may reference other 
information already submitted to repositories or the MSRB, or filed 
with the Commission.110
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    \1\10Of course, any required information must be the subject of 
an undertaking, and if the information cross referenced has not been 
submitted to a repository or the MSRB, or filed with the Commission, 
the undertaking will not have been complied with.
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    (3) Operating data. The Proposed Amendments111 would have 
required that the undertaking call for pertinent operating information, 
and that the parties specify the pertinent operating information to be 
provided on an annual basis. The basic concern of commenters regarding 
this provision, in addition to issues of specification of form and 
content discussed above, was that the use of the term ``pertinent'' did 
not provide sufficient guidance as to who would determine what was 
pertinent and what independent obligations Participating Underwriters 
would have with respect to such evaluation.112
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    \1\11Paragraph (b)(5)(i)(A) of the Proposed Amendments.
    \1\12See, e.g., Letter of APPA; Letter of Fidelity Management 
and Research Company; Letter of Hawkins Delafield & Wood.
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    The amendments have been modified to respond to these comments. The 
phrase ``pertinent'' has been deleted from the reference to operating 
information and the word ``data'' is used to emphasize the intended 
quantitative nature of the information. Operating data is included as a 
subset of annual financial information, and the operating data to be 
provided annually also is determined by reference to the type of 
operating data presented in the final official statement. Thus, the 
parties will determine at the outset, presumably with the assistance of 
applicable industry guidelines, what operating data will be provided 
both initially and on an ongoing basis. For example, in a conduit 
health care financing, under current industry practice, an official 
statement typically provides information relating to the obligated 
party--the hospital--in an appendix. In addition to a discussion 
describing the hospital, its administration and management, economic 
base and service area, and capital plan, operating statistics such as 
bed utilization, admissions and type, patient days, and payor 
utilization often is provided. Under the amendments, in this type of 
transaction, parties at the outset of a transaction will determine 
which operating data will be included in the hospital appendix; such 
information, in turn, will be the type of ``operating data'' to be 
provided annually.
    Some commenters expressed concern that the Proposed Amendments were 
not sufficiently flexible to permit parties to address changing 
conditions because the undertaking would have to describe the financial 
and pertinent operating information to be provided in the 
future.113 Nonetheless, the requirement that the undertaking 
specify in reasonable detail the type of data that will be provided on 
an ongoing basis, including the identity of the persons (or category of 
persons) about which the information will relate has been retained. As 
is the case with financial information, the intent of the amendments is 
to give investors and market participants the ability to evaluate the 
security through comparisons of the quantitative operating data 
provided. Contrary to the suggestion of some commenters, the 
undertaking would be meaningless if issuers and obligated persons could 
unilaterally determine that certain types of information were no longer 
necessary or meaningful to investors.
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    \1\13See, e.g., Letter of Chapman and Cutler; Joint Response; 
Letter of Kutak Rock.
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    Because the amendments require that the undertaking specify only 
the general type of information to be supplied, there should be 
sufficient flexibility to accommodate subsequent developments that may 
require adjustments in the financial information and operating data 
that should be provided annually. Of course, nothing in the undertaking 
will prevent a party from providing additional information, 
particularly where such disclosure may be necessary to avoid liability 
under the antifraud provisions of the federal securities laws. 
Similarly, the amendments make specific provision for adjusting the 
persons about which information is provided. As required in the case of 
pooled financings, parties may identify the persons covered by 
reference to objective selection criteria that will be applied on a 
consistent basis between the offering statements and with regard to 
annual financial information. Moreover, the party providing the 
undertaking need not continue to provide information concerning persons 
that are no longer obligated persons with respect to the municipal 
securities.
    A new provision has been added to the amendments which permits the 
written agreement or contract to have a termination provision with 
respect to any obligated person that is no longer directly or 
indirectly liable for repayment of any of the obligations on the 
municipal securities.114 Once an obligated person no longer has 
any liability for repayment of the municipal securities, whether 
through termination or expiration of its commitment to support payment, 
or as a result of a defeasance of the municipal securities with no 
remaining liability, then the obligation to provide annual financial 
information and notices of events may terminate.
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    \1\14See Rule 15c2-12(b)(5)(iii).
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2. Notice of Material Events
    Commenters generally agreed that issuers and obligors should be 
subject to an undertaking to provide event information to the 
market.115 Brokers, dealers and municipal securities dealers 
supported these provisions of the Proposed Amendments, because the use 
of a list provides guidance as to what events should be 
covered.116 Other commenters, however, felt that the list should 
be deleted from the rule and that the concept of materiality should be 
relied upon to determine what events should be the subject of 
notices.117 Some commenters believed that the list of eleven 
events should be expanded to include a provision that would cover any 
other event that might reasonably be expected to have a material 
adverse effect on the holders of the bonds.118
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    \1\15See paragraph (b)(5)(i)(B) of the Proposed Amendments. See 
also, Letter of A.G. Edwards; Letter of Chemical Securities; Letter 
of J.J. Kenny Co., Inc. (``J.J. Kenny Co.''); Letter of MSRB.
    \1\16See, e.g., Letter of Chemical Securities; Letter of Goldman 
Sachs; Letter of George K. Baum; Letter of PSA.
    \1\17See, e.g., Letter of CDFA; Letter of Gust & Rosenfeld; 
Joint Response; Letter of Municipal Treasurers Association; Letter 
of Rauscher Pierce Refsnes, Inc.; Letter of Standish Ayer & Wood, 
Inc.
    \1\18See, e.g., Letter of Chemical Securities; Letter of Edward 
D. Jones & Co.; Letter of Finance Authority of Maine; Letter of 
Ferris Baker Watts; Letter of Norwest Investment Services, Inc.; 
Letter of Prudential Investment Corp.
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    The list of eleven events has been retained in the 
amendments.119 As indicated in the Proposing Release, the list of 
eleven events was proposed in response to requests for guidance to 
issuers and other participants in the municipal securities markets as 
to those events that normally would reflect on the credit supporting 
the municipal securities, as well as on the terms of the securities 
that they issue, and thus normally would be considered material. Under 
the amendments, only the occurrence of one of the specified events 
will, if material, create an obligation to send a notice to the 
repository.
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    \1\19The introduction to the list also has been clarified to 
indicate that the events relate specifically to the securities being 
offered. See Rule 15c2-12(b)(5)(i)(C).
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    The determination of whether other events also should be the 
subject of notification pursuant to the information undertaking is left 
to the parties. For example, some commenters requested that the list of 
events be expanded to address circumstances when the notified events 
have been cured or rectified, as well as other favorable 
developments.120 The parties would be free to add such matters to 
the undertaking. Issuers also may wish to send information regarding 
material developments to the repositories, to ensure equal access to 
that information by all investors and participants in the market, 
regardless of whether the particular development is subject to the 
undertaking.121
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    \1\20See, e.g., Letter of NAST; Letter of the Treasurer of State 
of California.
    \1\21Several commenters have expressed concern that statements 
by various elected officials made in a political context relating to 
an issuer must now be included in information provided to a 
repository. The amendments contain no such requirement. Moreover, 
these concerns appear to be based upon a misunderstanding of the 
reminder to issuers in the Interpretive Release that investors may 
rely on a variety of formal and informal sources for continuing 
information on municipal issuers, including public statements and 
press releases concerning an entity's fiscal affairs made by 
municipal officials, particularly in the absence of a more 
standardized mechanism for disseminating information about the 
municipal issuer to the market as a whole. The caution contained in 
the Interpretive Release that the antifraud provisions may apply to 
releases of information to the public reasonably expected to reach 
investors and the trading market does not mean, as some commenters 
inferred, that such statements are per se material; nor do the 
amendments require that such statements, even where material, be 
provided to the repositories.
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    Some commenters were concerned that permitting issuers and obligors 
to send any notices or information they wished would flood the 
repositories. Given the fact that event notices generally are short, it 
appears that the repositories would be able to handle the flow of 
notices. The Commission will, however, monitor developments in this 
area.
    Some commenters expressed concern that the event described as 
``matters affecting collateral'' was too broad.122 In response to 
such observations, that reference has been revised to reflect more 
clearly the types of events relating to collateral that could affect 
the creditworthiness of the security being offered. For instance, the 
item was not intended to require disclosure in the event of a drop in 
revenues or receipts securing payment. Rather, as more clearly 
indicated in the revised amendments, it is intended to encompass the 
release, substitution, or sale of property securing repayment of the 
securities being offered.123
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    \1\22See, e.g., Letter of ABA Business Law Section; Letter of 
ABA Urban Law Section; Letter of NABL; Letter of NCHFFA; Letter of 
New York State Housing Finance Agency; Letter of Orrick Herrington.
    \1\23See Rule 15c2-12(b)(5)(i)(C)(10).
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    Commenters also questioned whether the event relating to adverse 
tax opinions or events affecting the tax-exempt status of the security 
would include events not specific to an issuer, such as tax law changes 
which may affect a multitude of issuances and which are broadly 
reported.124 They argued that there is no need for each issuer to 
make that disclosure, which may overwhelm the repositories. The 
amendments do not include a uniform requirement for notification of 
events having widespread impact that are widely reported. Frequently, 
individual issuer disclosure may not affect the total ``mix'' of 
information available to investors, for example where Congress amends 
tax rates or alternative minimum tax rules that could affect an 
investor's yield. On the other hand, it may not be clear, absent 
individual disclosure, which classes of outstanding securities are 
affected by the general events, for example, where the tax law change 
affects a particular type of municipal security or financing structure.
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    \1\24See, e.g., Letter of ABA Urban Law Section; Letter of Kutak 
Rock; Letter of Orrick Herrington.
---------------------------------------------------------------------------

    It is possible that an ``event'' affecting the tax-exempt status of 
the security may include the commencement of litigation and other legal 
proceedings, including an audit by the Internal Revenue Service, when 
an issuer determines, based on the status of the proceedings and their 
likely impact on holders of the municipal securities, among other 
things, that such events may be material to investors.
    Commenters expressed concern that the party providing the 
undertaking may not have knowledge of the occurrence of events 
affecting other parties that might be called for by the provisions of 
the rule.125 This concern should be addressed by the revised 
approach of enabling the parties to the transaction to determine who 
will provide the undertakings. For example, in the conduit context, the 
covenant could be provided by the person that is committed by contract 
or other arrangement to support payment of debt service, rather than 
the conduit issuer.
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    \1\25See, e.g., Letter of First Southwest Company; Letter of New 
York Dormitory Authority; Letter of the Treasurer of the State of 
North Carolina; Letter of City of Pullman, Washington.
---------------------------------------------------------------------------

    The timing for providing the notification has not been changed from 
the Proposed Amendments, which required that the notice be provided on 
a ``timely'' basis. The amendments do not establish a specific time 
frame as ``timely,'' because of the wide variety of events and issuer 
circumstances. In general, this determination must take into 
consideration the time needed to discover the occurrence of the event, 
assess its materiality, and prepare and disseminate the notice.
    A new paragraph has been added to the amendments126 that would 
require a Participating Underwriter to reasonably determine that the 
undertaking includes an agreement to notify the appropriate repository 
if the annual financial information is not provided in the stated time 
frame. Given the expressed concerns of some commenters regarding the 
difficulty that they would face in determining whether an issuer or 
other person was in compliance with any of its undertakings,127 
this provision will help inform market participants if annual financial 
information for such persons has not been made available in the agreed 
upon time frame.
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    \1\26See Rule 15c2-12(b)(5)(i)(D).
    \1\27See, e.g., Letter of Gust & Rosenfeld.
---------------------------------------------------------------------------

3. Location of Undertaking in a Written Agreement or Contract
    The Proposed Amendments called for the undertaking to be contained 
in a written agreement or contract for the benefit of holders of 
municipal securities. Commenters provided a variety of views as to 
where the undertakings should be memorialized, who should be parties to 
such undertakings, and the need for flexibility to modify undertakings 
in the future. Commenters suggested, for instance, that the 
undertakings could be included in the trust indenture, bond resolution, 
ordinance, or other legislation, a separate written agreement, or the 
underwriting agreement or bond purchase agreement.
    As discussed in the Proposing Release, many offerings of municipal 
securities are issued pursuant to a trust indenture setting out the 
covenants of the issuer for the benefit of the holders of the municipal 
securities. If there is no trust indenture as part of an offering, as 
is the case with general obligation and certain other types of bonds, 
there may be a bond resolution, ordinance, or other legislation. Most 
commenters addressing this issue considered the trust indenture, bond 
resolution, ordinance, or other legislation to be appropriate for 
undertakings to provide secondary market disclosure, because they would 
create a direct obligation by issuers to bondholders.128 
Commenters also suggested the use of a separate written agreement 
between the issuer and the trustee as an appropriate method of 
memorializing undertakings.129
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    \1\28See, e.g., Letter of Merrill Lynch. Certain commenters 
considered that undertakings in a trust indenture could prove 
inflexible, as well as difficult to modify if they became 
inappropriate in the future. Letter of ABA Business Law Section. 
Other commenters considered that the issue of flexibility could be 
addressed through careful drafting. Letter of Morgan Stanley; Letter 
of Rauscher, Pierce, Refsnes, Inc.
    \1\29See Letter of Chapman and Cutler (suggesting that an 
agreement could be made between an issuer and a trustee or between 
the issuer and a NRMSIR); Letter of Rauscher, Pierce, Refsnes, Inc. 
These commenters noted that such agreements provide flexibility for 
the future modification of the type, timing, or presentation of 
secondary market disclosure, as well as remedies in the event of a 
breach of the agreement.
---------------------------------------------------------------------------

    Several commenters suggested that the inclusion of the undertakings 
in an underwriting agreement or bond purchase agreement would be 
sufficient for purposes of Rule 15c2-12,130 though another 
commenter suggested that a promise running to the benefit of the 
underwriter, whether in a bond purchase agreement or in a separate 
agreement, would be enforceable by existing and future bondholders only 
on the basis of a third party beneficiary theory, the availability of 
which may vary from state to state.131
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    \1\30See e.g., Letter of Mudge Rose.
    \1\31See Letter of Morgan Stanley. Morgan Stanley also suggested 
that an underwriting agreement was an unsatisfactory vehicle for 
undertakings to provide secondary market disclosure because an 
underwriter of a specific bond issue should not be the recipient of 
a long-term contract of this type. See Letter of Morgan Stanley. 
Other commenters agreed that undertakings should be for the benefit 
of holders of municipal securities, and that there should be no 
requirement that undertakings be made for the benefit of 
Participating Underwriters. See, e.g., Letter of Merrill Lynch 
(noting that ``the holders of the securities have the greatest 
interest in enforcing the covenant to provide information and are in 
the best position to evaluate whether affirmative efforts to enforce 
the covenant should be undertaken'').
---------------------------------------------------------------------------

    Because commenters were supportive of leaving the determination of 
the location of the undertaking to the parties, the relevant language 
of the Proposed Amendments, requiring a Participating Underwriter to 
look to ``undertakings in a written agreement or contract for the 
benefit of holders of such securities'' has been adopted as proposed. 
Therefore, undertakings may be included in a trust indenture, bond 
resolution or other legislation, or a separate written agreement. 
Undertakings also may be included in the bond form itself. This general 
requirement will create a direct obligation to bondholders, yet will be 
flexible to address variations in state law, as well as the wide 
variety of types and structures of offerings in the municipal 
securities market.
    The Commission also recognizes that an issuer's ability to contract 
may be limited under state law. To the extent that issuers are 
restricted by statute from entering into long-term contractual 
arrangements, the undertaking may include a qualifier to its 
obligation, such as that it is subject to appropriation.132
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    \1\32Some commenters were concerned that in some jurisdictions, 
an issuer's ability to agree to provide information beyond a one 
year period might be restricted by state law. To address such 
concerns, inclusion of a condition subsequent in the covenant, such 
as subject to appropriation, might be appropriate. It is 
anticipated, however, that should funds that would enable the issuer 
to provide the agreed upon information not be appropriated, 
disclosure of such fact would be made by notice to the repositories 
pursuant to Rule 15c2-12(b)(5)(i)(D).
---------------------------------------------------------------------------

    Commenters generally took the view that, while a statement in the 
final official statement describing any undertakings to provide 
secondary market disclosure would be an important addition to 
undertakings in a written agreement or contract, in order to make clear 
that the undertaking is an obligation of the issuer or obligated person 
that is enforceable on behalf of bondholders, the undertaking should be 
in a writing signed by the issuer or obligated person.133 
Statements regarding an issuer's or obligated person's provision of 
secondary market disclosure made exclusively in an official statement 
would not satisfy the terms of Rule 15c2-12(b)(5) because they would 
not create a contract enforceable on behalf of bondholders.
---------------------------------------------------------------------------

    \1\33See, e.g., Letter of Chemical Securities; Letter of Dain 
Bosworth, Inc.; Letter of Dillon, Read & Co., Inc.
---------------------------------------------------------------------------

    Commenters addressing the inclusion of undertakings in various 
documents were concerned that the failure to provide continuing 
disclosure pursuant to the undertakings could be deemed a potential 
event of default on the securities.134 Though a failure to comply 
with the undertaking would be a breach of contract, the rule does not 
specify the consequences of an issuer's breach of its undertakings to 
provide secondary market disclosure. As called for by the Joint 
Response, as well as other commenters, remedies for breach of any 
undertaking under applicable state law are a subject for negotiation 
between the parties to the Offering. To avoid uncertainties of 
enforcement, the parties to a transaction are encouraged to enumerate 
the consequences in the undertaking, including the available remedies, 
for breach of the information undertaking.
---------------------------------------------------------------------------

    \1\34Commenters argued that an issuer's failure to comply with 
undertakings to provide secondary market disclosure should not 
result in an event of default. See, e.g., Letter of ABA Urban Law 
Section; Letter of State of Washington, Office of the Treasurer; 
Letter of Colorado Municipal Bond Supervision Advisory Board.
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B. Recommendation of Transactions in Municipal Securities

    The Proposed Amendments would have prohibited any broker, dealer, 
or municipal securities dealer from recommending the purchase or sale 
of a municipal security unless it had specifically reviewed the 
information the issuer of such municipal security had undertaken to 
provide.135 The purpose of this provision of the Proposed 
Amendments was to assist dealers in satisfying their obligation to have 
a reasonable basis to recommend municipal securities by requiring them 
to consider the most current information before making a 
recommendation.
---------------------------------------------------------------------------

    \1\35See paragraph (c) of the Proposed Amendments.
---------------------------------------------------------------------------

    In view of the importance of secondary market liquidity in 
municipal issues, the Commission requested comment on whether the 
Proposed Amendments would have a substantial or long-lasting effect on 
market liquidity. This request for comment was based on concerns raised 
about whether municipal securities dealers would be willing to effect 
secondary market transactions in a broad range of municipal securities 
if review was required on a recommendation by recommendation basis.
    Many commenters strongly criticized this provision of the Proposed 
Amendments. The majority of commenters responded that requiring the 
review of information prior to making a recommendation on the purchase 
or sale of a municipal security would create substantial compliance 
burdens for dealers.136 Commenters also noted that the specific 
requirement to review information either would impel dealers to hire 
larger research and analysis staffs,137 or, more likely, would 
cause dealers to restrict the issuers whose municipal securities they 
would trade to a smaller number of large and frequent issuers.138 
Commenters predicted that, as a result, liquidity for all but the 
largest and most frequent issuers would be reduced.139
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    \1\36See Letter of PSA (noting that paragraph (c) would require 
dealers to create records showing that they had reviewed municipal 
securities).
    \1\37See, e.g., Letter of Chapman and Cutler (brokers with fewer 
analysts will be at a competitive disadvantage); Letter of Morgan 
Stanley (noting that in order to comply with paragraph (c) as 
proposed, reliance on third-party service providers for information 
analysis would be required).
    \1\38See, e.g., Joint Response; Letter of PSA; Letter of 
Gabriel, Hueglin & Cashman.
    \1\39See, e.g., Joint Response; Letter of PSA.
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    Commenters proposed alternatives to the recommendation prohibition, 
including basing the type of review of a municipal security, and 
disclosure about such review, on whether the investor was an 
institutional or retail investor,140 or on the type of municipal 
security recommended.141 Other commenters suggested the continued 
reliance on the reasonable basis standard inherent in the MSRB's 
suitability rule, G-19, and the antifraud provisions, as discussed by 
the Commission in the 1988 and 1989 Releases proposing and adopting 
Rule 15c2-12, as well as the Interpretive Release.142
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    \1\40Letter of Investment Company Institute (``ICI''). See also 
Letter of MSRB; Letter of NABL. NABL suggested disclosure by dealers 
as to whether a party has committed to provide secondary market 
disclosure, and if not, the consequences of investing in the 
securities.
    \1\41See, e.g., Letter of Edward D. Jones & Co. (suggesting 
application of the Proposed Amendments only to non-rated or special 
assessment bonds); Letter of NABL (suggesting exemptions from the 
amendments to Rule 15c2-12 for issuers that obtain and maintain an 
investment grade rating, and for general obligation bonds and 
revenue bonds issued to finance essential government purposes).
    \1\42See, e.g., Letter of PSA; Letter of A.G. Edwards & Sons, 
Inc. (reviewing issuer's disclosure is not the only way to form the 
basis for a recommendation).
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    As adopted, this provision has been modified in a number of 
respects to respond to concerns expressed by commenters. In particular, 
the amendments replace the proposed review standard with a requirement 
that dealers have procedures in place that provide reasonable assurance 
that they will receive promptly any notices of material events 
regarding the securities that they recommend. The events are any of the 
eleven events disclosed as described in Rule 15c2-12(b)(5)(i)(C), or 
the notice of failure to provide annual financial information in 
accordance with an undertaking as described in Rule 15c2-12(b)(5)(i)(D) 
with respect to that security. Many dealers currently subscribe to 
electronic reporting systems that give notice of significant events 
made public by municipal issuers. To comply with the rule's 
requirement, these dealers should make certain that these systems 
receive, directly or indirectly, material event notices for issues the 
dealer recommends. In addition, dealers should develop procedures to 
ensure that notices of such events will be available to the staff 
responsible for making recommendations.
    In the Commission's view, the recommendation provision, as 
modified, should substantially reduce the concerns of commenters with 
respect to compliance burdens and effects on liquidity. It also will 
help ensure that dealers will consider the material event notices that 
issuers produce, thus enabling them to have an adequate basis on which 
to recommend143 municipal securities.
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    \1\43As noted in the Proposing Release, most situations in which 
a dealer brings a municipal security to the attention of a customer 
involve an implicit recommendation of the security to the customer.
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    Moreover, even though the amendments do not require that dealers 
directly review an issuer's ongoing disclosure before making each 
recommendation, the Commission agrees with those commenters that said 
that additional information made available by issuers will be taken 
into account by dealers making recommendations regarding that security, 
under the MSRB's fair dealing and suitability rules, and the antifraud 
provisions.144 In addition to the Commission's past 
interpretations of the responsibilities of dealers to have a reasonable 
basis for their recommendations, the MSRB repeatedly has emphasized 
that secondary market disclosure information publicized by issuers must 
be taken into account by dealers to meet the investor protection 
standards imposed by its investor protection rules. Specifically, MSRB 
rule G-17 requires dealers to disclose material facts of a transaction 
to the customer; MSRB rule G-19 requires dealers to ensure that any 
transaction recommended to the customer is suitable for that customer; 
and MSRB rule G-30 requires dealers to ensure that the prices set for 
customer transactions are fair and reasonable. In its comment letter, 
the MSRB noted that ``[i]f a dealer is not aware of major financial and 
other material developments affecting an issuer's securities, it is 
difficult or impossible for the dealer to comply with these 
requirements.''145
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    \1\44See, e.g., Letter of MSRB (emphasizing that, in the Board's 
view, dealers would be responsible for continuing disclosure 
information available in NRMSIRs even without the specific 
``review'' requirement); Letter of Paine Webber.
    \1\45Letter of MSRB (noting the requirements of the MSRB's rules 
in commenting that the Proposed Amendment's requirement to review 
periodic information is not a practical option for dealers).
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    For example, if a dealer reviews an electronic reporting system for 
material events relating to a security, and finds that an issuer has 
submitted a notice that it has failed to provide annual financial 
information on or before the date specified in the written agreement or 
contract,146 that fact would be a significant factor to be taken 
into account when the dealer formulates the basis for a recommendation 
of such securities. While the dealer would not be prohibited per se 
from recommending such municipal securities, notice that the issuer has 
failed to provide annual financial information would be the type of 
material information required to be disclosed to the customer pursuant 
to MSRB rule G-17.147 Such a notice also would trigger a further 
inquiry by the dealer to assure itself that it is cognizant of the 
condition of the issuer or obligated persons, despite the absence of 
promised information. This also would be true if a dealer attempts to 
obtain an issuer's annual financial information, finds that it has not 
been submitted to any repository, and the dealer had no record of the 
issuer submitting a notice to this effect. In such cases, further 
research may be necessary or advisable prior to making a recommendation 
in the issuer's securities.
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    \1\46See Rule 15c2-12(b)(5)(i)(D).
    \1\47See MSRB Manual (CCH) 3581.30 (interpreting MSRB rule G-17 
to require that a dealer disclose, at or prior to a sale, all 
material facts concerning the transaction, including a complete 
description of the security). See also 1988 Release at n. 50 and 
accompanying text.
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C. Information Repositories

1. Background
    Under Rule 15c2-12, as adopted in 1989, NRMSIRs essentially serve 
the function of disseminators of official statements on behalf of 
Participating Underwriters.148 The option of Participating 
Underwriters to transfer their final official statement delivery 
obligations to NRMSIRs has encouraged the development of 
NRMSIRs.149 The three existing NRMSIRs are private vendors that 
gather and disseminate final official statements pursuant to Rule 15c2-
12. In addition, although not required under existing provisions of the 
rule, they provide other current information about municipal issuers to 
the primary and secondary municipal securities markets.150
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    \1\48Under Rule 15c2-12(b)(4), underwriters must deliver final 
official statements to potential customers for a 90 day period after 
the close of the underwriting period. The underwriters' 90 day 
delivery obligation is shortened to 25 days if the final official 
statement can be obtained from a NRMSIR.
    \1\49Since the Commission adopted Rule 15c2-12, the Division of 
Market Regulation issued three no-action letters recognizing 
national information vendors as NRMSIRS, based on the standards set 
out in the July 1989 Release. See Letters from Richard G. Ketchum, 
Director, Division of Market Regulation 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). Recently, the Commission has received inquiries 
from additional information vendors desiring to be recognized as 
NRMSIRs.
    \1\50NRMSIRs are not the only source of information in the 
municipal market. The MSRB has developed its Municipal Securities 
Information Library (``MSIL'') system, which presently collects 
information and disseminates it to market participants and 
information vendors. The Official Statement and Advance Refunding 
Document-Paper Submission System (``OS/ARD'') of the MSIL collects 
and makes available on magnetic tape and on paper official 
statements and advance refunding notices. Securities Exchange Act 
Release No. 29298 (June 13, 1991), 56 FR 28194. As a part of the 
MSIL system, the MSRB commenced operation of its Continuing 
Disclosure Information (``CDI'') pilot system in January, 1993. The 
CDI system 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. Neither the MSIL OS/ARD system 
nor the CDI system is a NRMSIR; the Commission has previously 
indicated that it would consider the competitive implications of a 
MSRB request for NRMSIR status. See Securities Exchange Act Release 
No. 28081 (June 1, 1990), 55 FR 23333, 23337 n.26.
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    As a result of the amendments, NRMSIRs will play an expanded role 
in the collection and dissemination of secondary market information. In 
addition to the collection and dissemination of final official 
statements, they will collect and disseminate annual financial 
information, as well as notices of material events. The Commission is 
sensitive to the need of NRMSIRs for flexibility, especially with 
respect to the timing requirements for the dissemination of notices of 
material events. The Commission will monitor developments in the 
municipal securities market as participants adapt to the changes in 
Rule 15c2-12, and fully expects that the current and potential NRMSIRs 
are capable of adjusting to their expanded role. The Commission is of 
the view that NRMSIRs, as private information vendors, will have 
sufficient economic incentives to serve their expanded functions 
resulting from the amendments to Rule 15c2-12, even in the absence of 
the more specific review requirement of the recommendation prohibition 
of the Proposed Amendments.151
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    \1\51See, e.g., Letter of PSA (noting that the suggestion made 
by some market participants that municipal securities dealers will 
not utilize information they have long sought is implausible), 
Letter of Ferris Baker Watts (information will be used if it is 
available).
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2. Definition of Nationally Recognized Municipal Securities Information 
Repository
    The Commission requested comment on whether the term ``NRMSIR'' 
should be defined in Rule 15c2-12, and whether specific standards 
should be established for NRMSIRs. If standards were to be established 
in the rule, the Commission requested comment on whether proposed 
standards set forth in the release were adequate.\152\ The majority of 
state-based information gatherers and disseminators, and other NRMSIRs 
that addressed the issue of defining the term ``NRMSIR'' supported 
maintaining the guidelines already established by the Commission in the 
1989 Release.\153\ After reviewing the comment letters, the Commission 
has determined that the guidance established in the 1989 Release for 
NRMSIRs should be modified only as necessary to reflect the amendments 
to Rule 15c2-12. In determining whether a particular entity is a NRMSIR 
the Commission will now consider, among other things, whether the 
repository:
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    \152\The Commission suggested that NRMSIRs (a) maintain current, 
accurate information about municipal securities, including final 
official statements, the issuer's annual final information, and 
issuer's notices of material events; (b) have effective systems for 
the timely collection, indexing, storage and retrieval of these 
documents; and (c) 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. The Commission also 
stressed the importance of timely public availability upon receipt 
of information by a NRMSIR.
    \153\See, e.g., Letter of Bloomberg L.P.; Letter of Cypress 
Capital Corp. (a dealer chosen by the Louisiana Municipal 
Association to assist it in developing a repository to collect and 
disseminate information on Louisiana issuers of municipal 
securities). In discussing NRMSIRs in the 1989 Release, 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 limit 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. See 
1989 Release at n. 65.
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    (1) Is national in scope;
    (2) Maintains\154\ current, accurate\155\ information about 
municipal offerings in the form of official statements, and annual 
financial information, notices of material events, and notices of a 
failure to provide annual financial information undertaken to be 
provided in accordance with Rule 15c2-12;
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    \154\In the past, the Division of Market Regulation has required 
that each NRMSIR maintain copies of all disclosure documents. In 
view of recent requests from information collectors and 
disseminators, the Division of Market Regulation will review, on a 
case by case basis, NRMSIR proposals to satisfy the requirement to 
maintain copies of disclosure documents through a contract with 
another entity (including the MSRB) that will maintain copies. See 
Letters from Laurence M. Landau, Vice President, Dow Jones Telerate, 
to Elizabeth MacGregor, Division of Market Regulation, SEC, (July 
18, 1994) and to Gautam S. Gujral, Division of Market Regulation, 
SEC (August 4, 1994). See also Letter of Storch & Brenner (on behalf 
of R.R. Donnelly Financial). This flexible approach, requested by 
industry participants, may allow NRMSIRs to reduce the cost at which 
they can collect and disseminate disclosure information to broker-
dealers and investors.
    \155\It should be noted that NRMSIRs are not being required to 
verify the accuracy of the information provided them. NRMSIRs are 
required to accurately convey the information provided to them.
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    (3) Has effective retrieval and dissemination systems;
    (4) Places no limits on the persons from which it will accept 
official statements, and annual financial information, notices of 
material events, and notices of a failure to provide annual financial 
information undertaken to be provided in accordance with Rule 15c2-12;
    (5) Provides access to the documents deposited with it to anyone 
willing and able to pay the applicable fees; and
    (6) Charges reasonable fees.
    While NRMSIRs may charge reasonable fees\156\ for the dissemination 
of information, they may not charge issuers for accepting information 
provided by issuers in accordance with Rule 15c2-12.\157\ In response 
to concerns raised by commenters, the Commission also notes that giving 
preferential treatment to certain brokers, dealers, and municipal 
securities dealers by giving them market information before it is made 
available to all customers would be wholly inconsistent with 
recognition as a NRMSIR.\158\
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    \156\See 1989 Release.
    \157\See, e.g., Letter of Maine Municipal Bond Bank; Letter of 
National Association of Independent Public Financial Advisers 
(NRMSIR users, not issuers, should pay the NRMSIR costs).
    \158\See, e.g., Letter of Colonial Management Associates, Inc.
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    Comment also was requested on the ability and willingness of both 
potential NRMSIRs, and those presently operating under no-action 
letters, to meet the dissemination standards discussed in the Proposing 
Release. NRMSIRs responded that they can meet these standards.\159\ In 
order to implement these standards, the Commission has determined that 
existing NRMSIRs should reapply for recognition from the Commission 
under the revised criteria to continue to function as NRMSIRs.
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    \159\Letter of Bloomberg L.P.; Letter of J.J. Kenny Co.; Letter 
of The Bond Buyer.
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3. State Information Depositories
    The Commission also requested comment on whether a state-based 
depository could serve as an effective means to disseminate information 
to the market for a nationally traded security, thus enabling the 
appropriate parties to fulfill their disclosure obligations using a 
state-based depository. Commenters expressed divergent views on this 
issue.\160\ No state responded directly in response to the Commission's 
request for comment on whether states are willing to make the necessary 
financial commitment to create a state-based system. The Comptroller of 
the State of New York pointed out, however, that his office already 
collects financial data from local governments, and that there ``is an 
appropriate and important function which the states may perform in the 
secondary market disclosure process.''\161\ A number of third party 
state-based information collectors also stated that they were in the 
process of creating state-based repositories.\162\ Other such third 
party state-based information collectors pointed out that they already 
had working depositories in place.\163\
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    \160\With one notable exception, national information vendors 
generally did not see a need for state-based repositories and argued 
that state-based repositories would indeed add to the complexity of 
collecting and disseminating information. See, e.g., Letter of J.J. 
Kenny Co. Some state-based information gatherers and disseminators, 
however, argued that they already had created mechanisms for the 
collection and dissemination of information, and their systems are 
working well. The National Association of State Auditors, 
Comptrollers and Treasurers (``NASACT'') pointed out that issuers 
and other obligors will probably file with state-based repositories, 
with whom they are accustomed to working and with whom they 
typically must file in any event for regulatory purposes unrelated 
to secondary market disclosure. NASACT argued that while the state 
repositories do not wish to compete with NRMSIRs, state-based 
repositories can serve an important role in enhancing the 
accessibility of disclosure information for repackaging by the 
NRMSIRs. See Letter of NASACT.
    \161\See Letter of the Office of the State Comptroller, State of 
New York.
    \162\See, e.g., Letter of Cypress Capital Corporation (Louisiana 
Municipal Security Disclosure Board ``intends to be in a position to 
comply with the standards developed by the Commission for 
NRMSIRs'').
    \163\See Letter of Municipal Advisory Council of Texas; Letter 
of Ohio Municipal Advisory Council.
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    Based on these comments, and in light of existing disclosure 
mechanisms and recent legislation in several states designed to enhance 
secondary market disclosure,\164\ it appears that states can play a 
beneficial role in enhancing disclosure in the municipal securities 
market.\165\ State-based depositories will be in a special relationship 
with filers of disclosure information to provide for convenient and 
efficient dissemination. The Commission therefore encourages states to 
develop state-based depositories.
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    \164\South Carolina recently enacted legislation requiring 
issuers to agree in a bond indenture to file an annual independent 
audit within a specified number of days of the issuer's receipt 
thereof and certain event information with a central repository. 
South Carolina Senate Bill 1182, (effective September 1, 1994) to be 
codified in S.C. Code Ann. Chapter 1, Title 11, Section 11-1-85 
(1976). Similarly, Tennessee recently adopted legislation 
authorizing the adoption of rules to facilitate secondary market 
disclosure by any public entity, including the form and content of 
that disclosure. Tenn. Code Ann. Sec. 9-21-151 (a) and (b)(2).
    \165\See, e.g., Letter of the Office of the State Comptroller, 
State of New York.
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    To encourage the development of state-based depositories, the 
Commission has amended Rule 15c2-12 to require that Participating 
Underwriters reasonably determine that the information undertaken to be 
provided, in addition to being submitted to the NRMSIRs, or, in some 
cases, to the MSRB, will be submitted to a state information depository 
(``SID''), if an appropriate SID has been established in that state. 
Further, as discussed below,\166\ an exemption conditioned on making 
annual financial information available upon request or to a SID, and 
providing notices of material events to each NRMSIR or the MSRB, and to 
a SID, has been adopted. An appropriate SID would be a depository 
operated or designated\167\ by the state that receives information from 
all issuers within the state, and makes this information available 
promptly to the public on a contemporaneous basis.\168\ The Commission 
staff is prepared to provide guidance in particular instances regarding 
a SID's qualification for purposes of the rule.
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    \166\See Section II.D.1. infra.
    \167\There is no requirement that SIDs be instrumentalities of a 
state. A number of private organizations already function as state-
based repositories, at times at no cost to the taxpayer. The 
Commission defers to each state's determination whether to have a 
private or public entity be its SID.
    \168\As with NRMSIRs, for a SID to give preferential treatment 
to a NRMSIR by giving it market information before it is made 
available to other NRMSIRs would be wholly inconsistent with 
functioning as a SID.
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4. Information Delivery Requirements
    The Proposing Release asked to whom the required information should 
be delivered. It also requested comment on the feasibility of requiring 
NRMSIRs to inform the MSRB when they receive disclosure information 
from issuers, and whether such information also should be required to 
be placed with the MSRB, in addition to or in lieu of a NRMSIR. The 
NRMSIRs did not address the issue of requiring them to inform the MSRB 
whenever they received disclosure information from an issuer, although 
one commenter argued that designating the MSRB as a repository only 
would add an unnecessary layer to the dissemination process.\169\ Other 
commenters suggested designating a single central repository.\170\ 
Similarly, some commenters suggested imposing a requirement that 
disclosure information be delivered to all NRMSIRs,\171\ while others 
suggested that NRMSIRs be required to share the information received 
with other NRMSIRs,\172\ and a third group preferred the establishment 
of a central index.\173\ State-based information gatherers and 
disemminators had diverging views on this issue.\174\
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    \169\Letter of Bloomberg L.P.
    \170\See, e.g., Artemis Capital Group, Ltd. (proposing that the 
Commission designate the MSRB's MSIL system as the single central 
repository); Letter of Chapman and Cutler (there should be one 
central source of information).
    \171\See, e.g., Letter of J.J. Kenny Co.; Letter of National 
Association of Independent Public Financial Advisers.
    \172\See, e.g., Letter of MSRB; Letter of Richard A. Ciccarone.
    \173\Letter of Storch & Brenner (on behalf of R.R. Donnelly 
Financial); Letter of The Bond Buyer.
    \174\The Ohio Municipal Advisory Council stated that it is 
feasible to require repositories to inform the MSRB as to which 
issuers have released information to it. Under Cypress Capital 
Corporation's proposal, the indexing party would receive 
descriptions of all materials received by the Louisiana Repository. 
But see, Letter of NASACT (requirement that a repository be required 
to notify a central index each time an item of information is 
received by the repository is unduly burdensome and unnecessary).
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    Based on these comments, the Commission has determined to require 
that annual financial information undertaken to be provided be 
deposited with each NRMSIR and the appropriate SID in the issuer's 
state. Any audited financial statements submitted in accordance with 
the undertakings also must be delivered to each NRMSIR and to the SID 
in the issuer's state, if such a depository has been established. The 
requirement to have annual financial information and audited financial 
statements delivered to all NRMSIRs and the appropriate SID is a 
modification of the Proposed Amendments. This modification will ensure 
that all NRMSIRs receive disclosure information directly. It also 
permits the Commission to adopt the amendments without a delay for the 
creation of a central index or a system of information sharing among 
NRMSIRs.\175\ The requirement to send information to all NRMSIRs rather 
than a single NRMSIR of the issuer's or obligated person's choice, 
should not impose significant burdens or costs, other than duplication 
and mailing costs. Furthermore, this requirement to deliver disclosure 
to the NRMSIRs and the appropriate SID also allays the anti-competitive 
concerns raised by the creation of a single NRMSIR.
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    \175\Some commenters expressed an interest in creating a central 
index and an information sharing system. Letter of Storch & Brenner 
(on behalf of R.R. Donnelly Financial); Letter of Dow Jones 
Telerate, Inc. The Commission is prepared to review such mechanisms 
for centralized collection and dissemination if requested to do so.
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    In contrast to annual financial information, under the amendments, 
notices of material events, as well as notices of a failure by an 
issuer or other obligated person to provide annual financial 
information must be delivered to each NRMSIR or the MSRB, and the 
appropriate SID. The Commission is of the view that permitting issuers 
and obligated persons to file such notices either with each NRMSIR or 
with the MSRB (as well as the appropriate SID) will facilitate prompt 
and wide disclosure. The amendments reflect the preference of some 
commenters for filing such notices in one central place, such as the 
MSRB, rather than having to file with multiple NRMSIRs. The Commission 
expects that if notices are filed with the MSRB, the MSRB will make 
these notices available to all NRMSIRs on a prompt and contemporaneous 
basis.
5. Timing of Dissemination
    Due to the time sensitive nature of notices of material event and 
failures to provide annual financial statements, it is important that 
such notices are disseminated quickly. These market requirements will 
dictate that disseminators have a system in place by which information 
vendors can make such notices available to broker-dealers and investors 
quickly and contemporaneously.
    NRMSIRs and other information vendors have indicated in their 
comment letters that under certain circumstances a 15 minute 
turnaround\176\ time for notices of material events, and a 24 hour 
turnaround period for annual financial information may be feasible, 
and, in some instances, already is in place.\177\ Nonetheless, because 
the ultimate scope of the information undertakings was not known to the 
existing and potential NRMSIRs at the time they submitted their 
comments, the Commission intends to discuss with the NRMSIRs during the 
recognition process appropriate and practicable turnaround standards 
for information re-dissemination. Because SIDs are alternative sources 
of information for every type of disclosure, the Commission does not 
intend to impose strict turnaround times for SIDs. Instead, SIDs should 
provide the Commission and users with a clear statement of turnaround 
times that they will meet consistently.
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    \176\The Commission considers ``turnaround time'' or 
``turnaround period'' to mean the time between which a NRMSIR 
initially receives information, and the time when such information 
is made available to the public. NRMSIRs will be required to make 
available the full text of notices of material events, and post the 
receipt and availability of other documents within the designated 
turnaround time period.
    \177\The Bond Buyer stated that it broadcasts, through its 
Munifacts News product, material events and time critical 
announcements within 15 minutes of their receipt to municipal market 
participants throughout the country. It stated that it also posts 
documents within 24 hours of a document's receipt to the Bond 
Buyer's On-line Index which is updated throughout the day. Letter of 
The Bond Buyer. Similarly, Dow Jones Telerate stated that electronic 
dissemination will allow the turnaround time of 24 hours for an 
official statement and 15 minutes for secondary disclosure documents 
on material events to be feasible. Letter of Dow Jones Telerate. 
Material information is electronically disseminated on a ``real 
time'' basis by Bloomberg L.P. Letter of Bloomberg L.P.
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6. Technological Considerations
    The Commission also received many suggestions from information 
gatherers and vendors on streamlining the filing of disclosure 
information. These suggestions included requiring electronic filing of 
disclosure information, providing filings on computer disks and 
providing information to NRMSIRs as images of original source documents 
rather than exclusively as coded text.\178\ Rather than dictate 
standards, the Commission encourages municipal securities market 
participants to coordinate their requirements and preferences on an 
industry-wide basis.
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    \178\J.J. Kenny Co. requested that documents be required to be 
filed as images of original source documents rather than exclusively 
as coded text. Dow Jones Telerate requested that Official statements 
be filed along with one electronic disk copy of the original Word 
Processing/Desktop publishing file with the label marked as to which 
software and version was used. For secondary market disclosure 
documents, Telerate advises using the NFMA proposed worksheets. The 
Bond Buyer stated that ``collection would be most efficient if 
documents were in ASCII and a common word processing or publishing 
format''.
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D. Exemptions

    The Proposed Amendments contained two new exemptions, which are 
being adopted with certain modifications. A third new exemption from 
the annual financial information requirement, for short-term 
securities, also is being adopted. In addition, Rule 15c2-12's 
limitation to primary offerings of municipal securities with an 
aggregate principal amount of $1,000,000 or more, and its existing 
exemptions, also apply to the amendments.\179\
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    \179\Former paragraph (c) of Rule 15c2-12 was proposed to be, 
and has been redesignated as paragraph (d)(1). This paragraph 
exempts primary offerings of municipal securities in authorized 
denominations of $100,000 or more, if such securities: (1) are sold 
to no more than 35 investors, each of whom the underwriter 
reasonably believes is capable of evaluating the investment and who 
is not purchasing with a view to distribution; (2) have a maturity 
of nine months or less or; (3) at the option of the holder may be 
tendered to an issuer at least as frequently as every nine months.
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1. Small Issuer Exemption
    The Proposed Amendments would have exempted from the provisions of 
the undertaking and recommendation prohibitions of the rule municipal 
securities issued in Offerings by issuers that had (i) less than 
$10,000,000 in principal amount of securities outstanding, including 
the offered securities and (ii) issued less than $3,000,000 in 
aggregate amount of municipal securities in the most recent 48 months 
preceding the offering.
    A number of commenters discussed the appropriateness of the 
proposed dollar exemption, with comments ranging from a call for 
increased thresholds to no thresholds at all.180 Some commenters 
believed that the thresholds should be increased, because many small 
municipalities would exceed these thresholds if they delay their 
financings in order to issue a greater amount of bonds at one time. The 
commenters argued that these are small, infrequent issuers with limited 
trading in the secondary market and the cost of compliance would 
outweigh the benefits received from improved secondary market 
disclosure.181
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    \1\80See, e.g. Letter of ALHFA; Letter of CDFA; Letter of NFMA; 
Letter of National Association of Independent Public Finance 
Advisors; Letter of Prudential Investment Corp.; Letter of PSA; 
Letter of Washington State Auditor.
    \1\81See, e.g., Letter of NAST; Letter of SIA.
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    Other commenters took exception to the proposed thresholds because 
they were too high. These commenters argued that the exemption as 
proposed would exclude from coverage of the rule the types of issuers 
who have historically had deficient disclosure practices and 
disproportionate numbers of defaults.182 A number of commenters 
also argued that the $3 million/48 month component of the threshold was 
too complex.183
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    \1\82See, e.g. Letter of Chemical Securities; Letter of Eaton 
Vance Management; Letter of Edward D. Jones & Co.; Letter of Morgan 
Stanley; Letter of National Association of Independent Public 
Finance Advisors; Letter of Norwest Investment Services.
    \1\83See, e.g., Letter of APPA; Letter of The Bank of New York; 
Joint Response.
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    As adopted,184 the exemption retains the aggregate $10,000,000 
limitation, but eliminates the $3,000,000 threshold. Instead, in 
addition to falling under the $10,000,000 in outstanding securities 
threshold, the exemption is conditioned upon an issuer or obligated 
person providing a limited disclosure undertaking. Under this 
undertaking, financial information and operating data concerning each 
obligor for which financial information or operating data is presented 
in the final official statement, must be provided upon request to any 
person, or be provided at least annually to the appropriate SID. The 
undertaking would specify the type of financial information and 
operating data that will be made available annually, which must include 
financial information and operating data that is customarily prepared 
by the obligated person and is publicly available. The final official 
statement must describe where and how the financial information and 
operating data can be obtained.
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    \1\84See Rule 15c2-12(d)(2).
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    Financial information and operating data of governmental issuers 
generally are subject to freedom of information laws, and thus would be 
publicly available for purposes of this condition of the exemption. 
Conduit borrowers generally provide annual financial information to 
trustees, credit enhancers, or the financing agency that issued the 
municipal securities, and thus would have no difficulty complying with 
this standard if that information is made publicly available. To the 
extent that an obligated person does not currently publicly disclose 
that information, they are free to specify the type of information they 
are undertaking to provide on an ongoing basis, but they must agree to 
provide some information. That information need not be the same type of 
information presented in the official statement. Nor would these exempt 
persons have to release their audited financial statements, unless they 
otherwise customarily prepare and make their audited financial 
statements publicly available. Moreover, the limited disclosure 
undertaking need only cover those obligors for which financial 
information or operating data is provided in the official statement.
    In addition to providing financial information and operating data 
annually, notices of material events must be sent to each NRMSIR or to 
the MSRB, and the appropriate SID. This public information condition 
has been adopted in response to comments highlighting the need for 
information regarding small issuers accessing the public debt 
market.185
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    \1\85See Joint Response. A number of other commenters expressed 
concern about the lack of information on issuers in market segments 
in which the higher proportion of defaults have occurred. See note 
182, supra and accompanying text. The effective date for this 
information undertaking condition on the small issuer exemption will 
be delayed until January 1, 1996. See Section II.E., infra.
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    The threshold of $10,000,000 has been retained, notwithstanding 
comments that it was too high or too low. According to statistics 
provided by one commenter,186 in 1993, 71% of the approximately 
52,000 municipal issuers had under $10,000,000 in outstanding municipal 
securities. Accordingly, the amendments as proposed already provided 
significant exemptive relief for small issuers. Indeed, the fact that a 
majority of issuers fall below that threshold supports conditioning the 
exemption on a commitment to provide a limited amount of secondary 
market information from exempt issuers. Even with that condition, a 
significant percentage of offerings would remain totally exempt from 
the amendments as adopted, because over 20% of the total issuances in 
1993 were under $1,000,000.187 As these statistics demonstrate, 
the exemption should exclude a large percentage of small infrequent 
issuers.
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    \1\86See Letter of The Bond Buyer.
    \1\87See Letter of The Bond Buyer. The requirements of Rule 
15c2-12, as amended, may not be avoided by breaking up an offering 
into several offerings of less than $1,000,000, where the offerings 
are of the same class of securities and are for the same purpose.
---------------------------------------------------------------------------

    Commenters also questioned how the aggregate thresholds were 
measured, including whose securities would be included and whether the 
exemption applied only to outstanding securities that were sold in 
Offerings subject to the rule.188 Many commenters indicated that 
the thresholds should be separately applied to each issuer of municipal 
securities and each underlying obligor.189 Thus, in the case of 
conduit issuers that have no liability on the municipal securities, 
commenters argued that the thresholds should be determined by reference 
to the persons who are the beneficiaries of the financing.190 Some 
commenters argued that those issuers that had different types of 
financings that relied on separate revenue streams for repayment, such 
as dedicated tax revenues, should not be foreclosed from relying on the 
small issuer exemption for each financing.191
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    \1\88See, e.g., Letter of ABA Urban Law Section; Letter of CIFA; 
Letter of Colorado Municipal Bond Supervision Advisory Board.
    \1\89See, e.g., Letter of ALHFA; Letter of CDFA; Letter of 
Hawkins Delafield & Wood.
    \1\90See, e.g., Letter of Alaska Municipal Bond Bank; Letter of 
Bose, McKinney & Evans; Letter of CDFA; Letter of Oregon Economic 
Development Department.
    \1\91See, e.g., Letter of ABA Business Law Section; Letter of 
Chapman and Cutler; Letter of NABL.
---------------------------------------------------------------------------

    To address the first of these concerns, the amendments have been 
revised to clarify that the availability of the exemption turns on the 
amount of outstanding municipal securities for which an issuer or 
obligated person also is an obligated person. An issuer of municipal 
securities would need to satisfy the threshold only if it were an 
obligated person with respect to the security being offered. Under this 
approach, if a financing agency that is offering obligations that have 
some recourse to the agency, only those outstanding securities of the 
agency that likewise are recourse would count toward the threshold. If 
the financing agency does not issue recourse securities, the exemption 
will be unavailable only if a conduit borrower obligated on the 
municipal securities being offered is an obligated person with respect 
to more than $10,000,000 in outstanding municipal securities. If any 
one obligated person in an Offering exceeds the threshold, then the 
entire Offering, including all obligated persons, will be subject to 
the rule. Subsequent non-recourse offerings by the financing agency 
would not be affected, but would be subject to a similar test.
    With respect to the second concern, however, the amendments require 
that an obligated person aggregate all its outstanding obligations, 
even if some are payable from separate dedicated revenue sources. For 
example, a city or county that issues securities for a number of 
different purposes could not qualify as a small and infrequent issuer 
merely because its outstanding securities are payable from separate 
revenue streams. Thus, while a governmental issuer's outstanding 
obligations need not be aggregated with that of non-governmental 
obligated persons, a governmental issuer could not avoid aggregation of 
its securities by restricting repayment to separate revenue 
streams.192
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    \1\92Significant indicia of whether an issuer in a revenue-type 
financing is in fact a part of a larger municipality would be 
whether the issuer's accounts are reflected in the municipality's 
financial statements and whether the municipality's officials or 
personnel manage the separate financing programs.
---------------------------------------------------------------------------

    Commenters also discussed a related issue of what securities would 
be included in the calculation. Commenters contended that only publicly 
offered securities should be included in the calculation. Other 
commenters questioned how short term obligations such as bond 
anticipation notes, refunded bonds and installment/lease purchase 
agreements would be treated. Several commenters suggested that the 
threshold should be measured only against publicly offered, long-term 
bonds.193
---------------------------------------------------------------------------

    \1\93See, e.g., Letter of ABA Business Law Section; Letter of 
Day Berry & Howard; Joint Response; Letter of Kutak Rock; Letter of 
the Treasurer of the State of North Carolina.
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    The amendments have been clarified in this respect to exclude from 
the threshold calculation securities that were offered in transactions 
exempt from Rule 15c2-12 because they were otherwise exempt as private 
placements and short term financings. In addition, to the extent that 
an issuer or obligated person is no longer liable for repayment on 
bonds, as with certain defeased bonds, then such bonds would not be 
included in the calculation of the threshold for such issuer or 
obligated person.
    A number of commenters indicated that an exemption should be 
available based on the number of holders of the municipal 
securities.194 However, in accordance with concerns voiced by 
other commenters regarding the difficulty in ascertaining the number of 
holders due to the fact that most municipal securities are held in 
street name through a very limited number of depositories,195 the 
amendments do not adopt any exemption based on the number of holders of 
the municipal securities.
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    \1\94See, e.g., Letter of ABA Business Law Section; Letter of 
Kutak Rock; Letter of Mudge Rose; Letter of National League of 
Cities.
    \1\95See, e.g., Letter of Bank One Corporation; Letter of 
Reliance Trust Company.
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    A variety of other comments were raised relating to exemptions, and 
a number of alternative exemptions were proposed, including exemptions 
based on the type of issuer or the existence of an investment grade 
rating.196 Commenters also believed that an exemption should be 
available for securities covered by bond insurance or other credit 
enhancement, such as bank letters of credit.197 Except as 
described above, the exemptions have not been revised to adopt these 
suggestions. Commenters, including some bond insurance 
providers,198 expressed the view that the existence of credit 
enhancement does not necessarily eliminate the need for information 
regarding the underlying credit.
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    \1\96See, e.g., Letter of ICI; Letter of McDonald & Company 
Securities; Letter of NABL; Letter of National League of Cities; 
Letter of NFMA; Letter of New York Dormitory Authority; Letter of 
Putnam Investment Management; Letter of State of Utah, Office of the 
State Treasurer; Letter of State of Washington, Office of the State 
Treasurer.
    \1\97See, e.g., Letter of Delaware County Industrial Development 
Authority; Letter of Financial Security Assurance; Letter of McNair 
& Sanford; Letter of Smith, Gambrell & Russell.
    \1\98As some commenters indicated, the existence of credit 
enhancement or other programmatic enhancement features does not 
eliminate the need for information on underlying obligated persons, 
particularly where there is a long term guarantee, because of the 
potential impact of a default on the pricing of the securities. See 
Letter of Kutak Rock on behalf of Financial Guaranty Insurers; 
Letter of FGIC; Letter of Prudential Investment Corp. See also 
Securities and Exchange Commission, Report by the Securities and 
Exchange Commission on the Financial Guaranty Market: The Use of the 
Exemption In Section 3(a)(2) of the Securities Act for Securities 
Guaranteed by Banks and the Use of Insurance Policies to Guarantee 
Debt Securities (August 28, 1987).
---------------------------------------------------------------------------

    A number of commenters also argued that new exemptions should be 
added that would mirror exemptions under the Securities Act.199 
Some commenters argued that exemptions should be included for non-
profit entities that would have their own exemption from registration 
under the Securities Act.200 The Commission is not including any 
exclusion in the amendments for any such issuers. Issuers accessing the 
tax-exempt public securities markets have obligations to promote the 
integrity and efficiency of those markets. As the Commission noted in 
the Interpretive Release, the high level of defaults in sectors such as 
healthcare, lifecare, retirement homes and multifamily housing, 
relative to other market sectors,201 and the past problems with 
the sufficiency of information in many of these sectors, weighs heavily 
against adopting such exclusions.
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    \1\99See, e.g., Letter of ABA Business Law Section; Letter of 
Goldman Sachs; Letter of Morgan Stanley; Letter of Mudge Rose; 
Letter of Thacher Proffitt & Wood.
    \2\00See, e.g., Letter of Morgan Stanley; Letter of Mudge Rose; 
Letter of New York Dormitory Authority.
    \2\01Interpretive Release at Section III.D. See also Letter of 
The Bond Buyer.
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2. Exemption from the Annual Financial Information Requirement for 
Short-term Securities
    A new exemption has been added to exempt from the requirement for 
an undertaking calling for annual financial information, Offerings of 
securities with an 18 month or shorter maturity.202 The new 
exemption is in response to comments suggesting that the rule not 
require annual financial information in situations where the securities 
would mature shortly after, or possibly even before, the annual 
financial information would be due.203 The provisions of the 
amended rule relating to notices of material events, however, would 
apply to these Offerings absent some other Rule 15c2-12 exemption.
---------------------------------------------------------------------------

    \2\02Rule 15c2-12(d)(3).
    \2\03See, e.g., Letter of ABA Urban Law Section; Letter of 
Chemical Securities; Letter of Day, Berry & Howard; Letter of Kutak 
Rock; Letter of Maryland Department of Economic and Employment 
Development.
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3. Exemptions from the Recommendation Prohibition
    The Proposed Amendments also included a new exemption,204 
which would have permitted the recommendation in the secondary market 
of securities that were not subject to the underwriting prohibition, 
either because they were sold in a primary offering205 of 
municipal securities with an aggregate principal amount of less than 
$1,000,000, or came within the existing exemptions for limited 
placements, short-term securities, and securities with demand 
features,206 or within the new exemption for small, infrequent 
issuers.207 This exemption has been adopted as proposed,208 
with the exception that securities sold in an exempt Offering that is 
subject to the limited undertaking condition,209 are not exempt 
from the application of the recommendation prohibition. Pursuant to 
this element of the small issuer exemption, dealers must have in place 
procedures to receive notices of material events.210
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    \2\04See paragraph (d)(3) of the Proposed Amendments.
    \2\05This exemption has been modified to clarify that the 
recommendation prohibition will not apply to primary or secondary 
market trading where municipal securities are exempt at the time of 
their original issuance. Several commenters noted that the inclusion 
of the term ``a primary offering of'' created confusion, based on 
the stated purpose of the exemption in the Proposing Release. See, 
e.g., Letter of Kutak Rock; Letter of ABA Urban Law Section; Letter 
of Colorado Municipal Bond Supervision Advisory Board; Letter of 
Day, Berry & Howard. The exemption has been modified to delete that 
term, thus giving the exemption its intended meaning.
    \2\06See paragraph (d)(1) of the Proposed Amendments.
    \2\07See paragraph (d)(2) of the Proposed Amendments.
    \2\08Rule 15c2-12(d)(4).
    \2\09See Rule 15c2-12(d)(2).
    \2\10See Rule 15c2-12(b)(5)(i)(C).
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4. Transactional Exemption
    The existing Rule 15c2-12 transactional exemption211 permits 
the Commission to exempt any Participating Underwriter from any 
requirement of the rule. Because Rule 15c2-12, as amended, places 
requirements on brokers, dealers, and municipal securities dealers in 
the secondary market, the transactional exemption has been amended to 
clarify that the Commission has exemptive authority with respect to 
both Participating Underwriters, in connection with Offerings, and with 
respect to brokers, dealers, and municipal securities dealers 
recommending transactions in the secondary market.212
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    \2\11Former paragraph (d) of Rule 15c2-12.
    \2\12The transactional exemption also has been redesignated as 
paragraph (e) of Rule 15c2-12.
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E. Transitional Provision
    The rule as amended contains a transitional provision for the 
amendments to Rule 15c2-12.213 The underwriting prohibition 
applies to a Participating Underwriter that has contractually committed 
to act as an underwriter in an Offering on or after the effective date 
of the rule, July 3, 1995; provided that issuers need not undertake to 
provide annual financial information for fiscal years ending prior to 
January 1, 1996. The recommendation prohibition will become effective 
on January 1, 1996. The Commission is of the view that this delay of 
six months beyond the effective date of the amendment relating to the 
underwriting of municipal securities is sufficient to permit 
participants in the municipal securities market to design procedures 
for compliance with the provisions of Rule 15c2-12. Brokers, dealers 
and municipal securities dealers must, therefore, have procedures in 
place to comply with the recommendation prohibition on or before 
January 1, 1996. Finally, the limited undertaking condition to the 
small issuer exemption need not be satisfied for offerings commencing 
prior to January 1, 1996.
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    \2\13See Rule 15c2-12(g).
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III. Effects on Competition and Regulatory Flexibility Act 
Considerations

    Section 23(a)(2) of the Exchange Act214 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 has considered the 
amendments to Rule 15c2-12 in light of the standard cited in Section 
23(a)(2) and believes the adoption of the amendments will not impose 
any burden on competition not necessary or appropriate in furtherance 
of the Exchange Act.
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    \2\1415 U.S.C. 78w(a)(2).
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    In addition, the Commission has prepared a final regulatory 
flexibility analysis (``FRFA''), pursuant to the requirements of the 
Regulatory Flexibility Act215 regarding the proposed amendments to 
Rule 15c2-12. The Commission requested 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 issuers, brokers, dealers, and municipal securities dealers if 
the amendments are adopted as proposed. The FRFA 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 amendments 
already are observed, absent access to the continuing information 
provided by the amendments, by issuers, brokers, dealers, and municipal 
securities dealers as a matter of business practice, or to fulfill 
their existing obligations under the antifraud provisions of the 
federal securities laws. To the extent that the Proposed Amendments 
would have imposed additional costs on small issuers, brokers, dealers, 
and municipal securities dealers, in response to commenters' concerns, 
the Commission has modified the amendments as described.
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    \2\155 U.S.C. 604.
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    A copy of the FRFA may be obtained from Janet W. Russell-Hunter, 
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) 942-0073.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendments to Rule 15c2-12

    In accordance with the foregoing, Title 17, Chapter II of Title 17 
of the Code of Federal Regulations is 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, 
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
27, 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); revising 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), paragraph (e), and paragraph (f)(3); adding 
paragraph (f)(9) and paragraph (f)(10); and adding four sentences 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, Securities Exchange Act Release No. 33741, FR-42 (March 9, 
1994). For a discussion of the obligations of underwriters to have a 
reasonable basis for recommending 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).

    (a) General. 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 (a ``Participating 
Underwriter'' when used in connection with an Offering) to act as an 
underwriter in a primary offering of municipal securities with an 
aggregate principal amount of $1,000,000 or more (an ``Offering'') 
unless the Participating Underwriter complies with the requirements of 
this section or is exempted from the provisions of this section.
* * * * *
    (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 an issuer of 
municipal securities, or an obligated person for whom financial or 
operating data is presented in the final official statement has 
undertaken, either individually or in combination with other issuers of 
such municipal securities or obligated persons, in a written agreement 
or contract for the benefit of holders of such securities, to provide, 
either directly or indirectly through an indenture trustee or a 
designated agent:
    (A) To each nationally recognized municipal securities information 
repository and to the appropriate state information depository, if any, 
annual financial information for each obligated person for whom 
financial information or operating data is presented in the final 
official statement, or, for each obligated person meeting the objective 
criteria specified in the undertaking and used to select the obligated 
persons for whom financial information or operating data is presented 
in the final official statement, except that, in the case of pooled 
obligations, the undertaking shall specify such objective criteria;
    (B) If not submitted as part of the annual financial information, 
then when and if available, to each nationally recognized municipal 
securities information repository and to the appropriate state 
information depository, audited financial statements for each obligated 
person covered by paragraph (b)(5)(i)(A) of this section;
    (C) In a timely manner, to each nationally recognized municipal 
securities information repository or to the Municipal Securities 
Rulemaking Board, and to the appropriate state information depository, 
if any, notice of any of the following events with respect to the 
securities being offered in the Offering, 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) Release, substitution, or sale of property securing repayment 
of the securities;
    (11) Rating changes; and
    (D) In a timely manner, to each nationally recognized municipal 
securities information repository or to the Municipal Securities 
Rulemaking Board, and to the appropriate state information depository, 
if any, notice of a failure of any person specified in paragraph 
(b)(5)(i)(A) of this section to provide required annual financial 
information, on or before the date specified in the written agreement 
or contract.
    (ii) The written agreement or contract for the benefit of holders 
of such securities also shall identify each person for whom annual 
financial information and notices of material events will be provided, 
either by name or by the objective criteria used to select such 
persons, and, for each such person shall:
    (A) Specify, in reasonable detail, the type of financial 
information and operating data to be provided as part of annual 
financial information;
    (B) Specify, in reasonable detail, the accounting principles 
pursuant to which financial statements will be prepared, and whether 
the financial statements will be audited; and
    (C) Specify the date on which the annual financial information for 
the preceding fiscal year will be provided, and to whom it will be 
provided.
    (iii) Such written agreement or contract for the benefit of holders 
of such securities also may provide that the continuing obligation to 
provide annual financial information and notices of events may be 
terminated with respect to any obligated person, if and when such 
obligated person no longer remains an obligated person with respect to 
such municipal securities.
    (c) Recommendations. 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 procedures in place 
that provide reasonable assurance that it will receive prompt notice of 
any event disclosed pursuant to paragraph (b)(5)(i)(C), paragraph 
(b)(5)(i)(D), and paragraph (d)(2)(ii)(B) of this section with respect 
to that security.
    (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 an issuer of such municipal 
securities delivers the securities to the Participating Underwriters:
    (i) No obligated person will be an obligated person with respect to 
more than $10,000,000 in aggregate amount of outstanding municipal 
securities, including the offered securities and excluding municipal 
securities that were offered in a transaction exempt from this section 
pursuant to paragraph (d)(1) of this section;
    (ii) An issuer of municipal securities or obligated person has 
undertaken, either individually or in combination with other issuers of 
municipal securities or obligated persons, in a written agreement or 
contract for the benefit of holders of such municipal securities, to 
provide:
    (A) Upon request to any person or at least annually to the 
appropriate state information depository, if any, financial information 
or operating data regarding each obligated person for which financial 
information or operating data is presented in the final official 
statement, as specified in the undertaking, which financial information 
and operating data shall include, at a minimum, that financial 
information and operating data which is customarily prepared by such 
obligated person and is publicly available; and
    (B) In a timely manner, to each nationally recognized municipal 
securities information repository or to the Municipal Securities 
Rulemaking Board, and to the appropriate state information depository, 
if any, notice of events specified in paragraph (b)(5)(i)(C) of this 
section with respect to the securities that are the subject of the 
Offering, if material; and
    (iii) the final official statement identifies by name, address, and 
telephone number the persons from which the foregoing information, 
data, and notices can be obtained.
    (3) The provisions of paragraph (b)(5) of this section, other than 
paragraph (b)(5)(i)(C) of this section, shall not apply to an Offering 
of municipal securities, if such municipal securities have a stated 
maturity of 18 months or less.
    (4) The provisions of paragraph (c) of this section shall not apply 
to municipal securities:
    (i) Sold in an Offering to which paragraph (b)(5) of this section 
did not apply, other than Offerings exempt under paragraph (d)(2)(ii) 
of this section; or
    (ii) Sold in an Offering exempt from this section under paragraph 
(d)(1) of this section.
    (e) Exemptive Authority. The Commission, upon written request, or 
upon its own motion, may exempt any broker, dealer, or municipal 
securities dealer, whether acting in the capacity of a Participating 
Underwriter or otherwise, that is a participant in a transaction or 
class of transactions from any requirement of this section, either 
unconditionally or on specified terms and conditions, if the Commission 
determines that such an exemption is consistent with the public 
interest and the protection of investors.
    (f) Definitions. * * *
    (3) The term final official statement means 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 the undertakings to be provided pursuant to 
paragraph (b)(5)(i), paragraph (d)(2)(ii), and paragraph (d)(2)(iii) of 
this section, if applicable, and of any instances in the previous five 
years in which each person specified pursuant to paragraph (b)(5)(ii) 
of this section failed to comply, in all material respects, with any 
previous undertakings in a written contract or agreement specified in 
paragraph (b)(5)(i) of this section. Financial information or operating 
data may be set forth in the document or set of documents, or may be 
included by specific reference to documents previously provided to each 
nationally recognized municipal securities information repository, and 
to a state information depository, if any, or filed with the 
Commission. If the document is a final official statement, it must be 
available from the Municipal Securities Rulemaking Board.
* * * * *
    (9) The term annual financial information means financial 
information or operating data, provided at least annually, of the type 
included in the final official statement with respect to an obligated 
person, or in the case where no financial information or operating data 
was provided in the final official statement with respect to such 
obligated person, of the type included in the final official statement 
with respect to those obligated persons that meet the objective 
criteria applied to select the persons for which financial information 
or operating data will be provided on an annual basis. Financial 
information or operating data may be set forth in the document or set 
of documents, or may be included by specific reference to documents 
previously provided to each nationally recognized municipal securities 
information repository, and to a state information depository, if any, 
or filed with the Commission. If the document is a final official 
statement, it must be available from the Municipal Securities 
Rulemaking Board.
    (10) The term obligated person means any person, including an 
issuer of municipal securities, who is either generally or through an 
enterprise, fund, or account of such person committed by contract or 
other arrangement to support payment of all, or part of the obligations 
on the municipal securities to be sold in the Offering (other than 
providers of municipal bond insurance, letters of credit, or other 
liquidity facilities).
* * * * *
    (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 July 3, 1995; except that paragraph (b)(5)(i)(A) and 
paragraph (b)(5)(i)(B) shall not apply with respect to fiscal years 
ending prior to January 1, 1996. Paragraph (c) shall become effective 
on January 1, 1996. Paragraph (d)(2)(ii) and paragraph (d)(2)(iii) of 
this section shall not apply to an Offering of municipal securities 
commencing prior to January 1, 1996.

    Dated: November 10, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-28448 Filed 11-16-94; 8:45 am]
BILLING CODE 8010-01-P