[Federal Register Volume 74, Number 141 (Friday, July 24, 2009)]
[Proposed Rules]
[Pages 36832-36868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-17466]



[[Page 36831]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 240 and 241



Proposed Amendment to Municipal Securities Disclosure; Proposed Rule

  Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 241

[Release No. 34-60332; File No. S7-15-09]
RIN 3235-AJ66


Proposed Amendment to Municipal Securities Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule and interpretation.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is publishing for comment proposed amendments to Rule 15c2-12 
under the Securities Exchange Act of 1934 (``Exchange Act'') relating 
to municipal securities disclosure. The proposal would amend certain 
requirements regarding the information that a broker, dealer, or 
municipal securities dealer acting as an underwriter in a primary 
offering of municipal securities must reasonably determine that an 
issuer of municipal securities or an obligated person has undertaken, 
in a written agreement or contract for the benefit of holders of the 
issuer's municipal securities, to provide to the Municipal Securities 
Rulemaking Board (``MSRB''). Specifically, the proposed amendments 
would require a broker, dealer, or municipal securities dealer to 
reasonably determine that the issuer or obligated person has agreed to 
provide notice of specified events in a timely manner not in excess of 
ten business days after the event's occurrence, would amend the list of 
events for which a notice is to be provided, and would modify the 
events that are subject to a materiality determination before 
triggering a notice to the MSRB. In addition, the amendments would 
revise an exemption from the rule for certain offerings of municipal 
securities with put features. The Commission also is providing 
interpretive guidance intended to assist municipal securities issuers, 
brokers, dealers and municipal securities dealers in meeting their 
obligations under the antifraud provisions.

DATES: Comments should be received on or before September 8, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to [email protected]. Please include 
File No. S7-15-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. S7-15-09. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549 on official business days between the hours of 10 a.m. and 3 p.m. 
All comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Martha Mahan Haines, Assistant 
Director and Chief, Office of Municipal Securities, at (202) 551-5681; 
Nancy J. Burke-Sanow, Assistant Director, Office of Market Supervision, 
at (202) 551-5620; Mary N. Simpkins, Senior Special Counsel, Office of 
Municipal Securities, at (202) 551-5683; Cyndi N. Rodriguez, Special 
Counsel, Office of Market Supervision, at (202) 551-5636; Rahman J. 
Harrison, Special Counsel, Office of Market Supervision, at (202) 551-
5663; David J. Michehl, Special Counsel, Office of Market Supervision, 
at (202) 551-5627; and Steven Varholik, Special Counsel, Office of 
Market Supervision, at (202) 551-5615, Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-6628.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment 
on a proposed amendment to Rule 15c2-12 under the Exchange Act.\1\
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    \1\ 17 CFR 240.15c2-12.
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I. Background

A. History of Rule 15c2-12

    The Commission has long been concerned with improving the quality, 
timing, and dissemination of disclosure in the municipal securities 
market. In an effort to improve the transparency of the municipal 
securities market, in 1989, the Commission adopted Rule 15c2-12 \2\ 
(``Rule'' or ``Rule 15c2-12'') and an accompanying interpretation 
modifying a previously published interpretation of the legal 
obligations of underwriters of municipal securities.\3\ As adopted in 
1989, Rule 15c2-12 required, and still requires, underwriters 
participating in primary offerings of municipal securities of 
$1,000,000 or more to obtain, review, and distribute to potential 
customers copies of the issuer's official statement. Specifically, Rule 
15c2-12 required, and still requires, an underwriter acting in a 
primary offering of municipal securities: (1) To obtain and review an 
official statement ``deemed final'' by an issuer of the securities, 
except for the omission of specified information, prior to making a 
bid, purchase, offer, or sale of municipal securities; (2) in non-
competitive bid offerings, to send, upon request, a copy of the most 
recent preliminary official statement (if one exists) to potential 
customers; (3) to send, upon request, a copy of the final official 
statement to potential customers for a specified period of time; and 
(4) to contract with the issuer to receive, within a specified time, 
sufficient copies of the final official statement to comply with the 
Rule's delivery requirement, and the requirements of the rules of the 
MSRB.
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    \2\ Id.
    \3\ See Securities Exchange Act Release No. 26985 (June 28, 
1989), 54 FR 28799 (July 10, 1989) (``1989 Adopting Release'').
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    While the availability of primary offering disclosure significantly 
improved following the adoption of Rule 15c2-12, there was a continuing 
concern about the adequacy of disclosure in the secondary market.\4\ To 
enhance the quality, timing, and dissemination of disclosure in the

[[Page 36833]]

secondary municipal securities market, the Commission in 1994 adopted 
amendments to Rule 15c2-12 (``1994 Amendments'').\5\ Among other 
things, the 1994 Amendments placed certain requirements on brokers, 
dealers, and municipal securities dealers (``Dealers'' or, when used in 
connection with primary offerings, ``Participating Underwriters'').
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    \4\ In 1993, the Commission's Division of Market Regulation (n/
k/a the Division of Trading and Markets) (``Division'') conducted a 
comprehensive review of many aspects of the municipal securities 
market, including secondary market disclosure (``1993 Staff 
Report''). Findings in the 1993 Staff Report highlighted the need 
for improved disclosure practices in both the primary and secondary 
municipal securities markets. The 1993 Staff Report found that 
investors need sufficient current information about issuers and 
significant obligors to better protect themselves from fraud and 
manipulation, to better evaluate offering prices, to decide which 
municipal securities to buy, and to decide when to sell. Moreover, 
the 1993 Staff Report found that the growing participation of 
individuals as both direct and indirect purchasers of municipal 
securities underscored the need for sound recommendations by 
brokers, dealers, and municipal securities dealers. See Commission, 
Division of Market Regulation, Staff Report on the Municipal 
Securities Market (September 1993) (available at http://www.sec.gov/info/municipal.shtml).
    \5\ See Securities Exchange Act Release No. 34961 (November 10, 
1994), 59 FR 59590 (November 17, 1994) (``1994 Amendments Adopting 
Release''). In light of the growing volume of municipal securities 
offerings, as well as the growing ownership of municipal securities 
by individual investors, in March 1994, the Commission published the 
Statement of the Commission Regarding Disclosure Obligations of 
Municipal Securities Issuers and Others. See Securities Exchange Act 
Release No. 33741 (March 9, 1994), 59 FR 12748 (March 17, 1994) 
(``1994 Interpretive Release''). The Commission intended that its 
statement of views with respect to disclosures under the federal 
securities laws in the municipal market would encourage and expedite 
the ongoing efforts by market participants to improve disclosure 
practices, particularly in the secondary market, and to assist 
market participants in meeting their obligations under the antifraud 
provisions. Id.
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    Specifically, Rule 15c2-12, as amended by the 1994 Amendments, 
prohibits Participating Underwriters from purchasing or selling 
municipal securities covered by the Rule in a primary offering, unless 
the Participating Underwriter has reasonably determined that an issuer 
of municipal securities or an obligated person \6\ has undertaken in a 
written agreement or contract for the benefit of holders of such 
securities (``continuing disclosure agreement'') to provide specified 
annual information and event notices to certain information 
repositories.\7\ The information to be provided consists of: (1) 
Certain annual financial and operating information and audited 
financial statements (``annual filings''); \8\ (2) notices of the 
occurrence of any of eleven specific events (``event notices''); \9\ 
and (3) notices of the failure of an issuer or other obligated person 
to make a submission required by a continuing disclosure agreement 
(``failure to file notices'').\10\ The 1994 Amendments also amended 
Rule 15c2-12 to require the Participating Underwriter to reasonably 
determine that an issuer of municipal securities or an obligated person 
has undertaken in the continuing disclosure agreement to provide: (1) 
Annual filings to each nationally recognized municipal securities 
information repository (``NRMSIR''); (2) event notices and failure to 
file notices either to each NRMSIR or to the MSRB; and (3) in the case 
of states that established state information depositories (``SIDs''), 
all continuing disclosure documents to the appropriate SID. Finally, 
the 1994 Amendments amended Rule 15c2-12 to revise the definition of 
``final official statement'' to include a description of the issuer's 
or obligated person's continuing disclosure undertakings for the 
securities being offered, and of any instances in the previous five 
years in which the issuer or obligated person failed to comply, in all 
material respects, with undertakings in previous continuing disclosure 
agreements.
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    \6\ The term ``obligated persons'' means persons, including the 
issuer of municipal securities, committed by contract or other 
arrangement to support payment of all or part of the obligations on 
the municipal securities to be sold in an offering. See 17 CFR 
240.15c2-12(f)(10).
    \7\ See 17 CFR 240.15c2-12(b)(5)(i)(C). This provision now 
provides that the annual information and event notices are to be 
submitted to a single repository, the MSRB. See infra note 11 and 
accompanying text.
    \8\ 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).
    \9\ 17 CFR 240.15c2-12(b)(5)(i)(C). Currently, the following 
events, if material, require notice: (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; and (11) rating changes. In 
addition, Rule 15c2-12(d)(2) provides an exemption from the 
application of paragraph (b)(5) of the Rule with respect to certain 
primary offerings if, among other things, the issuer or obligated 
person has agreed to a limited disclosure obligation. See 17 CFR 
240.15c2-12(d)(2). As discussed in detail in Section II.C., below, 
the Commission is proposing to eliminate the materiality 
determination for certain of these events.
    \10\ 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event 
notices, and failure to file notices are referred to collectively 
herein as ``continuing disclosure documents.''
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    Furthermore, to promote more efficient, effective, and wider 
availability of municipal securities information to investors and 
market participants, on December 5, 2008, the Commission adopted 
amendments to Rule 15c2-12 (``2008 Amendments'') to provide for a 
single centralized repository, the MSRB, for the electronic collection 
and availability of information about outstanding municipal securities 
in the secondary market.\11\ In the 2008 Amendments Adopting Release, 
the Commission stated that the establishment of a single centralized 
repository will help provide ready and prompt access to continuing 
disclosure documents to investors and other municipal market 
participants and will help fulfill the regulatory and information needs 
of municipal market participants, including Dealers, Participating 
Underwriters, mutual funds and others.\12\ Specifically, the 2008 
Amendments require the Participating Underwriter to reasonably 
determine that the issuer or obligated person has undertaken in its 
continuing disclosure agreement to provide the continuing disclosure 
documents: (1) Solely to the MSRB; and (2) in an electronic format and 
accompanied by identifying information, as prescribed by the MSRB.\13\
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    \11\ See Securities Exchange Act Release No. 59062 (December 5, 
2008), 73 FR 76104 (December 15, 2008) (``2008 Amendments Adopting 
Release''). See also Securities Exchange Act Release No. 58255 (July 
30, 2008), 73 FR 46138 (August 7, 2008) (``2008 Proposing 
Release''). The 2008 Amendments became effective on July 1, 2009. 
The Commission proposes that the effective date of the proposed 
amendments discussed herein would be no earlier than three months 
after any final approval of the proposed amendments, should the 
Commission adopt these proposed rule amendments.
    \12\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
at 76106.
    \13\ Id. See also Securities Exchange Act Release No. 59061 
(December 5, 2008), 73 FR 75778 (December 12, 2008) (order approving 
the MSRB's proposed rule change to establish as a component of its 
central municipal securities document repository, the Electronic 
Municipal Market Access (``EMMA'') system, the collection and 
availability of continuing disclosure documents over the Internet 
for free).
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B. Need for Further Amendments to Rule 15c2-12

    As discussed below, experience with the operation of the Rule, 
changes in the municipal market since the adoption of the 1994 
Amendments, and recent market events have suggested the need for the 
Commission to reconsider certain aspects of the Rule, including the 
exemption for primary offerings of municipal securities in authorized 
denominations of $100,000 or more which, 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 (``demand 
securities'').\14\ Furthermore, since the adoption of the 1994 
Amendments, municipal securities industry participants have raised a 
number of areas in which the Rule's provisions could be clarified or 
enhanced and have expressed a desire for additional information about 
these securities.\15\
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    \14\ 17 CFR 240.15c2-12(d)(1)(iii).
    \15\ See, e.g., Letter from Karrie McMillan, General Counsel, 
Investment Company Institute (``ICI''), to Florence E. Harmon, 
Secretary, Commission (July 25, 2008) (available at http://www.sec.gov/comments/s7-13-08/s71308-44.pdf); comments of 
participants in the 2001 SEC Municipal Market Roundtable--
``Secondary Market Disclosure for the 21st Century,'' (available at 
http://www.sec.gov/info/municipal/roundtables/thirdmuniround.htm) 
(Leslie Richards-Yellen, Principal, The Vanguard Group: ``* * * what 
I'd like to see change the most is the inclusion of securities that 
have been carved out of Rule 15c2-12. I would like securities such 
as money market securities to be within the ambit of Rule 15c2-12. 
In addition, I'd like to see the eleven material events be expanded. 
The first eleven were very helpful. The ICI drafted a letter and 
we've added another twelve for the industry to think about and 
cogitate on * * *,'' and Dianne McNabb, Managing Director, A.G. 
Edwards & Sons, Inc: ``I think that in summary, we could use more 
specificity as far as what needs to be disclosed, the timeliness of 
that disclosure, such as the financial statements, more events, I 
think that we would agree that there are more events * * *''); and 
National Federation of Municipal Analysts, Recommended Best 
Practices in Disclosure for Variable Rate and Short-Term Securities, 
February, 2003 (recommendations for continuing disclosures of 
specified information) (available at http://www.nfma.org/publications/short_term_030207.pdf).

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    Since the adoption of the 1994 Amendments, the amount of 
outstanding municipal securities has more than doubled--to almost $2.7 
trillion.\16\ Notably, despite this large increase in the amount of 
outstanding municipal securities, direct investment in municipal 
securities by individuals remained relatively steady from 1996 to 2008, 
ranging from approximately 35% to 39% of outstanding municipal 
securities.\17\ At the end of 2008, individual investors held 
approximately 36% of outstanding municipal securities directly and up 
to another 36% indirectly through money market funds, mutual funds, and 
closed end funds.\18\ There is also substantial trading volume in the 
municipal securities market. According to the MSRB, almost $5.5 
trillion of long and short term municipal securities were traded in 
2008 in nearly 11 million transactions.\19\ Further, the municipal 
securities market is extremely diverse, with approximately 50,000 state 
and local issuers of these securities. In addition, municipal bonds can 
and do default. In fact, at least 917 municipal bond issues went into 
monetary default during the 1990s with a defaulted principal amount of 
over $9.8 billion.\20\ Bonds for healthcare, multifamily housing, and 
industrial development, together with land-backed debt, accounted for 
more than 80% of defaulted dollar amounts.\21\ In 2007, a total of $226 
million in municipal bonds defaulted (including both monetary and 
covenant defaults).\22\ In 2008, 140 issuers defaulted on $7.6 billion 
in municipal bonds.\23\
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    \16\ According to statistics assembled by the Securities 
Industry and Financial Markets Association (``SIFMA''), the amount 
of outstanding municipal securities grew from approximately $1.26 
trillion in 1996 to $2.69 trillion at the end of 2008. See SIFMA 
Outstanding U.S. Bond Market Debt (available at http://www.sifma.org/research/pdf/Overall_Outstanding.pdf).
    \17\ See SIFMA, Holders of U.S. Municipal Securities (available 
at http://www.sifma.org/research/pdf/Holders_Municipal_Securities.pdf) (``SIFMA Report'').
    \18\ Id.
    \19\ See MSRB, Real-Time Transaction Reporting, Statistical 
Patterns in the Municipal Market, Monthly Summaries 2008 (available 
at http://www.msrb.org/msrb1/TRSweb/MarketStats/statistical_patterns_in_the_muni.htm).
    \20\ See Standard and Poor's, A Complete Look at Monetary 
Defaults in the 1990s (June, 2000) (available at http://www.kennyweb.com/kwnext/mip/paydefault.pdf) (``Standard and Poor's 
Report''). See also Moody's Investors Service, The U.S. Municipal 
Bond Rating Scale: Mapping to the Global Rating Scale And Assigning 
Global Scale Ratings to Municipal Obligations (March 2008) 
(available at http://www.moodys.com/cust/content/content.ashx?source=StaticContent/Free%20pages/Credit%20Policy%20Research/documents/current/102249_RM.pdf) 
(regarding municipal defaults of Moody's rated municipal 
securities).
    \21\ See Standard and Poor's Report, supra note 20.
    \22\ See Joe Mysak, Subprime Finds New Victim as Muni Defaults 
Triple, Bloomberg News, May 30, 2008.
    \23\ See Joe Mysak, Municipal Defaults Don't Reflect Tough 
Times: Chart of Day, Bloomberg News, May 28, 2009 (also noting that 
since 1999, issuers have defaulted on $24.13 billion in municipal 
bonds).
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    At the time the Rule was adopted in 1989, municipal securities with 
put or demand features were relatively new. Approximately $13 billion 
of variable rate demand obligations (``VRDOs'') \24\ were issued in 
1989.\25\ However, by 2008, new issuances of VRDOs had grown to 
approximately $115 billion,\26\ with trading in VRDOs representing 
approximately 38% of trading volume of all municipal securities.\27\ 
Many issuers and other obligated persons are reported to have converted 
their municipal auction rate securities (``ARS'') \28\ to securities 
with other interest rate modes (as provided in related trust 
indentures),\29\ such as VRDOs, or refunded or otherwise refinanced 
their ARS in order to reduce the unusually high interest rates on ARS 
caused by turmoil in the ARS market.\30\ This conversion or refinancing 
appears to have contributed to the increased volume of new issues of 
VRDOs in 2008 \31\ and was accompanied by an increased number of 
investors in VRDOs, with some investors holding these securities for 
long periods of time.\32\ There has also been an increase in the 
trading volume of VRDOs. As the size and complexity of the VRDO market 
and the number of investors has grown, so have the risks associated 
with less complete disclosure. In addition, during the fall of 2008, 
the VRDO market experienced significant volatility.\33\ Moreover, there 
have been concerns expressed by representatives of the primary 
purchasers of VRDOs--money market funds--that suggest that the 
exemption in Rule 15c2-12 for these securities may no longer be 
justified.\34\ All of these developments highlight the need for the 
Commission to consider whether improvements should be made regarding 
the availability to investors of important information regarding demand 
securities.
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    \24\ VRDOs principally are demand securities.
    \25\ See Two Decades of Bond Finance: 1989-2008, The Bond Buyer/
Thomson Reuters 2009 Yearbook 4 (Matthew Kreps ed., Source Media, 
Inc.) (2009).
    \26\ Id.
    \27\ According to the MSRB, trading volume in VRDOs in 2008 was 
approximately $2.1 trillion. Total trading volume in 2008 for all 
municipal securities was approximately $5.5 trillion. See e-mail 
between Martha M. Haines, Assistant Director and Chief, Office of 
Municipal Securities, Division, Commission, and Harold Johnson, 
Deputy General Counsel, MSRB, May 28, 2009 (confirming 2008 trading 
volume in VRDOs and trading volume for municipal securities).
    \28\ Auction rate securities are not demand securities.
    \29\ ``Interest rate modes'' is the term used to refer 
collectively to the various forms in which offerings that include 
variable rate demand obligations may typically be issued or 
converted. Such ``multi-modal'' bonds typically include a variety of 
optional forms (modes), such as fixed interest rate, variable 
interest rates of different lengths (e.g., daily, weekly or monthly 
interest rate resets), auction rate, and commercial paper.
    \30\ See, e.g., Press Release, Dormitory Authority State of New 
York, DASNY Moving Clients Out of Auction Rate Securities (March 26, 
2008) (available at http://www.dasny.org/dasny/news/2008/080326moving.php); Press Release, Office of Chief Financial Officer, 
District of Columbia, Over $100 Million Saved: $10 Million This 
Fiscal Year by CFO Debt Management Strategy (May 27, 2008) 
(available at http://newsroom.dc.gov/show.aspx/agency/cfo/section/2/release/13845); Henry J. Gomez, Bond Failures Could Mean Millions In 
Lost Interest, Cleveland Plain Dealer, March 4, 2008, at B3; Laura 
Brost, Citizens to Cut its Borrowing Cost, Orlando Sentinel, March 
14, 2008, at C3; and Matt Krantz, Credit Crisis Forces Museums to be 
Creative; Skittish Bond Investors Meant Their Interest Costs Were 
Getting Out of Hand, USA TODAY, April 17, 2008, at 4B.
    \31\ According to Thomson Reuters, VRDO issuances in 2008 were 
much higher than in 2007--approximately $115 billion in 2008 vs. $50 
billion in 2007. No ARS were reported to have been issued during the 
same period in 2008. See Two Decades of Bond Finance: 1989-2008, The 
Bond Buyer/Thomson Reuters 2009 Yearbook 7 (Matthew Kreps ed., 
Source Media, Inc.) (2009).
    \32\ See infra note 45 and accompanying text.
    \33\ See Diya Gullapalli, Crisis On Wall Street: Muni Money-Fund 
Yields Surge--Departing Investors Send 7-Day Returns Over 5%, Wall 
Street Journal, September 27, 2008; Andrew Ackerman, Short-Term 
Market Dries Up: Illiquidity Leads to Lack of Bank LOCs, The Bond 
Buyer, October 7, 2008. (``The reluctance of financial firms to 
carry VRDOs is evident in the spike in the weekly [SIFMA] municipal 
swap index, which is based on VRDO yields and spiked from 1.79% on 
Sept. 10 to 7.96% during the last week of the month. It has since 
declined somewhat to 5.74%.'').
    \34\ See supra note 15 and accompanying text.
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    As a result of the changes in the VRDO market, the Commission 
believes that investors and other municipal market participants today 
should be able to obtain ongoing continuing disclosure information 
regarding demand securities in order to make more knowledgeable 
investment decisions, to effectively manage and monitor their 
investments, and thereby be better able to protect themselves from

[[Page 36835]]

misrepresentations and fraudulent activities. Accordingly, the 
Commission proposes to modify the exemption in the Rule, as discussed 
below, for demand securities \35\ by requiring Participating 
Underwriters to reasonably determine that the issuer or obligated 
person of demand securities has undertaken in a written agreement to 
provide continuing disclosure documents to the MSRB.
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    \35\ See 17 CFR 240.15c2-12(d)(1)(iii). Specifically, the 
Commission proposes to eliminate the exemption for primary offerings 
of demand securities contained in paragraph (d)(1)(iii) of the Rule 
and to add new paragraph (d)(5) to the Rule. Paragraph (d)(5) of the 
Rule, as proposed, would exempt primary offerings of demand 
securities from all of the provisions of the Rule except those 
relating to a Participating Underwriter's obligations pursuant to 
paragraph (b)(5) of the Rule and relating to recommendations by 
brokers, dealers, and municipal securities dealers pursuant to 
paragraph (c) of the Rule. As a result of these proposed changes, 
Participating Underwriters, in connection with a primary offering of 
demand securities, would need to reasonably determine that the 
issuer or obligated person has entered into a continuing disclosure 
agreement with respect to the submission of continuing disclosure 
documents to the MSRB. In addition, brokers, dealers and municipal 
securities dealers recommending the purchase or sale of demand 
securities would need to have procedures in place that provide 
reasonable assurance that they would receive prompt notice of event 
notices and failure to file notices. See 17 CFR 240.15c2-12(c).
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    In addition, the Commission proposes to require Participating 
Underwriters to reasonably determine that the issuer or obligated 
person has contractually agreed to provide notice of specified events 
within a certain time frame, amend the list of events that would 
trigger an issuer's or other obligated person's obligation under its 
continuing disclosure agreement to submit an event notice to the MSRB, 
and amend the Rule to modify those events that would be subject to a 
materiality determination before triggering a notice to the MSRB.\36\ 
As discussed below, the Commission believes that these proposed changes 
would, among other things, help Participating Underwriters satisfy 
their obligations and help improve the availability of timely and 
important information to investors of municipal securities. In 
addition, in line with the objectives behind the Commission's prior 
revisions to Rule 15c2-12 and the 2008 Amendments, these proposed 
amendments are designed to help deter fraud and manipulation in the 
municipal securities market by prohibiting the underwriting and 
recommendation of transactions in municipal securities for which 
adequate information is not available on an ongoing basis.
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    \36\ As discussed below in Section II.F., the Commission is 
aware that undertakings by issuers and obligated persons that were 
entered into prior to the effective date of any final amendments 
would be different from those entered into on or after the effective 
date of any final amendments.
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II. Description of the Proposed Amendments to Rule 15c2-12

A. Modification of the Exemption for Demand Securities

    Rule 15c2-12(d) provides an exemption for a primary offering \37\ 
of municipal securities in authorized denominations of $100,000 or 
more, if such securities, 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.\38\ Demand securities qualify for this 
exemption. The Commission now proposes to delete the current exemption 
for demand securities in paragraph (d)(1)(iii) and add language in new 
paragraph (d)(5) so that paragraphs (b)(5) \39\ and (c) \40\ of the 
Rule also would apply to a primary offering of demand securities.
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    \37\ See Rule 15c2-12(f)(7) for a definition of primary 
offering. 17 CFR 240.15c2-12(f)(7).
    \38\ 17 CFR 240.15c2-12(d)(1)(iii).
    \39\ As noted above, Rule 15c2-12(b)(5) requires a Participating 
Underwriter, before purchasing or selling municipal securities in 
connection with an offering of municipal securities, to reasonably 
determine that the issuer or obligated person has undertaken, in a 
written agreement or contract, for the benefit of the holders of 
municipal securities, to provide annual filings, material event 
notices, and failure to file notices (i.e., continuing disclosure 
documents) to the MSRB. See 17 CFR 240.15c2-12(b)(5). See also supra 
note 11.
    \40\ Rule 15c2-12(c) requires a broker, dealer, or municipal 
securities dealer that recommends the purchase or sale of a 
municipal security to have procedures in place that provide 
reasonable assurance that it will receive prompt notice of any 
material event and any failure to file annual financial information 
regarding the municipal security. See 17 CFR 240.15c2-12(c).
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    The Commission believes that its experience with the operation of 
the Rule and market changes since the adoption of the 1994 Amendments 
have suggested a need to modify the exemption relating to demand 
securities as described. The effect of this proposed amendment would be 
to eliminate the current exemption of demand securities from the 
requirement that a Participating Underwriter reasonably determine that 
the issuer or obligated person has undertaken, in a continuing 
disclosure agreement, to provide continuing disclosure documents to the 
MSRB. As noted above, when this exemption was adopted VRDOs were 
relatively new and did not represent a large proportion of the 
market.\41\ However, by 2008, the amount of issuances of VRDOs was 
approximately $115 billion \42\ and trading volume of VRDOs exceeded 38 
percent of all municipal securities.\43\ The Commission observes that 
an unusually high volume of VRDOs were issued in 2008.\44\ The increase 
in the amount of issuances and trading volume of VRDOs seem to indicate 
that more investors own such securities. Furthermore, despite their 
periodic ability to tender VRDOs to the respective issuer for 
repurchase, some investors in VRDOs appear to hold these securities for 
long periods of time \45\ and would be better able to protect 
themselves against manipulation and fraud if they were able more easily 
to access information about important events, such as those listed in 
paragraphs (b)(5) and (c) of the Rule.
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    \41\ See supra note 25 and accompanying text.
    \42\ See supra note 25 and accompanying text.
    \43\ See supra note 27 and accompanying text.
    \44\ See supra notes 30 and 31 and accompanying text.
    \45\ Telephone call between Heather Traeger, Associate Counsel, 
Securities Regulation, Capital Markets, ICI, and Martha M. Haines, 
Assistant Director and Chief, Office of Municipal Securities, 
Division, Commission, on July 14, 2009.
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    Accordingly, the increased amount of VRDO issuances, high VRDO 
trading volume, increased number of investors in VRDOs,\46\ and some 
investors' tendency to hold these securities for long periods of time 
highlight the risks associated with less information being available 
and suggest a need to take

[[Page 36836]]

measures designed to help improve the availability of important 
information to investors in this considerable segment of the municipal 
market. Representatives of money market funds have discussed their 
difficulty or, on some occasions, their inability to obtain the 
information that they believe is necessary to oversee their investments 
in demand securities.\47\ Modification of the exemption for demand 
securities, as further discussed below, would help improve the 
availability of continuing disclosures about these securities, not only 
to institutional investors, such as mutual funds, that acquire demand 
securities for their portfolios, but also to individual investors who 
own, or who may be interested in owning, demand securities, and would 
help them make better informed investment decisions, and thereby better 
protect themselves.
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    \46\ The recent increased investment interest and activity in 
VRDOs may be attributable, in part, to the recent turmoil in the 
market for ARS, which began in February 2008. See MSRB Notice 2008-
09 (February 19, 2008) (``Recent downgrades of municipal bond 
insurers and other short-term liquidity concerns have created 
extreme volatility in the market for municipal Auction Rate 
Securities. There also have been an unprecedented number of `failed 
auctions,' meaning that investors who chose to liquidate their 
positions through the auction process were not able to do so.'') 
(available at http://www.msrb.org/msrb1/whatsnew/2008-09.asp). See 
also Anthony P. Inverso, 2008 First-Half Municipal Market Review: 
The End of Securities and Bond Insurance As We Know It? Building 
Futures, New Jersey Educational Facilities Authority (June 2008) 
(stating that as downgrades to bond insurer ratings grew, so did the 
rates on ARS. Further stating that by the end of the first half of 
2008, nearly half of all auction rate securities will have been 
converted or redeemed, mainly in the form of more predictable fixed 
rate debt or variable rate secured by a bank letter of credit.) 
(available at http://www.njefa.com/njefa/pdf/newsletter/NJEFA%20Building%20futures%20newsletter%20June%202008%20Vol.%207,%20No.%201.pdf); and Adrian D'Silva, Haley Gregg, and David Marshall, 
Explaining the Decline in the Auction Rate Securities Market, 
Chicago Fed Letter, The Federal Reserve Bank of Chicago (November 
2008) (stating that the rash of failed auctions in the ARS markets 
starting in February 2008 has prompted issuers to consider a variety 
of potential solutions, including: Finding buyers for ARSs in the 
secondary market; converting ARSs to variable-rate demand notes; and 
replacing ARSs with short term debt funding.) (available at http://www.chicagofed.org/publications/fedletter/cflnovember2008_256.pdf). 
See also supra note 30.
    \47\ See, e.g., comments of Leslie Richards-Yellen, Principal, 
The Vanguard Group, transcript of the 2001 Municipal Market 
Roundtable--``Secondary Market Disclosure for the 21st Century'' 
(available at http://www.sec.gov/info/municipal/roundtables/thirdmuniround.htm) (``* * * what I hope more than anything is that 
variable rate demand obligations become within the Rule 15c2-12 
disclosure regime * * * put yourself in the position of a fund, we 
have on one hand Rule 15c2-12, which is very helpful and it sets the 
floor of what kind of information must be delivered for a secondary 
market, * * *. But on the other hand, mutual funds are bound by Rule 
2a-7 and that says for short-term obligations what we must find for 
every security, and Rule 2a-7 has legal requirements that we must 
fulfill in order to buy the securities, and * * * to make these 
findings we have to make our own determination, we can't rely on 
rating agencies, we do this all in house.''). See also supra note 
15.
---------------------------------------------------------------------------

    Further, the Commission notes that the exemption for demand 
securities, which was included in the Rule when Rule 15c2-12 was 
adopted in 1989, was intended to respond to concerns expressed by 
commenters ``that applying the provisions of the [Proposed] Rule to 
variable rate demand notes, or similar securities, might unnecessarily 
hinder the operation of this market, if underwriters were required to 
comply with the provisions of the Proposed Rule on each tender or reset 
date.'' \48\ The exemption in the original Rule was intended to ensure 
that the remarketings would not be affected by application of 
paragraphs (a) and (b)(1)-(4) of the Rule, which require Participating 
Underwriters to review an official statement that the issuer ``deems 
final'' before it may bid for, purchase, offer or sell an offering; to 
deliver a preliminary official statement or final official statement to 
any potential customer, upon request; and to contract with the issuer 
to receive an adequate number of the final official statement to 
accompany confirmation statements and otherwise fulfill its regulatory 
responsibilities. Although remarketings of VRDOs may be primary 
offerings,\49\ the Commission did not impose paragraphs (a) and (b)(1)-
(4) of the Rule on Participating Underwriters of each remarketing--of 
which hundreds could occur on the same day--because it potentially 
would have made it impractical and unduly burdensome for Participating 
Underwriters to comply with these Rule provisions.\50\
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    \48\ See 1989 Adopting Release, supra note 3, 54 FR at 28808, n. 
68.
    \49\ See supra note 37.
    \50\ See 1994 Amendments Adopting Release, supra note 5. The 
Commission notes that, in the 1994 Amendments Adopting Release, it 
did not address the application of paragraph (b)(5) of the Rule to 
remarketing of VRDOs, including the practicality and burdens for 
Participating Underwriters to comply with this provision. The 1994 
Amendments did not reconsider any of the exemptions contained in the 
Rule. As discussed above, since that time, there have been 
significant developments in the market related to demand securities.
---------------------------------------------------------------------------

    Generally, there are no continuing disclosure agreements in place 
with respect to VRDOs, because primary offerings of these securities 
are exempt from the Rule.\51\ Under the proposed amendments, the 
Participating Underwriter of a primary offering of VRDOs would need to 
reasonably determine that the issuer or obligated person has entered 
into a continuing disclosure agreement with respect to the submission 
to the MSRB of continuing disclosure documents. The proposed amendment 
modifying the exemption for VRDOs would apply to any initial offering 
of VRDOs occurring on or after the effective date of any final 
amendments that the Commission may adopt. In addition, the proposed 
amendment also would apply to any remarketing of VRDOs that are primary 
offerings \52\ occurring on or after the effective date of any final 
amendments that the Commission may adopt, including any such 
remarketing of VRDOs that initially were issued prior to any such 
effective date. Consequently, the initial issuance of VRDOs, and any 
remarketing that is a primary offering of VRDOs, following the 
effective date of any final amendments would require the Participating 
Underwriter to reasonably determine that the issuer or obligated person 
has entered into a continuing disclosure agreement reflecting the 
proposed new provisions of the Rule.
---------------------------------------------------------------------------

    \51\ There may, however, be continuing disclosure agreements for 
VRDOs that were initially issued in an interest rate mode, such as a 
fixed rate mode, subject to the Rule that were subsequently 
converted to VRDOs in accordance with the provisions of the related 
indenture.
    \52\ 17 CFR 240.15c2-12(f)(7).
---------------------------------------------------------------------------

    The Commission, however, preliminarily believes that the effect of 
the application of paragraphs (b)(5) and (c) of the Rule to VRDOs would 
not be significantly burdensome for Participating Underwriters in 
connection with the initial issuance and remarketing of VRDOs following 
the effective date of any final amendments. If the amendments are 
adopted, any primary offering (including a remarketing) that occurs on 
or after the effective date of the Rule would require a Participating 
Underwriter or a Participating Underwriter serving as a remarketing 
agent \53\ for a particular VRDO issue to make a determination that an 
issuer or obligated person has entered into a continuing disclosure 
agreement for that issue reflecting the new provisions of the Rule. The 
Participating Underwriter or the remarketing agent (who often served as 
the underwriter in the initial issuance of the VRDOs) would need to 
reasonably determine that the issuer or obligated person has entered 
into a continuing disclosure agreement in which it undertakes to 
provide continuing disclosure documents to the MSRB. However, once the 
Participating Underwriter has made such a determination for a 
particular VRDO issue, it would be aware of the existence of the 
continuing disclosure agreement reflecting the proposed amendment, and 
thus would easily be able to make the necessary determination for 
remarketings of that issue occurring thereafter.\54\ Furthermore, 
remarketing agents who did not previously participate in a remarketing 
could confirm that the issuer has entered into an undertaking in 
conformity with the proposed amendment by obtaining an official 
statement from the issuer (which by definition must include a 
description of the issuer's undertakings),\55\ from the MSRB (under its 
program that makes official statements for nearly every offering of 
municipal securities available on the Internet from the MSRB's EMMA 
system),\56\ or from a

[[Page 36837]]

variety of vendors. In addition, a remarketing agent could obtain a 
copy of the continuing disclosure agreement from the issuer or 
obligated person at the time that it enters into a contract to act as a 
remarketing agent.
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    \53\ A remarketing agent is a broker-dealer responsible for 
reselling to new investors securities (such as VRDOs) that have been 
tendered for purchase by their owner. The remarketing agent also 
typically is responsible for resetting the interest rate for a 
variable rate issue and also may act as tender agent. See MSRB, 
Municipal Securities Rulemaking Board Glossary, Second Edition 
(January 2004) (defining ``remarketing agent'') (available at http://www.msrb.org/msrb1/glossary).
    \54\ See infra Section III. for a reaffirmation of the 
Commission's interpretations regarding Participating Underwriters' 
obligations under Rule 15c2-12.
    \55\ 17 CFR 240.15c2-12(f)(3).
    \56\ See Securities Exchange Act Release No. 59061 (December 5, 
2008), 73 FR 75778 (December 12, 2008) (File No. SR-MSRB-2008-05) 
(order approving the MSRB's proposed rule change to make permanent a 
pilot program for an Internet-based public access portal for the 
consolidated availability of primary offering information about 
municipal securities).
---------------------------------------------------------------------------

    According to an industry commentator, some rating agencies 
recommend that variable-rate debt not exceed 20 percent of the total 
debt outstanding of governmental issuers.\57\ If governmental issuers 
follow this recommendation, it would be likely that state and local 
government issuers with VRDOs would have some fixed rate securities 
outstanding, at least some of which likely would be subject to 
continuing disclosure agreements under Rule 15c2-12. Because any 
existing continuing disclosure agreements for those other outstanding 
securities would obligate such issuers and obligated persons to provide 
annual filings, event notices and failure to file notices with respect 
to their outstanding securities, the Commission does not anticipate 
that the modification of the exemption for demand securities in the 
proposed amendments would increase significantly the obligation that 
they would incur to provide continuing disclosure documents to the 
MSRB.\58\ Furthermore, the Commission notes that some annual filings, 
such as audited financial statements, are often prepared by issuers and 
obligated persons in the ordinary course of their business. In such 
cases, the obligation incurred by an issuer or obligated person to 
provide to the MSRB information that it has already prepared should be 
small.\59\ Issuers and obligated persons of demand obligations that 
have not previously issued such securities, however, would be entering 
into a continuing disclosure agreement for the first time and would 
incur some costs to provide continuing disclosure documents 
electronically to the MSRB.\60\
---------------------------------------------------------------------------

    \57\ See Douglas Skarr, Auction Rate Securities: A Primer For 
Finance Officers, Government Finance Review, August 2005.
    \58\ See infra Section V. for a discussion of the collection of 
information burdens and costs as they relate to the proposed 
amendment regarding demand securities.
    \59\ Id.
    \60\ Id.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission believes that 
application of paragraphs (b)(5) and (c) of the Rule would be 
appropriate in the case of demand securities. The Commission 
preliminarily believes that any additional burden on Participating 
Underwriters, issuers or obligated persons, the MSRB or others would be 
justified by the improved availability of information to investors in 
demand securities, so that investors in these securities could make 
better informed investment decisions and thereby better protect 
themselves from misrepresentations and fraudulent activities. Investors 
now would have better access to baseline information and material 
events regarding VRDOs. The availability of such information also would 
assist brokers, dealers and municipal securities dealers in fulfilling 
their responsibilities to their customers,\61\ such as disclosing 
material facts about transactions and securities; making suitable 
recommendations in transactions for municipal securities; and complying 
with other sales practice obligations.\62\
---------------------------------------------------------------------------

    \61\ For example, brokers, dealers and municipal securities 
dealers with access to current information contained in event 
notices submitted to the MSRB would be able to use such information 
when deciding whether or not to recommend the purchase or sale of a 
particular demand security.
    \62\ See MSRB, Reminder of Customer Protection Obligations in 
Connection with Sales of Municipal Securities, Interpretative Notice 
of Rule G-17, dated May 30, 2007 (available at http://www.msrb.org/msrb1/rules/notg17.htm).
---------------------------------------------------------------------------

    The Commission requests comment on whether it is appropriate to 
revise the Rule's exemption for demand securities by proposing to apply 
paragraphs (b)(5) and (c) of the Rule to the offering of demand 
securities.\63\ Further, the Commission requests comment regarding 
investors' and other municipal market participants' need for continuing 
disclosure information relating to demand securities. In addition, the 
Commission requests comment on the extent to which the proposed 
amendment would provide benefits to investors and other municipal 
market participants. The Commission also requests comment regarding the 
effect of the proposed amendment on Participating Underwriters, issuers 
and obligated persons, and others.
---------------------------------------------------------------------------

    \63\ See supra note 35.
---------------------------------------------------------------------------

B. Time Frame for Submitting Event Notices Under a Continuing 
Disclosure Agreement

    The Commission proposes to modify paragraph (b)(5)(i)(C) of the 
Rule to require a Participating Underwriter to reasonably determine 
that the issuer or obligated person has agreed in its continuing 
disclosure agreement to submit event notices to the MSRB \64\ ``in a 
timely manner not in excess of ten business days after the occurrence 
of the event,'' instead of ``in a timely manner'' as the Rule currently 
provides. The Commission proposes a similar revision to the limited 
undertaking in paragraph (d)(2)(ii)(B) of the Rule \65\ to require a 
Participating Underwriter to reasonably determine that the issuer or 
obligated person has agreed in its continuing disclosure agreement to 
submit event notices to the MSRB \66\ ``in a timely manner not in 
excess of ten business days after the occurrence of the event,'' 
instead of ``in a timely manner'' as the Rule currently provides. 
Therefore, under the proposed amendments, a Participating Underwriter 
would need to reasonably determine that the continuing disclosure 
agreement provides for the submission of notices to the MSRB within a 
period up to and including ten business days after the occurrence of 
the event. In the 1994 Amendments, the Commission noted that it had not 
established a specific time frame with respect to ``timely'' because of 
the wide variety of events and issuer circumstances.\67\ The Commission 
stated that, 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.\68\ It 
has been reported that some event notices have not been submitted until 
months after the events occurred.\69\ The Commission believes that 
these delays can, among other things, deny investors important 
information that they need in order to make informed decisions 
regarding whether to buy or sell municipal securities. More timely 
information would aid brokers, dealers and municipal securities dealers 
to be better able to satisfy their obligations to have a reasonable 
basis to recommend the

[[Page 36838]]

purchase or sale of municipal securities and aid investors in 
determining whether the price they pay or receive for their 
transactions is appropriate, and thereby better protect themselves from 
misrepresentations and other fraudulent activities.
---------------------------------------------------------------------------

    \64\ See supra note 11 and accompanying text.
    \65\ 17 CFR 240.15c2-12(d)(2)(ii)(B).
    \66\ See supra note 11 and accompanying text.
    \67\ See 1994 Amendments, supra note 5, 59 FR at 59601.
    \68\ Id.
    \69\ See, e.g., Elizabeth Carvlin, Trustee for Vigo County, 
Ind., Agency Taps Reserve Fund for Debt Service, The Bond Buyer, 
April 2, 2004, page 3 (reporting the filing of a material event 
notice regarding a draw on debt service reserve fund that occurred 
in February); Alison L. McConnell, Two More Deals Under Audit By TEB 
Office, The Bond Buyer, April 5, 2006 (event notice of tax audit 
filed nine months after audit was opened); Susanna Duff Barnett, IRS 
Answers Toxic Query; Post 1986 Radioactive Waste Debt Not Exempt, 
The Bond Buyer, November 2, 2004 (material event notice filed 
October 29, 2004 regarding IRS technical advice memorandum dated 
August 27, 2004 that bonds issued to finance certain radioactive 
solid waste facilities were taxable; related preliminary adverse 
determination letter was issued in January, 2002); and Michael 
Stanton, IRS: Utah Pool Bonds Taxable; Issuer Disputes Facts of 
Case, The Bond Buyer, December 8, 1997 (issuer's receipt of August, 
1997 IRS technical advice memorandum concluding certain bonds were 
taxable was disclosed on December 5, 1997).
---------------------------------------------------------------------------

    The Commission believes that longer delays in providing notice of 
the events set forth in paragraph (b)(5)(i)(C) of the Rule undermine 
the effectiveness of the Rule. Indeed, market participants have 
emphasized the importance of the prompt availability of such 
information.\70\ In addition to helping to reduce opportunities for 
fraudulent activities, the Commission anticipates that, in providing 
for a maximum time frame within which event notices should be disclosed 
under a continuing a disclosure agreement, the proposed amendment 
should foster the availability of up-to-date information about 
municipal securities, thereby promoting greater transparency and 
investor confidence in the municipal securities market as a whole.
---------------------------------------------------------------------------

    \70\ See, e.g., National Federation of Municipal Analysts, 
Recommended Best Practices in Disclosure for General Obligation and 
Tax-Supported Debt (December 2001) (``Any material event notices, 
including those required under SEC Rule 15c2-12, should be released 
as soon as practicable after the information becomes available.'') 
(available at http://www.nfma.org/disclosure.php); Peter J. Schmitt, 
Letter to the Editor, To the Editor: MuniFilings.com: The Once and 
Future Edgar?, The Bond Buyer, October 9, 2007, Commentary, Vol. 362 
No. 32732, at 36 (``We suggest * * * that the true problem is issuer 
compliance * * * filing issues are the sole cause of lack of 
transparency and disclosure availability in the industry. These 
filing issues include * * * late filing, * * * '').
---------------------------------------------------------------------------

    The Commission notes that, with respect to Participating 
Underwriters, the proposed amendment simply would require them to 
reasonably determine that issuers and obligated persons have 
contractually agreed to submit event notices ``in a timely manner not 
in excess of ten business days after the occurrence of the event,'' 
rather than in a ``timely manner.'' On the other hand, there would be a 
significant benefit to investors and municipal market participants, who 
would be able to obtain information about municipal securities within a 
specific time frame of an event's occurrence. Indeed, while issuers and 
obligated persons under continuing disclosure agreements entered into 
prior to the effective date of any final amendments that the Commission 
may adopt already would have committed to submit event notices in a 
timely manner, the proposed amendment would help to make the timing of 
such submissions more certain in the case of issuers and obligated 
persons that enter into continuing disclosure agreements on or after 
the effective date of any final amendments that the Commission may 
adopt.\71\
---------------------------------------------------------------------------

    \71\ The Commission notes that the proposed ten business day 
time frame would not apply to continuing disclosure agreements 
entered into with respect to primary offerings that occurred prior 
to the effective date of any final amendments that the Commission 
may adopt.
---------------------------------------------------------------------------

    The Commission believes that the proposed change regarding the time 
frame for submission of event notices would continue to provide an 
issuer or obligated person with adequate time to become aware of the 
event and, pursuant to its undertaking, submit notice of the event's 
occurrence to the MSRB. In proposing that event filings be provided 
``in a timely manner not in excess of ten business days after the 
occurrence of the event,'' the Commission intends to strike a balance 
between the need for such information to be disseminated promptly and 
the need to allow adequate time for an issuer or other obligated person 
to become aware of the event and to prepare and file such a notice. The 
Commission preliminarily believes that the proposed ten business day 
time frame would provide a reasonable amount of time for issuers to 
comply with their obligations under their continuing disclosure 
agreements, while also allowing event notices to be made available to 
investors, underwriters, and other market participants in a timely 
manner.
    By their nature, the events currently listed in (and proposed to be 
added to) subparagraph (b)(5)(i)(C) of the Rule are significant and 
should become known to the issuer or obligated person 
expeditiously.\72\ For example, some events, such as payment defaults, 
tender offers and bankruptcy filings, generally involve the issuer's or 
obligated person's participation.\73\ Other events, such as the failure 
of a credit or liquidity provider to perform, are of such importance 
that an issuer or obligated person likely would become aware of such 
events within the proposed ten business day time frame \74\ or would 
expect an indenture trustee, paying agent or other transaction 
participant to bring the event to the issuer's or obligated person's 
attention within the proposed time frame for submission of event 
notices.\75\ Although a few events, such as rating changes, are not 
directly within the issuer's control, the Commission expects that 
issuers and obligated persons usually would become aware of the events 
specified in paragraph (b)(5)(i)(C) of the Rule within the proposed ten 
business day time frame.\76\ Accordingly, the Commission believes that 
the proposed ten business day time frame within which issuers or 
obligated persons would submit notices pursuant to a continuing 
disclosure agreement would provide an adequate amount of time for 
issuers or obligated persons to prepare and submit event notices to the 
MSRB. While the proposed maximum time period for submitting event 
notices would be ten business days, in many instances it is likely that 
a notice could be submitted in fewer than ten business days. This, 
however, would depend upon the particular facts and circumstances of 
each event.
---------------------------------------------------------------------------

    \72\ See supra note 9 for a description of events currently 
contained in Rule 15c2-12(b)(5)(i)(C); See infra Section II.E. for a 
description of events proposed to be added to the Rule.
    \73\ In addition, issuer or obligated person involvement is 
often required for substitution of credit or liquidity providers; 
modifications to rights of security holders; release, substitution, 
sale of property securing repayment of the securities; and optional 
redemptions. See Form Indenture and Commentary, National Association 
of Bond Lawyers, 2000.
    \74\ For example, issuers or obligated persons should have 
direct knowledge of principal and interest payment delinquencies, 
receipt of preliminary or proposed determinations of taxability from 
the IRS, tender offers that they initiate, and bankruptcy filings.
    \75\ The Commission believes that indenture trustees generally 
would be aware of principal and interest payment delinquencies; 
material non-payment related defaults, unscheduled draws on credit 
enhancements reflecting financial difficulties; the failure of 
credit or liquidity providers to perform; and adverse tax opinions 
or events affecting the tax-exempt status of the security.
    \76\ Those issuers or obligated persons required by Section 
13(a) or Section 15(d) of the Exchange Act to report certain events 
on Form 8-K (17 CFR 249.308) would already make such information 
public in the Form 8-K. The Commission believes that such persons 
should be able to file material event notices, pursuant to the 
issuer's or obligated person's undertakings, within a short time 
after the Form 8-K filing. See 15 U.S.C. 78m and 78o(d).
---------------------------------------------------------------------------

    The Commission requests comment concerning the ability of issuers 
and obligated persons to obtain information regarding the occurrence of 
events currently specified in, and that the proposed amendments would 
add to, paragraph (b)(5)(i)(C) of the Rule, in sufficient time to 
prepare and file a notice of such an occurrence in a timely manner not 
in excess of ten business days. If commenters believe that the time 
frame that would be set forth in continuing disclosure agreements for 
submission of event notices should be longer or shorter, they should 
provide suggestions for the appropriate time and the reasons for their 
views. For example, should the time frame be four business days, which 
is generally commensurate with the time period required by Form 8-K? 
\77\ Would a shorter period of time raise difficulties for smaller 
municipal

[[Page 36839]]

issuers and obligated persons, and if so, why would it? Furthermore, 
comment is requested regarding the need to establish such a time frame 
for submissions of event notices. Should the trigger for the ten 
business day time frame begin when the issuer or obligated person knew 
or should have known of the occurrence of the event, rather than the 
actual occurrence of the event? Comment is also requested on whether an 
issuer's need to monitor for events that would trigger an event notice 
would impose any new burdens or costs. Comment is requested on whether 
the proposal would help to reduce untimely submissions of event 
notices, or whether untimely submissions of event notices are caused by 
other factors. Comment is also requested on whether there are 
alternative ways to modify a Participating Underwriter's obligations 
that would result in more prompt availability of event notices to 
investors.
---------------------------------------------------------------------------

    \77\ 17 CFR 249.308.
---------------------------------------------------------------------------

C. Materiality Determinations Regarding Event Notices

    In the 1994 Proposing Release, the Commission stated that the list 
of events in paragraph (b)(5)(i)(C) of the Rule consists of recognized 
material events that reflect on the creditworthiness of the issuer of 
the municipal security or any significant obligor, as well as on the 
terms of the securities that they issue.\78\ The Commission is 
proposing to delete the condition in paragraph (b)(5)(i)(C) of the Rule 
that presently provides that notice of all of the listed events need be 
made only ``if material.'' In connection with the proposed deletion of 
the materiality condition, the Commission has reviewed each of the 
Rule's current specified events to determine whether or not a 
materiality determination should be retained for that particular event 
and preliminarily believes such a determination is still appropriate 
for certain listed events, as discussed below.\79\ As a result of this 
proposed change, for those events listed in paragraph (b)(5)(i)(C) that 
are not proposed to contain the ``if material'' condition, the 
Participating Underwriter must reasonably determine that the issuer or 
other obligated person has agreed to submit event notices to the MSRB 
whenever such an event occurs.
---------------------------------------------------------------------------

    \78\ See Securities Exchange Act Release No. 33742 (March 9, 
1994), 59 FR 12759, 12761-2 (March 17, 1994).
    \79\ The discussion in this section pertains to materiality 
determinations for events currently specified in paragraph 
(b)(5)(i)(C) of the Rule. For events proposed to be added to the 
Rule, whether a materiality determination would be included is noted 
in the discussion below for each such proposed event.
---------------------------------------------------------------------------

    The Commission now believes, based on its experience with the 
operation of paragraph (b)(5)(i)(C) of the Rule, that notice of certain 
events currently listed in paragraph (b)(5)(i)(C) need not be preceded 
by a materiality determination and always should be available because 
of their importance to investors and other market participants. These 
events include: (1) Principal and interest payment delinquencies with 
respect to the securities being offered; (2) unscheduled draws on debt 
service reserves reflecting financial difficulties; (3) unscheduled 
draws on credit enhancements reflecting financial difficulties; (4) 
substitution of credit or liquidity providers, or their failure to 
perform; (5) defeasances; and (6) rating changes. The availability of 
this information to investors would enable them to better protect 
themselves from misrepresentations and fraud. Furthermore, the 
availability of this information would assist brokers, dealers and 
municipal securities dealers to satisfy their obligation to have a 
reasonable basis on which to recommend municipal securities.
    The Commission believes that the proposal to remove the materiality 
condition for the aforementioned events should not alter greatly the 
current practice. Because of the significant nature of these events and 
their importance to investors in the marketplace, the Commission 
believes that issuers and obligated persons would already be providing 
notice of most, if not all, such events pursuant to existing continuing 
disclosure agreements.
    More specifically, the Commission believes that notice of principal 
and interest payment delinquencies should always be provided to aid 
investors in protecting themselves from fraud and to assist brokers, 
dealers and municipal securities dealers in satisfying their obligation 
to have a reasonable basis to recommend municipal securities. Even a 
small payment default may indicate that an issuer or other obligated 
party has begun to experience financial distress. Further, a payment 
default often adversely affects the market value of a municipal 
security. Similarly, unscheduled draws on debt service reserves 
reflecting financial difficulties and unscheduled draws on credit 
enhancements reflecting financial difficulties often have an adverse 
impact on the market value of a security and therefore should always be 
available to investors to protect against fraud and to other market 
participants to satisfy their securities law obligations. The 
Commission believes that investors should always be provided with these 
notice of events because such events likely indicate that the financial 
condition of a municipal securities issuer or obligor has deteriorated 
and therefore that there is potentially an increased risk of a payment 
default or, in the case of default by an issuer or other obligated 
party that results in payment of the securities by the provider of 
credit enhancement (such as a standby letter of credit), premature 
redemption. Bondholders and other market participants also would be 
concerned with the sufficiency of the amount of debt service and other 
reserves available to support an issuer or obligor through a period of 
temporary difficulty, along with the present financial condition of the 
provider of any credit enhancement.
    The identity of credit or liquidity providers and their ability to 
perform is important to investors. The Commission understands that 
credit ratings of municipal securities are typically based on the 
higher of the issuer's (or other obligor's) rating or the rating of the 
credit provider.\80\ With occasional exceptions, credit enhancement is 
obtained from a credit provider with a higher rating than that of the 
issuer or other obligor. When a credit enhancer such as a bond insurer 
is downgraded, the market value and liquidity of the securities that it 
has enhanced generally decline.\81\ Similarly, the identity and

[[Page 36840]]

ability of a liquidity provider to perform is typically critical to 
investors. Investors in VRDOs, for example, depend on liquidity 
providers to satisfy holders' right to ``put'' their securities in a 
timely manner. As a result, the Commission preliminarily believes that 
notice of the substitution of credit or liquidity providers, or their 
failure to perform, should always be provided in an event notice to aid 
investors to protect against fraud and brokers, dealers and municipal 
securities dealers to satisfy their obligation to have a reasonable 
basis to recommend municipal securities.
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    \80\ See, e.g., Municipal Structured Finance Criteria Report: 
Dual-Party Pay Criteria for Long-Term Ratings on LOC-Supported U.S. 
Public Finance Bonds, Fitch Ratings, Public Finance, June 11, 2009 
(noting that ``U.S. public finance bonds supported by bank letters 
of credit (LOC) are assigned long-term ratings one-to-two notches 
higher than the rating on the LOC provider or the underlying rating 
of the bond, whichever is higher, if [certain] conditions hold 
true[.]'')
    \81\ See, e.g., Alistair Varr, Moody's Warning Ripples Through 
Municipal Bond Market, MarketWatch, December 17, 2007 (noting that 
``when a security is cut to AA from AAA, the value of the bond would 
go down.'') (available at http://www.marketwatch.com/story/moodys-bond-insurer-call-has-unprecedented-effect-on-muni-market); Jeffrey 
R. Kosnett, Why Municipal Bonds Are Stumbling, Kiplinger.com, 
December 4, 2007 (stating that municipal bonds normally meriting a 
triple-B or single-A rating being upgraded to triple-A status as a 
result of having bond insurance) (available at http://www.kiplinger.com/columns/balance/archive/2007/balance1204.html); 
``[T]he municipal industry chose to use bond insurance to enhance an 
issuer's lower credit rating to that of the higher insurance 
company's rating. The last 18 months have exposed the risks of this 
choice when insurance company downgrades, and auction-rate security 
failures, forced numerous leveraged investors to unwind massive 
amounts of debt into an illiquid secondary market. The consequence 
was that issuers of new debt were forced to pay extremely high 
interest rates and investors were confused by volatile evaluations 
of their investments.'' Enhancing Investor Protection and the 
Regulation of Securities Markets: Before the S. Comm. on Banking, 
Housing and Urban Affairs, 111th Cong. ----, March 10, 2009 
(statement of Thomas Doe, Founder and CEO Municipal Market Advisors) 
(available at http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=faf91bea-ca58-4bc1-873d-33739dbb4f76&Witness_ID=64207b41-3512-414b-8085-ae4b71520b0a).
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    Further, the Commission preliminarily believes, for the same 
purposes, that defeasances and rating changes should always be 
available to investors and other market participants. Defeasances 
secured by a pool of U.S. Treasury securities sufficient to pay 
principal and interest commonly result in a bond receiving the highest 
rating \82\ and thus can affect the security's market value. Rating 
changes more generally may affect the market price of the security, 
making it important both to bondholders and to investors who may be 
considering the purchase of a particular security.
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    \82\ Such defeasances are known as ``advance refundings'' or 
``pre-refundings''. See MSRB, Municipal Securities Rulemaking Board 
Glossary, Second Edition (January 2004) (defining ``advance 
refunding'' and ``defeasance'') (available at http://www.msrb.org/msrb1/glossary). See also MSRB, EMMA Education Center, FAQ: ``How am 
I affected if my bond is advance refunded?'' (available at http://emma.msrb.org/EducationCenter/FAQs.aspx?topic=AboutARD); Fitch 
Ratings, Municipal Structured Finance Criteria Report: Guidelines 
for Rating Prerefunded Municipal Bonds, April 2, 2009 (available at 
http://www.fitchratings.com/corporate/reports/report_frame.cfm?rpt_id=431370&sector_flag=&marketsector=3&detail=); and 
Moody's Investors Service, Rating Methodology: Refunded Bonds, June, 
2007 (available at: http://www.moodys.com/moodys/cust/research/MDCdocs/29/2006700000441141.pdf?doc_id=2006700000441141&frameOfRef=municipal).
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    The Commission, however, believes that a materiality determination 
should be retained for other events currently listed in paragraph 
(b)(5)(i)(C) because the occurrence of such events, in some 
circumstances, may not be of such importance to investors that they 
always should be disclosed. Experience with the operation of the Rule 
has not provided information to propose a change at this time, and the 
Commission continues to believe that information about these events 
may, depending on the facts and circumstances, not need to be available 
to investors and other market participants in all instances to 
accomplish the Rule's goals.\83\ Therefore, the Commission proposes to 
modify the text of subparagraph (b)(5)(i)(C) and subparagraphs 
(b)(5)(i)(C)(2), (7), (8), and (10) of the Rule, with regard to the 
Participating Underwriter's obligations, to specify that a 
determination of materiality would be retained for event notices 
regarding non-payment related defaults; modifications to rights of 
security holders; bond calls; and the release, substitution, or sale of 
property securing repayment of the securities.
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    \83\ For example, a release of substitution of property may 
involve a small amount of property that is not particularly valuable 
or important to the business of the issuer or obligated person, and 
minor modifications to the rights of securities holders are often 
made pursuant to the provisions of trust indentures that allow them 
only if they are not materially adverse to the interests of 
bondholders.
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    The Commission requests comment on the proposed amendment to delete 
the phrase ``if material'' in the case of notices for the following 
events: (1) Principal and interest payment delinquencies with respect 
to the securities being offered; (2) unscheduled draws on debt service 
reserves reflecting financial difficulties; (3) unscheduled draws on 
credit enhancements reflecting financial difficulties; (4) substitution 
of credit or liquidity providers, or their failure to perform; (5) 
defeasances; and (6) rating changes. Are these events of such 
importance to investors that their occurrence always should be 
disclosed? Are there situations in which notice of the occurrence of 
these events would not need to be available to investors to protect 
themselves from fraud and to brokers, dealers and municipal securities 
dealers to aid them in satisfying their obligations under the 
securities laws? Are there other events listed in the Rule as to which 
the materiality determination should be eliminated because their 
occurrence always should be disclosed to investors? Should a 
materiality determination be retained for event notices regarding non-
payment related defaults; modifications to rights of security holders; 
bond calls; and the release, substitution, or sale of property securing 
repayment of the securities? Does the proposed amendment to eliminate 
the materiality determination for certain events create or eliminate 
any burdens on issuers?

D. Amendment Relating to Event Notices Regarding Adverse Tax Events 
Under a Continuing Disclosure Agreement

    The Commission proposes to modify paragraph (b)(5)(i)(C)(6) of the 
Rule, which presently requires Participating Underwriters reasonably to 
determine that the issuer or obligated person has entered into a 
continuing disclosure agreement to submit a notice for ``[a]dverse tax 
opinions or events affecting the tax-exempt status of the security,'' 
if material.\84\ The proposed amendment would revise paragraph 
(b)(5)(i)(C)(6) of the Rule to provide specifically for the disclosure 
of adverse tax opinions, the issuance, by the Internal Revenue Service 
(``IRS''), of proposed or final determinations of taxability, Notices 
of Proposed Issue (IRS Form 5701-TEB) or other material notices or 
determinations with respect to the tax-exempt status of securities, or 
other events affecting the tax-exempt status of the security.\85\ As 
stated above, such disclosure would be made to the MSRB.
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    \84\ 17 CFR 240.15c2-12(b)(5)(i)(C)(6).
    \85\ The Commission understands that when determining whether 
interest on a bond issue is taxable, the IRS first issues an audit 
letter to the issuer (which may indicate whether or not IRS staff 
suspects a problem with the particular transaction). In the event 
that, as a result of the audit, IRS staff believes that it has found 
a reasonable basis to declare the interest on a bond issue under 
audit to be taxable, IRS staff issues a Notice of Proposed Issue 
(IRS Form 5701-TEB), which it recently began to use instead of a 
letter referred to as a ``preliminary determination of taxability.'' 
If, following subsequent discussions with, and review of additional 
documents provided by, the entity under audit, IRS staff continues 
to believe that interest on the bonds should be declared taxable and 
no settlement has been reached, it issues a letter to the issuer 
referred to as a ``proposed determination of taxability.'' Unless 
appealed to the Office of Appeals of the IRS, a proposed 
determination of taxability becomes a final determination of 
taxability in 30 days. Final determinations of taxability are not 
appealable to the IRS and may not be appealed in a federal court by 
an issuer. A bondholder who has received a tax assessment on account 
of such a final determination may take an appeal in federal court. 
See Internal Revenue Manual (``IRM'') 4.81.14 to 4.81.1.19. See also 
IRM 4.18.5.9 (setting forth Office of Tax-Exempt Bonds' current 
practice regarding the issuance of a Notice of Proposed Issue (IRS 
Form 5701-TEB) in instances in which preliminary determinations of 
taxability would previously have been issued).
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    In adopting the 1994 Amendments, the Commission noted 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. * * *'' \86\ While the 
Commission continues to believe that ``events affecting the tax-

[[Page 36841]]

exempt status of the security'' in paragraph (b)(5)(i)(C)(6) of the 
Rule \87\ can include an audit, and thus an audit should be the subject 
of an event notice when it is material, the Commission recognizes that 
not all audits are indications of a risk to the tax-exempt status of 
interest on a municipal security. The IRS Office of Tax Exempt Bonds, 
through its examination classification process, initiates examinations 
in various market segments with a view toward ensuring broad 
examination coverage of the various tax-exempt bond segments.\88\ 
However, determinations by the IRS, such as proposed and final 
determinations of taxability and Notices of Proposed Issue (IRS Form 
5701-TEB), indicating that the IRS believes the securities are or may 
be taxable and has begun a formal administrative process in that 
regard, indicate that there could be a significant risk to the tax-
exempt status of a security. Accordingly, the Commission believes that 
proposed and final determinations of taxability and Notices of Proposed 
Issue (IRS Form 5701-TEB) by the IRS relating to the taxability of a 
municipal security are of such importance that they always should be 
disclosed pursuant to a continuing disclosure agreement.
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    \86\ See 1994 Amendments, supra note 5, 59 FR at 59600.
    \87\ 17 CFR 240.15c2-12(b)(5)(i)(C)(6).
    \88\ E-mail communication among Clifford Gannett, Director, 
Office of Tax-Exempt Bonds, Robert E. Henn, Manager, Office of Tax-
Exempt Bonds Field Operations, Office of Tax-Exempt Bonds, IRS, and 
Martha M. Haines, Assistant Director and Chief, Office of Municipal 
Securities, Division, Commission, on December 9, 2008. Information 
in e-mail confirmed in telephone conversation between Robert E. 
Henn, Manager, Office of Tax-Exempt Bonds Field Operations, Office 
of Tax-Exempt Bonds, IRS, and Martha M. Haines, Assistant Director 
and Chief, Office of Municipal Securities, Division, Commission, on 
May 29, 2009.
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    Investors consider the tax-exempt status of a municipal security, 
specifically the issuance of such IRS notices, to be of great 
importance when making investment decisions.\89\ Because the interest 
rate on a tax-exempt municipal security generally is significantly 
lower than the interest rate on a comparable taxable security because 
of the value of the municipal security's tax exemption, investors are 
sensitive to factors that could affect the value of the return that 
they would receive from such an investment, such as the tax exempt 
status of interest earned on a municipal security that they currently 
own or may purchase.\90\ A determination by the IRS that interest may, 
in fact, be taxable on a municipal security purchased as tax-exempt not 
only could reduce the security's market value, but also could adversely 
affect each investor's federal and, in some cases, state income tax 
liability.\91\ The tax-exempt status of a municipal security is also 
important to many mutual funds whose governing documents, with certain 
exceptions, limit their investment to tax-exempt municipal 
securities.\92\ Mutual funds may liquidate securities that become 
taxable, which could have adverse consequences for the fund and its 
holders. Therefore, retail and institutional investors alike are 
extremely interested in events that could adversely affect the tax-
exempt status of the bonds that they own or may purchase.
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    \89\ See In the Matter of Neshannock Township School District, 
Securities Act Release No. 8411 and Securities Exchange Act Release 
No. 49600, AP 3-11461 (April 22, 2004) (settled action) (``A 
substantial risk to the tax-exempt status of securities which have 
been sold as tax-exempt is a material item.''); In the Matter of 
Rauscher Pierce Refsnes, Inc., Dain Rauscher Inc., and James R. 
Feltham, Securities Act Release No. 7844 and Securities Exchange Act 
Release No. 42644, A.P. File No. 3-10182 (April 6, 2000) (settled 
action) (``* * * an essential feature of the 1992B [Certificates of 
Participations] was the tax-exempt status of the interest component 
to be paid to investors''); and In re: County of Orange, California; 
Orange County Flood Control District and County of Orange, 
California Board of Supervisors, Securities Act Release No. 7260 and 
Securities Exchange Act Release No. 36760, AP 3-8937 (January 1, 
1996) (identifying tax-exempt status of offering of securities as a 
material fact). See also, e.g., Lori Trawinski, et al., The Bond 
Market Association, Secondary Market Effects of Municipal Bond Tax 
Audit Disclosure, at 10 (August 2002) (settled action) (available at 
http://www.gfoa.org/downloads/Tax_Audit_Study_August_2002.pdf) 
(study examining the effect of IRS audit announcements on the 
secondary market for municipal bonds and discussing the concerns of 
investors and other municipal market participants); Lynn Hume, 
Panel: This Top 10 List Doesn't Have Buy-Side Players Laughing, The 
Bond Buyer, May 5, 2006, NFMA Annual Conference, Vol. 356 No. 32375, 
at 7 (``* * * and issuers' failures to disclose Internal Revenue 
Service notices that bonds are taxable are among the `10 top things 
that drive the buy side crazy,' analysts and lawyers said * * * 
during a panel session at the National Federation of Municipal 
Analysts' 23rd annual meeting . * * *'').
    \90\ See, e.g., Lori Trawinski, et al., The Bond Market 
Association, Secondary Market Effects of Municipal Bond Tax Audit 
Disclosure, at 10 (August 2002); Kathleen Pender, State Energy Bonds 
Could Be Hard Sell; Treasurer says most won't be tax-exempt, The San 
Francisco Chronicle, February 21, 2001, at D1; and John Gin, Compare 
apples to apples when looking at bonds; Tax-equivalent yield is the 
test, The Times-Picayune, September 5, 2007, Money; Money Watch, at 
1; and SIFMA, Calculator: Tax-Free vs. Taxable Yield Comparison 
(available at http://www.investinginbonds.com/learnmore.asp?catid=8&subcatid=80).
    \91\ For example, investors in such a circumstance may have to 
include interest on such a security as income when computing their 
federal income taxes for current and future tax years and may have 
to pay additional taxes for prior tax years.
    \92\ See Investment Company Institute, Frequently Asked 
Questions About Money Market Funds (available at http://www.ici.org/home/faqs_money_funds.html#TopOfPage) (``Typically, tax-exempt 
money market funds, which seek to pay dividends that are exempt from 
federal income tax and/or state income tax, invest in instruments 
issued by state and local governments (`municipal securities').'').
---------------------------------------------------------------------------

    Subsequent to a 1993 Report of the General Accounting Office,\93\ 
the IRS established an Office of Tax-Exempt Bonds with more than 60 
staff members devoted to audits and tax collections related to tax-
exempt municipal securities.\94\ Staff of the Office of Tax-Exempt 
Bonds has identified numerous offerings in which bonds sold as tax-
exempt were determined to be taxable.\95\ As a result, the IRS has 
collected a significant amount of taxes--generally through settlements 
with issuers and obligated persons, but also with bondholders.\96\ 
Furthermore, staff of the IRS Office of Tax-Exempt Bonds has 
established a Bondholder Unit to increase the staff's efficiency in 
identifying bondholders in the case of bonds determined to be 
taxable.\97\
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    \93\ See U.S. General Accounting Office, Tax Policy and 
Administration--Improvements for More Effective Tax-Exempt Bond 
Oversight, Report of the General Accounting Office to the Chairman, 
Subcommittee on Human Resources and Intergovernmental Relations, 
Committee on Government Operations, House of Representatives, May 
10, 1993 (available at http://archive.gao.gov/t2pbat5/149322.pdf) 
(which recommended, in part, that the existing bond audit program be 
redirected and that program staffing levels, locations and training 
needs be reassessed in light of the program's future).
    \94\ E-mail from Clifford Gannett, Director, Office of Tax-
Exempt Bonds, IRS, to Martha M. Haines, Assistant Director and 
Chief, Office of Municipal Securities, Division, Commission, dated 
August 26, 2008. Information in e-mail confirmed in telephone 
conversation between Robert E. Henn, Manager, Office of Tax-Exempt 
Bonds Field Operations, Office of Tax-Exempt Bonds, IRS, and Martha 
M. Haines, Assistant Director and Chief, Office of Municipal 
Securities, Division, Commission, on May 29, 2009.
    \95\ E-mail communications among Clifford Gannett, Director, 
Office of Tax-Exempt Bonds, Robert E. Henn, Manager, Office of Tax-
Exempt Bonds Field Operations, Office of Tax-Exempt Bonds, IRS, and 
Martha M. Haines, Assistant Director and Chief, Office of Municipal 
Securities, Division, Commission, dated August 26, 2008 and December 
9, 2008. Information in e-mail confirmed in telephone conversation 
between Robert E. Henn, Manager, Office of Tax-Exempt Bonds Field 
Operations, Office of Tax-Exempt Bonds, IRS, and Martha M. Haines, 
Assistant Director and Chief, Office of Municipal Securities, 
Division, Commission, on May 29, 2009.
    \96\ Id.
    \97\ According to the 2008 Work Plan for the IRS Office of Tax-
Exempt Bonds, the bondholder identification process is expected to 
be initiated no later than the date a proposed adverse determination 
is issued (available at http://www.irs.gov/pub/irs-tege/teb_fy08_work_plan.pdf). See, e.g., Susanna Duff Barnett and Lynn Hume, IRS 
to Warn Mutual Funds of Taxability Letters Being Sent to Over 12 
Companies, The Bond Buyer, March 30, 2004, Washington, at 1 (``More 
mutual funds can be expected to be contacted in the future.'') and 
Susanna Duff Barnett, A Growing Caseload; More Challenges Face IRS 
Bond Office in '05, The Bond Buyer, December 23, 2004, Washington, 
Vol. 350 No. 32036, at 1 (``One result that has stemmed from the 
lengthier audits is the IRS' aggressive search for bondholder names 
earlier in an audit cycle through so-called John Doe summonses and 
other methods.'').

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[[Page 36842]]

    IRS staff has indicated \98\ that during the period from April 2007 
through July 2008, approximately 80% of the audits that received a 
preliminary determination of taxability (now IRS Form 5701-TEB \99\) 
and were resolved were settled through closing agreements with the IRS. 
During the same period, of those cases that received a proposed 
determination of taxability and were closed: approximately 25% were 
settled through a closing agreement with IRS; approximately 37.5% 
received final determinations that the bonds were taxable; and 
approximately 37.5% were appealed to the IRS Office of Appeals. In 
light of the foregoing discussion, the Commission believes that the 
risk of taxability following the issuance of proposed and final 
determinations of taxability and Notices of Proposed Issue (IRS Form 
5701-TEB) is significant.
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    \98\ E-mail from Robert Henn, Manager, Office of Tax-Exempt 
Bonds Field Operation, IRS, to Martha M. Haines, Assistant Director 
and Chief, Office of Municipal Securities, Division, Commission, 
dated July 14, 2009.
    \99\ The IRS Office of Tax-Exempt Bonds now issues Notices of 
Proposed Issue (IRS Form 5701-TEB) in instances in which it 
previously would have issued preliminary determinations of 
taxability. E-mail from Clifford Gannett, Director, Office of Tax-
Exempt Bonds, IRS, to Martha M. Haines, Assistant Director and 
Chief, Office of Municipal Securities, Division, Commission, dated 
August 26, 2008. Information in e-mail confirmed in telephone 
conversation between Robert E. Henn, Manager, Office of Tax-Exempt 
Bonds Field Operations, Office of Tax-Exempt Bonds, IRS, and Martha 
M. Haines, Assistant Director and Chief, Office of Municipal 
Securities, Division, Commission, on May 29, 2009.
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    Despite the possibility that these events could adversely affect 
the tax-exempt status of the bonds that investors own or may purchase 
and thus could significantly affect the pricing of those municipal 
securities,\100\ it has been reported that notices regarding such tax 
events are not always filed.\101\ The Commission believes that the 
issuance of proposed and final determinations of taxability and Notices 
of Proposed Issue (IRS Form 5701-TEB) by the IRS is important 
information that should be made available to investors and therefore 
should be part of a Participating Underwriter's obligation to determine 
whether such events are included in a continuing disclosure agreement.
---------------------------------------------------------------------------

    \100\ See, e.g., Susanna Duff Barnett and Lynn Hume, IRS to Warn 
Mutual Funds of Taxability Letters Being Sent to Over 12 Companies, 
The Bond Buyer, March 30, 2004, Washington, at 1 (``The bondholder 
community has been saying for years that they want prompt disclosure 
of audits and issuer discussions with the IRS relating to the tax-
exempt status of the bonds.''--Tom Metzold, president and portfolio 
manager at Eaton Vance Management; ``It's vital to disclose the risk 
of taxability to the entire marketplace to protect potential 
investors.''--Gerard J. Lian, then chairman of the National 
Federation of Municipal Analysts and vice president and senior 
analyst at Morgan Stanley Investment Management.); and National 
Federation of Municipal Analysts, NFMA releases results of member 
survey (November 30, 2001) (available at http://www.nfma.org/publications/survey_results.pdf) (``Over 54% of analysts responding 
to the survey felt that all IRS audits, whether routine, targeted or 
based on external information, should be disclosed to the 
market.''). See also, Lori Trawinski, et al., The Bond Market 
Association, Secondary Market Effects of Municipal Bond Tax Audit 
Disclosure (August 2002) (available at http://www.gfoa.org/downloads/Tax_Audit_Study_August_2002.pdf) (``This study clearly 
demonstrates that effect for certain variable-rate tax-exempt bonds, 
where rates paid by state and local bond issuers have risen 
significantly when news of the audit is made public. While anecdotal 
evidence suggests similar effects for long-term, fixed-rate bonds, 
empirical evidence is inconclusive.'').
    \101\ See, e.g., Susanna Duff Barnett, IRS Answers Toxic Query; 
Post 1986 Radioactive Waste Debt Not Exempt, The Bond Buyer, 
November 2, 2004 (material event notice filed October 29, 2004 
regarding IRS technical advice memorandum dated August 27, 2004 that 
bonds issued to finance certain radioactive solid waste facilities 
were taxable; related preliminary adverse determination letter was 
issued in January, 2002).
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendment to modify 
the provision of the Rule regarding the submission of a notice with 
respect to adverse tax opinions to include the issuance by the IRS of 
proposed or final determinations of taxability, Notices of Proposed 
Issue (IRS Form 5701-TEB) or other material notices or determinations 
with respect to the tax-exempt status of the securities, or other 
events affecting the tax-exempt status of the security. Comment is 
requested on whether the proposed amendment would further the 
disclosure of such events and thereby aid investors to protect 
themselves from misrepresentations and fraud and brokers, dealers and 
municipal securities dealers to carry out their obligations. The 
Commission requests comment regarding the extent to which investors and 
other market participants would find it useful to be informed of the 
issuance of proposed and final determinations of taxability, Notices of 
Proposed Issue (IRS Form 5701-TEB) or other material notices or 
determinations with respect to the tax-exempt status of securities by 
the IRS. Commenters should advise whether the proposal would aid 
investors in their understanding of potential adverse tax consequences 
that may arise with respect to a particular municipal security. In 
addition, commenters should address whether such information is 
important to investors of various types of municipal securities, such 
as fixed and variable rate securities or demand securities. Should the 
continuing disclosure agreement specify that a copy of the 
determinations of taxability, Notices of Proposed Issue (IRS Form 5701-
TEB) or other material notices issued by the IRS be provided to the 
MSRB, or would a notice of any such determination provide sufficient 
information to investors? What would be the benefit of disclosing a 
copy of any such determination? What drawbacks, if any, might such 
disclosure entail? Should the Rule be amended to require a 
Participating Underwriter to reasonably determine that the issuer or 
obligated person has entered into a continuing disclosure agreement to 
submit a notice of tax audits? If so, why?

E. Addition of Events To Be Disclosed Under a Continuing Disclosure 
Agreement

    The Commission also proposes to amend paragraph (b)(5)(i)(C) of the 
Rule by including notice of four additional events the Participating 
Underwriter must reasonably determine that the issuer or other 
obligated person has agreed to provide in its continuing disclosure 
agreement. These would include: (1) Tender offers; (2) bankruptcy, 
insolvency, receivership or similar proceeding of the obligated person; 
(3) the consummation of a merger, consolidation, or acquisition 
involving an obligated person or the sale of all or substantially all 
of the assets of the obligated person, other than in the ordinary 
course of business, the entry into a definitive agreement to undertake 
such an action or the termination of a definitive agreement relating to 
any such actions, other than pursuant to its terms, if material; and 
(4) appointment of a successor or additional trustee, or the change of 
name of a trustee, if material.
1. Tender Offers
    The Commission proposes to add tender offers to the list of events 
in subparagraph (b)(5)(i)(C)(8) of the Rule.\102\ Under the proposed 
amendment, the Participating Underwriter must reasonably determine that 
the issuer or obligated person has agreed in its continuing disclosure 
agreement to provide notice of tender

[[Page 36843]]

offers to the MSRB.\103\ The Commission believes that notice of the 
existence of tender offers for municipal securities would help 
investors to be better able to protect themselves from 
misrepresentations and fraud, including deciding whether to tender 
their holdings to the issuer or its representative, and assist brokers, 
dealers and municipal securities dealers to carry out their 
obligations. Tender offers typically require an investor to respond 
within a limited time frame.\104\ Tender offers may provide an avenue 
of liquidity to investors, such as during periods of market 
turmoil.\105\ The Commission believes that communication of the 
existence of a tender offer to municipal securities investors is 
important to assist each investor to make an informed, timely decision 
whether or not to tender.\106\
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    \102\ Generally, municipal securities are not subject to 
Commission rules governing tender offers, including Rule 13e-4 under 
the Exchange Act, 17 CFR 240.13e-4, which sets forth disclosure, 
time periods, and other requirements governing tender offers by 
issuers. In passing the Williams Act, P.L. 90-439, in 1968, Congress 
recognized that regulation of tender offers was necessary for the 
purposes of disclosure of material information and substantive 
protection to investors. See Rep. No. 550, 90th Cong., 1st Sess. 3 
(1967) at 1.
    \103\ See supra note 11 and accompanying text.
    \104\ See Edward N. Gadsby, et al., Regulation of Tender Offers, 
Federal Securities Exchange Act of 1934, Sec.  7A.03 (David Colby, 
et al., ed., Matthew Bender & Company, Inc.) (2008) (describing that 
usually a time limit is placed on a tender offer).
    \105\ See, e.g., Caitlin Devitt, Midwest Health Systems Use New 
ARS Strategy; Two Systems See to Ease ARS Sting, The Bond Buyer, 
March 7, 2008, The Regions, Vol. 363 No. 32833, at 1 (describing an 
issuer's use of a tender offer in its auction rate securities to 
provide liquidity).
    \106\ The Commission proposes to retain in Rule 15c2-
12(b)(5)(i)(C)(8) the requirement that Participating Underwriters 
reasonably determine that the issuer or obligated person has agreed 
in a continuing disclosure agreement to provide to the MSRB notice 
of bond calls, if material. Thus, unlike with respect to tender 
offers, the issuer would make a materiality determination with 
respect to a notice regarding a bond call. The Commission believes 
that this distinction is appropriate in light of the various types 
of bond calls (e.g., sinking fund redemptions, extraordinary 
redemptions, and optional redemptions) that can occur. In addition, 
the specific amounts to be redeemed and dates for some redemptions 
(i.e., sinking fund redemptions) are generally included in official 
statements; therefore, information about such events is already 
available to investors.
---------------------------------------------------------------------------

    Indeed, the recent events in the market for ARS could be seen as an 
example of the need to provide timely notice within ten business days 
of a tender offer. Since approximately mid-February of 2008, the market 
for ARS has experienced severe illiquidity, with consequences to 
investors who purchased what they may have believed to be liquid, cash 
equivalent investments.\107\ Some issuers and obligated persons have 
offered to purchase some or all of their outstanding ARS from investors 
who desire liquidity.\108\ Notices about these tender offers may not 
always be widely disseminated. Had this information been available from 
the then-existing information repositories, it may have become more 
widely known to the market through these repositories and through 
private information vendors and news media who obtain information from 
the repositories.
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    \107\ See, e.g., MSRB Notice 2008-09 (February 19, 2008) 
(reminding brokers, dealers and municipal securities dealers of the 
application of MSRB disclosure and suitability requirements that 
apply to all customer transactions in municipal ARS and stating, for 
example, that it may be a material fact for an investor that an ARS 
recently was subject to a failed auction); Press Release 2009-127, 
Commission, SEC Finalizes ARS Settlements With Bank of America, RBC, 
and Deutsche Bank (June 3, 2009) (announcing settlement of SEC's 
complaints alleging that Bank of America, RBC Capital Markets, and 
Deutsche Bank failed to make their customers aware of risks in ARS 
investments.).
    \108\ See, e.g., notice dated March 28, 2008 of Nationwide 
Children's Hospital regarding the intent of the hospital to bid for 
auction rate bonds (available at https://www.nationalcity.com/content/private-client-group/products-services/create-grow-wealth/pages/documents/2008-03-28.pdf) and Caitlin Devitt, Midwest Health 
Systems Use New ARS Strategy; Two Systems Seek To Ease ARS Sting, 
The Bond Buyer, March 7, 2008, The Regions, Vol. 363 No. 32833, at 
1.
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    During a tender offer for municipal securities, such as ARS, some 
investors may be left in doubt whether their securities were the 
subject of the offer. To determine the facts about such offers, it 
often is necessary for investors to seek the information independently 
by contacting the issuer or other obligated person directly. Some 
investors may not have been able to learn of the existence of a tender 
offer for municipal securities that they hold, in a timely fashion and, 
in such a case, may not have been able to tender their securities. The 
Commission believes that the proposed amendment requiring Participating 
Underwriters to reasonably determine that such notices are provided 
pursuant to a continuing disclosure agreement would help ensure the 
consistent availability of this information to investors when they make 
investment decisions, and thereby assist them to be better able to 
protect themselves from misrepresentation and fraud.
    The Commission believes that the proposed amendment requiring 
Participating Underwriters to reasonably determine that issuers and 
other obligated persons have agreed in their continuing disclosure 
agreements to provide notice of tender offers to the MSRB \109\ would 
result in this information being more widely available to investors 
through the MSRB. In addition, the proposal to revise paragraph 
(b)(5)(i)(C) of the Rule to specify that event notices be submitted in 
a timely manner not in excess of ten business days after the event's 
occurrence, as discussed above, would help to improve the timely 
availability of tender offer information so that investors would be 
afforded the opportunity to make more informed decisions whether to 
hold or tender their securities. The Commission believes that its 
proposal regarding notice of tender offer disclosures would enhance the 
ability of issuers, other obligated persons, or others making such 
tender offers to effectively communicate their offers to a wider 
constituency of bondholders and thereby would increase the likelihood 
that those holders would be informed of the offer.
---------------------------------------------------------------------------

    \109\ See supra note 11 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment regarding all aspects of the 
proposed amendment of subparagraph (b)(5)(i)(C)(8) of the Rule to 
include tender offers. For example, would specifying in Rule 15c2-12 
the submission to the MSRB of a notice of a tender offer assist issuers 
and other obligated persons in providing tender offer information to 
bondholders on a wider basis? Is there a benefit or drawback to adding 
tender offers as an event item in subparagraph (b)(5)(i)(C)(8) of the 
Rule? Would the proposal help prevent fraud? If so, would the proposed 
amendment to modify subparagraph (b)(5)(i)(C)(8) to include notice of 
tender offers to the MSRB be an appropriate avenue to address this 
objective? If a tender offer is open for a short period of time, is the 
proposed ``ten business day'' standard appropriate in the context of a 
tender offer or would another time frame be more appropriate? The 
Commission seeks comment regarding whether tender offers should be 
added to this provision of Rule 15c2-12 and requests suggestions 
concerning alternative methods to address the concerns stated above 
with regard to tender offers for municipal securities. In addition, 
comment is requested about the existence and prevalence of exchange 
offers for municipal securities and whether exchange offers also should 
be included in this provision. Further, the Commission requests comment 
regarding whether it should specify that the Participating Underwriter 
reasonably determine that the issuer or obligated person has agreed to 
provide particular information regarding a tender offer that should be 
included in such notices, such as: The offer price; change in offer 
price; withdrawal rights; identity of the offeror; an offeror's ability 
to finance the offer; conditions to the offer; and the time frame and 
manner for tendering securities and the method for acceptance (e.g., 
whether all securities tendered would be accepted and, if not, the 
method for determining which securities would be accepted). Are there 
other items of information that

[[Page 36844]]

should be included in the notice to help accomplish the purposes of the 
Rule or would some of the items listed above be unnecessary in this 
context? If so, please specify which ones and explain the rationale as 
to why they should or should not be included.
2. The Occurrence of Bankruptcy, Insolvency, Receivership or Similar 
Events Regarding an Issuer or an Obligated Person
    The Commission proposes to add new subparagraph (b)(5)(i)(C)(12) to 
the Rule to require a Participating Underwriter to reasonably determine 
that the continuing disclosure agreement requires a notice to be 
submitted to the MSRB,\110\ in the case of bankruptcy, insolvency, 
receivership or similar event of the obligated person. Rule 15c2-12 
would state in a Note following the events specified in subparagraph 
(b)(5)(i)(C)(12) that, for the purposes of the subparagraph 
(b)(5)(i)(C)(12), the event would be considered to occur when any of 
the following occur: the appointment of a receiver, fiscal agent or 
similar officer for an obligated person in a proceeding under the U.S. 
Bankruptcy Code or in any other proceeding under state or federal law 
in which a court or governmental authority has assumed jurisdiction 
over substantially all of the assets or business of the issuer or 
obligated person, or if such jurisdiction has been assumed by leaving 
the existing governing body and officials or officers in possession but 
subject to the supervision and orders of a court or governmental 
authority, or the entry of an order confirming a plan or 
reorganization, arrangement or liquidation by a court or governmental 
authority having supervision or jurisdiction over substantially all of 
the assets or business of the obligated person.\111\ Although issuers 
and other obligated persons of municipal securities rarely are involved 
in bankruptcy, insolvency, receivership or similar events, the 
Commission notes that the occurrence of such events, even if rare, can 
significantly impact the value of the municipal securities. Information 
about these events is important to investors and other market 
participants,\112\ and knowledge of the bankruptcy, insolvency, 
receivership or similar event involving an issuer or other obligated 
person would allow investors to make informed decisions about whether 
to buy, sell or hold the municipal security and help prevent 
fraud.\113\ Accordingly, the Commission believes that Participating 
Underwriters should be required to reasonably determine that such 
information is provided pursuant to a continuing disclosure agreement.
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    \110\ See supra note 11 and accompanying text.
    \111\ See Form 8-K, Item 1.03 for provisions relating to 
bankruptcy or receivership that are applicable to entities subject 
to Exchange Act reporting requirements. 17 CFR 249.308. Item 1.03 of 
Form 8-K requires the registrant to provide specified items of 
disclosure on Form 8-K if a receiver, fiscal agent or similar 
officer has been appointed for a registrant or its parent, in a 
proceeding under the U.S. Bankruptcy Code or in any other proceeding 
under state and federal law in which a court or governmental 
authority has assumed jurisdiction over substantially all of the 
assets or business of the registrant or its parent, or if such 
jurisdiction has been assumed by leaving the existing directors and 
officers in possession but subject to the supervision and orders of 
a court or governmental authority. The proposed Rule 15c2-12 event 
item is intended to be consistent with the Form 8-K, Item 1.03 
provisions applicable to entities subject to the reporting 
requirements of the Exchange Act.
    \112\ See, e.g., Letter from Karrie McMillan, General Counsel, 
ICI, to Florence E. Harmon, Secretary, Commission (September 22, 
2008) (``ICI Letter'') (available at http://www.sec.gov/comments/s7-21-08/s72108-12.pdf) (suggesting that disclosure information should 
include information relating to bankruptcy and receivership); 
National Federation of Municipal Analysts, Recommended Best 
Practices in Disclosure for Land Secured Debt Transactions, June 
2000 (available at http://data.memberclicks.com/site/nfma/DG.BP.landsecuredpractices.doc.pdf) (recommending best practice 
disclosures, including disclosures of bankruptcy).
    \113\ The Commission is aware that bonds are often secured by 
letters of credit, bond insurance, and other forms of credit 
enhancement that some have argued could reduce the importance of the 
creditworthiness of an issuer or obligated person. However, the 
Commission has long been of the view that information regarding 
obligated persons generally is material to investors in credit 
enhanced offerings. See 1989 Adopting Release, supra note 3, 54 FR 
at 28812 (``The presence of credit enhancements generally would not 
be a substitute for material disclosure concerning the primary 
obligor on municipal bonds.''). See also Regulation AB, 17 CFR 
229.1100 et seq.
---------------------------------------------------------------------------

    Under current Rule 15c2-12(b)(5)(i)(C)(2), notice of a material 
``non-payment related default'' is to be provided to the MSRB pursuant 
to a continuing disclosure agreement. The Commission understands that 
the governing documents for some municipal securities include 
bankruptcy, insolvency, receivership or similar events involving an 
issuer or obligated person as a ``non-payment related default.'' \114\ 
However, the Commission further understands that this may not be 
uniformly the case. The proposed amendment would help improve the 
availability of notice of bankruptcy, insolvency, receivership, or 
similar events to all investors. The proposed Note, as described above, 
is intended to clarify the scope of the event item contained in new 
subparagraph (b)(5)(i)(C)(12) of the Rule. Moreover, because of the 
importance of such events to investors and their possible impact on the 
value of the security, a materiality condition would not be added to 
proposed subparagraph (b)(5)(i)(C)(12).
---------------------------------------------------------------------------

    \114\ See National Association of Bond Lawyers (NABL) Form 
Indenture, dated June 1, 2002 (``NABL Form Indenture'').
---------------------------------------------------------------------------

    The Commission requests comment regarding all aspects of the 
proposed addition of the event relating to bankruptcy, insolvency, 
receivership or similar proceeding of the issuer or other obligated 
person in the Rule. In particular, the Commission requests comment 
regarding whether there are other similar events or proceedings 
affecting the financial condition of issuers or other obligated persons 
that should be included as events requiring notice. The Commission 
seeks input regarding whether commenters believe that the items 
contained in proposed subparagraph (b)(5)(i)(C)(12) of the Rule are 
already addressed by current subparagraph (b)(5)(i)(C)(2) of the Rule 
and thus whether it is unnecessary to revise the Rule in this regard. 
The Commission also seeks comment on whether it is appropriate to 
exclude a materiality determination from this proposed event item.
3. Merger, Consolidation, Acquisition, and Sale of All or Substantially 
All Assets
    The Commission proposes to add subparagraph (b)(5)(i)(C)(13) to the 
Rule, which would require a Participating Underwriter reasonably to 
determine that the continuing disclosure agreement provides for the 
submission of notice to the MSRB \115\ of any of the following events 
with respect to the securities being offered: the consummation of a 
merger, consolidation, or acquisition involving an obligated person or 
the sale of all or substantially all of the assets of the obligated 
person, other than in the ordinary course of business, the entry into a 
definitive agreement to undertake such an action or the termination of 
a definitive agreement relating to any such actions, other than 
pursuant to its terms, if material.\116\ Although mergers,

[[Page 36845]]

consolidations, acquisitions, and substantial asset sales are events 
believed to be rare among governmental issuers,\117\ they are not 
uncommon for obligated persons such as health care institutions, other 
non-profit entities, and for-profit businesses.\118\ Currently, Rule 
15c2-12 does not require Participating Underwriters to reasonably 
determine that continuing disclosure agreements provide for notice of a 
merger, consolidation, acquisition and substantial asset sales 
involving such obligated persons, if material.\119\ Investors often are 
not readily able to obtain information about such actions by obligated 
persons.
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    \115\ See supra note 11 and accompanying text.
    \116\ Although the Commission's disclosure rules that are 
applicable to reporting companies do not apply to municipal 
securities, the Commission notes that reporting companies are 
required to make disclosures upon the occurrence of similar events. 
See Items 1.01 and 2.01 of Form 8-K relating to entry into a 
material definitive agreement and completion of the acquisition or 
disposition of assets, respectively, which require entities subject 
to Exchange Act reporting requirements to disclose specified 
information within four business days of the occurrence of such 
events. 17 CFR 249.308. Item 1.01 of Form 8-K requires the 
registrant to provide specified items of disclosure on Form 8-K if 
the registrant has entered into a material definitive agreement not 
made in the ordinary course of business of the registrant, or into 
any amendment of such agreement that is material to the registrant. 
For purposes of Item 1.01, a ``material definitive agreement'' means 
an agreement that provides for obligations that are material to and 
enforceable against the registrant, or rights that are material to 
the registrant and enforceable by the registrant against one or more 
parties to the agreement, in each case whether or not subject to 
conditions. Item 2.01 of Form 8-K requires the registrant to provide 
specified items of disclosure on Form 8-K if the registrant or any 
of its majority-owned subsidiaries has completed the acquisition or 
disposition of a significant amount of assets, other than in the 
ordinary course of business.
    \117\ But see Illinois Finance Authority, which was created on 
January 1, 2004 following the consolidation of seven existing state 
authorities. See Illinois Finance Authority, Illinois Finance 
Authority Bond Program Handbook, November 1, 2004 (available at 
http://www.il-fa.com/policies/BondHandbook11-1-04.pdf).
    \118\ For example, according to the American Hospital 
Association, more than 680 hospital mergers were announced from 
1998-2006. See American Hospital Association, TRENDWATCH CHARTBOOK 
2008--Trends in the Overall Health Care Market, Chart 2.10: 
Announced Hospital Mergers and Acquisitions, 1998-2006 (available at 
http://www.aha.org/aha/trendwatch/chartbook/2008/08chart2-10.pdf).
    \119\ The materiality of the consummation of a merger, 
consolidation, or acquisition involving an obligated person or the 
sale of all or substantially all of the assets of the obligated 
person, other than in the ordinary course of business, the entry 
into a definitive agreement to undertake such an action or the 
termination of a definitive agreement relating to any such actions 
must be determined through a review of the particular facts and 
circumstances of such event. Although in a number of instances such 
events may be determined to be material, it is possible for such an 
event to be so sufficiently insignificant that an event notice would 
not be required. For example, a merger or acquisition of a small 
entity by one of substantial size may not be material to investors 
in bonds for which the larger entity is the obligated person, absent 
other circumstances. On the other hand, such a merger or acquisition 
may be material to investors in bonds for which the small entity is 
the obligated person.
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    The Commission believes that notice of the consummation of a 
merger, consolidation, or acquisition involving an obligated person or 
the sale of all or substantially all of the assets of the obligated 
person, other than in the ordinary course of business, the entry into a 
definitive agreement to undertake such an action or the termination of 
a definitive agreement relating to any such actions, other than 
pursuant to its terms, if material, is important information for 
investors and market participants.\120\ The foregoing events may signal 
that a significant change in the obligated person's corporate structure 
could occur or has occurred. In the case of such event, investors may 
want to have information about the identity and financial stability of 
the obligated person that would be responsible, following such event, 
for payment of a municipal security. Further, municipal security 
holders generally may wish to know about the obligated person's 
creditworthiness, particularly its ability to support payment of the 
security following such event when they assess whether to buy, sell or 
hold a municipal security. A notice regarding such an event, if 
material, would help further the availability of relevant information 
to bondholders, market professionals, and the public generally. 
Accordingly, the Commission believes that it is appropriate to include 
in the Rule the proposed event item relating to the consummation of a 
merger, consolidation, or acquisition involving an obligated person or 
the sale of all or substantially all of the assets of the obligated 
person, other than in the ordinary course of business, the entry into a 
definitive agreement to undertake such an action or the termination of 
a definitive agreement relating to any such actions other than pursuant 
to its terms, if material. The Commission does not believe that all 
mergers are necessarily of sufficient importance that information on 
mergers needs to be made available in all instances. For example, a 
merger could involve the combination of a shell corporation or other 
small entity into a very large healthcare organization that is a 
conduit borrower. Such a merger generally would not have a significant 
impact on the business or financial condition of the larger corporation 
and, under all of the applicable facts and circumstances, would not be 
important to investors.
---------------------------------------------------------------------------

    \120\ See ICI Letter, supra note 112 (suggesting that disclosure 
information should include information relating to material 
acquisitions and dispositions).
---------------------------------------------------------------------------

    The Commission requests comment regarding all aspects of the 
proposed addition to the Rule with respect to the consummation or entry 
into or termination of a definitive agreement involving a merger, 
consolidation, acquisition, or the sale of all or substantially all of 
the assets of the obligated person. The Commission requests comment 
regarding the frequency of such events, and whether this information 
would be meaningful to investors. The Commission further requests 
comment on whether a determination of materiality for such events is an 
appropriate condition to add to this proposed provision. The Commission 
also requests comments regarding the benefits and drawbacks of this 
proposed event item.
4. Successor, Additional, or Change in Trustee
    Finally, the Commission proposes to add subparagraph 
(b)(5)(i)(C)(14) to the Rule to require Participating Underwriters to 
reasonably determine that the issuer or other obligated person has 
contractually agreed to submit notice to the MSRB \121\ when there is 
an appointment of a successor or additional trustee, or a change of 
name of a trustee, if material.\122\ The proposed amendment reflects 
the Commission's belief in the importance of an investor's ability to 
learn of a material change in the trustee's identity, given the 
significant function and role of the trustee for the holders of the 
municipal security. The trustee makes critical decisions that impact 
investors and has a duty to represent the interests of bondholders. For 
example, the trustee often must determine whether: Proposed amendments 
to the governing documents of the municipal security are permissible 
without bondholder consent; parity obligations could be issued; 
security could be released; or an event of default has occurred.\123\ 
In addition, a trustee is responsible for sending payments to investors 
and computing applicable interest rates. In some cases, a trustee may 
be responsible for taking certain actions at the direction of a 
designated percentage of bondholders.\124\ A trustee may also be 
responsible for providing information requested by investors; often the 
trustee serves as the issuer's dissemination agent for continuing 
disclosures. Although the identity of the trustee may have little or no 
influence on a decision whether to buy or sell a security under normal 
circumstances, bondholders would need to know the identity of a trustee 
to be able to contact the trustee for various reasons, particularly 
when

[[Page 36846]]

an issuer or other obligated person may be experiencing financial 
difficulty. These factors support the need for investors to know the 
identity of the trustee. Yet, the Commission is unaware of any method 
by which investors, particularly individual investors, presently have a 
consistent means of obtaining up-to-date information about changes to 
the identity of the trustee. The proposed amendment therefore would 
require that the Participating Underwriter reasonably determine that 
the continuing disclosure agreement provide that a notice concerning a 
change in the identity of the trustee be submitted to the MSRB.
---------------------------------------------------------------------------

    \121\ See supra note 11 and accompanying text.
    \122\ The materiality of the name change of a trustee must be 
determined through a review of the particular facts and 
circumstances of such event. For instance, it is possible for a name 
change by a trustee to be so minor that an event notice would not be 
required. For example, a name change such as ``ABC National Bank and 
Trust Company of XYZ,'' to ``ABC National Bank and Trust Company'' 
may not be material in the absence of other factors, such as a 
change of the location at which the trustee can be reached.
    \123\ See NABL Form Indenture, supra note 114.
    \124\ Id.
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    The Commission requests comment regarding all aspects of the 
proposed addition of subparagraph (b)(5)(i)(C)(14) concerning the 
appointment of a successor or additional trustee or the change of name 
of a trustee. In particular, the Commission requests comment relating 
to the frequency of such an event and the importance of such 
information to investors. Commenters should advise whether the 
continuing disclosure agreement should set forth other information 
regarding the trustee that should be disclosed and whether a 
determination of materiality for such events is an appropriate 
condition to add to this proposed provision. Commenters are requested 
to provide their views on the benefits and drawbacks of this aspect of 
the proposal.

F. Effective Date and Transition

    The proposed amendments to Rule 15c2-12 would impact only 
continuing disclosure agreements that are entered into in connection 
with primary offerings occurring on or after the effective date of 
these proposed amendments, if they were adopted by the Commission. The 
Commission understands that existing undertakings by issuers and 
obligated persons that were entered into prior to the effective date of 
any final amendments would not require a broker, dealer, or municipal 
securities dealer to reasonably determine that the issuer or other 
obligated person had agreed to provide notice of specified events in a 
timely manner not in excess of ten business days of the event's 
occurrence or include the additional items discussed above that are 
proposed to be added to paragraph (b)(5)(i)(C) of the Rule. In 
addition, such existing undertakings would provide for the submission 
of the events specified in paragraph (b)(5)(i)(C) of the Rule, ``if 
material.''
    Further, the Commission is aware that, prior to the effective date 
of any final amendments, a broker, dealer, or municipal securities 
dealer in primary offerings of demand securities in authorized 
denominations of $100,000 would not be required reasonably to determine 
that the issuer or other obligated person had entered into a continuing 
disclosure agreement, as prescribed by the Rule. The Commission 
requests comment regarding the potential effects and implications of 
existing continuing disclosure agreements having different terms (e.g., 
lacking the proposed additional events for which notices would be sent 
to the MSRB and the specified ten business day deadline for doing as 
discussed above) than continuing disclosure agreements entered into on 
or after any effective date of the proposed amendments, should the 
proposed amendments be adopted by the Commission.
    The Commission preliminarily believes that, if the proposed 
amendments to Rule 15c2-12 were adopted, it would be preferable to 
implement them expeditiously. If the Commission were to approve the 
proposed amendments, the Commission is preliminarily considering an 
effective date that would be no earlier than three months after any 
final adoption of the proposed amendments in order to permit sufficient 
time for the MSRB to make necessary modifications to the EMMA system 
and for Participating Underwriters to comply with the new Rule. The 
Commission requests comment on such an effective date and whether 
another effective date might be preferable, if the Commission were to 
adopt the proposed rule amendments. In particular, comment is requested 
regarding any transition issues with respect to the proposed 
amendments, such as whether there would be any conflicts with respect 
to terms in existing continuing disclosure agreements.
    The Commission notes that under paragraph (c) of the Rule, a 
broker, dealer, or municipal securities dealer cannot 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 paragraphs (b)(5)(i)(C) and (D) and paragraph 
(d)(2)(ii)(B) of the Rule with respect to the security. The Commission 
recognizes that continuing disclosure agreements entered into prior to 
the effective date of any final amendments that the Commission may 
adopt would not reflect changes made to the Rule by such amendments, 
including with respect to event notices. As a result, event items 
covered by a continuing disclosure agreement entered into prior to the 
effective date of any amendments that the Commission may adopt may be 
different from those event items covered by a continuing disclosure 
agreement entered into on or after the effective date of any final 
amendments that the Commission may adopt. Thus, in the case of 
municipal securities subject to a continuing disclosure agreement 
entered into prior to the effective date of any final amendments that 
the Commission may adopt, the recommending broker, dealer or municipal 
securities dealer would receive notice solely of those events covered 
by that continuing disclosure agreement, namely, the eleven events 
specified in the current Rule. Because, in that case, the continuing 
disclosure agreement would not cover any of the items proposed to be 
added to the Rule, it would not be necessary for the recommending 
broker, dealer, or municipal securities dealer to have procedures in 
place that provide reasonable assurance that it received prompt notice 
of events proposed to be added to the Rule. The Commission requests 
comment on the impact of the proposed amendments with respect to 
brokers, dealers, and municipal securities dealers that recommend the 
purchase or sale of municipal securities. The Commission also requests 
comment on what changes, if any, brokers, dealers and municipal 
securities dealers would have to make to their procedures as a result 
of any final amendments that the Commission may adopt relating to the 
receipt of event notices. The Commission also requests comment on 
whether it should amend the Rule or otherwise provide further guidance 
to take into account differences in event notices included in 
continuing disclosure agreements entered into prior to the effective 
date of any final amendments that the Commission may adopt and those 
event notices included in continuing disclosure agreements entered into 
on or after the effective date of any final amendments that the 
Commission may adopt.
    The Commission seeks comment on any other transition issues in 
connection with the proposed amendments to Rule 15c2-12. For example, 
in connection with the 2008 Amendments, one commenter suggested that 
continuing disclosure agreements executed following the effective date 
of the 2008 Amendments should amend all prior continuing disclosure 
agreements of the same issuer to incorporate the changes to the Rule 
made in the 2008 Amendments. In the event that the proposed amendments 
were to be

[[Page 36847]]

adopted, would transitional issues be minimized by the fact that over 
time fewer bonds would be subject to continuing disclosure agreements 
entered into prior to the effective date? Would an effective date that 
is no earlier than three months after any final approval of the 
proposed amendments, should the Commission determine to adopt the 
proposed amendments, provide adequate time for issuers and underwriters 
to become informed about the proposed amendments and adapt to them?

III. Interpretive Guidance With Respect to Obligations of Participating 
Underwriters

    As noted above in Section I.B., the Commission is aware that 
municipal securities industry participants have expressed concern that 
some municipal issuers and other obligated persons may not consistently 
submit continuing disclosure documents, particularly event notices and 
failure to file notices, in accordance with their undertakings in 
continuing disclosure agreements.\125\
---------------------------------------------------------------------------

    \125\ See the comments of participants at the 2001 SEC Municipal 
Market Roundtable--Secondary Market Disclosure for the 21st Century, 
(available at http://www.sec.gov/info/municipal/roundtables/thirdmuniround.htm). See also E-mail from Peter J. Schmitt, CEO, DPC 
Data Inc., to SEC, Rule-Comments, dated September 19, 2008, 
regarding the 2008 Proposed Amendments.
---------------------------------------------------------------------------

    Municipal security holders' access to meaningful information 
promotes informed investment decision-making about whether to buy, sell 
or hold municipal securities \126\ and thereby better protection 
against misrepresentations and fraudulent activities. Availability of 
that information also will aid brokers, dealers, and municipal 
securities dealers to satisfy their obligations under the federal 
securities laws to have a reasonable basis for recommending municipal 
securities. In the Commission's view, the flow of municipal securities 
disclosure to investors and other market participants depends on 
issuers and obligated persons abiding by their undertakings in 
continuing disclosure agreements.\127\ Accordingly, the Commission 
emphasizes that it is important for an underwriter in a municipal 
offering to evaluate carefully the likelihood that the issuer or 
obligated person will comply on a timely basis with the undertakings it 
has made.
---------------------------------------------------------------------------

    \126\ See e.g., 2008 Amendments Adopting Release, supra note 11, 
73 FR at 76129.
    \127\ See 1994 Amendments Adopting Release, supra note 5, 59 FR 
at 59594-5.
---------------------------------------------------------------------------

    In prior releases, the Commission set forth its interpretations of 
the obligations of municipal underwriters under the antifraud 
provisions of the federal securities laws.\128\ The Commission 
discussed the duty of underwriters to the investing public to have a 
reasonable basis for recommending any municipal securities and, in 
fulfilling that obligation, it is their responsibility to review the 
issuer's or obligated person's disclosure documents in a professional 
manner with respect to the accuracy and completeness of statements made 
in connection with the offering.\129\ The Commission today reaffirms 
its previous interpretations and provides additional guidance with 
respect to underwriters' responsibilities under the antifraud 
provisions of the federal securities laws.\130\
---------------------------------------------------------------------------

    \128\ See Securities Exchange Act Release No. 26100 (September 
22, 1988), 53 FR at 37787-91 (September 28, 1988) (``1988 Proposing 
Release''); the 1989 Adopting Release, supra note 3, 54 FR at 28811-
12; and the 1994 Interpretive Release, supra note 5, 59 FR at 12757-
58 (reaffirming the Commission's interpretation of the obligations 
of municipal underwriters under the antifraud provisions of the 
federal securities laws).
    \129\ See 1989 Adopting Release, supra note 3, 54 FR at 28811. 
See also 1988 Proposing Release, supra note 128, 53 FR at 37787.
    \130\ In light of the underwriter's obligation, as discussed in 
the 1988 Proposing Release, supra note 128, 53 FR at 37787-91, the 
1989 Adopting Release, supra note 3, 54 FR 28811-12, and the 1994 
Interpretive Release, supra note 5, 59 FR 12757-58, to review the 
official statement and to have a reasonable basis for its belief in 
the accuracy and completeness of the official statement's key 
representations, the Commission noted that disclaimers by 
underwriters of responsibility for the information provided by the 
issuer or other parties without further clarification regarding the 
underwriter's belief as to accuracy, and the basis therefore, are 
misleading and should not be included in official statements. See 
1994 Interpretive Release, supra note 5, 59 FR 12758 n.103.
---------------------------------------------------------------------------

    The provisions of paragraph (b) of Rule 15c2-12 are intended to 
assist a municipal underwriter in meeting its ``reasonable basis'' 
obligations, including the requirement that an underwriter receive and 
review a nearly complete final official statement prior to bidding for 
or purchasing securities in connection with the offering.\131\ Under 
paragraph (b)(5)(i)(C) of the Rule, the underwriter is obligated to 
reasonably determine that the issuer or obligated person has 
undertaken, in a written agreement or contract for the benefit of the 
bondholders, to provide continuing disclosure documents to the 
MSRB.\132\ Further, the Rule's definition of ``final official 
statement'' provides for the disclosure of any instances in the 
previous five years in which any person identified in the continuing 
disclosure agreement has failed to comply, in all material respects, 
with any previous informational undertakings in the continuing 
disclosure agreement.\133\ When the Commission in 1994 adopted these 
provisions of the Rule, it stated its belief that the failure of the 
issuer or other obligated person to comply in all material respects 
with prior informational undertakings is information that is important 
to the market, and should, therefore, be disclosed in the final 
official statement.\134\ As the Commission noted at that time, the 
provision in the Rule regarding disclosure of a prior history of 
material non-compliance by issuers or other obligated persons with 
their undertakings was specifically intended to serve as an incentive 
for them to comply with their undertakings to provide secondary market 
disclosure.\135\ Moreover, such disclosure would assist underwriters 
and others in assessing the reliability of issuers' or obligated 
persons' disclosure representations.\136\ The Commission continues to 
believe in the importance of these Rule provisions and would like to 
remind underwriters of their obligations under Rule 15c2-12.
---------------------------------------------------------------------------

    \131\ See 1988 Proposing Release, supra note 128, 53 FR at 
37790.
    \132\ Under the 2008 Amendments, the MSRB is the sole 
information repository.
    \133\ Rule 15c2-12(f)(3), 17 CFR 15c2-12(f)(3).
    \134\ See 1994 Amendments Adopting Release, supra note 5, 59 FR 
at 59594-5.
    \135\ Id. at 59595.
    \136\ Id..
---------------------------------------------------------------------------

    The Commission previously has stated that, in its view, the 
reasonableness of a belief in the accuracy and completeness of the key 
representations in the final official statement, and the extent of a 
review of the issuer's or other obligated person's situation necessary 
to arrive at that belief, will depend upon all the circumstances.\137\ 
In both negotiated and competitively bid municipal offerings, the 
Commission expects, at a minimum, that underwriters will review the 
issuer's disclosure documents in a professional manner for possible 
inaccuracies and omissions.\138\ The Commission previously has provided 
a non-exclusive list of factors that it believes generally would be 
relevant in determining the reasonableness of an underwriter's basis 
for assessing the truthfulness of key representations in final official 
statements.\139\ These factors include: (1) The extent to which the 
underwriter relied upon municipal officials, employees, experts, and 
other persons whose duties have given them knowledge of particular 
facts; (2) the role of the underwriter (manager, syndicate member, or 
selected dealer);

[[Page 36848]]

(3) the type of bonds being offered (general obligation, revenue, or 
private activity); (4) the past familiarity of the underwriter with the 
issuer; (5) the length of time to maturity of the bonds; and (6) 
whether the bonds are competitively bid or are distributed in a 
negotiated offering.\140\ Sole reliance on the representations of the 
issuer will not suffice.\141\
---------------------------------------------------------------------------

    \137\ See 1988 Proposing Release, supra note 128, 53 FR at 37789 
and 1989 Adopting Release, supra note 3, 54 FR 28811-12.
    \138\ Id.
    \139\ Id.
    \140\ Id.
    \141\ See 1988 Proposing Release, supra note 128, 53 FR at 
37789.
---------------------------------------------------------------------------

    The Commission has determined further to expound upon its prior 
interpretations regarding municipal underwriter's responsibilities. As 
articulated in a prior interpretation, the Commission believes that it 
is doubtful that an underwriter could form a reasonable basis for 
relying on the accuracy or completeness of the issuer's or obligated 
person's ongoing disclosure representations, if such issuer or 
obligated person has a history of persistent and material breaches or 
if it has not remedied such past failures by the time the offering 
commences.\142\ The Commission believes that, if the underwriter finds 
that the issuer or obligated person has on multiple occasions during 
the previous five years,\143\ failed to provide on a timely basis 
continuing disclosure documents, including event notices and failure to 
file notices, as required in continuing disclosure agreements for prior 
offerings, it would be very difficult for the underwriter to make a 
reasonable determination that the issuer or obligated person would 
provide such information under a continuing disclosure agreement in 
connection with a subsequent offering. In the Commission's view, it is 
doubtful that an underwriter could meet the reasonable belief standard 
without the underwriter affirmatively inquiring as to that filing 
history.\144\ The underwriter's reasonable belief would be based on its 
independent judgment, not solely on representations of the issuer or 
obligated person as to the materiality of any failure to comply with 
any prior undertaking. If the underwriter finds that the issuer or 
obligated person has failed to provide such information, the 
underwriter should take that failure into account in forming its 
reasonable belief in the accuracy and completeness of representations 
made by the issuer or obligated person.
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    \142\ See 1994 Amendments Adopting Release, supra note 5, 59 FR 
at 59595.
    \143\ 17 CFR 240.15c2-12(f)(3).
    \144\ The Commission notes that, in light of the adoption of the 
2008 Amendments and their effective date of July 1, 2009, for 
disclosures made on or after July 1, 2009, an underwriter could 
verify that the information has been submitted electronically to the 
MSRB.
---------------------------------------------------------------------------

    Comment is solicited regarding whether there are alternative or 
additional ways in which an underwriter could satisfy its obligations, 
including obligations to ascertain whether issuers or obligated persons 
are abiding by their municipal disclosure commitments. Commenters 
should address the current practices used by underwriters to satisfy 
their ``reasonable basis'' obligation and any aspects of such practices 
that could be addressed through further Commission interpretation or 
rulemaking.

IV. Request for Comments

    The Commission seeks comment on all aspects of the proposed 
amendments to the Rule. In addition to the comments requested 
throughout this release, comment is requested on whether the proposed 
amendments would further the Commission's goal of enhancing the 
availability to investors important information regarding municipal 
securities and their issuers in a prompt manner, and whether the 
proposed amendments would improve investors' ability to obtain such 
information. Further, the Commission seeks comment regarding the impact 
of the proposed amendments on Participating Underwriters, issuers and 
obligated persons, institutional and individual investors, the MSRB, 
information vendors, and others that may be affected by the proposed 
amendments.
    In addition, the Commission requests comment on whether there are 
additional events for which notices should be provided, and alternative 
approaches or modifications to the Commission's proposed approach to 
improving the public's ability to obtain important information about 
municipal securities that the Commission should consider. Commenters 
are requested to indicate their views and to provide any other 
suggestions that they may have.

V. Paperwork Reduction Act

    Certain provisions of the proposed amendments to the Rule contain 
``collection of information requirements'' within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\145\ In accordance with 44 
U.S.C. 3507 and 5 CFR 1320.11, the Commission has submitted revisions 
to the currently approved collection of information titled ``Municipal 
Securities Disclosure'' (17 CFR 240.15c2-12) (OMB Control No. 3235-
0372) to OMB. An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
---------------------------------------------------------------------------

    \145\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    Under paragraph (b) of Rule 15c2-12, a Participating Underwriter 
currently is required: (1) To obtain and review an official statement 
``deemed final'' by an issuer of the securities, except for the 
omission of specified information, prior to making a bid, purchase, 
offer, or sale of municipal securities; (2) in non-competitively bid 
offerings, to send, upon request, a copy of the most recent preliminary 
official statement (if one exists) to potential customers; (3) to send, 
upon request, a copy of the final official statement to potential 
customers for a specified period of time; (4) to contract with the 
issuer to receive, within a specified time, sufficient copies of the 
final official statement to comply with the Rule's delivery 
requirement, and the requirements of the rules of the MSRB; and (5) 
before purchasing or selling municipal securities in connection with an 
offering, to reasonably determine that the issuer or obligated person 
has undertaken, in a written agreement or contract, for the benefit of 
holders of such municipal securities, to provide annual filings, event 
notices, and failure to file notices (i.e., continuing disclosure 
documents) to the MSRB in an electronic format as prescribed by the 
MSRB.\146\ Under paragraph (c) of the Rule, a broker-dealer that 
recommends the purchase or sale of a municipal security must have 
procedures in place that provide reasonable assurance that it will 
receive prompt notice of any event specified in paragraph (b)(5)(i)(C) 
of the Rule and any failure to file annual financial information 
regarding the security.\147\
---------------------------------------------------------------------------

    \146\ As noted above, the Commission recently approved 
amendments to Rule 15c2-12 that, among other things, established the 
MSRB as the sole repository for continuing disclosure documents and 
provided that those documents are to be submitted to the MSRB in an 
electronic format. See 2008 Amendments Adopting Release, supra note 
11. Previously, continuing disclosure documents were to be submitted 
to the NRMSIRs and the appropriate SID, if any. The 2008 Amendments 
became effective on July 1, 2009. The Commission proposes that the 
effective date of the proposed amendments discussed herein would be 
no earlier than three months after the final approval of the 
proposed amendments, should the Commission adopt them.
    \147\ 17 CFR 240.15c2-12(c).
---------------------------------------------------------------------------

    Under paragraph (d)(1)(iii) of the Rule, a primary offering of 
municipal securities in authorized denominations of $100,000 or more is 
exempt from the Rule, if the securities, at the option of the holder 
thereof, may be tendered to

[[Page 36849]]

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.\148\ These securities are referred to as demand 
securities or variable rate demand obligations (``VRDOs''). The 
Commission proposes to modify the exemption for demand securities by 
adding proposed paragraph (d)(5) to the Rule, which would apply current 
paragraphs (b)(5) and (c) of the Rule to a primary offering of demand 
securities in authorized denominations of $100,000 or more.
---------------------------------------------------------------------------

    \148\ 17 CFR 240.15c2-12(d)(1)(iii).
---------------------------------------------------------------------------

    Under the current Rule, a Participating Underwriter must reasonably 
determine that the issuer or obligated person has undertaken in a 
continuing disclosure agreement to provide an event notice to the MSRB 
when any of the following events with respect to the securities being 
offered in an offering occurs, 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 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 
securities; and (11) rating changes.\149\
---------------------------------------------------------------------------

    \149\ 17 CFR 240.15c2-12(b)(5)(i)(C).
---------------------------------------------------------------------------

    Under the proposed amendments, Participating Underwriters would be 
required to reasonably determine that the issuer or obligated person 
has undertaken in a continuing disclosure agreement to provide event 
notices to the MSRB, in an electronic format as prescribed by the MSRB, 
in a timely manner not in excess of ten business days, rather than only 
in ``a timely manner.'' In addition, the Commission proposes to add the 
following event items to paragraph (b)(5)(i)(C) of the Rule: (1) the 
issuance by the IRS of proposed or final determinations of taxability, 
Notices of Proposed Issue (IRS form 5701-TEB) or other material notices 
or determinations with respect to the tax-exempt status of the 
securities; (2) tender offers; (3) bankruptcy, insolvency, receivership 
or similar event of the issuer or obligated person; (4) the 
consummation of a merger, consolidation, or acquisition involving an 
obligated person or the sale of all or substantially all of the assets 
of the obligated person, other than in the ordinary course of business, 
the entry into a definitive agreement to undertake such an action or 
the termination of a definitive agreement relating to any such actions, 
other than pursuant to its terms, if material; and (5) appointment of a 
successor or additional trustee, or the change of name of a trustee, if 
material. Further, the Commission proposes to delete the generally 
applicable ``if material'' condition from paragraph (b)(5)(i)(C) of the 
Rule and instead indicate in specific event items listed in that 
paragraph whether notice of such event must be made only to the extent 
that such event is material. In this regard, Participating Underwriters 
would need to reasonably determine that notice of the following events 
would be made in all circumstances: (1) Principal and interest payment 
delinquencies with respect to the securities being offered; (2) 
unscheduled draws on debt service reserves reflecting financial 
difficulties; (3) unscheduled draws on credit enhancements reflecting 
financial difficulties; (4) substitution of credit or liquidity 
providers, or their failure to perform; (5) defeasances; and (6) rating 
changes.

B. Proposed Use of Information

    By specifying the time period for submission of event notices, 
expanding the Rule's current categories of events, and modifying an 
exemption in the current Rule used for demand securities, the proposed 
amendments are intended to promptly make available to broker-dealers, 
institutional and retail investors, and others important information 
about significant events relating to municipal securities and their 
issuers. The proposed amendments would help enable investors and other 
municipal securities market participants to be better informed about 
important events that occur with respect to municipal securities and 
their issuers, including with respect to demand securities, and thus 
would allow investors to better protect themselves against fraud. In 
addition, the proposed amendments would provide brokers, dealers, and 
municipal securities dealers with access to important information about 
municipal securities that they can use to carry out their obligations 
under the securities laws. This information could be used by individual 
and institutional investors; underwriters of municipal securities; 
other market participants, including broker-dealers and municipal 
securities dealers; analysts; municipal securities issuers; the MSRB; 
vendors of information regarding municipal securities; Commission's 
staff; and the public generally.

C. Respondents

    In December 2008, OMB approved a revision to the collection of 
information associated with the Rule in accordance with 2008 Amendments 
to the Rule. The current paperwork collection associated with Rule 
15c2-12 applies to broker-dealers, issuers of municipal securities, and 
the MSRB. The paperwork collection associated with today's proposed 
amendments applies to the same respondents.
    The proposal would require that a Participating Underwriter in a 
primary offering of municipal securities reasonably determine that the 
issuer or an obligated person has undertaken in a continuing disclosure 
agreement to submit event notices in a timely manner not in excess of 
ten business days of their occurrence to the MSRB, as well as to submit 
such notices for proposed additional disclosure items. The proposal 
also would revise the Rule with respect to whether or not a materiality 
condition would apply to each of the Rule's specified events prompting 
submission of notices to the MSRB. In addition, the proposed amendments 
would revise the Rule with respect to its treatment of demand 
securities. The Commission gathered updated information regarding the 
paperwork burden associated with Rule 15c2-12 in connection with the 
Commission's adoption of the 2008 Amendments and is using these 
estimates in preparing the paperwork collection associated with its 
current proposal. In the 2008 Amendments Adopting Release, the 
Commission estimated that the number of respondents impacted by the 
paperwork collection associated with the Rule consists of 250 broker-
dealers and 10,000 issuers.\150\ The Commission's staff expects that 
the proposed amendments would not change the number of broker-dealer 
respondents described in the 2008 Amendments Adopting Release. The 
Commission's staff expects that the proposed amendments would increase 
the number of issuer respondents in comparison to the Rule's paperwork 
current collection, as set forth in the 2008 Amendments Adopting 
Release. This is because the proposed amendments would expand the types 
of securities covered under subparagraphs (b)(5) and (c) of the Rule, 
thus increasing the number of issuers having a paperwork burden. 
Specifically, the

[[Page 36850]]

Commission's staff estimates that the proposed revision of the Rule's 
exemption for demand securities would increase the number of issuers 
with a paperwork burden by 2,000 issuers, for a total of 12,000 issuer 
respondents.\151\ The Commission's 2008 Amendments Adopting Release 
included a paperwork collection burden for the MSRB and, for purposes 
of the proposed amendments, the Commission's staff expects that the 
MSRB also would be a respondent.
---------------------------------------------------------------------------

    \150\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \151\ In 2008, there were approximately 2,000 offerings of 
demand securities. See Two Decades of Bond Finance: 1989-2008, The 
Bond Buyer/Thomson Reuters 2009 Yearbook 7 (Matthew Kreps ed., 
SourceMedia, Inc.) (2009). To provide estimates that would not be 
under-inclusive, the Commission's staff has elected to assume that 
all 2,000 offerings of demand securities were issued by separate 
issuers and that each of those issuers currently is not a party to a 
continuing disclosure agreement that provides for the submission of 
continuing disclosure documents to the MSRB. Thus, the Commission's 
staff estimates that approximately 2,000 additional issuers would be 
affected by the proposed amendments to the Rule. These 2,000 
additional issuers represent a 20% increase in the total number of 
issuers affected by the Rule. 10,000 (number of issuers under 
current Rule)/2,000 (number of additional issuers under proposed 
amendments to the Rule) x 100 = 20%.
---------------------------------------------------------------------------

D. Total Annual Reporting and Recordkeeping Burden

    In the 2008 Amendments Adopting Release, the Commission included 
estimates for the hourly burdens that the Rule imposes upon broker-
dealers, issuers of municipal securities, and the MSRB. The 
Commission's staff has relied on these estimates to prepare the 
analysis discussed below for each of the aforementioned entities.
    The Commission's staff estimates the aggregate information 
collection burden for the amended Rule would consist of the following:
1. Broker-Dealers
    The Commission's staff estimates that approximately 250 broker-
dealers potentially could serve as Participating Underwriters in an 
offering of municipal securities.\152\ Therefore, the Commission's 
staff estimates that, under the proposed amendments, the maximum number 
of broker-dealer respondents would be 250.
---------------------------------------------------------------------------

    \152\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
---------------------------------------------------------------------------

a. Proposed Amendment To Modify the Exemption for Demand Securities
    Under the current Rule, the Commission has estimated that the total 
annual burden on all 250 broker-dealers is 250 hours (1 hour annually 
per broker-dealer).\153\ The Commission believes that the proposed 
amendment to modify the exemption from the Rule for a primary offering 
of demand securities in authorized denominations of $100,000 or more, 
would increase the number of issuers with municipal securities 
offerings that are subject to the Rule annually by 20%, based on the 
Commission's staff estimate of the ratio of demand securities 
outstanding in relation to the municipal security market 
generally.\154\ The Commission's staff estimates that this 20% increase 
in the number of issuers with offerings subject to the Rule also would 
increase the estimated average annual burden for each broker-dealer by 
20%, or .20 hours (12 minutes = 60 minutes x .20 (20%)) and the total 
estimated annual paperwork burden for all broker-dealers by 20%, or 50 
hours.\155\ This increased burden represents the estimated additional 
time broker-dealers would need annually to review the continuing 
disclosure agreements associated with the additional municipal 
securities offerings that would be subject to the amended Rule. As 
discussed in more detail below,\156\ the Commission notes that the 
continuing disclosure agreements that are reviewed by broker-dealers as 
part of their obligation under the Rule are form agreements. The 
proposed changes to the Rule would result in minor changes to certain 
provisions of these continuing disclosure agreements. However, because 
these continuing disclosure agreements are form agreements, the 
Commission does not believe that there would be a substantial increase 
in the annual hourly burden for broker-dealers under the proposed 
amendments to the Rule. Accordingly, the Commission's staff estimates 
that 250 broker-dealers would incur an estimated average burden of 300 
hours per year to comply with the Rule, as proposed to be amended.\157\
---------------------------------------------------------------------------

    \153\ Id.
    \154\ See supra note 151.
    \155\ 250 hours (total annual burden for all broker-dealers 
under the current Rule) x .20 (20% increase in total hourly burden) 
= 50 hours. This estimated increase in the annual burden for broker-
dealers also accounts for their review of continuing disclosure 
agreements in connection with remarketings of VRDOs that are primary 
offerings.
    \156\ See Section V.D.2., infra.
    \157\ (250 hours (total estimated annual hourly burden for all 
broker-dealers under the current Rule) + 50 hours (total estimated 
additional annual hourly burden for all broker-dealers under the 
proposed amendments to the Rule) = 300 hours.
---------------------------------------------------------------------------

b. Proposed Amendments to Events To Be Disclosed Under a Continuing 
Disclosure Agreement
    The proposed amendments to paragraphs (b)(5)(i)(C) and 
(d)(2)(ii)(B) of the Rule would not alter a broker-dealer's obligation 
to reasonably determine that the issuer or obligated person has 
undertaken, in a written agreement or contract, for the benefit of 
holders of such municipal securities, to provide annual filings, event 
notices, and failure to file notices to the MSRB. As described above, 
the proposed amendments to paragraph (b)(5)(i)(C) of the Rule would add 
four new event disclosure items to the Rule, as well as amend an 
existing event disclosure item currently contained in the Rule, and 
would modify the events that are subject to a materiality determination 
before triggering a notice to the MSRB. In addition, the proposed 
amendments to paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of the Rule 
would change the timing for filing event notices from ``in a timely 
manner'' to ``in a timely manner not to exceed ten business days.'' The 
Commission believes that these amendments would not change the 
obligation of broker-dealers under the Rule to reasonably determine 
that the issuer or obligated person has undertaken, in a written 
agreement or contract, for the benefit of holders of such municipal 
securities, to provide annual filings, event notices, and failure to 
file notices to the MSRB.\158\ Accordingly, the Commission does not 
believe that the proposed amendments relating to the timing and scope 
of event notices would affect the annual paperwork burden for broker-
dealers.
---------------------------------------------------------------------------

    \158\ The Commission notes that while the proposed amendments to 
the Rule do not change this obligation, broker-dealers would need to 
reasonably determine that the written agreement or contract entered 
into by an issuer or obligated person contains the proposed change 
to the timing for filing event notices.
---------------------------------------------------------------------------

c. One-Time Paperwork Burden
    The Commission's staff estimates that a broker-dealer would incur a 
one-time paperwork burden to have its internal compliance attorney 
prepare and issue a notice advising its employees about the proposed 
revisions to Rule 15c2-12, if they are adopted by the Commission. In 
the 2008 Amendments Adopting Release, the Commission estimated that it 
would take a broker-dealer's internal compliance attorney approximately 
30 minutes to prepare and issue a notice describing the broker-dealer's 
obligations in light of the 2008 Amendments to the Rule.\159\ The 
Commission's staff believes that this 30 minute estimate to prepare a 
notice would also apply to a broker-dealer's internal compliance 
attorney to prepare such a notice for these current amendments to the 
Rule. The Commission's staff believes that the task of preparing and 
issuing a notice

[[Page 36851]]

advising the broker-dealer's employees about the proposed amendments, 
if they are adopted, is consistent with the type of compliance work 
that a broker-dealer typically handles internally. Accordingly, the 
Commission's staff estimates that 250 broker-dealers would each incur a 
one-time, first-year burden of 30 minutes to prepare and issue a notice 
to its employees regarding the broker dealer's obligations under the 
proposed amendments.
---------------------------------------------------------------------------

    \159\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
---------------------------------------------------------------------------

d. Total Annual Burden for Broker-Dealers
    Under the proposed amendments, the total burden on broker-dealers 
would be 425 hours for the first year \160\ and 300 hours for each 
subsequent year.\161\
---------------------------------------------------------------------------

    \160\ (250 (broker-dealers impacted by the proposed amendments 
to the Rule) x 1.20 hours) + (250 (broker-dealers impacted by the 
proposed amendments to the Rule) x .5 hour (estimate for one-time 
burden to issue notice regarding broker-dealer's obligations under 
the proposed amendments to the Rule)) = 425 hours.
    \161\ 250 (broker-dealers impacted by the proposed amendments to 
the Rule) x 1.20 hours = 300 hours.
---------------------------------------------------------------------------

2. Issuers
    Issuers' undertakings regarding the submission of annual filings, 
event notices, and failure to file notices that are set forth in 
continuing disclosure agreements contemplated by the existing Rule, as 
well as the proposed amendments to the Rule, impose a paperwork burden 
on issuers of municipal securities.
a. Proposed Amendment To Modify the Exemption for Demand Securities
    The Commission's staff believes that the proposed amendment to 
delete paragraph (d)(1)(iii) from the Rule, which contains an exemption 
from the Rule for a primary offering of demand securities in authorized 
denominations of $100,000 or more, and add new paragraph (d)(5) to the 
Rule to apply paragraphs (b)(5) and (c) of the Rule to a primary 
offering of demand securities in authorized denominations of $100,000 
or more, would increase the number of issuers with a paperwork burden 
under the Rule. In the 2008 Amendments Adopting Release, the Commission 
estimated that the Rule affected approximately 10,000 issuers.\162\ 
Using the estimate of 10,000 issuers from the 2008 Amendments Adopting 
Release, the Commission's staff estimates that, under the proposed 
amendments, the number of issuers with a paperwork burden would 
increase by approximately 20% \163\ to 12,000 issuers.\164\ These 
additional issuers would increase the aggregate number of annual 
filings, event notices and failure to file notices submitted each year. 
In the 2008 Amendments Adopting Release, the Commission estimated the 
hourly burdens for an issuer to prepare and submit an annual filing (45 
minutes), an event notice (45 minutes) and a failure to file notice (30 
minutes).\165\ The proposed modification to the Rule's exemption for 
demand securities would not alter these hourly burdens. Thus, the 
Commission's staff estimates that the aggregate number of annual 
filings, event notices and failure to file notices submitted by issuers 
also would increase by 20% from the estimates contained in the 2008 
Amendments Adopting Release.\166\
---------------------------------------------------------------------------

    \162\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \163\ See supra note 151.
    \164\ 10,000 (number of issuers under current Rule) 1.20 (20% 
increase) = 12,000. To provide estimates that would not be under-
inclusive, the Commission's staff has elected to use an estimate 
that assumes that all issuers of demand securities currently are not 
a party to a continuing disclosure agreement that provides for the 
submission of continuing disclosure documents to the MSRB.
    \165\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \166\ The Commission's staff believes that this estimated 20% 
increase in the number of each type of continuing disclosure 
document filed by issuers is appropriate since it maintains the same 
ratio between the number of issuers and the number of each type of 
document submitted by these issuers as set forth in the 2008 
Amendments Adopting Release.
---------------------------------------------------------------------------

(i) Annual Filings
    In the 2008 Amendments Adopting Release, the Commission estimated 
that Rule 15c2-12 imposed a total paperwork burden of 11,250 hours on 
10,000 issuers to prepare and submit annual filings in any given 
year.\167\ In determining the paperwork burden for issuers under the 
2008 Amendments Adopting Release, the Commission estimated that issuers 
would prepare and submit a total of approximately 15,000 annual filings 
yearly.\168\ Under the proposed amendment to modify the current 
exemption for demand securities contained in the Rule, the Commission's 
staff estimates that 12,000 municipal issuers with continuing 
disclosure agreements would prepare and submit approximately 18,000 
annual filings yearly.\169\
---------------------------------------------------------------------------

    \167\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \168\ Id.
    \169\ 15,000 (annual filings under 2008 Amendments Adopting 
Release) x 1.20 (20% increase in filings under proposed amendments) 
= 18,000 annual filings.
---------------------------------------------------------------------------

    In the 2008 Amendments Adopting Release, the Commission estimated 
that the process for an issuer to prepare and submit annual filings to 
the MSRB in an electronic format would require approximately 45 
minutes.\170\ The proposed amendments to the Rule would not change the 
way annual filings are prepared and submitted. The Commission's staff 
estimates that, under the proposed amendments, an issuer would still 
require approximately 45 minutes to prepare and submit annual filings 
to the MSRB in an electronic format. Therefore, under the proposed 
amendments, the total burden on issuers of municipal securities to 
prepare and submit 18,000 annual filings to the MSRB in an electronic 
format is estimated to be 13,500 hours.\171\
---------------------------------------------------------------------------

    \170\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \171\ 18,000 (estimated number of annual filings under proposed 
amendments) x .75 hours (45 minutes) (estimated time to prepare and 
submit annual filings under the 2008 Amendments Adopting Release) = 
13,500 hours. To provide an estimate for the paperwork burden that 
would not be under-inclusive, the Commission's staff elected to use 
the higher end of the estimate for the total number of annual 
filings estimated to be submitted each year.
---------------------------------------------------------------------------

(ii) Event Notices
    In determining the paperwork burden for issuers under the 2008 
Amendments Adopting Release, the Commission estimated that issuers 
would prepare and submit a total of approximately 60,000 event notices 
yearly.\172\ Under the proposed amendments to modify the exemption for 
demand securities contained in the Rule, the Commission's staff 
estimates that the 12,000 municipal issuers with continuing disclosure 
agreements would prepare and submit approximately 72,000 event notices 
yearly.\173\
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    \172\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \173\ 60,000 (number of event notices under 2008 Amendments 
Adopting Release) x 1.20 (20% increase in filings under proposed 
amendments) = 72,000 event notices. The Commission's staff's 
estimates of the additional event notices associated with the 
proposed amendments relating to the materiality condition and 
additional event disclosure items contained in paragraph 
(b)(5)(1)(C) of the Rule are discussed in Sections V.D.2.a.iii. 
through vii. infra. As discussed below, the total number of event 
notices estimated to be submitted to the MSRB in connection with the 
proposed amendments is 78,757 notices.
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    In the 2008 Amendments Adopting Release, the Commission estimated 
that the process for an issuer to prepare and submit event notices to 
the MSRB in an electronic format would require approximately 45 
minutes.\174\ Since the proposed amendments to the Rule would not 
change the way event notices are prepared and submitted, the 
Commission's staff estimates that, under today's proposed amendments, 
an issuer still would require approximately 45 minutes to prepare and 
submit an event

[[Page 36852]]

notice. Therefore, under today's proposed amendments relating to demand 
securities, the total burden on issuers of municipal securities to 
prepare and submit 72,000 event notices to the MSRB is estimated to be 
54,000 hours.\175\
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    \174\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \175\ 72,000 (estimated number of material event notices under 
proposed amendments) x .75 hours (45 minutes) (estimated time to 
prepare and submit material event notices under the 2008 Amendments 
Adopting Release) = 54,000 hours.
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(iii) Failure To File Notices
    In the 2008 Amendments Adopting Release, the Commission estimated 
that Rule 15c2-12 currently imposes a total paperwork burden of 1,000 
hours on 10,000 issuers to submit failure to file notices in any given 
year.\176\ In determining the paperwork burden for issuers under the 
2008 Amendments Adopting Release, the Commission estimated that 10,000 
issuers would prepare and submit a total of approximately 2,000 failure 
to file notices yearly.\177\ Under the proposed amendment to modify the 
exemption for demand securities contained in the Rule, the Commission's 
staff estimates that the 12,000 municipal issuers with continuing 
disclosure agreements would prepare and submit approximately 2,400 
failure to file notices yearly.\178\
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    \176\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \177\ Id.
    \178\ 2,000 (failure to file notices) x 1.20 (20% increase in 
filings) = 2,400 failure to file notices.
---------------------------------------------------------------------------

    In the 2008 Amendments Adopting Release, the Commission estimated 
that the process for an issuer to submit failure to file notices would 
require approximately 30 minutes.\179\ Since the proposed amendments to 
the Rule would not change the way failure to file notices are prepared 
and submitted, the Commission's staff estimates that, under today's 
proposed amendments, an issuer would require approximately 30 minutes 
to prepare and submit a failure to file notice. Therefore, under the 
proposed amendments, the total burden on issuers of municipal 
securities to prepare and submit 2,400 failure to file notices to the 
MSRB is estimated to be 1,200 hours.\180\
---------------------------------------------------------------------------

    \179\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \180\ 2,400 (estimated number of failure to file notices under 
proposed amendments) x .5 hours (30 minutes) (estimated time to 
prepare and submit failure to file notices under the 2008 Amendments 
Adopting Release) = 1,200 hours.
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b. Proposed Amendments to Event Notice Provisions of the Rule
    The Commission proposes to modify paragraph (b)(5)(i)(C) of the 
Rule, which presently requires Participating Underwriters to reasonably 
determine that an issuer or obligated person has entered into a 
continuing disclosure agreement that, among other things, contemplates 
the submission of an event notice to the MSRB in an electronic format 
upon the occurrence of any events set forth in the Rule, if such event 
is material. The current Rule contains eleven such events. The proposed 
amendments to this paragraph of the Rule would add four new event 
disclosure items and revise an existing event disclosure item. In 
addition, the proposed amendments to paragraphs (b)(5)(i)(C) and 
(d)(2)(ii)(B) would revise the Rule to state that event notices should 
be submitted in a timely manner ``not to exceed ten business days after 
the occurrence of the event,'' rather than simply in a timely manner, 
as set forth in the current Rule, and would apply to some (but not all) 
events the materiality condition that applies to the current eleven 
events. In the 2008 Amendments Adopting Release, the Commission 
estimated that 60,000 event notices would be prepared and submitted 
annually. As described above, the Commission's staff estimates that the 
proposed amendments to modify the Rule's exemption for demand 
securities would increase the number of event notices to be prepared 
and submitted to 72,000 annually.\181\ The Commission's staff believes 
that these proposed amendments to paragraphs (b)(5)(i)(C) and 
(d)(2)(ii)(B) of the Rule would further increase the current annual 
paperwork burden for issuers because they would result in an increase 
in the number of event notices to be prepared and submitted.\182\
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    \181\ See supra note 173.
    \182\ Id.
---------------------------------------------------------------------------

(i) Time Frame for Submitting Event Notices Under a Continuing 
Disclosure Agreement
    Currently, paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of the Rule 
state that notice of an event should be provided in ``a timely 
manner.'' The proposed amendment would revise these provisions to state 
that such notice should be provided ``in a timely manner not in excess 
of ten business days after the occurrence of the event.'' As noted 
above, the Commission's staff estimates that an issuer can prepare and 
submit an event notice in 45 minutes, which is the hourly burden noted 
in the 2008 Amendments Adopting Release.\183\ The proposed revision to 
the Rule regarding the time period for submission of event notices 
would not change this estimated burden of 45 minutes, which is the 
amount of time under the Rule's current paperwork collection to prepare 
and submit event notices. Rather, the change in burden hours results 
from the fact that more event notices are expected to be filed under 
the proposed amendments. The Commission's staff believes that the 
proposed change to ``not in excess of ten business days after the 
occurrence of the event'' to submit a event notice would not affect the 
length of time it takes an issuer to prepare and submit the notice and 
thus would not have any impact on the current paperwork burden with 
respect to the length of time it would take an issuer to prepare and 
submit an event notice.
---------------------------------------------------------------------------

    \183\ See supra note 174 and accompanying text.
---------------------------------------------------------------------------

(ii) Modification With Regard to Those Events for Which a Materiality 
Determination Is Necessary
    As discussed earlier, the Commission believes that it is 
appropriate to delete the condition in paragraph (b)(5)(i)(C) of the 
Rule that presently provides that notice of all of the listed events 
need be made only ``if material.'' In connection with the proposed 
deletion of the materiality condition, the Commission has reviewed each 
of the Rule's current specified events to determine whether a 
materiality determination should be retained for that particular event 
and preliminarily believes such a determination is still appropriate 
for certain listed events.\184\ As a result of this proposed change, 
for those events listed in paragraph (b)(5)(i)(C) that are not proposed 
to contain the ``if material'' condition, the Participating Underwriter 
must reasonably determine that the issuer or other obligated person has 
agreed to submit event notices to the MSRB whenever such an event 
occurs. These events include: (1) Principal and interest payment 
delinquencies with respect to the securities being offered; (2) 
unscheduled draws on debt service reserves reflecting financial 
difficulties; (3) unscheduled draws on credit enhancements reflecting 
financial difficulties; (4) substitution of credit or liquidity 
providers, or their failure to perform; (5) defeasances; and (6) rating 
changes.\185\ The Commission, however, believes that for other events 
currently listed in paragraph (b)(5)(i) a materiality determination 
should be retained.
---------------------------------------------------------------------------

    \184\ The discussion in this section pertains to materiality 
determinations for events currently specified in paragraph 
(b)(5)(i)(C) of the Rule. For events proposed to be added to the 
Rule, whether a materiality determination is specified is included 
in the discussion below for each such proposed event.
    \185\ See supra Section II.C. for a discussion of the 
Commission's rationale regarding why the Commission proposes not to 
retain a materiality condition for these events.

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[[Page 36853]]

    In a telephone conversation between the Commission's staff and MSRB 
staff on June 12, 2009, Commission staff was advised that the increase 
in the number of event notices in connection with the proposal to 
modify the materiality condition would result in an increase of no more 
than 1,000 event notices, taking into account the increase in event 
notices that would result from the proposed amendment relating to 
demand securities.\186\ Therefore, the Commission's staff estimates 
that this proposed change to the materiality condition would increase 
the total number of event notices to be submitted annually by issuers 
by 1,000 notices.
---------------------------------------------------------------------------

    \186\ Telephone conversation between Ernesto A. Lanza, General 
Counsel, MSRB, and Martha M. Haines, Assistant Director and Chief, 
Office of Municipal Securities, Division, Commission, June 12, 2009. 
The MSRB staff believes that the potential increase could be much 
smaller; however, the Commission's staff is using the estimate of 
1,000 event notices to provide a conservative estimate.
---------------------------------------------------------------------------

(iii) Amendment to the Submission of Event Notices Regarding Adverse 
Tax Events Under a Continuing Disclosure Agreement
    Subparagraph (b)(5)(i)(C)(6) of the Rule refers to an event notice 
in the case of adverse tax events. Under the proposed amendments, 
subparagraph (b)(5)(i)(C)(6) of the Rule would be amended to include 
``the issuance by the Internal Revenue Service of proposed or final 
determinations of taxability, Notices of Proposed Issue (IRS form 5701-
TEB) or other material notices or determinations with respect to the 
tax-exempt status of the securities.'' This proposed amendment would 
address the circumstances in which issuers would submit an event notice 
to the MSRB with respect to IRS determinations of taxability or other 
material notices or determinations with respect to the tax status of a 
municipal security. As discussed above,\187\ the Commission believes 
that the proposed amendment to subparagraph (b)(5)(i)(C)(6) of the Rule 
would clarify that IRS determinations of taxability or other material 
notices or determinations with respect to the tax status of a municipal 
security are events that currently should be disclosed under a 
continuing disclosure agreement. The Commission's staff estimates that 
the proposed amendments to paragraph (b)(5)(i)(C)(6) of the Rule would 
increase the total number of event notices to be submitted by issuers 
annually by approximately 130 notices.\188\
---------------------------------------------------------------------------

    \187\ See supra Section II.C.
    \188\ During conversations with the Commission's staff in 
December 2008, the staff of the IRS indicated that during a 12-month 
period it issues approximately 130 notices of determinations of 
taxability. To provide an estimate that is not under-inclusive, the 
Commission's staff has estimated that event notices are not 
currently submitted for any of these IRS notices. Accordingly, the 
Commission's staff estimates that approximately 130 additional event 
notices would be submitted under the proposed amendments to 
subparagraph (b)(5)(i)(C)(6) of the Rule.
---------------------------------------------------------------------------

(iv) Tender Offers
    Subparagraph (b)(5)(i)(C)(8) of the Rule refers to notice of an 
event in the case of bond calls. Under the proposed amendments, 
subparagraph (b)(5)(i)(C)(8) of the Rule would be amended to include 
tender offers. The inclusion of tender offers in this subparagraph of 
the Rule would expand the circumstances in which issuers would submit 
an event notice to the MSRB. The Commission's staff estimates that 
proposed amendments to subparagraph (b)(5)(i)(C)(8) of the Rule would 
increase the total number of event notices to be submitted by issuers 
annually by approximately 100 notices.\189\
---------------------------------------------------------------------------

    \189\ Based on industry sources that included lawyers, trade 
associations and vendors of municipal disclosure information, the 
Commission's staff has estimated that there are typically no more 
than 100 tender offers annually in the municipal securities market. 
The Commission's staff believes that the actual number of tender 
offers annually is significantly less than 100. However, to provide 
an estimate for the paperwork burden that would not be under-
inclusive, the Commission's staff has elected to use the higher end 
of the estimate with respect to the number of municipal tender 
offers that occur each year.
---------------------------------------------------------------------------

(v) The Occurrence of Bankruptcy, Insolvency, Receivership or Similar 
Event Regarding an Issuer or an Obligated Person
    Under the proposed amendments, subparagraph (b)(5)(i)(C)(12) would 
be added to the Rule and would contain a new disclosure event in the 
case of bankruptcy, insolvency, receivership or similar event of the 
issuer or obligated person. The proposed addition to the Rule of 
bankruptcy, insolvency, receivership or similar event of the issuer or 
obligated person would expand the circumstances in which issuers would 
submit an event notice. Based on a review of industry sources by the 
Commission's staff, the Commission's staff estimates that the proposed 
amendment to add the new bankruptcy, insolvency, receivership or 
similar event of the issuer or obligated person in subparagraph 
(b)(5)(i)(C)(8) of the Rule would increase the total number of event 
notices submitted by issuers annually by approximately 24 notices.\190\
---------------------------------------------------------------------------

    \190\ The Commission's staff based this estimate on the 
following: (i) 917 (number of issuances of municipal securities that 
defaulted during the 1990's based on statistics contained in 
Standard and Poor's ``A Complete Look at Monetary Defaults in the 
1990s'' (June, 2000))/10 (number of years in a decade) = 91.7 
(estimated number of issuances defaulting per year) (rounded to 92); 
(ii) 92 (estimated number of issuances defaulting per year)/50,000 
(estimated total number of municipal issuers) = .002 (.2%) 
(estimated percentage of all issuers that default annually); and 
(iii) 12,000 (estimated number of issuers under proposed amendments 
to the Rule) x (.002) (.2%) (estimated percentage of all issuers 
that default annually) x 1 (estimated number of material event 
notices that an issuer would file) = 24 notices. The Commission's 
staff notes that not all issuers that default eventually enter 
bankruptcy. However, to provide an estimate for the paperwork burden 
that would not be under-inclusive, the Commission staff has elected 
to use the number of defaults as a basis for this estimate.
---------------------------------------------------------------------------

(vi) Merger, Consolidation, Acquisition, and Sale of All or 
Substantially All Assets
    Under the proposed amendments, subparagraph (b)(5)(i)(C)(13) would 
be added to the Rule and would contain a new disclosure event in the 
case of a merger, consolidation, acquisition involving an obligated 
person or sale of all or substantially all of the assets of the 
obligated person, other than in the ordinary course of business, the 
entry into a definitive agreement to undertake such an action or the 
termination of a definitive agreement relating to any such actions, 
other than pursuant to its terms, if material. The proposed addition to 
the Rule of the merger, consolidation, acquisition, or sale of all or 
substantially all of the assets to the Rule would expand the 
circumstances in which issuers would submit an event notice. The 
Commission's staff believes that the proposed amendment to add the new 
event of merger, consolidation, acquisition, or sale of all or 
substantially all of the assets in subparagraph (b)(5)(i)(C)(13) of the 
Rule would increase the total number of event notices submitted by 
issuers annually. Based on a review of industry sources, the 
Commission's staff estimates that the proposed amendment to add the new 
bankruptcy, insolvency, receivership or similar event of the issuer or 
obligated person in subparagraph (b)(5)(i)(C)(8) of the Rule would 
increase the total number of event notices submitted by issuers 
annually by approximately 1,783 notices.\191\
---------------------------------------------------------------------------

    \191\ The Commission's staff based this estimate on the 
following: (i) 2,201 (total number of merger transactions reported 
under the Hart-Scott-Rodino Act in 2007 contained in the Hart-Scott-
Rodino Annual Report Fiscal Year 2007 (November 2008) available at 
http://www.ftc.gov/os/2008/11/hsrreportfy2007.pdf (``HSR Report'') x 
81% (percentage of mergers in industries in which municipal 
securities may exist) = 1782.81 notices (rounded to 1783). The 
Commission staff estimated the percentage of mergers in the 
municipal industry based on data contained in the HSR Report. The 
HSR Report contained data regarding the percentage of merger 
transactions reported from nine industry segments. Of these nine 
segments, the only segment that does not issue municipal securities 
is the banking and insurance industry segment which accounted for 
19% of reported merger transactions. The Commission notes that each 
of the mergers reported under the other industry segments may not 
involve entities that have issued municipal securities. However, to 
provide an estimate that is not under-inclusive, the Commission's 
staff has estimated that all of the reported mergers in the 
remaining industry segments would involve entities that have issued 
municipal securities.

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[[Page 36854]]

(vii) Successor or Additional Trustee, or Change in Trustee Name
    Under the proposed amendments, paragraph (b)(5)(i)(C)(14) would be 
added to the Rule and would contain a new disclosure event related to 
the appointment of a successor or additional trustee or the change of 
name of a trustee, if material. The proposed addition to the Rule of 
the event relating to trustee changes would expand the circumstances in 
which issuers would submit an event notice to the MSRB. The 
Commission's staff believes that a change affecting the largest trustee 
of municipal securities would provide a reasonable estimate of the 
number of additional event notices that would be submitted annually 
under this proposed amendment to the Rule. The largest trustee covered 
approximately 31% of the municipal issuances in 2008.\192\ The 
Commission's staff believes that this percentage represents a 
reasonable estimate of the percentage of issuers covered by the largest 
trustee. Thus, the Commission's staff estimates that a change to the 
largest trustee would cover approximately 31% of issuers, or 3,720 
issuers, which would serve as a conservative proxy for the number of 
event notices to be submitted regarding a change in trustee.\193\ 
Therefore the Commission's staff estimates that the proposed amendment 
to add the new disclosure event contained in paragraph (b)(5)(i)(C)(14) 
of the Rule would increase the total number of event notices submitted 
by issuers annually by approximately 3,720 notices.\194\
---------------------------------------------------------------------------

    \192\ See Two Decades of Bond Finance: 1989-2008, The Bond 
Buyer/Thomson Reuters 2009 Yearbook 7 (Matthew Kreps ed., 
SourceMedia, Inc.) (2009) and Top 50 Trustee Banks: 2008, The Bond 
Buyer/Thomson Reuters 2009 Yearbook 89 (Matthew Kreps ed., 
SourceMedia, Inc.) (2009).
    \193\ The Commission's staff based this estimate on the 
following: 12,000 (estimated number of issuers under proposed 
amendments) x .31 (31%) (estimated percentage of issuers that would 
be impacted by a change to the largest trustee of municipal 
securities) = 3,720 issuers.
    \194\ The Commission's staff based this estimate on the 
following: 3,720 (estimated number of issuers that would be impacted 
by a change to the largest trustee of municipal securities) x 1 
(estimated number of event notices that an issuer would file) = 
3,720 notices. The Commission staff believes that the actual number 
of changes involving the trustee that occur annually is 
significantly less than 3,720. However, to provide an estimate for 
the paperwork burden that would not be under-inclusive, the 
Commission's staff has elected to use an estimate that takes into 
account a change involving the largest trustee.
---------------------------------------------------------------------------

c. Total Burden on Issuers for Proposed Amendments to Event Notices
    In the 2008 Amendments Adopting Release, the Commission estimated 
that the process for an issuer to prepare and submit event notices to 
the MSRB in an electronic format would require approximately 45 
minutes.\195\ As discussed above, under the proposed amendment to 
modify the Rule's exemption for demand securities, the total number of 
issuers affected by the Rule would increase to 12,000, the total number 
of event notices submitted by issuers would increase to 72,000, and the 
annual paper work burden for issuers to submit event notices would 
increase to 54,000 hours. Under the proposed amendments to paragraph 
(b)(5)(i)(C) of the Rule, the Commission's staff estimates that the 
12,000 municipal issuers with continuing disclosure agreements would 
prepare an additional 6,757 event notices annually,\196\ raising the 
total number of event notices prepared by issuers annually to 
approximately 78,757.\197\ This increase in the number of event notices 
would result in an increase of 5,068 hours in the annual paperwork 
burden for issuers to submit event notices.\198\ This increase would 
result in an annual paperwork burden for issuers to submit event 
notices of approximately 59,068 hours (54,000 hours + 5,068 hours).
---------------------------------------------------------------------------

    \195\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \196\ 1000 (estimated number of additional notices submitted 
under change to events materiality condition) + 130 (estimated 
number of adverse tax event notices under proposed amendments) + 100 
(estimated number of tender offers event notices under proposed 
amendments) + 24 (estimated number of bankruptcy/insolvency event 
notices under proposed amendments) + 1,783 (estimated number of 
merger or acquisition event notices under proposed amendments) + 
3,720 (estimated number of appointment/change of trustee event 
notices under proposed amendments) = 6,757 (total number of 
additional event notices that would be prepared under the proposed 
amendments to the event notice provisions of the Rule).
    \197\ 72,000 (number of event notices under proposed amendments 
modifying the exemption for demand securities exemption) + 6,757 
(total number of additional event notices that would be prepared 
under the proposed amendments to the event notice provisions of the 
Rule) = 78,757 event notices.
    \198\ 6,757 (total number of additional event notices that would 
be prepared under the proposed amendments to the event notice 
provisions of the Rule) x .75 hours (45 minutes) (estimated time to 
prepare an event notice under 2008 Amendments Adopting Release) = 
5,067.75 hours (rounded to 5,068 hours).
---------------------------------------------------------------------------

d. Total Burden for Issuers
    Accordingly, under the proposed amendments, the total burden on 
issuers to submit annual filings, event notices and failure to file 
notices would be 73,768 hours.\199\
---------------------------------------------------------------------------

    \199\ 13,500 hours (estimated burden for issuers to submit 
annual filings) + 59,068 hours (estimated burden for issuers to 
submit event notices) + 1,200 hours (estimated burden for issuers to 
submit failure to file notices) = 73,768 hours.
---------------------------------------------------------------------------

3. MSRB
    In the 2008 Amendments Adopting Release, the Commission estimated 
that the MSRB incurred an annual burden of approximately 7,000 hours to 
collect, index, store, retrieve, and make available the pertinent 
documents under the Rule.\200\ As discussed above, the Commission's 
staff anticipates that the proposed amendments to modify the Rule's 
exemption for demand securities would increase filings submitted by 
approximately 20% annually.\201\ In addition, the Commission's staff 
estimates that the proposed amendments to the event notice provisions 
of the Rule would increase filings submitted by approximately an 
additional 9% annually. \202\ Accordingly, the Commission's staff 
estimates that the total burden on the MSRB of collecting, indexing, 
storing, retrieving and disseminating information requested by the 
public also would increase by approximately 29% or 2,030 hours (7,000 
hours x .29). Thus, the Commission's staff estimates that the total 
burden on the MSRB to collect, store, retrieve, and make available the 
disclosure documents covered by the proposed amendments to the Rule 
would be 9,030 hours annually.\203\
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    \200\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \201\ See supra note 151.
    \202\ 6,757 (estimated additional event notices under the 
proposed event notice amendments)/77,000 (estimated number of 
continuing disclosure documents submitted under current Rule (60,000 
(event notices) + 15,000 (annual filings) + 2,000 (failure to file 
notices) = 77,000)) = .087 x 100 = approximately 9%.
    \203\ Annual burden for MSRB: 7000 hours (annual burden under 
2008 Amendments Adopting Release) + 2,030 hours (additional hourly 
burden under proposed amendments) = 9,030 hours.
---------------------------------------------------------------------------

4. Annual Aggregate Burden for Proposed Amendments
    The Commission's staff estimates that the ongoing annual aggregate 
information collection burden for the proposed amendments to the Rule 
would be 83,098 hours.\204\
---------------------------------------------------------------------------

    \204\ 300 hours (total estimated burden for broker-dealers) + 
73,768 hours (total estimated burden for issuers) + 9,030 hours 
(total estimated burden for MSRB) = 83,098 hours. The initial first-
year burden would be 83,223 hours: 425 hours (total estimated burden 
for broker-dealers in the first year) + 73,768 hours (total 
estimated burden for issuers) + 9,030 hours (total estimated burden 
for MSRB) = 83,223 hours.

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[[Page 36855]]

E. Total Annual Cost Burden

1. Broker-Dealers and the MSRB
    The Commission does not expect broker-dealers to incur any 
additional external costs associated with the proposed amendments to 
the Rule since the proposed amendments do not change the obligation of 
broker-dealers under the Rule to reasonably determine that the issuer 
or obligated person has undertaken, in a written agreement or contract, 
for the benefit of holders of such municipal securities, to provide 
annual filings, event notices, and failure to file notices to the MSRB.
    The Commission believes that the MSRB may incur costs to modify the 
indexing system in its EMMA system to accommodate the proposed changes 
to the Rule that would add additional material disclosure events. Based 
on information provided to the Commission's staff by MSRB staff in a 
telephone conversation on November 7, 2008, the MSRB staff estimated 
that the MSRB's costs to update its EMMA system to accommodate the 
proposed changes to the material disclosure events of the Rule would be 
no more than approximately $10,000.\205\
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    \205\ Telephone conversation between Harold Johnson, Deputy 
General Counsel, MSRB, and Martha M. Haines, Assistant Director and 
Chief, Office of Municipal Securities, Division, Commission, 
November 7, 2008.
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2. Issuers
(a) Current Issuers
    The Commission expects that some issuers that currently submit 
continuing disclosure documents to the MSRB in an electronic format 
(referred to herein as ``current issuers'') could be subject to some 
additional costs associated with the proposed amendments to the Rule. 
For current issuers that convert their annual filings, event notices 
and/or failure to file notices into the MSRB's prescribed electronic 
format through a third party there would be costs associated with any 
additional submissions of event notices and failure to file notices.
    The cost for an issuer to have a third-party vendor convert paper 
continuing disclosure documents into the MSRB's prescribed electronic 
format could vary depending on what resources are required to transfer 
the documents into the appropriate electronic format. One example of 
such a transfer would be the scanning of paper-based continuing 
disclosure documents into an electronic format. In the 2008 Amendments 
Adopting Release, the Commission estimated that the cost for an issuer 
to have a third-party vendor scan documents would be $6 for the first 
page and $2 for each page thereafter.\206\ In the 2008 Amendments 
Adopting Release, the Commission also estimated that event notices and 
failure to file notices consist of one to two pages.\207\ Accordingly, 
the approximate cost for an issuer to use a third party vendor to scan 
an event notice or failure to file notice would be $8 per notice. The 
Commission believes these estimates are still accurate. In the 2008 
Amendments Adopting Release, the Commission estimated that the high end 
of the estimate for the number of event notices submitted by an issuer 
annually is three.\208\ Under the proposed amendments to the Rule, some 
current issuers would need to prepare additional event notices for 
submission to the MSRB. Some current issuers could need to submit these 
additional event notices to a third party to convert into an electronic 
format for submission to the MSRB. Under the proposed amendments to the 
Rule, the Commission's staff estimates that a conservative estimate of 
the number of additional event notices that an issuer would need to 
submit annually under the proposed amendments would be one, increasing 
the total estimate to four.\209\ Each of these issuers would incur an 
annual cost of $8 to convert the additional event notice into an 
electronic format for submission to the MSRB.\210\ The Commission 
believes that current issuers that already have the technology 
resources to convert continuing disclosure documents into an electronic 
format for submission to the MSRB would not incur any additional 
external costs associated with the proposed amendments to the Rule.
---------------------------------------------------------------------------

    \206\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \207\ Id.
    \208\ Id.
    \209\ 6,757 (estimated additional event notices submitted under 
proposed amendments to event notices)/12,000 (estimated number of 
issuers under proposed amendments) = .563 notices per issuer 
(rounded up to 1) (estimated number of additional event notices 
submitted annually per issuer). To provide an estimate that would 
not be under-inclusive, the Commission's staff has elected to use an 
estimate that expects each issuer would submit one additional event 
notice as a result of the proposed amendments.
    \210\ $8 (cost to have third party convert an event notice or 
failure to file notice into an electronic format) x 1 (maximum 
estimated number of additional event or failure to file notices 
filed per year per issuer)] = $8.
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    There may be some costs incurred by issuers to revise their current 
template for continuing disclosure agreements to reflect the proposed 
amendments to the Rule, if they are adopted. The Commission understands 
that models currently exist for continuing disclosure agreements that 
are relied upon by legal counsel to issuers and, accordingly, these 
documents are likely to be updated by outside attorneys to reflect the 
proposed amendments, if the Commission should adopt them. Based on a 
review of industry sources, the Commission believes that continuing 
disclosure agreements are form agreements. Based on a review of 
industry sources, the Commission's staff estimates that it would take 
an outside attorney approximately 15 minutes to revise the template for 
continuing disclosure agreements for a current issuer, if the proposed 
amendments are adopted. Thus, the Commission's staff estimates that the 
approximate cost of revising a continuing disclosure agreement to 
reflect the proposed amendments for each current issuer would be 
approximately $100,\211\ for a one-time total cost of $1,000,000 \212\ 
for all current issuers, if an outside counsel were used to revise the 
continuing disclosure agreement.
---------------------------------------------------------------------------

    \211\ 1 (continuing disclosure agreement) x $400 (hourly wage 
for an outside attorney) x .25 hours (estimated time for outside 
attorney to revise a continuing disclosure document in accordance 
with the proposed amendments to the Rule) = $100. The $400 per hour 
estimate for an outside attorney's work is based on the Commission's 
staff review of industry sources.
    \212\ $100 (estimated cost to revise a continuing disclosure 
agreement I accordance with the proposed amendments to the Rule) x 
10,000 (number of current issuers) = $1,000,000.
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(b) VRDO Issuers
    As discussed above, the Commission's staff estimates that the 
proposal relating to demand securities would increase the number of 
issuers affected by the Rule by approximately 20% or 2,000 issuers 
(referred to herein as ``VRDO issuers''). VRDO issuers may have some 
external costs associated with the preparation and submission of annual 
filings, event notices and failure to file notices. Under the Rule, 
Participating Underwriters are required to reasonably determine that an 
issuer has entered into a continuing disclosure agreement to provide 
continuing disclosure documents to the MSRB in an electronic format as 
prescribed by the MSRB. Under the proposed amendments to the Rule, 
Participating Underwriters of VRDO issuers would need to reasonably 
determine that these VRDO issuers have entered into continuing 
disclosure agreements. The Commission understands that models currently 
exist for continuing disclosure agreements that are relied upon by 
legal counsel to issuers and, accordingly, these documents are likely 
to be updated by

[[Page 36856]]

outside attorneys to reflect the proposed amendments, if the Commission 
should adopt them. Based on a review of industry sources, the 
Commission believes that continuing disclosure agreements are form 
agreements. Also, based on a review of industry sources, the 
Commission's staff estimates that it would take an outside attorney 
approximately 1.5 hours to draft a continuing disclosure agreement. 
Thus, the Commission's staff estimates that the approximate cost of 
preparing a continuing disclosure agreement for each VRDO issuer would 
be approximately $600,\213\ for a one-time total cost of $1,200,000 
\214\ for all VRDO issuers, if an outside counsel were to prepare the 
entire agreement.
---------------------------------------------------------------------------

    \213\ 1 (continuing disclosure agreement) x $400 (hourly wage 
for an outside attorney) x 1.5 hours (estimated time for outside 
attorney to draft a continuing disclosure document) = $600. The $400 
per hour estimate is based on the Commission's staff review of 
industry sources.
    \214\ $600 (cost for continuing disclosure agreement) x 2,000 
(number of VRDO issuers) = $1,200,000.
---------------------------------------------------------------------------

    The Commission believes that VRDO issuers generally would not incur 
any other external costs associated with the preparation of annual 
filings, event notices (including those notices for the new event 
disclosure items included in the proposed amendments) and failure to 
file notices. The Commission believes that VRDO issuers would prepare 
the information contained in these continuing disclosure documents 
internally and that these internal costs have been accounted for in the 
hourly burden section above.\215\
---------------------------------------------------------------------------

    \215\ See supra Section V.D.
---------------------------------------------------------------------------

    The Commission believes that the only external costs VRDO issuers 
could incur in connection with the submission of continuing disclosure 
documents to the MSRB would be the costs associated with converting 
them into an electronic format. The Commission believes that many 
issuers of municipal securities currently have the computer equipment 
and software necessary to convert paper copies of continuing disclosure 
documents to electronic copies and to electronically transmit the 
documents to the MSRB. VRDO issuers that presently do not have the 
ability to prepare their annual filings, event notices and/or failure 
to file notices in an electronic format could incur some costs to 
obtain electronic copies of such documents if they are prepared by a 
third party (e.g., accountant or attorney) or, alternatively, to have a 
paper copy converted into an electronic format. These costs would vary 
depending on how the VRDO issuer elected to convert its continuing 
disclosure documents into an electronic format. An issuer could elect 
to have a third-party vendor transfer its paper continuing disclosure 
documents into the appropriate electronic format. An issuer also could 
decide to undertake the work internally, and its costs would vary 
depending on the issuer's current technology resources. An issuer also 
could elect to use a designated agent to submit its continuing 
disclosure documents to the MSRB. In the 2008 Amendments Adopting 
Release, the Commission estimated that 30% of issuers would elect to 
use designated agents to submit continuing disclosure documents to the 
MSRB.\216\ Generally, when issuers utilize the services of a designated 
agent, they enter into a contract with the agent for a package of 
services, including the submission of continuing disclosure documents, 
for a single fee. Based on a review of industry sources, the 
Commission's staff estimates this fee to range from $100 to $500 per 
year depending on which designated agent an issuer uses.\217\ 
Accordingly, the Commission's staff estimates that the high end of the 
total annual cost that could be incurred by VRDO issuers that use the 
services of a designated agent would be approximately $300,000.\218\
---------------------------------------------------------------------------

    \216\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \217\ This estimated range of the annual fee for the services of 
a designated agent is based on the Commission's staff review of 
industry sources in December 2008.
    \218\ 2,000 (number of VRDO issuers) x .30 (percentage of 
issuers that use designated agents) x $500 (estimated annual cost 
for issuer's use of a designated agent) = $300,000. In order to 
provide a total cost estimate that is not under-inclusive the 
Commission's staff elected to use the higher end of the estimated 
range of annual fees for designated agent's services.
---------------------------------------------------------------------------

    The cost for an issuer to have a third-party vendor transfer its 
paper continuing disclosure documents into an appropriate electronic 
format could vary depending on what resources are required to transfer 
the documents into the appropriate electronic format. One example of 
such a transfer would be the scanning of paper-based continuing 
disclosure documents into an electronic format. In the 2008 Amendments 
Adopting Release, the Commission estimated that the approximate cost 
for an issuer to use a third party vendor to scan an event notice or 
failure to file notice would be $8 per notice, and that the maximum 
number of event notices or failure to file notices that an issuer would 
submit annually is three.\219\ The Commission still believes these 
estimates are accurate. Under the proposed amendments to the Rule, the 
Commission's staff estimates that the maximum number of event notices 
and failure to file notices submitted by issuers would increase to 
four.\220\ Accordingly, the Commission's staff estimates that the 
maximum external costs for a VRDO issuer who elects to have a third-
party scan continuing event notices or failure to file notices into an 
electronic format under the proposed amendments would be $32.\221\ In 
the 2008 Amendments Adopting Release, the Commission estimated that the 
approximate cost for an issuer to use a third party vendor to scan an 
average-sized annual financial statement would be $64 per annual 
statement, and that the maximum number of annual filings submitted per 
year is two.\222\ The Commission believes that these estimates are 
still accurate. The proposed amendments to the Rule would increase the 
number of issuers submitting annual filings each year. However, the 
proposed amendments to the Rule would not increase the number of annual 
filings each issuer submits yearly. Thus, the Commission expects that 
the number of annual filings submitted yearly, per issuer, under the 
proposed amendments to the Rule would remain the same. Accordingly, the 
Commission's staff estimates that the maximum external costs for a VRDO 
issuer who elects to have a third-party scan annual filings into an 
electronic format under the proposed amendments would be $128.\223\
---------------------------------------------------------------------------

    \219\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \220\ 6,757 (estimated additional event notices submitted under 
proposed amendments)/12,000 (estimated number of issuers under 
proposed amendments) = .563 notices per issuer (rounded up to 1) 
(estimated number of additional event notices submitted annually per 
issuer). To provide an estimate that would not be under-inclusive, 
the Commission's staff has elected to use an estimate that expects 
each issuer would submit one additional material event notice as a 
result of the proposed amendments.
    \221\ The maximum cost is the cost to scan and convert four 
material event or failure to file notices: 4 (number of notices 
submitted annually) x $8.00 (cost to scan and convert each notice) = 
$32.
    \222\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \223\ The maximum cost is the cost to scan and convert two 
annual filings: 2 (number of annual filings submitted annually) x 
$64.00 (cost to scan and convert each annual filing) = $128.
---------------------------------------------------------------------------

    Alternatively, a VRDO issuer that currently does not have the 
appropriate technology to convert paper continuing disclosure documents 
into an electronic format could elect to purchase the resources to do 
so.\224\ In the 2008

[[Page 36857]]

Amendments Adopting Release, the Commission estimated that an issuer's 
initial cost to acquire these technology resources could range from 
$750 to $4,300.\225\ Some VRDO issuers may have the necessary hardware 
to transmit documents electronically to the MSRB, but may need to 
upgrade or obtain the software necessary to submit documents to the 
MSRB in the electronic format that it prescribes. In the 2008 
Amendments Adopting Release, the Commission estimated that an issuer's 
cost to update or acquire this software could range from $50 to 
$300.\226\ The Commission believes these estimates are still accurate.
---------------------------------------------------------------------------

    \224\ Generally, the technology resources necessary to transfer 
a paper document into an electronic format are a computer, scanner 
and possibly software to convert the scanned document into the 
appropriate electronic document format. Most scanners include a 
software package that is capable of converting scanned images into 
multiple electronic document formats. An issuer would only need to 
purchase software if the issuer (i) has a scanner that does not 
include a software package that is capable of converting scanned 
images into the appropriate electronic format, or (ii) purchases a 
scanner that does not include a software package capable of 
converting documents into the appropriate electronic format.
    \225\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \226\ Id.
---------------------------------------------------------------------------

    In addition, VRDO issuers without direct Internet access could 
incur some costs to obtain such access to submit the documents. In the 
2008 Amendments Adopting Release, the Commission noted that Internet 
access is now broadly available to and utilized by businesses, 
governments, organizations and the public, and the Commission expects 
that most issuers of municipal securities currently have Internet 
access.\227\ In the event that a VRDO issuer does not have Internet 
access, it could incur costs in obtaining such access, which the 
Commission estimates to be approximately $50 per month, based on its 
limited inquiries to Internet service providers.\228\ Otherwise, there 
are multiple free or low cost locations that an issuer could utilize, 
such as various commercial sites, which could help an issuer to avoid 
the costs of maintaining continuous Internet access solely to comply 
with the proposed amendments to the Rule.\229\
---------------------------------------------------------------------------

    \227\ Id.
    \228\ Id.
    \229\ Id.
---------------------------------------------------------------------------

    Accordingly, the Commission estimates that the costs to some of the 
VRDO issuers to acquire technology necessary to convert continuing 
disclosure documents into an electronic format to submit to the MSRB 
could include: (i) An approximate cost of $8 per notice to use a third 
party vendor to scan an event notice or failure to file notice, and an 
approximate cost of $64 to use a third party vendor to scan an average-
sized annual financial statement, (ii) an approximate cost ranging from 
$750 and $4,300 to acquire technology resources to convert continuing 
disclosure documents into an electronic format, (iii) $50 to $300 
solely to upgrade or acquire the software to submit documents in an 
electronic format; and (iv) approximately $50 per month to acquire 
Internet access. The Commission included these estimates in the 2008 
Amendments Adopting Release and the Commission believes that they are 
still accurate.\230\
---------------------------------------------------------------------------

    \230\ Id.
---------------------------------------------------------------------------

    For a VRDO issuer that does not have Internet access and elects to 
have a third party convert continuing disclosure documents into an 
electronic format (``Category 1''), the total maximum external cost 
such issuer would incur would be $760 per year.\231\ For an issuer that 
does not have Internet access and elects to acquire the technological 
resources to convert continuing disclosure documents into an electronic 
format internally (``Category 2''), the total maximum external cost 
such VRDO issuer would incur would be $4,900 for the first year and 
$600 per year thereafter.\232\ To be conservative for purposes of the 
PRA, the Commission estimates that any VRDO issuers that incur costs 
associated with converting continuing disclosure documents into an 
electronic format would choose the Category 2 option.\233\ The 
Commission's staff estimates that approximately no more than 400 VRDO 
issuers would incur costs associated with acquiring technology 
resources to convert continuing disclosure documents into an electronic 
format.\234\ Additionally, the Commission's staff estimates that the 
estimated maximum annual costs for those VRDO issuers that need to 
acquire technology resources to submit documents to the MSRB would be 
approximately $1,960,000 \235\ for the first year after the adoption of 
the proposed amendments and approximately $240,000 \236\ for each year 
thereafter.
---------------------------------------------------------------------------

    \231\ The total maximum external cost for a Category 1 VRDO 
issuer would be calculated as follows: [$64 (cost to have third 
party convert annual filing into an electronic format) x 2 (maximum 
estimated number of annual filings filed per year per issuer)] + [$8 
(cost to have third party convert material event notice or failure 
to file notice into an electronic format) x 4 (maximum estimated 
number of event or failure to file notices filed per year per 
issuer)] + [$50 (estimated monthly Internet charge) x 12 months] = 
$760. The Commission's staff estimates that an issuer would file one 
to six continuing disclosure documents per year. These documents 
generally would consist of no more than two annual filings and four 
event or failure to file notices. The Commission's staff estimates 
the maximum number of documents filed annually per issuer as 
follows: 5 documents (consisting of 2 annual filings and 3 event or 
failure to file notices based on the Commission's estimate from the 
2008 Amendment Adopting Release) + 1 document (consisting of the 
additional event notice that would be filed under the proposed 
amendments to the Rule).
    \232\ The total maximum external cost for a Category 2 VRDO 
issuer would be calculated as follows: [$4300 (maximum estimated 
one-time cost to acquire technology to convert continuing disclosure 
documents into an electronic format)] + [$50 (estimated monthly 
Internet charge) x 12 months] = $4900. After the initial year, 
issuers who acquire the technology to convert continuing disclosure 
documents into an electronic format internally would only have the 
cost of obtaining Internet access. $50 (estimated monthly Internet 
charge) x 12 months = $600.
    \233\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \234\ 2,000 VRDO issuers x 20% = 400 VRDO issuers. The 
Commission used a 20% estimate in the 2008 Amendment Adopting 
Release. See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104. The Commission believes that this estimate is still 
appropriate.
    \235\ 400 (Category 2 issuers) x $4,900 = $1,960,000.
    \236\ 400 (Category 2 issuers) x $600 = $240,000.
---------------------------------------------------------------------------

(c) Current and VRDO Issuers
    Lastly, some current and VRDO issuers may incur a one-time external 
cost associated with the proposed amendment to change the timing 
requirement for submitting event notices in the Rule from ``in a timely 
manner'' to ``in a timely manner not to exceed ten business days after 
the occurrence of the event.'' In particular, some current and VRDO 
issuers may incur a one-time external cost associated with monitoring 
for a change in the name of the issuer's trustee. One way an issuer may 
monitor a change in the name of its trustee cost would be to have 
outside counsel add a notice provision to the issuer's trust indenture 
requiring the trustee to provide the issuer with notice of any change 
in the trustee's name. Based on a review of industry sources, the 
Commission's staff estimates that it would take an outside attorney 
approximately 15 minutes to draft and add a notice provision for a 
change in name of the trustee to an indenture agreement. Thus, the 
Commission's staff estimates that the approximate cost of adding this 
notice provision to an issuer's trust indenture for each issuer would 
be approximately $100,\237\ for a one-time annual cost of $1,200,000 
\238\ for all issuers.
---------------------------------------------------------------------------

    \237\ 1 (continuing disclosure agreement) x $400 (hourly wage 
for an outside attorney) x .25 hours (estimated time for outside 
attorney to draft and add a change of name notice provision to a 
trust indenture) = $100. The $400 per hour estimate for an outside 
attorney's work is based on the Commission's staff review of 
industry sources.
    \238\ $100 (estimated cost to have outside counsel add a change 
of name notice provision to a trust indenture) x 12,000 (number of 
issuers under the proposed amendments) = $1,200,000.
---------------------------------------------------------------------------

F. Retention Period of Recordkeeping Requirements

    As an SRO subject to Rule 17a-1 under the Exchange Act,\239\ the 
MSRB is

[[Page 36858]]

required to retain records of the collection of information for a 
period of not less than five years, the first two years in an easily 
accessible place. The proposed amendments to the Rule would contain no 
recordkeeping requirements for any other persons.
---------------------------------------------------------------------------

    \239\ 17 CFR 240.17a-1.
---------------------------------------------------------------------------

G. Collection of Information Is Mandatory

    Any collection of information pursuant to the proposed amendments 
to the Rule would be a mandatory collection of information.

H. Responses to Collection of Information Will Not Be Kept Confidential

    The collection of information pursuant to the proposed amendments 
to the Rule would not be confidential and would be publicly available. 
The collection of information that would be provided pursuant to the 
continuing disclosure documents under the proposed amendments would be 
accessible through the MSRB's EMMA system and would be publicly 
available via the Internet.

I. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments regarding: (1) Whether the proposed collections of information 
are necessary for the proper performance of the functions of the 
agency, including whether the information will have practical utility; 
(2) the accuracy of the Commission's estimate of the burden of the 
revised collections of information; (3) whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (4) whether there are ways to minimize the burden of the 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    The Commission has submitted to OMB for approval the proposed 
revisions to the current collection of information titled ``Municipal 
Securities Disclosure.'' Persons submitting comments on the collection 
of information requirements should direct them to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should also send a copy of their comments to 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-0609, with reference to File No. S7-15-09, and to 
the Securities and Exchange Commission, Public Reference Room, 100 F 
Street, NE., Washington, DC 20549. As OMB is required to make a 
decision concerning the collection of information between 30 and 60 
days after publication, a comment to OMB is best assured of having its 
full effect if OMB receives it within 30 days of publication. Requests 
for materials submitted to OMB by the Commission with regard to this 
collection of information should be in writing, should refer to File 
No. S7-15-09, and be submitted to the Securities and Exchange 
Commission, Public Reference Room, 100 F Street, NE., Washington, DC 
20549.

VI. Costs and Benefits of Proposed Amendment to Rule 15c2-12

    The Commission is proposing amendments to Rule 15c2-12 that would 
amend certain requirements regarding the information that a broker, 
dealer, or municipal securities dealer acting as an underwriter in a 
primary offering of municipal securities must reasonably determine that 
an issuer of municipal securities or an obligated person has 
undertaken, in a written agreement or contract for the benefit of 
holders of the issuer's municipal securities, to provide to the MSRB. 
Specifically, the proposed amendments would require a broker, dealer, 
or municipal securities dealer to reasonably determine that the issuer 
or obligated person has agreed to provide notice of specified events in 
a timely manner not in excess of ten business days after the event's 
occurrence, would amend the list of events for which a notice must be 
provided, and would modify the events that are subject to a materiality 
determination before triggering a notice to the MSRB. In addition, the 
amendments would revise an exemption from the rule for certain 
offerings of municipal securities with put features. These proposed 
amendments are intended to help improve the availability of timely and 
important information to investors and other market participants 
regarding municipal securities, including demand securities, so that 
investors could make more knowledgeable investment decisions, 
effectively manage and monitor their investments, and help protect 
themselves against fraud, and so brokers, dealers, and municipal 
securities dealers could satisfy their obligation to have a reasonable 
basis on which to recommend a municipal security.
    The Commission is sensitive to the costs and benefits of the 
proposed rule amendments and requests comment on the costs and benefits 
of the proposed amendments to Rule 15c2-12 discussed above. The 
Commission encourages commenters to identify, discuss, analyze, and 
supply relevant data regarding any such costs or benefits.

A. Benefits

    The proposed amendments would modify paragraphs (b)(5)(i)(C) and 
(d)(2)(ii)(B) of the Rule to provide that a Participating Underwriter 
must reasonably determine that the issuer or obligated person has 
undertaken in a continuing disclosure agreement to provide event 
notices to the MSRB in a timely manner not to exceed ten business days 
after the occurrence of the event. The current provisions of the Rule 
state that a Participating Underwriter must reasonably determine that 
the continuing disclosure agreement provides that event notices are to 
be provided ``in a timely manner'' to the MSRB in an electronic format. 
As discussed above, the Commission preliminarily believes that more 
timely availability of such significant information would assist 
investors in making better informed investment decisions and should 
help reduce instances of fraud. The Commission also anticipates that, 
in providing for a maximum time frame within which event notices should 
be disclosed under a continuing disclosure agreement, the proposed 
amendment should foster the availability of up-to-date information 
about municipal securities, thereby further promoting greater 
transparency and investor confidence in the municipal securities market 
as a whole, and assisting investors to better protect themselves 
against fraud. Moreover, brokers, dealers and municipal securities 
dealers should be able to more readily carry out their responsibilities 
under the securities laws. The Commission believes that the proposed 
change regarding the maximum time frame for submission of event notices 
should continue to provide an issuer with adequate time to become aware 
of the event and, pursuant to its undertaking, submit notice of the 
event's occurrence to the MSRB. In proposing that event notices be 
provided ``in a timely manner not in excess of ten business days after 
the occurrence of the event,'' the Commission intends to strike a 
balance between the need for such information to be disseminated 
promptly and the need to allow adequate time for an issuer to become 
aware of the event and to prepare and file such a notice. The 
Commission preliminarily believes that the proposed time frame of ten 
business days after the occurrence of the event would provide a 
reasonable amount of time for issuers to comply with their

[[Page 36859]]

obligations under their continuing disclosure agreements, while also 
allowing event notices to be made available to investors in a more 
timely manner. The Commission notes that issuers would not be precluded 
from submitting subsequent notices as additional information relating 
to the event becomes available.
    The proposed amendments would modify subparagraph (b)(5)(i)(C)(6) 
of the Rule to require a Participating Underwriter to reasonably 
determine that the issuer or obligated person has undertaken in a 
continuing disclosure agreement to provide notice to the MSRB of the 
issuance of proposed and final determinations of taxability, Notices of 
Proposed Issue (IRS form 5701-TEB), or other material notices or 
determinations with respect to the tax-exempt status of securities by 
the Internal Revenue Service, as well as adverse tax opinions and other 
events affecting the tax-exempt status of such securities. As discussed 
earlier, the Commission believes that the tax-exempt status of 
municipal securities is of significant importance to investors and 
other participants in the municipal securities market.\240\ The 
Commission believes that this tax-exempt status has a significant 
impact on the value of municipal securities, as well as on the 
potential tax liability a municipal security holder may incur if such 
status were to change. Accordingly, the Commission believes that this 
amendment to subparagraph (b)(5)(i)(C)(6) of the Rule would clarify a 
Participating Underwriter's obligation to determine that the issuer has 
undertaken in its continuing disclosure agreements to provide notice of 
these events that could affect the tax-exempt status of its municipal 
securities.
---------------------------------------------------------------------------

    \240\ See supra Section II.C.
---------------------------------------------------------------------------

    The Commission is proposing to delete the condition in paragraph 
(b)(5)(i)(C) of the Rule that presently provides that notice of all of 
the listed events need be made only ``if material.'' The Commission has 
reviewed each of the Rule's current disclosure event items and 
determined six instances in which no materiality evaluation should be 
necessary.\241\ Issuers would not need to undertake the determination 
of materiality for these six events, which should help speed the 
disclosure of these events to investors and the public and eliminate 
the costs presently required of an issuer to make such a determination.
---------------------------------------------------------------------------

    \241\ These events are: (1) Principal and interest payment 
delinquencies with respect to the securities being offered; (2) 
unscheduled draws on debt service reserves reflecting financial 
difficulties; (3) unscheduled draws on credit enhancements 
reflecting financial difficulties; (4) substitution of credit or 
liquidity providers, or their failure to perform; (5) defeasances; 
and (6) rating changes.
---------------------------------------------------------------------------

    The proposed amendments would add tender offers to subparagraph 
(b)(5)(i)(C)(8) of the Rule, which currently covers bond calls.\242\ 
The Commission believes that the need to reach all investors with 
important information regarding a tender offer, which necessitates that 
an investor decide whether or not to tender within the prescribed time 
period, makes its proposed addition to the Rule appropriate. As a 
result, the proposal would help improve the ability of issuers and 
other obligated persons to communicate tender offers to bondholders 
effectively and of bondholders to respond within the tender offer 
period. In addition, the proposed amendment to subparagraph 
(b)(5)(i)(C)(8) of the Rule could help eliminate the possibility of any 
investor confusion regarding whether a certain municipal security is 
the subject of a tender offer. In all these ways, the availability of 
this information would help investors protect themselves from 
misrepresentation and fraud, and would also aid brokers, dealers and 
municipal securities dealers to satisfy their obligation to have a 
reasonable basis to recommend a municipal security.
---------------------------------------------------------------------------

    \242\ See supra Section II.E.1.
---------------------------------------------------------------------------

    The proposed addition of subparagraph (b)(5)(i)(C)(12) to the Rule 
would require the Participating Underwriter to reasonably determine 
that the issuer or obligated person has undertaken in a continuing 
disclosure agreement to provide notice to the MSRB, upon its 
bankruptcy, insolvency, receivership or similar event.\243\ The 
Commission notes that, while bankruptcy, insolvency, receivership or 
similar event of the issuer or obligated person are uncommon in the 
municipal market, these events can have a significant impact on the 
price of the municipal issuer's securities. The Commission believes 
that the potential severity of the consequences to investors from 
bankruptcy, insolvency, receivership or similar event of the issuer or 
obligated person, and the corresponding benefit of the availability of 
that information to help prevent fraud, supports its proposal that the 
Participating Underwriter should be required to reasonably determine 
that the issuer or obligated person has undertaken in its continuing 
disclosure agreement to provide notice to the MSRB if such an event 
should occur.
---------------------------------------------------------------------------

    \243\ See supra Section II.E.2.
---------------------------------------------------------------------------

    In addition, the proposed amendments would add subparagraph 
(b)(5)(i)(C)(13) to the Rule, which would require the Participating 
Underwriter to reasonably determine that the issuer or obligated person 
has undertaken in a continuing disclosure agreement to provide notice 
to the MSRB, if material, of the consummation of a merger, 
consolidation, or acquisition involving an obligated person or the sale 
of all or substantially all of the assets of the obligated person, 
other than in the ordinary course of business, the entry into a 
definitive agreement to undertake such an action or the termination of 
a definitive agreement relating to any such actions, other than 
pursuant to its terms.\244\ As with bankruptcy, insolvency, 
receivership or similar event of the issuer or obligated person, there 
can be a potential impact on the price of a municipal security as a 
result of the consummation of a material merger, consolidation, or 
acquisition involving an obligated person or the sale of all or 
substantially all of the assets of the obligated person, other than in 
the ordinary course of business, the entry into a definitive agreement 
to undertake such an action or the termination of a definitive 
agreement relating to any such actions, other than pursuant to its 
terms. In such a circumstance, the Commission believes that the 
proposed amendment would help to ensure that investors and other market 
participants could obtain knowledge of the identity of the entity that 
would have responsibility for municipal security repayment obligations 
after the transaction is consummated. In addition, investors and other 
market participants would have the opportunity to review the 
creditworthiness and other aspects of the acquiring entity that would 
support repayment of the security following the transaction. Thus, the 
proposed amendment would help to prevent fraud.
---------------------------------------------------------------------------

    \244\ See supra Section II.E.3.
---------------------------------------------------------------------------

    Proposed subparagraph (b)(5)(i)(C)(14) to the Rule would add the 
appointment of a successor or additional trustee or the change of name 
of a trustee to the list of events contained in the Rule, if material. 
As discussed earlier, the Commission believes that the trustee of a 
municipal security performs important functions for investors in that 
security.\245\ The Commission notes that the proposed amendment would 
benefit investors by helping to ensure that the continuing disclosure 
agreement would provide that investors be made aware of the identity of 
and contact information for the most current trustee for a municipal 
security and that any changes to the trustee's identity would be made

[[Page 36860]]

known to investors in a timely manner, not in excess of ten business 
days of the event's occurrence.
---------------------------------------------------------------------------

    \245\ See supra Section II.E.4.
---------------------------------------------------------------------------

    Further, the Commission proposes to modify the exemption in the 
Rule for demand securities. As discussed above, when the Commission 
adopted this exemption, demand obligations made up a relatively small 
portion of the municipal market.\246\ Recently, issuances of demand 
securities have increased.\247\ The Commission believes that it is 
important that there be greater information regarding these securities 
available to investors, market professionals, and the public generally. 
Accordingly, the Commission believes that modifying the Rule's 
exemption for demand securities would be beneficial to investors and 
the prevention of fraud. The modification of the Rule's exemption for 
demand securities would provide investors with notice of the events set 
forth in the Rule regarding demand securities that may not have been 
available previously. In addition, this proposal would restrict a 
broker, dealer or municipal securities dealer from making 
recommendations regarding such securities unless it has procedures in 
place that provide reasonable assurance that it would receive prompt 
notice of the events set forth in the Rule,\248\ which should benefit 
investors because the broker, dealer or municipal securities dealer 
should have available to it continuing disclosure information regarding 
the demand obligation it recommends.
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    \246\ See supra Section II.A.
    \247\ Id.
    \248\ See 17 CFR 240.15c2-12(c).
---------------------------------------------------------------------------

    The Commission believes that the proposed amendments would benefit 
individual and institutional investors who would be able to obtain 
greater information about municipal securities that they could use to 
make informed investment decisions. Moreover, this information would 
aid investors by helping them to determine that they are not the 
subject of fraudulent or manipulative acts or practices with respect to 
municipal security transactions. In addition, the Commission believes 
that the proposed amendments could assist broker-dealers and others, 
such as mutual funds, with their compliance with regulatory 
requirements because they would have access to greater information 
about municipal securities. Moreover, municipal securities vendors 
could benefit from the proposed amendments because additional 
information about municipal securities and their issuers would be made 
available, which they then could use in developing or enhancing value-
added products to offer to interested parties.
    In the Commission's view, the proposed amendments would have a 
positive impact on the municipal securities market and participants in 
that market sector. It is possible that, with more information 
available to market professionals, individual investors, and others 
regarding municipal securities, including VRDOs, there could be greater 
competition in the marketplace with respect to the offer and sale of 
municipal securities, to the benefit of these individuals and entities. 
Greater information enhances the ability of market professionals, 
investors and others to make investment-related decisions about 
particular municipal securities, which in turn can promote competition 
in the marketplace. Moreover, individual and institutional investors 
might take into account the fact that more information would be 
available about municipal securities, including VRDOs, when they decide 
whether to purchase municipal securities.
    The Commission seeks comment on the anticipated benefits of the 
proposed amendments.

B. Costs

1. Broker-Dealers
    The proposed amendments to paragraph (b)(5)(i)(C) of the Rule would 
add events that would require Participating Underwriters to reasonably 
determine that issuers or obligated persons agreed to provide notice of 
and would specify the maximum time period in which such notices would 
need to be submitted to the MSRB. The Commission does not believe that 
the proposed amendments to paragraph (b)(5)(i)(C) of the Rule would 
cause broker-dealers to incur any additional recurring external or 
internal costs in connection with their implementation, if the 
proposals are adopted, because they would not significantly alter the 
existing Rule's requirements for broker-dealers. Under the Rule, 
broker-dealers already must reasonably determine that issuers or 
obligated persons have undertaken to provide notice of specified events 
in their continuing disclosure agreements and the addition of a few 
more events that would require notice to the MSRB and the addition of a 
provision regarding the timeliness of such notices should not 
significantly increase broker-dealers' obligations and thus their 
costs. As noted above, continuing disclosure documents generally are 
form documents. The broker-dealer must reasonably determine that 
provisions relating to the issuer's or obligated person's undertaking 
to provide notice of those events that are specified in the current 
Rule, as well as those events that are proposed to be added to the 
Rule, are contained in the continuing disclosure agreement.
    The proposed amendments also would modify the Rule's exemption for 
demand securities. The Commission preliminarily believes that these 
proposed amendments would not result in any external recurring costs 
for broker-dealers but could result in their incurring a small increase 
in internal recurring costs because these proposals would increase the 
number of municipal securities offerings subject to paragraphs (b)(5) 
and (c) of the Rule. The proposed deletion of paragraph (d)(1)(iii) of 
the Rule and the addition of new paragraph (d)(5) to the Rule, would 
modify an exemption from the Rule for primary offerings of demand 
securities. As noted above, the Commission's staff estimates that the 
modification of this exemption from the Rule would increase the number 
of issuers with municipal securities offerings subject to the Rule by 
20%.\249\ The Commission's staff estimates that the annual information 
collection burden for each broker-dealer under this proposed amendment 
to the Rule would be 1.20 hours (1 hour and 12 minutes).\250\ 
Accordingly, the Commission's staff estimates that it would cost each 
broker-dealer $324 annually to comply with the Rule, which represents a 
cost increase of $54 annually over each broker-dealer's current annual 
cost to comply with the Rule.\251\
---------------------------------------------------------------------------

    \249\ See supra Section V.D.1.a.
    \250\ Id.
    \251\ 1.20 hours (estimated annual information collection burden 
for each broker-dealer) x $270 (hourly cost for a broker-dealer's 
internal compliance attorney) = $324. The hourly rate for the 
compliance attorney is from SIFMA's Management & Professional 
Earnings in the Securities Industry 2008, modified by the 
Commission's staff to account for an 1800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead. Cost increase for Broker-Dealers under the 
proposed amendments to the Rule: $324 (annual cost under amended 
rule) - $270 (annual cost under current Rule) = $54. This estimated 
cost for broker-dealers also accounts for their review of continuing 
disclosure agreements in connection with remarketings of VRDOs that 
are primary offerings.
---------------------------------------------------------------------------

    In addition, the Commission's staff estimates that a broker-dealer 
could have a one-time internal cost associated with having an in-house 
compliance attorney prepare and issue a memorandum advising the broker-
dealer's employees about the proposed revisions to Rule 15c2-12. The 
Commission's staff estimates it would take internal counsel 
approximately 30

[[Page 36861]]

minutes to prepare this memorandum,\252\ for a cost of approximately 
$135.\253\ The Commission further believes that the ongoing obligations 
of broker-dealers under the Rule would be handled internally because 
compliance with these obligations is consistent with the type of work 
that a broker-dealer typically handles internally.
---------------------------------------------------------------------------

    \252\ See supra Section V.D.1.c.
    \253\ .5 hours (estimated annual information collection burden 
for each broker-dealer) x $270 (hourly cost for a broker-dealer's 
internal compliance attorney) = $135. The hourly rate for the 
compliance attorney is from SIFMA's Management & Professional 
Earnings in the Securities Industry 2008, modified by the 
Commission's staff to account for an 1,800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead.
---------------------------------------------------------------------------

    The Commission seeks comment on any other potential costs that may 
result from the proposal amendments, including whether there would be 
any change to the cost of underwriting variable rate demand obligations 
or other types of municipal securities for which greater information 
would be available as a result of the Commission's proposals and, if 
so, whether there would be any effect on a broker-dealer's business and 
revenues. The Commission seeks comment on whether the proposed 
amendments would adversely affect the ability of broker-dealers to 
serve as Participating Underwriters in municipal securities offerings, 
particularly in the case of offerings of variable rate demand 
obligations. While the Commission does not anticipate that there would 
be any adverse consequences to a broker-dealer's business, activities 
or financial condition as a result of the proposed amendments, it seeks 
commenters' views regarding the possibility of any such impact. The 
Commission requests comment on any direct or indirect costs broker-
dealers could incur as a result of the proposed amendments and asks 
commenters to quantify those costs, where possible.
2. Issuers
(a) Current Issuers
    The Commission expects that some current issuers could be subject 
to some internal and external costs associated with the proposed 
amendments to the Rule. As noted above, the proposed revisions to the 
Rule regarding the time period for submission of event notices and 
regarding the materiality condition for such notices would not change 
the substance of an event notice, the method for filing an event 
notice, or the location to which an event notices would be 
submitted.\254\ Accordingly, the Commission preliminarily does not 
believe that issuers would incur any costs associated with the proposed 
change to the timing provision of the Rule, except to the extent that 
some issuers may need to submit notices more speedily than they do 
currently and may need to be cognizant of events not within their 
direct control, such as a rating change, that would prompt submission 
of an event notice. The Commission preliminarily believes that the 
costs for current issuers would result from the proposed amendments to 
the Rule associated with the proposed new and modified event notice 
provisions and the elimination of the materiality determination for 
certain event notices in the current Rule.\255\ Current issuers would 
incur internal costs associated with the preparation of the additional 
event notices that may result from these proposed changes to the event 
notice provisions of the Rule. Current issuers also would incur costs 
if they issue demand obligations, as discussed below.
---------------------------------------------------------------------------

    \254\ See supra Section V.D.2.b.i. See infra Section V.I.B.2.b. 
for a discussion of the costs associated with an increase in the 
number of issuers as a result of the proposed amendment modifying 
the exemption for demand securities.
    \255\ As to two of the proposed new events, the amendments would 
include a materiality determination. Such a materiality 
determination could result in costs to investors, market 
professionals and others to the extent the issuer or obligated 
person determined that the event was not material and thus did not 
submit a notice to the MSRB. If investors, market professionals and 
others would have considered the information important and had 
access to it, they might have made a different investment decision.
---------------------------------------------------------------------------

    For current issuers that convert their annual filings, event 
notices and/or failure to file notices into the MSRB's prescribed 
electronic format through a third party there would be additional costs 
associated with any additional submissions of event notices and failure 
to file notices. As noted above, the Commission estimates that each 
current issuer would submit one additional event notice annually as a 
result of the proposed amendments.\256\ If the current issuer uses a 
third-party vendor to scan the additional event notice into an 
electronic format for submission to the MSRB, the Commission estimates 
that such issuer would have an additional annual cost of $8 per 
notice.\257\ For current issuers that convert their annual filings, 
event notices and/or failure to file notices into the MSRB's prescribed 
electronic format internally there would be no additional external 
costs associated with the conversion of the event notice into the 
MSRB's prescribed electronic format.
---------------------------------------------------------------------------

    \256\ See supra Section V.E.2.a.
    \257\ Id.
---------------------------------------------------------------------------

    As discussed above,\258\ some current issuers may incur a one-time 
cost of $100 associated with the need to revise the template for 
continuing disclosure agreements, if the proposed amendments are 
adopted.\259\
---------------------------------------------------------------------------

    \258\ Id.
    \259\ Id. The Commission's staff estimates that there is an 
approximate cost of $100 associated with revising each continuing 
disclosure agreement by the current issuer's outside counsel. Thus, 
the total cost for revising continuing disclosure agreements for all 
current issuers by the current issuers' outside counsel would be 
approximately $1,000,000.
---------------------------------------------------------------------------

    The Commission also believes that current issuers could incur some 
internal labor costs associated with the preparation and submission of 
the additional event notice. As discussed above,\260\ the Commission's 
staff estimates that a current issuer would submit a maximum of one 
additional event notice annually.\261\ Thus, the Commission staff 
estimates that the maximum annual labor cost to prepare and submit the 
additional event notice is approximately $47 per current issuer.\262\
---------------------------------------------------------------------------

    \260\ Id.
    \261\ This estimate includes additional event notices that may 
be submitted as a result of the proposed modification of the 
materiality condition in paragraph (b)(5)(i)(C) of the Rule.
    \262\ 1 (maximum estimated number of additional material event 
notices submitted per year per issuer) x $63 (hourly wage for a 
compliance clerk) x .75 hours (45 minutes) (estimated time for 
compliance clerk to prepare and submit a material event notice) = 
$47.25 (rounded to $47). The $63 per hour estimate for a compliance 
clerk is from SIFMA's Office Salaries in the Securities Industry 
2008, modified by the Commission's staff to account for an 1800-hour 
work-year and multiplied by 2.93 to account for bonuses, firm size, 
employee benefits and overhead. In order to provide an estimate of 
total costs for issuers that would not be under-inclusive, the 
Commission's staff elected to use the higher end of the estimate of 
annual submissions of continuing disclosure documents. See supra 
note 220.
---------------------------------------------------------------------------

    The Commission seeks comment on any other costs that the proposed 
addition of several new event items, the proposed maximum time frame to 
submit event notices, and the revisions with respect to the materiality 
condition would have on issuers. While the Commission preliminarily 
does not believe that these proposals would have a significant cost 
impact on issuers, it seeks commenters' views on any direct or indirect 
cost consequences as a result of the proposals. For example, would the 
proposed amendments in any way make it more likely or less likely for 
issuers to obtain needed financing or to obtain a broker-dealer to 
conduct a primary offering on their behalf? Would there be any costs 
incurred by investors, market professionals or others as a result of 
the proposed amendments? Are

[[Page 36862]]

there other internal or external costs not identified by the Commission 
that could result from the proposed amendments? The Commission requests 
comment on any direct or indirect costs issuers could incur as a result 
of the proposed amendments and asks commenters to quantify those costs, 
where possible.
(b) VRDO Issuers
    As discussed above, the Commission estimates that the proposed 
modification of the Rule's exemption for demand securities would 
increase the number of issuers affected by the Rule by approximately 
20% or 2,000 issuers.\263\ These VRDO issuers may have some costs 
associated with the preparation and submission of continuing disclosure 
documents. As discussed above, the Commission believes that each VRDO 
issuer may have a one-time external cost of $600 associated with 
entering into a continuing disclosure agreements.\264\ The Commission 
believes that the only other external costs for VRDO issuers would be 
the costs associated with converting continuing disclosure documents 
into an electronic format to submit to the MSRB. As noted earlier, the 
Commission believes that many issuers of municipal securities currently 
have the computer equipment and software necessary to convert paper 
copies of continuing disclosure documents to electronic copies and to 
electronically transmit the documents to the MSRB.\265\ VRDO issuers 
that presently do not have the ability to prepare their annual filings, 
event notices and/or failure to file notices in an electronic format 
could incur some costs to obtain electronic copies of such documents if 
they are prepared by a third party (e.g., accountant or attorney) or, 
alternatively, to have a paper copy converted into an electronic 
format. These costs would vary depending on how the VRDO issuer elected 
to convert its continuing disclosure documents into an electronic 
format. An issuer could elect to have a third-party vendor transfer its 
paper continuing disclosure documents into the appropriate electronic 
format. An issuer also could decide to undertake the work internally, 
and its costs would vary depending on the issuer's current technology 
resources. An issuer also could use the services of a designated agent 
to submit its continuing disclosure documents to the MSRB. In the 2008 
Amendments Adopting Release, the Commission noted that approximately 
30% of municipal issuers rely on the services of a designated agent to 
submit continuing disclosure documents for them.\266\ Generally, when 
issuers utilize the services of a designated agent, they enter into a 
contract with the agent for a package of services, including the 
submission of continuing disclosure documents, for a single fee. As 
noted above, the Commission's staff estimates that the annual fees for 
designated agents range from $100 to $500 per issuer, for a total 
maximum annual cost of $300,000 for all VRDO issuers.\267\
---------------------------------------------------------------------------

    \263\ See supra Section V.D.2.a.
    \264\ See supra Section V.E.2.b. The Commission's staff has 
estimated that there is an approximate cost of $600 associated with 
drafting each continuing disclosure agreement by the VRDO issuer's 
outside counsel. Thus, the total cost for preparing continuing 
disclosure documents for all VRDO issuers by the VRDO issuers' 
outside counsel would be approximately $1,200,000.
    \265\ Id.
    \266\ See 2008 Amendments Adopting Release, supra note 11, 73 FR 
76104.
    \267\ See supra Section V.E.2.b.
---------------------------------------------------------------------------

    As noted above, the Commission estimates that the costs to some of 
the VRDO issuers may incur costs associated with converting continuing 
disclosure documents into an electronic format to submit to the MSRB. 
These costs could include: (i) An approximate cost of $8 per notice to 
use a third party vendor to scan a event notice or failure to file 
notice, and an approximate cost of $64 to use a third party vendor to 
scan an average-sized annual financial statement, (ii) an approximate 
cost ranging from $750 and $4,300 to acquire technology resources to 
convert continuing disclosure documents into an electronic format, 
(iii) $50 to $300 solely to upgrade or acquire the software to submit 
documents in an electronic format; and (iv) approximately $50 per month 
to acquire Internet access.\268\
---------------------------------------------------------------------------

    \268\ Id.
---------------------------------------------------------------------------

    For a VRDO issuer that does not have Internet access and elects to 
have a third party convert continuing disclosure documents into an 
electronic format (``Category 1''), the total maximum external cost 
such issuer would incur would be $760 per year.\269\ For an issuer that 
does not have Internet access and elects to acquire the technological 
resources to convert continuing disclosure documents into an electronic 
format internally (``Category 2''), the total maximum external cost 
such VRDO issuer would incur would be $4,900 for the first year and 
$600 per year thereafter. As noted above, in order to provide a 
conservative cost estimate, the Commission has estimated that any VRDO 
issuer that incurs costs associated with converting continuing 
disclosure documents into the MSRB's prescribed electronic format would 
choose the more expensive Category 2 approach.\270\ The Commission's 
staff estimates that approximately 400 VRDO issuers would incur costs 
associated with acquiring technology resources to convert continuing 
disclosure documents into an electronic format.\271\ Additionally, the 
Commission's staff estimates that the maximum annual costs for those 
VRDO issuers that need to acquire technology resources to submit 
documents to the MSRB would be approximately $1,960,000 for the first 
year after the adoption of the proposed amendments and approximately 
$240,000 for each year thereafter.\272\
---------------------------------------------------------------------------

    \269\ See supra note 231.
    \270\ See supra Section V.E.2.b.
    \271\ 2000 VRDO issuers x 20% = 400 VRDO issuers. See 2008 
Amendments Adopting Release, supra note 11, 73 FR 76104.
    \272\ See supra Section V.E.2.b.
---------------------------------------------------------------------------

    Although the Commission preliminarily does not believe that there 
are any additional costs to issuers or obligated persons of VRDOs as a 
result of the proposed amendments, it requests comment regarding any 
possible direct or indirect costs that such issuers could incur, such 
as any potential impact on underwriting fees, interest costs, or other 
costs generally. Would the proposed amendments adversely affect the 
business, activities or financial condition of VRDO issuers or 
obligated persons, their ability to engage broker-dealers to underwrite 
or to act as remarketing agents of VRDOs, or to engage financial 
advisors?
(c) Current and VRDO Issuers
    Lastly, as discussed above, some current and VRDO issuers may incur 
a one-time external cost associated with the proposed amendment to 
change the timing requirement for submitting event notices in the Rule 
from ``in a timely manner'' to ``in a timely manner not to exceed ten 
business days after the occurrence of the event.'' In particular, some 
current and VRDO issuers may incur a one-time external cost associated 
with monitoring for a change in the name of the issuer's trustee. One 
way an issuer may monitor a change in the name of its trustee cost 
would be to have outside counsel add a notice provision to the issuer's 
trust indenture requiring the trustee to provide the issuer with notice 
of any change in the trustee's name. The Commission's staff estimates 
that the approximate cost of adding this notice provision to an 
issuer's trust indenture for each issuer would be approximately 
$100,\273\ for a one-time annual cost of $1,200,000\274\ for all 
issuers.
---------------------------------------------------------------------------

    \273\ See supra note 237.
    \274\ See supra note 238.

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[[Page 36863]]

    The Commission requests comment on any direct or indirect costs 
issuers or obligated persons could incur as a result of the proposed 
amendments and asks commenters to quantify those costs, where possible.
3. MSRB
    Since the number of continuing disclosure documents submitted would 
increase as a result of the proposed amendments, the MSRB could incur 
costs associated with the proposed amendments. The Commission's staff 
estimates that these costs for the MSRB may include: (i) the cost to 
hire additional clerical personnel at an estimated annual cost of 
$127,890 to process the additional submissions associated with the 
proposed amendments to the Rule \275\ and (ii) the cost to update its 
EMMA system to accommodate indexing information in connection with the 
proposed changes to the material disclosure events of the Rule. Based 
on information provided to Commission staff by MSRB staff in a 
telephone conversation on November 7, 2008, the MSRB staff estimated 
that the MSRB's costs to update its EMMA system to accommodate the 
proposed changes to the material disclosure events of the Rule would be 
approximately $10,000.\276\ Therefore, in connection with the proposed 
amendments the MSRB would incur a one-time cost of approximately 
$10,000 as well as a recurring annual cost of approximately 
$127,890.\277\
---------------------------------------------------------------------------

    \275\ 2,030 hours (estimated additional annual number of hours 
worked by a compliance clerk) x $63 (hourly wage for a compliance 
clerk) = $127,890 (annual salary for compliance clerk). The $63 per 
hour estimate for a compliance clerk is from SIFMA's Office Salaries 
in the Securities Industry 2008, modified by the Commission's staff 
to account for an 1800-hour work-year and multiplied by 2.93 to 
account for bonuses, firm size, employee benefits and overhead. The 
estimate for additional annual hours worked by a compliance clerk is 
the estimated additional hourly burden the MSRB would incur on an 
annual basis under the proposed amendments to the Rule. See Section 
V.D.
    \276\ Telephone conversation between Harold Johnson, Deputy 
General Counsel, MSRB, and Martha M. Haines, Assistant Director and 
Chief, Office of Municipal Securities, Division, Commission, 
November 7, 2008.
    \277\ See supra notes 261 and 262.
---------------------------------------------------------------------------

    Given that the MSRB has provided a preliminary estimate of the 
costs that it would incur in connection with the proposed amendments, 
the Commission does not believe that there are any other direct or 
indirect additional costs that the MSRB may incur as a result of the 
proposals. The Commission seeks comment on all direct and indirect 
costs that its proposals would impose on the MSRB and requests that 
those costs be quantified, where possible.

C. Request for Comment on Costs and Benefits

    The Commission preliminarily believes that any additional burden or 
costs on broker-dealers, issuers, and the MSRB as a result of the 
proposed amendments would be justified by the improved availability of 
information to broker-dealers, mutual funds that hold municipal 
securities, analysts and other market professionals, institutional and 
retail investors, vendors of municipal securities information, and the 
public generally, all of which contribute to investors' ability to make 
more knowledgeable investment decisions, effectively manage and monitor 
their investments, and protect themselves from misrepresentation and 
fraud. This availability also would contribute to brokers, dealers and 
municipal securities dealers' reasonable basis to recommend the 
purchase or sale of municipal securities. To assist the Commission in 
evaluating the costs and benefits that could result from the proposed 
amendments to the Rule, the Commission requests comments on the 
potential costs and benefits identified in this proposal, as well as 
any other costs or benefits that could result from the proposed 
amendments to the Rule. In particular, comments are requested on 
whether there are costs or benefits to any entity not identified above. 
Commenters should provide analysis and data to support their views on 
the costs and benefits. In particular, the Commission requests comment 
on the costs and benefits of the proposed amendments on broker-dealers, 
issuers, the MSRB, other municipal securities information vendors, as 
well as any costs on others, including market participants and 
investors.

VII. Consideration of Burden and Promotion of Efficiency, Competition, 
and Capital Formation

    Section 3(f) of the Exchange Act \278\ requires the Commission, 
whenever it engages in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider whether the action would promote efficiency, 
competition, and capital formation. In addition, Section 23(a)(2) of 
the Exchange Act \279\ requires the Commission, when adopting rules 
under the Exchange Act, to consider the impact such rules would have on 
competition. Section 23(a)(2) of the Exchange Act also prohibits the 
Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
---------------------------------------------------------------------------

    \278\ 15 U.S.C. 78c(f).
    \279\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The proposed amendments to the Rule would revise paragraph (b)(5) 
of Rule 15c2-12 to require Participating Underwriters to reasonably 
determine that the issuer or obligated person has agreed at the time of 
a primary offering: (i) To provide notice of the events listed in 
paragraph (b)(5)(i)(C) of the Rule in a timely manner, but not later 
than ten business days after the occurrence of the event; \280\ and 
(ii) to expand the list of events in paragraph (b)(5)(i)(C) of the Rule 
to include the following: the issuance by the Internal Revenue Service 
of proposed or final determinations of taxability, Notices of Proposed 
Issue (IRS form 5701-TEB) or other material notices or determinations 
with respect to the tax-exempt status of the securities; a tender 
offer; bankruptcy, insolvency, receivership or similar event of the 
issuer or obligated person; and the consummation of a merger, 
consolidation, or acquisition involving an obligated person or the sale 
of all or substantially all of the assets of the obligated person, 
other than in the ordinary course of business, the entry into a 
definitive agreement to undertake such an action or the termination of 
a definitive agreement relating to any such actions, other than 
pursuant to its terms, if material. The proposed amendments would 
delete the materiality condition for some, but not all, of the events 
currently listed in paragraph (b)(5)(i)(C) of the Rule. In addition, 
the proposed amendments would narrow the exemption currently contained 
in paragraph (d)(1)(iii) of the Rule for demand securities, by deleting 
paragraph (d)(1)(iii), and adding paragraph (d)(5) to the Rule to make 
the event disclosure provisions contained in section (b)(5)(i)(C) of 
the Rule applicable to this category of municipal securities.
---------------------------------------------------------------------------

    \280\ The Commission proposes a similar revision to the limited 
undertaking in paragraph (d)(2)(ii)(B) of the Rule to require a 
Participating Underwriter to reasonably determine that the issuer or 
obligated person has agreed in its continuing disclosure agreement 
to submit event notices to the MSRB ``in a timely manner not in 
excess of ten business days after the occurrence of the event,'' 
instead of ``in a timely manner'' as the Rule currently provides.
---------------------------------------------------------------------------

    As discussed below, the Commission preliminarily believes that the 
proposed amendments to the Rule should help make the municipal 
disclosure process more efficient because of the proposed new events to 
be added to paragraph (b)(5)(i)(C) of the Rule; the proposal that 
submissions of event notices to the MSRB must be made in a timely 
manner not in excess of ten business days of the event's occurrence; 
and the proposed

[[Page 36864]]

modification of the exemption for demand securities through the 
elimination of paragraph (d)(1)(iii) of the Rule, and the addition of 
paragraph (d)(5) to the Rule. Currently, the Rule does not contain a 
specific time frame within which a continuing disclosure agreement must 
specify that event notices will be provided to the MSRB. Thus, the 
Commission believes the proposed change should help individuals or 
entities interested in obtaining information about events relating to 
municipal issuers to obtain this information from the MSRB within a 
specific time frame of the event's occurrence. In addition, certain 
events regarding municipal securities that may be important to 
investors, such as certain tender offers or the consummation of a 
merger, consolidation, or acquisition involving an obligated person or 
the sale of all or substantially all of the assets of the obligated 
person, other than in the ordinary course of business, the entry into a 
definitive agreement to undertake such an action or the termination of 
a definitive agreement relating to any such actions, other than 
pursuant to its terms, if material, are not currently included in the 
Rule. Further, certain events listed in paragraph (b)(5)(i)(C) of the 
rule would need to be disclosed, without the issuer having to make a 
materiality determination. Moreover, the Rule currently contains an 
exemption for demand securities, which means that broker-dealers are 
not required to reasonably determine that the issuer or obligated 
person has undertaken to provide the information set forth in paragraph 
(b)(5) of the Rule. As a consequence of the proposed amendments, 
greater information about municipal securities and their issuers should 
be more readily accessible on a more-timely basis to broker-dealers, 
mutual funds, analysts and other market professionals, institutional 
and retail investors, and the public generally. Thus, these individuals 
and entities should be able to obtain greater information about 
municipal securities within a specific ten business day time frame, 
which could aid them in making better informed and more efficient 
investment decisions and should help reduce instances of fraud.
    The Commission preliminarily believes that this proposal could 
promote competition in the purchase and sale of municipal securities 
because the greater availability and timeliness of information as a 
result of the proposed amendments could instill greater investor 
confidence in the municipal securities market. As a result, more 
investors could be attracted to this market sector and broker-dealers 
and municipal issuers could compete for their business. The proposed 
amendments also could encourage improvement in the completeness and 
timeliness of issuer disclosures and could foster additional interest 
in municipal securities by retail and institutional customers. In 
addition, the greater availability of information about municipal 
securities would be beneficial to vendors of municipal securities 
information as they develop their value-added products. Thus, the 
proposed amendments could promote competition among those vendors of 
municipal securities information that could utilize the information 
provided to the MSRB pursuant to continuing disclosure agreements and 
would compete with each other in creating and offering for sale value-
added products relating to municipal securities. As discussed 
above,\281\ the proposed amendments to the Rule could result in some 
additional cost and hourly burdens for broker-dealers, issuers and the 
MSRB. However, the Commission preliminarily believes that these 
increased burdens are justified by the positive competitive impact of 
the proposed amendments to the Rule. Accordingly, the Commission 
preliminarily does not believe that the proposed amendments would 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \281\ See supra Sections V. and VI.
---------------------------------------------------------------------------

    The proposed amendments to the Rule would provide investors and 
other municipal market participants with notice of additional events, 
to be provided in a timely manner not in excess of ten business days of 
the event's occurrence, which could have an impact on the value of the 
applicable municipal security. In addition, the proposed amendments 
would help to provide investors and other municipal market participants 
with access to important information about demand securities that 
previously were not subject to the Rule's disclosure provisions. The 
Commission believes that these proposals should help improve investors' 
ability to make informed investment decisions, which, in turn, should 
help promote capital formation generally. The proposed amendments could 
have a positive effect on capital formation because the greater 
availability of information about municipal securities could provide 
institutional and retail investors with more complete information 
regarding these securities. As a result, investors could be more 
comfortable that they would have better access to important information 
about a particular municipal security when deciding whether to purchase 
that security.
    Based on the analysis above, the Commission preliminarily believes 
that the proposed amendments to the Rule would not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. The Commission requests comment on all aspects of 
this analysis and, in particular, on whether the proposed amendments to 
the Rule would place a burden on competition, as well as the effect of 
the proposed amendments on efficiency, competition, and capital 
formation. The Commission specifically seeks comment on whether the 
proposed amendments would place a burden on competition or have an 
effect on efficiency, competition, and capital formation with respect 
to issuers or obligated persons, the MSRB, broker-dealers, other market 
participants, investors, or others.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \282\ the Commission must advise the OMB as 
to whether the proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in: (1) An annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (2) 
a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effect on competition, 
investment or innovation.
---------------------------------------------------------------------------

    \282\ Public Law No. 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential impact of the 
proposed rule amendments on the economy on an annual basis. Commenters 
are requested to provide empirical data and other factual support for 
their view to the extent possible.

IX. Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been 
prepared in accordance with the provisions of the Regulatory 
Flexibility Act (``RFA'').\283\ It relates to proposed amendments to 
Rule 15c2-12,\284\ under the Securities Exchange Act of 1934, as 
amended.\285\ The proposed amendments would

[[Page 36865]]

amend certain requirements regarding the information that a broker, 
dealer, or municipal securities dealer acting as an underwriter in a 
primary offering of municipal securities must reasonably determine that 
an issuer of municipal securities or an obligated person has 
undertaken, in a written agreement or contract for the beneficial 
holders of the issuer's municipal securities, to provide, and revise an 
exemption from the rule. Specifically, the amendments would require a 
broker, dealer, or municipal securities dealer (or ``Participating 
Underwriter,'' when used in connection with primary offerings), to 
reasonably determine that an issuer or obligated person has agreed to 
provide notice of specified events in a timely manner not in excess of 
ten business days of the occurrence of the event and amend the list of 
events for which notices would be provided. In addition, the proposal 
would modify the condition that event notices be submitted to the 
Municipal Securities Rulemaking Board, ``if material,'' for some, but 
not all, of the Rule's specified events. Further, the amendments would 
modify an exemption from the rule for certain offerings of municipal 
securities with put features, by making the offering of such securities 
subject to continuing disclosure obligations set forth in the Rule.
---------------------------------------------------------------------------

    \283\ 5 U.S.C. 603(a).
    \284\ 17 CFR 240.15c2-12.
    \285\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

A. Reasons for the Proposed Action

    The main purpose of the proposal is to improve the availability of 
significant and timely information to the municipal securities markets 
and to help deter fraud and manipulation in the municipal securities 
market by prohibiting the underwriting and subsequent recommendation of 
transactions in municipal securities for which adequate information is 
not available on an ongoing basis.
    The Commission proposes to modify paragraphs (b)(5)(i)(C ) and 
(d)(2)(ii)(B ) of Rule 15c2-12 to require a Participating Underwriter 
to reasonably determine that the issuer or obligated person has agreed 
in its continuing disclosure agreement to provide event notices to the 
MSRB in an electronic format as prescribed by the MSRB, in a timely 
manner not in excess of ten business days after the occurrence of any 
such event, instead of ``in a timely manner'' as the Rule currently 
provides. In 1994, the Commission adopted amendments to Rule 15c2-12 
and noted that it had not established a specific time frame with 
respect to ``timely'' because of the wide variety of events and issuer 
circumstances.\286\ However, the Commission stated that, 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.\287\ It has been reported that 
there have been some instances in which event notices were not 
submitted until months after the events occurred.\288\ The Commission 
believes that delays deny investors important information that they 
need in order to make informed decisions regarding whether to buy, 
sell, or hold their municipal securities and to aid them in determining 
whether the price that they pay or receive for their transactions is 
appropriate.\289\
---------------------------------------------------------------------------

    \286\ See Securities Exchange Act Release No. 34961 (November 
10, 1994), 59 FR 59590, 59601 (November 17, 1994) (``1994 
Amendments'').
    \287\ Id.
    \288\ See supra Section II.B.
    \289\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that codifying in the Rule a 
specific time within which event notices would be provided, in 
accordance with the continuing disclosure agreement, to the MSRB should 
result in these notices being made available more promptly than at 
present. Accordingly, the proposed amendments would require a broker, 
dealer, or municipal securities dealer (i.e., a Participating 
Underwriter) to reasonably determine that an issuer or obligated person 
has agreed, in a continuing disclosure agreement, to provide notice of 
specified events in a timely manner not in excess of ten business days 
after the event's occurrence. The Commission believes this change would 
help promote more timely disclosure of this important information to 
municipal security investors.
    The Commission proposes to modify paragraph (b)(5)(i)(C)(6) of the 
Rule, which presently requires Participating Underwriters reasonably to 
determine that the issuer or obligated person has entered into a 
continuing disclosure agreement to submit a notice for ``[a]dverse tax 
opinions or events affecting the tax-exempt status of the security.'' 
The proposal would revise paragraph (b)(5)(i)(C)(6) of the Rule also to 
provide for the disclosure of the issuance of material ``proposed or 
final determinations of taxability, Notices of Proposed Issue (IRS form 
5701-TEB) or other material notices or determinations with respect to 
the tax-exempt status of securities'' by the IRS to the MSRB under a 
continuing disclosure agreement. A determination by the IRS that 
interest on a municipal security may, in fact, be taxable not only 
could reduce the security's market value, but also could adversely 
affect each investor's federal and, in some cases, state income tax 
liability.\290\ The tax-exempt status of a municipal security is also 
important to many mutual funds whose governing documents, with certain 
exceptions, limit their investments to tax-exempt municipal 
securities.\291\ Therefore, retail and institutional investors alike 
are extremely interested in events that could adversely affect the tax-
exempt status of the municipal securities that they own or may wish to 
purchase.\292\
---------------------------------------------------------------------------

    \290\ See supra Section II.D.
    \291\ Id.
    \292\ Id.
---------------------------------------------------------------------------

    The Commission is proposing that no determination of materiality 
would be necessary for the following six existing events: (1) Principal 
and interest payment delinquencies with respect to the securities being 
offered; (2) unscheduled draws on debt service reserves reflecting 
financial difficulties; (3) unscheduled draws on credit enhancements 
reflecting financial difficulties; (4) substitution of credit or 
liquidity providers, or their failure to perform; (5) defeasances; and 
(6) rating changes.\293\ The Commission preliminarily believes that 
these events are of such a high level of importance to investors that 
notice of their occurrence should always be included in a continuing 
disclosure agreement. Furthermore, the Commission preliminarily 
believes that eliminating the necessity to make a materiality decision 
upon the occurrence of these events would simplify issuer compliance 
with the terms of continuing disclosure agreements to which they are a 
party and would help to make such filings available more quickly.
---------------------------------------------------------------------------

    \293\ Id.
---------------------------------------------------------------------------

    The proposal also would add the following events, for which 
disclosure notices would be provided pursuant to a continuing 
disclosure agreement: (i) Tender offers (paragraph (b)(5)(i)(C)(8) of 
the Rule); \294\ (ii) bankruptcy, insolvency, receivership or similar 
event of the issuer or obligated person (paragraph (b)(5)(i)(C)(12) of 
the Rule); \295\ (iii) the consummation of a merger, consolidation, or 
acquisition involving an obligated person or the sale of all or 
substantially all of the assets of the obligated person, other than in 
the ordinary course of business, the entry into a definitive agreement 
to undertake

[[Page 36866]]

such an action or the termination of a definitive agreement relating to 
any such actions, other than pursuant to its terms, if material 
(paragraph (b)(5)(i)(C)(13) of the Rule); \296\ and (iv) appointment of 
a successor or additional trustee, or the change of name of a trustee 
(paragraph (b)(5)(i)(C)(14) of the Rule), if material.\297\ The 
Commission believes that there is a need to make available to all 
investors such important information affecting their decisions and the 
value of their securities. The Commission believes that the proposed 
addition of these four events disclosure items would substantially 
improve the availability of important information in the municipal 
securities market.
---------------------------------------------------------------------------

    \294\ See supra Section II.E.1.
    \295\ See supra Section II.E.2.
    \296\ See supra Section II.E.3.
    \297\ See supra Section II.E.4.
---------------------------------------------------------------------------

    Finally, the proposal would modify the Rule's exemption for demand 
securities by eliminating paragraph (d)(1)(iii) to Rule 15c2-12, and 
adding new paragraph (d)(5) to the Rule. The Commission's experience 
with the operation of the Rule and changes in the municipal securities 
market over the last fourteen years suggests a need to increase the 
availability of information to investors regarding demand 
securities.\298\ Furthermore, the recent period of turmoil in the 
markets for municipal auction rate securities and variable rate demand 
obligations (``VRDOs'') and the comments of numerous primary purchasers 
of demand securities also suggest that a full exemption for demand 
securities is no longer appropriate and that the exemption should be 
modified to provide that paragraphs (b)(5) and (c) of the Rule relating 
to the disclosure of continuing disclosure documents and 
recommendations by broker-dealers also would apply to the offerings of 
demand securities.\299\
---------------------------------------------------------------------------

    \298\ See supra Section II.A.
    \299\ Id.
---------------------------------------------------------------------------

B. Objectives

    The purpose of the proposal is to achieve more efficient, 
effective, and wider availability of municipal securities information 
to broker-dealers, mutual funds, analysts and other market 
professionals, institutional and retail investors, and the public 
generally, and to help prevent fraudulent, deceptive, or manipulative 
acts or practices in the municipal securities market.

C. Legal Basis

    Pursuant to the Exchange Act, and particularly Sections 2, 3(b), 
10, 15(c), 15B, 17 and 23(a)(1) thereof, 15 U.S.C. 78b, 78c(b), 78j, 
78o(c), 78o-4, 78q and 78w(a)(1), the Commission is proposing 
amendments to Sec.  240.15c2-12 of Title 17 of the Code of Federal 
Regulations.

D. Small Entities Subject to the Rule

    The proposal would apply to any broker, dealer, or municipal 
securities dealer that acts as an underwriter in a primary offering of 
municipal securities with an aggregate principal amount of $1,000,000 
or more and issuers of such securities.
    The RFA defines ``small entity'' to mean ``small business,'' 
``small organization,'' or ``small government jurisdiction.'' \300\ The 
Commission's rules define ``small business'' and ``small organization'' 
for purposes of the RFA for each of the types of entities regulated by 
the Commission.
---------------------------------------------------------------------------

    \300\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------

    A broker-dealer is a small business if its total capital (net worth 
plus subordinated liabilities) on the last day of its most recent 
fiscal year was $500,000 or less, and is not affiliated with any entity 
that is not a ``small business.'' \301\
---------------------------------------------------------------------------

    \301\ 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    A municipal securities dealer that is a bank (including a 
separately identifiable department or division of a bank) is a small 
business if it has total assets of less than $10 million at all times 
during the preceding fiscal year; had an average monthly volume of 
municipal securities transactions in the preceding fiscal year of less 
than $100,000; and is not affiliated with any entity that is not a 
``small business.'' \302\
---------------------------------------------------------------------------

    \302\ 17 CFR 240.0-10(f).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking, an issuer or person, other 
than an investment company, is a ``small business'' or ``small 
organization'' if its ``total assets on the last day of its most recent 
fiscal year were $5 million or less.'' \303\
---------------------------------------------------------------------------

    \303\ 17 CFR 230.157. See also 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    Based on information obtained by the Commission's staff in 
connection with the 2008 Adopted Amendments, the Commission estimates 
that 250 broker-dealers, including municipal securities dealers, would 
be Participating Underwriters within the meaning of Rule 15c2-12. Based 
on a recent review of industry sources, the Commission does not believe 
that any Participating Underwriters would be small broker-dealers or 
municipal securities dealers.
    A ``small governmental jurisdiction'' is defined by the RFA to 
include ``governments of cities, counties, towns, townships, villages, 
school districts, or special districts, with a population of less than 
fifty thousand.'' \304\ Currently, there are more than 50,000 state and 
local issuers of municipal securities \305\ that would be subject to 
the proposal. The Commission estimates that approximately 40,000 state 
and local issuers would be ``small'' entities for purposes of the RFA. 
However, the Commission believes that most issuers of municipal 
securities would qualify for the limited exemption in paragraph (d)(2) 
of the Rule.\306\ The Commission has estimated that currently 10,000 
issuers have entered into continuing disclosure agreements that provide 
for their submitting continuing disclosure documents to the MSRB and 
that, under the proposed amendment to narrow the Rule's exemption for 
demand securities, the number of affected issuers would increase to 
12,000 issuers. It is possible that some of these issuers may be small 
issuers.
---------------------------------------------------------------------------

    \304\ 5 U.S.C. 601(5).
    \305\ See Securities Exchange Act Release No. 33741 (March 9, 
1994), 59 FR 12748 (March 17, 1994).
    \306\ Specifically, Rule 15c2-12(d)(2) provides an exemption 
from the application of paragraph (b)(5) (Rule's provisions 
regarding continuing disclosure agreements) of the Rule with respect 
to primary offerings if, among other things, the issuer or obligated 
person has agreed to a limited disclosure obligation, including 
sending certain material event notices to the MSRB. See 17 CFR 
240.15c2-12(d)(2).
---------------------------------------------------------------------------

    The proposed amendments would apply to all small entities that are 
currently subject to Rule 15c2-12. Because small entities already may 
submit event notices for the current disclosure items, these entities 
are able to prepare event notices that are proposed to be incorporated 
into the Rule. The Commission expects that providing the additional 
event disclosure items would increase costs incurred by small entities, 
to the extent that their primary offerings of municipal securities are 
covered by the Rule, because they potentially would have to provide a 
greater number of event notices than they do currently. However, the 
Commission notes this increased cost would be approximately $8 per 
entity annually. The Commission's staff has estimated that for purposes 
of the Paperwork Reduction Act each issuer, including small entities, 
would be subject to an annual reporting burden of approximately 4.5 
hours and an estimated annual cost ranging from $600 to $760.\307\ In 
addition, some issuers could have one-time costs ranging from $50 to 
$4,300.\308\
---------------------------------------------------------------------------

    \307\ See supra Section V.E.2.
    \308\ Id.
---------------------------------------------------------------------------

E. Reporting, Recordkeeping and Other Compliance Requirements

    Rule 15c2-12 currently sets forth eleven disclosure items that the

[[Page 36867]]

Participating Underwriter must reasonably determine would be provided, 
in accordance with the continuing disclosure agreement, to the MSRB. 
The proposed amendments to Rule 15c2-12 would amend an existing event 
disclosure item and add four new event disclosure items. The proposed 
amendments would clarify the current disclosure item regarding adverse 
tax opinions, add tender offers to the current disclosure item 
regarding bond calls contained in paragraph (b)(5)(C)(8), and add three 
new disclosure items: bankruptcy, insolvency, receivership or similar 
event of the issuer or obligated person; merger, consolidation, or 
acquisition involving an obligated person or the sale of all or 
substantially all of the assets of the obligated person, other than in 
the ordinary course of business, the entry into a definitive agreement 
to undertake such an action or the termination of a definitive 
agreement relating to any such actions, other than pursuant to its 
terms, if material; and the appointment of a successor or additional 
trustee or the change of name of a trustee, if material. In addition, 
the proposal would modify the condition that event notices be submitted 
to the MSRB, ``if material,'' for some, but not all, of the Rule's 
specified events. The proposal also would delete the current exemption 
for demand securities in paragraph (d)(1)(iii) and add language in new 
paragraph (d)(5) so that paragraphs (b)(5) \309\ and (c) \310\ of the 
Rule also would apply to a primary offering of demand securities. 
Lastly, the proposed amendments would modify paragraphs (b)(5)(i)(C) 
and (d)(2)(ii)(B) of the Rule to require a Participating Underwriter to 
reasonably determine that the issuer or obligated person has agreed in 
its continuing disclosure agreement to submit event notices to the 
MSRB, ``in a timely manner not in excess of ten business days after the 
occurrence of the event,'' instead of ``in a timely manner'' as the 
Rule currently provides.
---------------------------------------------------------------------------

    \309\ Rule 15c2-12(b)(5) requires a Participating Underwriter, 
before purchasing or selling municipal securities in connection with 
an offering of municipal securities, to reasonably determine that 
the issuer or obligated person has undertaken, in a written 
agreement or contract, for the benefit of the holders of the 
municipal securities, to provide annual filings, material event 
notices, and failure to file notices (i.e., continuing disclosure 
documents) to the MSRB. See 17 CFR 240.15c2-12(b)(5).
    \310\ Rule 15c2-12(c) requires a broker, dealer, or municipal 
securities dealer that recommends the purchase or sale of a 
municipal security to have procedures in place that provide 
reasonable assurance that it will receive prompt notice of any 
material event and any failure to file annual financial information 
regarding the municipal security. See 17 CFR 240.15c2-12(c).
---------------------------------------------------------------------------

F. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes that there are no rules that duplicate, 
overlap, or conflict with the proposed amendments to Rule 15c2-12.

G. Significant Alternatives

    The RFA directs the Commission to consider significant alternatives 
that would accomplish the stated objective, while minimizing any 
significant adverse impact on small entities. In connection with the 
proposed revisions to the Rule, the Commission considered the following 
alternatives:
    (1) Establishing differing compliance or reporting requirements or 
timetables which take into account the resources available to smaller 
entities;
    (2) Exempting smaller entities from coverage of the disclosure 
requirements, or any part thereof;
    (3) The clarification, consolidation, or simplification of 
disclosure for small entities; and
    (4) Use of performance standards rather than design standards.
    The Commission believes that separate compliance or reporting 
requirements or timetables for smaller entities that would differ from 
the proposed requirements, or exempting broker-dealers from the 
obligations in paragraph (b)(5) and (c) of the Rule with respect to 
small issuers, would not achieve the Commission's objectives. At the 
outset, the Commission notes that most small issuers of municipal 
securities are eligible for the limited exemption currently contained 
in paragraph (d)(2) of the Rule. The exemption in Rule 15c2-12(d)(2) 
provides that paragraph (b)(5) of the Rule, which relates to the 
submission of continuing disclosure agreements, does not apply to a 
primary offering if the conditions contained therein are met.\311\ This 
limited exemption from the Rule is intended to assist small 
governmental jurisdictions that issue municipal securities. In the case 
of primary offerings by small governmental jurisdictions that are not 
covered by the exemption, the Commission notes that the proposal 
balances the informational needs of investors and others with regard to 
municipal securities issued by small governmental jurisdictions with 
the effects of the proposed rule change. The adoption of separate rules 
for broker-dealers with respect to continuing disclosure agreements 
entered into by smaller entities would not be consistent with the 
Commission's intent to improve the greater availability and timeliness 
of disclosures in the municipal securities market. Furthermore, the 
municipal securities market could be disadvantaged by disparate 
disclosures by small and large entities pursuant to their continuing 
disclosure agreements. Broker-dealers and other market participants 
would be better able to satisfy their legal obligations under the 
federal securities laws to have a reasonable basis on which to 
recommend municipal securities. In addition, the proposal would impose 
performance standards rather than design standards.
---------------------------------------------------------------------------

    \311\ Specifically, Rule 15c2-12(d)(2) provides an exemption 
from the application of paragraph (b)(5) (Rule's provisions 
regarding continuing disclosure agreements) of the Rule with respect 
to primary offerings if, among other things, the issuer or obligated 
person has agreed to a limited disclosure obligation, including 
sending certain material event notices to the MSRB. See 17 CFR 
240.15c2-12(d)(2).
---------------------------------------------------------------------------

H. Request for Comments

    The Commission encourages written comments on matters discussed in 
the IRFA. In particular, the Commission requests comments on: (a) The 
number of small entities that would be affected by the proposed 
amendments; (b) the nature of any impact the proposed amendments would 
have on small entities and empirical data supporting the extent of the 
impact; (c) how to quantify the number of small entities that would be 
affected by and/or how to quantify the impact of the proposed 
amendments; and (d) potential costs to small entities, if any, 
including costs associated with providing event notices. Such comments 
will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed rule is adopted, and will be 
placed in the same public file as comments on the proposed rule itself. 
Persons wishing to submit written comments should refer to the 
instructions for submitting comments in the front of this release.

X. Statutory Authority

    Pursuant to the Exchange Act, and particularly Sections 2, 3(b), 
10, 15(c), 15B, 17 and 23(a)(1) thereof, 15 U.S.C. 78b, 78c(b), 78j, 
78o(c), 78o-4, 78q and 78w(a)(1), the Commission is proposing 
amendments to Sec.  240.15c2-12 of Title 17 of the Code of Federal 
Regulations in the manner set forth below.

Text of Proposed Rule Amendments

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, Title 17, Chapter II, of 
the Code of Federal Regulations is proposed to be amended as follows.

[[Page 36868]]

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, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *
    2. Section 240.15c2-12 is amended by the following:
    A. Revise the introductory text of paragraph (b)(5)(i)(C), and 
paragraphs (b)(5)(i)(C)(2), (6), (7), (8), (10), and (11);
    B. Add new paragraphs (b)(5)(i)(C)(12), (13), and (14);
    C. Revise paragraph (d)(1)(ii);
    D. Remove paragraph (d)(1)(iii); and
    E. Revise the paragraph (d)(2)(ii)(B); and
    F. Add new paragraph (d)(5).
    The additions and revisions read as follows.


Sec.  240.15c2-12  Municipal securities disclosure.

* * * * *
    (b) * * *
    (5)(i) * * *
    (C) In a timely manner not in excess of ten business days after the 
occurrence of the event, notice of any of the following events with 
respect to the securities being offered in the Offering:
* * * * *
    (2) Non-payment related defaults, if material;
* * * * *
    (6) Adverse tax opinions, the issuance by the Internal Revenue 
Service of proposed or final determinations of taxability, Notices of 
Proposed Issue (IRS Form 5701-TEB) or other material notices or 
determinations with respect to the tax-exempt status of the securities, 
or other events affecting the tax-exempt status of the security;
    (7) Modifications to rights of security holders, if material;
    (8) Bond calls, if material, and tender offers;
* * * * *
    (10) Release, substitution, or sale of property securing repayment 
of the securities, if material;
    (11) Rating changes;
    (12) Bankruptcy, insolvency, receivership or similar event of the 
obligated person;

    Note to paragraph (b)(5)(i)(C)(12):
     For the purposes of the event identified in paragraph 
(b)(5)(i)(C)(12), the event is considered to occur when any of the 
following occur: the appointment of a receiver, fiscal agent or 
similar officer for an obligated person in a proceeding under the 
U.S. Bankruptcy Code or in any other proceeding under state or 
federal law in which a court or governmental authority has assumed 
jurisdiction over substantially all of the assets or business of the 
obligated person, or if such jurisdiction has been assumed by 
leaving the existing governing body and officials or officers in 
possession but subject to the supervision and orders of a court or 
governmental authority, or the entry of an order confirming a plan 
or reorganization, arrangement or liquidation by a court or 
governmental authority having supervision or jurisdiction over 
substantially all of the assets or business of the obligated person;

    (13) The consummation of a merger, consolidation, or acquisition 
involving an obligated person or the sale of all or substantially all 
of the assets of the obligated person, other than in the ordinary 
course of business, the entry into a definitive agreement to undertake 
such an action or the termination of a definitive agreement relating to 
any such actions, other than pursuant to its terms, if material;
    (14) Appointment of a successor or additional trustee or the change 
of name of a trustee, if material; and
* * * * *
    (d) * * *
    (1) * * *
    (ii) Have a maturity of nine months or less.
* * * * *
    (2) * * *
    (ii) * * *
* * * * *
    (B) In a timely manner not in excess of ten business days after the 
occurrence of the event, 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; and
* * * * *
    (5) With the exception of paragraphs (b)(5) and (c) of this 
section, this section shall not apply to a primary offering of 
municipal securities in authorized denominations of $100,000 or more if 
such securities may, at the option of the holder thereof, 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.
* * * * *

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES 
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

* * * * *
    3. Part 241 is amended by adding Release No. 34-XXXXX and the 
release date of X to the list of interpretative releases.

     Dated: July 17, 2009.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-17466 Filed 7-23-09; 8:45 am]
BILLING CODE 8010-01-P