[Federal Register Volume 63, Number 140 (Wednesday, July 22, 1998)]
[Notices]
[Pages 39321-39322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19445]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40197; File No. SR-MSRB-98-04]


Self-Regulatory Organizations, Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change Relating to Rule 
G-32, on Disclosures in Connection with New Issues

July 14, 1998.

I. Introduction

    On March 25, 1998, the Municipal Securities Rulemaking Board 
(``Board'' or ``MSRB'') submitted to the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend Rule G-32, on 
disclosures in connection with new issues. The proposed rule change 
provides an alternate method of compliance by brokers, dealers and 
municipal securities dealers with their obligation to deliver official 
statements in final form to customers by settlement for certain new 
issues of variable rate demand obligations. Notice of the proposed rule 
change appeared in the Federal Register on April 28, 1998.\3\ The 
Commission received one comment letter which endorsed the proposed rule 
change.\4\ This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ CFR 240.19b-4.
    \3\ See Securities Exchange Act Rel. No. 39900 (April 22, 1998), 
63 FR 23315.
    \4\ See letter from Sarah M. Starkweather, Vice President and 
Associate General Counsel, The Bond Market Association (``TBMA''), 
to Jonathan G. Katz, Secretary, SEC, dated May 19, 1998.
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II. Description of the Proposal

    The Board amended Rule G-32, on disclosures in connection with new 
issues, that would permit brokers, dealers and municipal securities 
dealers (``dealers''), selling variable rate demand obligations 
(``VRDO's'') to customers during the underwriting period, to deliver a 
preliminary official statement by no later than settlement and to send 
the official statement in final form within one business day of receipt 
from the issuer, provided these VRDOs qualify for the exemption 
provided under subparagraph (d)(1)(iii) of Rule 15c2-12 under the Act 
(``Rule 15c2-12'').
    In 1989, the Commission promulgated Rule 15c2-12,\5\ which requires 
underwriters in primary offerings subject to the rule, among other 
things, to contract with issuers to receive final official statements 
within seven business days after any final agreement to purchase, offer 
or sell municipal securities and to receive these statements in 
sufficient time to accompany any confirmation that requests payment 
from any customer. Commenters questioned applying this provision of the 
rule to VRDOs. In response, the Commission provided an exemption to the 
rule for obligations that can be tendered by their holders for purchase 
by the issuer or its agent at least as frequently as every nine months 
and that are in authorized denominations of $100,000 or more (``Exempt 
VRDOs''). This exemption reflects the fundamental structural 
differences between VRDOs and other traditional municipal securities. 
For most VRDO issues, particularly those that fall within the Exempt 
VRDO category, the purchase contract is not executed until the issue 
closing date or the immediately preceding day.\6\ Thus, in the vast 
majority of these issues, the Bond Delivery Period, the period between 
the purchase date and the closing date, is at most one business day. As 
issuers typically do not authorized the printing of the official 
statement in final form until the execution of the purchase contract, 
underwriters usually do not receive the official statement in final 
form until the closing date at the earliest and, in many instances, the 
printed version is not available until after the closing date, at which 
point the issuer has already delivered the Exempt VRDOs to the 
underwriters.
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    \5\ Securities Exchange Act Release No. 26985 (June 28, 1989), 
54 FR 28700 (July 10, 1989).
    \6\ This compressed time frame arises as a result of the fact 
that, as securities bearing short-term yields sold at par, the 
market dictates that pricing (i.e., the setting of the interest rate 
borne by the securities during the initial rate period) and 
settlement occur on a same-day or next-day basis.
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    At the time Rule 15c2-12 was drafted, the industry's standard Bond 
Delivery Period was two or more weeks.\7\ For example, the seven 
business day time frame of paragraph (b)(3) of Rule 15c2-12 presumably 
anticipated a typical Bond Delivery Period of at least one and one-half 
weeks, because the final official statement is generally expected to be 
available at least by closing of the underwriting transaction. 
Presumably, Rule G-32's official statement delivery obligation was 
premised, at least in part, on this industry standard.
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    \7\ Standard industry practice dictated that issuers deliver the 
securities to the underwriters two or more weeks after the sale date 
for the securities.
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    In 1997, the Board launch a review of the underwriting process 
which focused on, among other things, the manner and timeliness of 
delivery of official statements from issuers to underwriters under Rule 
15c2-12 and from underwriters to the Board of Rule G-36.\8\ The Board 
found that, in some instances, issuers do not meet their contractual 
obligations entered into with underwriters pursuant to Rule 15c2-12 
deliver official statements within seven business days after the date 
of final agreement to purchase, offer or sell the municipal securities. 
The Board noted that, if issuers are not meeting the current delivery 
requirement under Rule 15c2-12, it is possible that final official 
statements also are not being prepared in time to deliver to customers 
by settlement as required under Rule G-32.
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    \8\ See MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.
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    Thus, the Board determined that, because the Bond Delivery Period 
for Exempt VRDOs is at most one business day, it is often not possible 
for dealers to settle with customers, who expect to receive delivery of 
their securities on the issue date, without causing a violation of the 
requirement that they deliver the official statement in final form to 
such customers by settlement. As a result, the Board amended Rule G-32 
to permit a dealer, selling new issue Exempt VRDOs, to deliver the 
official statement in preliminary form to the

[[Page 39322]]

customer by settlement, together with a written notice that the 
official statement in final form will be sent to the customer within 
one business day of receipt. Thereafter, once the dealer receives the 
official statement in final form, it must send a copy to the customer 
within one business day of receipt. If no official statement in 
preliminary form is being prepared, the dealer would only be obligated 
to deliver by settlement the written notice regarding the official 
statement in final form and to send the official statement in final 
form upon receipt.\9\
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    \9\ As in the current rule, if no official statement in final 
form is being prepared, such dealer would deliver to the customer by 
settlement the official statement in preliminary form, if any, and 
written notice to the effect that an official statement in final 
form is not being prepared. If neither a final nor a preliminary 
official statement is being prepared, the dealer would only be 
obligated to deliver by settlement the written notice to the effect 
that no official statement in final form is being prepared.
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    The amendment provides an alternate method of compliance with Rule 
G-32 in the case of Exempt VRDOs where the final official statement is 
either unavailable or incomplete. However, in those limited 
circumstances where dealers may in fact receive the official statement 
in final form in sufficient time to deliver it to customers by 
settlement (e.g., if an issuer approves completion of the official 
statement in final form prior to execution of the purchase contract), 
dealers must comply with the existing provision of the rule by 
delivering the official statement in final form to the customer by 
settlement. If the final official statement is available or if the 
issuer approves the final official statement prior to settlement, then 
the existing provision of the rule would control. The dealer's 
compliance in this case would not be optional.

III. Discussion

    The Commission believes the proposed rule change is consistent with 
the Act and the rules and regulations promulgate thereunder.\10\ 
Specifically, the Commission believes that approval of the proposed 
rule change is consistent with Section 15B(b)(2)(C) \11\ of the Act. 
This proposed rule change should remove any potential timing 
discrepancies concerning dealer and customer receipt of official 
statements. The rule clarifies dealers' disclosure requirements; if a 
dealer receives an official statement from the issuer, concerning 
exempt VRDOs, then it must deliver this official statement within one 
business day of receipt.
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    \10\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. The amendment 
conforms the requirements of MSRB Rule G-32 with those of SEC Rule 
15c2-12. Making the rules consistent lessens the dealers' burden of 
complying with one rule while attempting to avoid violating the 
other. Also, the dealer's procedural and operational efficiency 
should be enhanced as the date for determining compliance will be 
that of receipt of some type of notification from the issuer, which 
should make for ease of recordkeeping and review. 15 U.S.C. 78c(f).
    \11\ Section 15B(b)(C) requires the Commission to determine that 
the Board's rules are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
municipal securities, to remove impediments to and perfect the 
mechanism of a free and open market in municipal securities, and, in 
general, to protect investors and the public interest.
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    The Commission recognizes the Board's effort to make the disclosure 
requirements in Rule G-32 consistent with the requirements delineated 
in Rule 15c2-12 under the Act. The Commission understands that the use 
of securities with a demand feature (e.g. VRDOs) allows issuers to 
acquire the necessary financing while protecting against interest rate 
risk. These types of obligations permit the issuer to convert 
outstanding debt from short-term variable rate notes to long-term fixed 
rates.\12\ It is possible that the maturities or reset dates of these 
VRDOs could be so brief (i.e, one day) that the issuer is unable to 
provide an official statement at settlement. Given the sophisticated 
nature of these instruments and the rapidity with which they can be 
converted, the Commission urges dealers to facilitate full and timely 
disclosure to investors. While the requirements of Rule 15c2-12 are 
inapplicable to these obligations, sound business practice and general 
antifraud provisions of the federal securities laws should dictate 
access to and disclosure of information covered by this rule.
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    \12\ See supra note 5 at p. 28810.
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IV. Conclusion

    For the above reasons, the Commission believes that the proposed 
rule change is consistent with the provision of the Act, and in 
particular with Section 15B(b)(2)(C).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-MSRB-98-04), is hereby 
approved.

    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-19445 Filed 7-21-98; 8:45 am]
BILLING CODE 8010-01-M