[Federal Register Volume 75, Number 111 (Thursday, June 10, 2010)]
[Rules and Regulations]
[Pages 33100-33157]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-13165]



[[Page 33099]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 240 and 241



Amendment to Municipal Securities Disclosure; Final Rule

  Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules 
and Regulations  

[[Page 33100]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 241

[Release No. 34-62184A; File No. S7-15-09]
RIN 3235-AJ66


Amendment to Municipal Securities Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Final rule and interpretation.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is adopting amendments to Rule 15c2-12 (``Rule 15c2-12'' or 
``Rule'') under the Securities Exchange Act of 1934 (``Exchange Act'') 
relating to municipal securities disclosure. The amendments revise 
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 amendments 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; amend the list of events for which a 
notice is to be provided; and modify the events that are subject to a 
materiality determination before triggering a requirement to provide 
notice to the MSRB. In addition, the amendments revise an exemption 
from the Rule for certain offerings of municipal securities with put 
features (defined below as ``demand securities''). The Commission also 
is providing interpretive guidance intended to assist municipal 
securities brokers, dealers, and municipal securities dealers in 
meeting their obligations under the antifraud provisions of the federal 
securities laws.

DATES: Effective Date: August 9, 2010, except Part 241 will be 
effective June 10, 2010.
    Compliance Date: December 1, 2010 with respect to Sec.  240.15c2-
12.

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; Molly M. Kim, Special Counsel, 
Office of Market Supervision, at (202) 551-5644; Rahman J. Harrison, 
Special Counsel, Office of Market Supervision, at (202) 551-5663; 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 adopting amendments to 
Rule 15c2-12 under the Exchange Act.\1\
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    \1\ 17 CFR 240.15c2-12.
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I. Executive Summary

    On July 24, 2009, the Commission published for comment amendments 
to Rule 15c2-12 to improve the quality and timeliness of information 
about municipal securities that are outstanding in the secondary 
market.\2\ The proposed amendments would have required a broker, 
dealer, or municipal securities dealer to reasonably determine that the 
issuer or obligated person has undertaken, in a written agreement or 
contract for the benefit of holders of the issuer's municipal 
securities (``continuing disclosure agreement''), to provide notice to 
the MSRB of specified events in a timely manner not in excess of ten 
business days after the event's occurrence. The proposal also would 
have amended the list of events for which a notice is to be provided 
and would have modified the events that are subject to a materiality 
determination before triggering the obligation to submit a notice to 
the MSRB. In addition, the amendments would have revised an exemption 
from the Rule for certain offerings of demand securities.
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    \2\ See Securities Exchange Act Release No. 60332 (July 17, 
2009), 74 FR 36831 (July 24, 2009) (``Proposing Release''). The 
comment period for the proposed amendments expired on September 8, 
2009.
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    The Commission received twenty-nine comment letters in response to 
the proposed amendments from a wide range of commenters.\3\ The 
respondents included the MSRB; state and local governments; mutual 
funds; trade organizations representing broker-dealers, government 
financial officials, and bond lawyers; and individual investors. Of the 
comment letters received, four expressed support for the proposed 
amendments; ten expressed support, but suggested modifications to 
certain provisions of the proposed amendments; three supported some of 
the proposed amendments and objected to others; and eight opposed the 
proposed amendments. In addition, four comment letters neither 
expressed support for nor opposed the proposed amendments.
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    \3\ Copies of all comments received on the proposed amendments 
are available on the Commission's Internet Web site, located at 
http://www.sec.gov/comments/s7-15-09/s71509.shtml. Comments are also 
available for Web site viewing and printing 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. 
Exhibit A, which is attached to this release, contains a citation 
key to the comment letters received by the Commission on the 
proposed amendments.
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    Some of the main concerns raised in the comment letters include: 
(i) The burden and costs associated with the proposed maximum ten 
business day time frame for submission of event notices; (ii) 
application of the proposed amendments to remarketings of demand 
securities; \4\ and (iii) the proposed removal of the materiality 
condition from various disclosure events that trigger submission of an 
event notice to the MSRB. A number of commenters offered alternative 
approaches to the proposal to address their concerns and made 
suggestions regarding implementation of the proposed amendments. Also, 
some commenters addressed two proposals submitted by the MSRB relating 
to modifications to its Electronic Municipal Market Access (``EMMA'') 
system.\5\
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    \4\ See infra note 28 and accompanying text for a description of 
demand securities.
    \5\ See Securities Exchange Act Release Nos. 60314 (July 15, 
2009), 74 FR 36300 (July 22, 2009); 61238 (December 23, 2009), 75 FR 
492 (January 5, 2010); 60315 (July 15, 2009), 74 FR 36294 (July 22, 
2009); and 61237 (December 23, 2009), 75 FR 485 (January 5, 2010). 
The EMMA system is a component of the MSRB's central municipal 
securities document repository for the collection and availability 
of continuing disclosure documents over the Internet. See http://emma.msrb.org.
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    This release describes and addresses only those portions of the 
comment letters that are relevant to the proposed amendments. The 
portions of the comment letters that discuss the MSRB proposals 
relating to the EMMA system are being considered separately in the 
Commission's orders approving the MSRB proposals.\6\
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    \6\ See Securities Exchange Act Release Nos. 62182 (May 26, 
2010) (SR-MSRB-2010-09) and 62183 (May 26, 2010) (SR-MSRB-2010-10) 
(pursuant to delegated authority).
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    The Commission has carefully considered all the comments it 
received regarding the proposed amendments and, as discussed below, is 
adopting the amendments substantially as proposed, with some 
modifications in response to comments. The amendments are intended to 
enhance the quality and availability of information about outstanding 
municipal securities. For

[[Page 33101]]

the reasons discussed in this release,\7\ the Commission believes that 
the amendments are consistent with the Commission's mandate to, among 
other things, adopt rules reasonably designed to prevent fraudulent, 
deceptive, or manipulative acts or practices in the market for 
municipal securities. In addition, the Commission is issuing 
interpretive guidance that is substantially the same as the guidance 
set forth in the Proposing Release and that is intended to assist 
municipal securities brokers, dealers, and municipal securities dealers 
in meeting their obligations under the antifraud provisions of the 
federal securities laws.
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    \7\ See also Proposing Release, supra note 2, 74 FR 36831.
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II. Background

    Rule 15c2-12 is intended to enhance disclosure, and thereby reduce 
fraud, in the municipal securities market by establishing standards for 
obtaining, reviewing, and disseminating information about municipal 
securities by their underwriters.\8\ In 1989, the Commission adopted 
paragraphs (a) and (b)(1)-(4) of Rule 15c2-12\9\ to require brokers, 
dealers, and municipal securities dealers (``Participating 
Underwriters'') acting as underwriters in primary offerings of 
municipal securities of $1,000,000 or more (subject to certain 
exemptions set forth in paragraph (d) of the Rule) to obtain, review, 
and distribute to potential customers copies of the issuer's official 
statement.\10\ In 1994, the Commission adopted paragraph (b)(5) of the 
Rule (``1994 Amendments''),\11\ which became effective in 1995 and was 
amended in 2008.\12\ Paragraph (b)(5) 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 or an obligated person \13\ of 
municipal securities has undertaken in a continuing disclosure 
agreement to provide specified information to the MSRB in an electronic 
format as prescribed by the MSRB.\14\ The information to be provided 
consists of: (1) Certain annual financial and operating information and 
audited financial statements (``annual filings''); \15\ (2) notices of 
the occurrence of any of eleven specific events (``event notices''); 
\16\ and (3) notices of the failure of an issuer or obligated person to 
make a submission required by a continuing disclosure agreement 
(``failure to file notices'').\17\
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    \8\ See Securities Exchange Act Release No. 26985 (June 28, 
1989), 54 FR 28799 (July 10, 1989) (``1989 Adopting Release''). For 
additional information relating to the history of the Rule, see 
Securities Exchange Act Release Nos. 34961 (November 10, 1994), 59 
FR 59590 (November 17, 1994) (``1994 Amendments Adopting Release'') 
and 59062 (December 5, 2008), 73 FR 76104 (December 15, 2008) 
(``2008 Amendments Adopting Release'').
    \9\ See 1989 Adopting Release, supra note 8.
    \10\ 17 CFR 240.15c2-12(a).
    \11\ 17 CFR 240.15c2-12(b)(5).
    \12\ See 1994 Amendments Adopting Release and 2008 Amendments 
Adopting Release, supra note 8.
    \13\ The term ``obligated person'' means ``any person, including 
an issuer of municipal securities, who is either generally or 
through an enterprise, fund, or account of such person committed by 
contract or other arrangement to support payment of all, or part of 
the obligations of the municipal securities to be sold in the 
Offering (other than providers of municipal bond insurance, letters 
of credit, or other liquidity facilities).'' See 17 CFR 240.15c2-
12(f)(10).
    \14\ 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. Specifically, the 2008 Amendments require a 
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. See 2008 
Amendments Adopting Release, supra note 8. 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.
    \15\ 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).
    \16\ 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 III.C. below, 
the Commission is adopting amendments to the Rule to eliminate the 
materiality determination for certain of these events.
    \17\ 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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    Since the adoption of the 1994 Amendments, the amount of 
outstanding municipal securities has more than doubled to $2.8 
trillion.\18\ 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 2009, 
ranging from approximately 35% to 39% of outstanding municipal 
securities.\19\ At the end of 2009, individual investors held 
approximately 35% of outstanding municipal securities directly and up 
to another 34% indirectly through money market funds, mutual funds, and 
closed end funds.\20\ There is also substantial trading volume in the 
municipal securities market. According to the MSRB, almost $3.8 
trillion of long and short term municipal securities were traded in 
2009 in over 10 million transactions.\21\ Further, there are 
approximately 51,000 state and local issuers of municipal securities, 
ranging from villages, towns, townships, cities, counties, and states, 
as well as special districts, such as school districts and water and 
sewer authorities.\22\
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    \18\ 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 $2.81 trillion at the end of 2009. See SIFMA 
Holders of U.S. Municipal Securities (available at http://www.sifma.org/uploadedFiles/Research/Statistics/SIFMA_USMunicipalSecuritiesHolders.pdf) (``SIFMA Report''). As noted in 
the Proposing Release, the amount of outstanding municipal 
securities was $2.69 trillion at the end of 2008, according to 
statistics assembled by SIFMA. See Proposing Release, supra note 2, 
74 FR at 36834, n. 16 and accompanying text.
    \19\ See SIFMA Report, supra note 18. As noted in the Proposing 
Release, direct investment in municipal securities by individuals 
from 1996 to 2008 ranged from approximately 35% to 39% of 
outstanding municipal securities, according to statistics assembled 
by SIFMA. See Proposing Release, supra note 2, 74 FR at 36834, n. 17 
and accompanying text.
    \20\ See SIFMA Report, supra note 18. As noted in the Proposing 
Release, 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, according to statistics assembled by SIFMA. See Proposing 
Release, supra note 2, 74 FR at 36834, n. 18 and accompanying text.
    \21\ See MSRB, Real-Time Transaction Reporting, Statistical 
Patterns in the Municipal Market, Monthly Summaries 2009 (available 
at http://www.msrb.org/msrb1/TRSweb/MarketStats/statistical_patterns_in_the_muni.htm). As noted in the Proposing Release, in 
2008, almost $5.5 trillion of long and short term municipal 
securities were traded in 2008 in nearly 11 million transactions. 
See Proposing Release, supra note 2, 74 FR at 36834, n. 19 and 
accompanying text.
    \22\ See, e.g., Report on Transactions in Municipal Securities 
prepared by Office of Economic Analysis and Office of Municipal 
Securities, the Division of Market Regulation, Commission, (July 1, 
2004) (available at http://www.sec.gov/news/studies/munireport2004.pdf).
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    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.\23\ Bonds for 
healthcare,

[[Page 33102]]

multifamily housing, and industrial development, together with land-
backed debt, accounted for more than 80% of defaulted dollar 
amounts.\24\ In 2007, a total of $226 million in municipal bonds 
defaulted (including both monetary and covenant defaults).\25\ In 2008, 
140 issuers defaulted on $7.6 billion in municipal bonds.\26\ There are 
reports that approximately $5 billion in municipal bonds are in default 
today.\27\
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    \23\ 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).
    \24\ See Standard and Poor's Report, supra note 23. See also 
Proposing Release, supra note 2, 74 FR at 36834.
    \25\ See Joe Mysak, Subprime Finds New Victim as Muni Defaults 
Triple, Bloomberg News, May 30, 2008.
    \26\ 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).
    \27\ See, e.g., Mary Williams Walsh, State Debt Woes Grow Too 
Big to Camouflage, The New York Times, March 30, 2010.
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    The Commission's experience with the operation of the Rule over the 
past 20 years, 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. In 
particular, the Commission proposed amendments to the Rule's 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 the issuer 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 
the issuer or its designated agent (``demand securities'').\28\
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    \28\ 17 CFR 240.15c2-12(d)(1)(iii).
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    As the Commission discussed in the Proposing Release, at the time 
the Rule was adopted in 1989, demand securities were relatively new to 
the municipal market.\29\ Approximately $13 billion of variable rate 
demand obligations (``VRDOs'') \30\ were issued in 1989.\31\ However, 
by 2009, it has been reported that approximately $32 billion of VRDOs 
were issued,\32\ with trading in VRDOs representing approximately 34% 
of trading volume of all municipal securities.\33\ Further, it has been 
reported that as of early 2009, the outstanding amount of VRDOs was 
estimated at approximately $400 billion.\34\ During the fall of 2008, 
the VRDO market experienced significant volatility.\35\ As the size, 
volatility, and complexity of the VRDO market and the number of 
investors have grown, so have the risks associated with less complete 
disclosure. Moreover, representatives of the primary purchasers of 
VRDOs--money market funds--have expressed concerns suggesting that the 
exemption in Rule 15c2-12 for these securities may no longer be 
justified.\36\ These developments highlight the need for the Commission 
to improve the availability to investors of important information 
regarding demand securities.
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    \29\ See Proposing Release, supra note 2, 74 FR at 36834-5.
    \30\ The Commission is not currently aware of any demand 
securities that were not issued as VRDOs. The MSRB describes VRDOs 
as ``[f]loating rate obligations that have a nominal long-term 
maturity but have a coupon rate that is reset periodically (e.g., 
daily or weekly). The investor has the option to put the issue back 
to the trustee or tender agent at any time with specified (e.g., 
seven days') notice. The put price is par plus accrued interest.'' 
See http://www.msrb.org/MSRB1/glossary/view_def.asp?vID=4310.
    \31\ See Two Decades of Bond Finance: 1989-2008, The Bond Buyer/
Thomson Reuters 2009 Yearbook 4 (Matthew Kreps ed., Source Media, 
Inc.) (2009).
    \32\ See Thomson Reuters, ``A Decade of Municipal Bond Finance'' 
(available at http://www.bondbuyer.com/marketstatistics/decade_1).
    \33\ According to the MSRB, trading volume in VRDOs in 2009 was 
approximately $1.3 trillion. Total trading volume in 2009 for all 
municipal securities was approximately $3.8 trillion. See E-mail 
between Martha M. Haines, Assistant Director and Chief, Office of 
Municipal Securities, Division, Commission, and Marcelo Vieira, 
Director of Research, MSRB, January 26, 2010. As noted in the 
Proposing Release, in 2008, approximately $115 billion of VRDOs were 
issued, with trading in VRDOs representing approximately 38% of 
trading volume of all municipal securities. See Proposing Release, 
supra note 2, 74 FR at 36834, n. 27 and accompanying text.
    \34\ See Andrew Ackerman, Regulation: MSRB Files Disclosure 
Proposals; Board Offers Four New Rules to SEC, The Bond Buyer, July 
15, 2009. See also Proposing Release, supra note 2, 74 FR at 36834 
and n. 27.
    \35\ 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%.''). See also Proposing Release, supra 
note 2, 74 FR at 36834, n. 33.
    \36\ 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); see Proposing 
Release, supra note 2, 74 FR at 36834, n. 15. See also ICI Letter at 
5 (``We support the proposed amendment to improve VRDO disclosure * 
* *. Specifically, the availability of continuing disclosure 
information regarding VRDOs would greatly benefit investors by 
enhancing their ability to make and monitor their investment 
decisions and protect themselves from misrepresentations and 
questionable conduct in this segment of the municipal securities 
market.''), and Fidelity Letter at 2. Fidelity indicated in its 
letter that it assisted in the preparation of the ICI Letter and 
expressed support for all of the statements made in the ICI Letter.
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    The Commission believes that investors and other municipal market 
participants today should be able to obtain continuing disclosure 
information regarding demand securities so that they can make more 
knowledgeable investment decisions and effectively manage and monitor 
their investments so as to reduce the likelihood of fraud facilitated 
by inadequate disclosure. Accordingly, the Commission is modifying the 
exemption in the Rule, as discussed below, for demand securities \37\ 
by requiring

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Participating Underwriters to reasonably determine that the issuer of 
demand securities, or any obligated person, has undertaken in a written 
agreement to provide continuing disclosure documents to the MSRB.
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    \37\ See 17 CFR 240.15c2-12(d)(1)(iii). Specifically, the 
Commission is eliminating the exemption for primary offerings of 
demand securities contained in paragraph (d)(1)(iii) of the Rule and 
adding new paragraph (d)(5) to the Rule. Paragraph (d)(5) of the 
Rule, as revised, exempts 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 discussed in Section III.A. below, the Commission is adopting a 
modified version of its initial proposal to cover demand securities 
issued on or after the amendments' compliance date. As a result of 
these changes, Participating Underwriters, in connection with a 
primary offering of demand securities, will 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 will 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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    As discussed in detail below, the Commission is adopting, 
substantially as proposed, the amendments to Rule 15c2-12. In sum, the 
Commission is modifying, substantially as proposed, the Rule's 
exemption for demand securities by deleting current paragraph 
(d)(1)(iii) and adding new paragraph (d)(5) to the Rule, thereby 
applying the continuing disclosure requirements of paragraphs (b)(5) 
and (c) of the Rule \38\ to a primary offering of demand securities. 
The amendments also modify, as proposed, paragraph (b)(5)(i)(C) of the 
Rule, thereby requiring all Participating Underwriters to 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 in excess of ten business days, rather than merely 
in ``a timely manner.''
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    \38\ See supra notes 11 through 16 and accompanying text for a 
description of paragraph (b)(5) of the Rule. Paragraph (c) of the 
Rule 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 notification regarding any event notice and any 
failure to file notice related to the municipal security. See 17 CFR 
240.15c2-12(c).
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    In addition, the Commission is adopting, with a few revisions from 
the proposal in the Proposing Release, an amendment to paragraph 
(b)(5)(i)(C) of the Rule relating to adverse tax events. Under the 
amendment, as revised from the proposal in the Proposing Release, this 
event item includes ``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 status of the security or other material events affecting the tax 
status of the security.'' The amendments also add, as proposed, the 
following events to paragraph (b)(5)(i)(C) of the Rule: (1) Tender 
offers; (2) bankruptcy, insolvency, receivership or similar event of 
the issuer or 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.
    Finally, the amendments delete the general materiality condition 
from paragraph (b)(5)(i)(C) of the Rule. In connection with the 
deletion of the general materiality condition from paragraph 
(b)(5)(i)(C) of the Rule, the amendments also add a materiality 
condition to select events contained in paragraph (b)(5)(i)(C) of the 
Rule. For those events in paragraph (b)(5)(i)(C) of the Rule that do 
not contain a materiality condition, Participating Underwriters will 
now need to reasonably determine that an issuer or obligated person has 
undertaken in a written agreement to provide notice of such events in 
all circumstances. 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.

III. Discussion of Amendments and Comments Received

A. Modification of the Exemption for Demand Securities

    As discussed in the Proposing Release, generally there are no 
continuing disclosure agreements for demand securities today because 
primary offerings of these securities are currently exempt from the 
Rule.\39\ When the Rule was adopted in 1989, the Commission exempted 
demand securities from its coverage in response to concerns that the 
Rule ``might unnecessarily hinder the operation of the market'' \40\ 
for VRDOs, or similar securities. Paragraphs (b)(1) through (b)(4) of 
the Rule require a Participating Underwriter to review an official 
statement that the issuer ``deems final'' before it may bid for, 
purchase, offer, or sell municipal securities in an offering, deliver 
preliminary and final official statements to any potential customer, on 
request, and contract with the issuer to receive an adequate number of 
the final official statements to fulfill its regulatory 
responsibilities. Although remarketings of VRDOs may be primary 
offerings,\41\ the Commission did not impose the requirements of 
paragraphs (b)(1) through (b)(4) of the Rule on Participating 
Underwriters of each remarketing--which could occur as frequently as 
weekly, and sometimes even daily, for each outstanding demand 
security--in part because of the burden this could impose on 
Participating Underwriters to comply with the Rule's provisions.\42\ 
The Commission, in the 1994 Amendments Adopting Release, did not 
specifically address the application of paragraph (b)(5) of the Rule, 
which currently requires Participating Underwriters to reasonably 
determine that an issuer of municipal securities or an obligated person 
\43\ has undertaken in a continuing disclosure agreement to provide 
specified information to the MSRB, to remarketings of demand 
securities.\44\
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    \39\ See Proposing Release, supra note 2, 74 FR at 36836.
    \40\ See 1989 Adopting Release, supra note 8, 54 FR at 28808, n. 
68. See also Proposing Release, supra note 2, 74 FR at 36836.
    \41\ See Rule 15c2-12(f)(7) for the definition of ``primary 
offering.'' 17 CFR 240.15c2-12(f)(7). Making a determination 
concerning whether a particular remarketing of demand securities is 
a primary offering by the issuer of the securities requires an 
evaluation of relevant provisions of the governing documents, the 
relationship of the issuer to the other parties involved in the 
remarketing transaction, and other facts and circumstances 
pertaining to such remarketing, particularly with respect to the 
extent of issuer involvement.
    \42\ See 1989 Adopting Release, supra note 8, 54 FR at 28808 and 
n. 68. See also Proposing Release, supra note 2, 74 FR at 36836.
    \43\ The term ``obligated person'' means ``any person, including 
an issuer of municipal securities, who is either generally or 
through an enterprise, fund, or account of such person committed by 
contract or other arrangement to support payment of all, or part of 
the obligations of the municipal securities to be sold in the 
Offering (other than providers of municipal bond insurance, letters 
of credit, or other liquidity facilities).'' See 17 CFR 240.15c2-
12(f)(10).
    \44\ See 1994 Amendments Adopting Release, supra note 8.
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    As discussed above, the Commission today is modifying the Rule's 
exemption for demand securities because its experience with the 
operation of the Rule and market changes since the adoption of the 1994 
Amendments have suggested a need to reconsider its scope. The increased 
issuance, trading volume, and outstanding dollar amount of VRDOs 
indicate that many more investors currently own such securities than 
when the Rule was adopted in 1989.\45\ Further, despite the periodic

[[Page 33104]]

ability to tender VRDOs to issuers for repurchase, some investors, such 
as mutual funds, appear to hold VRDOs for long periods of time and 
therefore have a need for continuing disclosure information about the 
issuer or obligated person.\46\
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    \45\ As stated in the Proposing Release, the increased 
investment interest and activity in VRDOs during 2008 may be 
attributable, in part, to the turmoil in the market for auction rate 
securities (``ARS'') that began in February 2008. See Proposing 
Release, supra note 2, 74 FR at 36834 and 36835, n. 48.
    \46\ See Proposing Release, supra note 2, 74 FR at 36835, n. 45.
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    Accordingly, the Commission believes that developments since 1989 
warrant narrowing the Rule's provision exempting demand securities from 
continuing disclosure obligations in order to improve the availability 
of information to investors. Indeed, representatives of money market 
funds, the primary purchasers of demand securities, have expressed 
difficulty or, on some occasions, the inability to obtain information 
that they believe is necessary to oversee their investments in demand 
securities.\47\ By narrowing the exemption for demand securities, the 
Commission intends to improve the availability of continuing 
disclosures, not only to institutional investors, such as mutual funds, 
that acquire these securities for their portfolios, but also to 
individual investors who own, or who may be interested in owning, 
demand securities. The availability of information regarding demand 
securities, in turn, should help institutional and individual investors 
make more informed decisions with respect to investments in those 
securities and should reduce the likelihood that such investors will be 
subject to fraud facilitated by inadequate disclosure. The Commission 
believes that broader requirements for consistent and accurate 
disclosure of important information should enhance the efficiency of 
the relevant capital market segments by better allocating capital at 
appropriate prices.
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    \47\ See Proposing Release, supra note 2, 74 FR at 36836.
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    Consequently, the Commission is deleting the exemption for demand 
securities \48\ set forth in paragraph (d)(1)(iii) of the Rule and 
adding new paragraph (d)(5) to the Rule, thereby making the continuing 
disclosure provisions of paragraphs (b)(5) \49\ and (c) \50\ of the 
Rule apply to a primary offering \51\ of demand securities.\52\ This 
change applies to any primary offering of demand securities (including 
a remarketing that is a primary offering) occurring on or after the 
compliance date of the amendments.\53\ However, as more fully discussed 
below,\54\ the Commission is revising the amendment from that proposed 
to include a ``limited grandfather provision'' (as defined below) for 
remarketings of currently outstanding demand securities.\55\ 
Specifically, the continuing disclosure provisions will not apply to 
remarketings of demand securities that are outstanding in the form of 
demand securities on the day preceding the compliance date of the 
amendments and that continuously have remained outstanding \56\ in the 
form of demand securities.
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    \48\ See supra note 28 and accompanying text.
    \49\ See supra note 14 and accompanying text.
    \50\ See supra note 38 for a description of Rule 15c2-12(c).
    \51\ See Rule 15c2-12(f)(7) for the definition of primary 
offering. 17 CFR 240.15c2-12(f)(7).
    \52\ See supra note 41.
    \53\ As noted in Section III.G., the compliance date of the 
amendments to the Rule adopted herein is December 1, 2010.
    \54\ See infra notes 111 and 112 and accompanying text, as well 
as the paragraph following the accompanying text.
    \55\ See infra note 112 and accompanying text for discussion of 
comments related to the limited grandfather provision.
    \56\ ``Outstanding'' generally means bonds that have been issued 
but have not yet matured or been otherwise redeemed. See, e.g, MSRB 
Glossary of Municipal Security Terms at http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=o.
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    Thus, as amended, paragraph (d)(2)(B)(5) of the Rule states that 
``[w]ith the exception of paragraphs (b)(1) through (b)(4), this 
section shall 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; provided, however, that paragraphs (b)(5) and (c) 
shall not apply to such securities outstanding as of November 30, 2010 
for so long as they continuously remain in authorized denominations of 
$100,000 or more and 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'' (emphasis added to indicate revised 
language) (``limited grandfather provision'').\57\
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    \57\ The Commission also is slightly modifying the text of 
paragraph (d)(2)(B)(5) of the Rule from the version in the Proposing 
Release to clarify that demand securities remain exempt from 
paragraphs (b)(1)-(4) of the Rule, consistent with the Commission's 
description and discussion of the amendment in the Proposing 
Release.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on 
whether it is appropriate to revise the Rule's exemption for demand 
securities. The Commission specifically requested comment regarding 
investors' and other municipal market participants' need for continuing 
disclosure information relating to demand securities and the extent to 
which the amendment would provide benefits to these individuals. The 
Commission also requested comment regarding the effect of the amendment 
on Participating Underwriters, issuers, obligated persons, and others.
    Commenters were generally supportive of applying the continuing 
disclosure provisions of paragraph (b)(5) of the Rule to demand 
securities, so that a Participating Underwriter of these securities 
will be required to reasonably determine that the issuer or obligated 
person has entered into a continuing disclosure agreement to submit 
continuing disclosure documents to the MSRB.\58\ A number of commenters 
agreed that applying continuing disclosure obligations to demand 
securities is ``critical'' to assist investors in making informed 
investment decisions.\59\ One commenter noted that the market for VRDOs 
was among the sectors most affected by the recent market turmoil and, 
consequently, there is good reason to increase the availability of 
information about these securities to investors.\60\ Similarly, another 
commenter stated that, during the recent market downturn, investors in 
VRDOs were well served by those issuers or obligated persons who 
voluntarily provided continuing

[[Page 33105]]

disclosure documents, despite the Rule's exemption.\61\
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    \58\ See California Letter at 1, CHEFA Letter at 2, Connecticut 
Letter at 1, DAC Letter at 3, e-certus Letter I at 11, Fidelity 
Letter at 3, Folts Letter at 1, ICI Letter at 2, NFMA Letter at 1, 
RBDA Letter at 2, and SIFMA Letter at 2.
     Although the Commission is eliminating certain exemptions, 
demand securities will continue to be exempt from paragraphs (b)(1)-
(4) of the Rule. In other words, a Participating Underwriter of a 
demand security will continue to be exempt from the obligation to 
review an official statement that the issuer ``deems final'' before 
it may bid for, purchase, offer, or sell municipal securities. Some 
commenters urged the Commission to eliminate the exemption for 
demand securities from these provisions. See Fidelity Letter at 3 
and RBDA Letter at 2, and SIFMA Letter at 2. One commenter expressed 
concern that not requiring Participating Underwriters to comply with 
these provisions with regard to demand securities suggests that the 
information required in the continuing disclosure documents may not 
be material for investors at the initial issuance of the demand 
securities. See SIFMA Letter at 2. The Commission believes that it 
is important for investors to have adequate information in order to 
make informed investment decisions. The Commission also notes that 
many official statements are prepared for demand securities. See 
http://www.emma.msrb.org.
    \59\ See ICI Letter at 5. See also SIFMA Letter at 2 and RBDA 
Letter at 2.
    \60\ See RBDA Letter at 2. See also Fidelity Letter at 2.
    \61\ See CHEFA Letter at 2.
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    Further, two commenters noted that application of paragraph (b)(5) 
of the Rule to demand securities might not significantly increase the 
disclosure burdens for many issuers and obligated persons.\62\ One 
commenter noted that, because many VRDO issuers are already subject to 
continuing disclosure undertakings for their fixed rate debt, extending 
these obligations to VRDOs would impose minimal additional burdens, 
while enhancing disclosure to a much broader segment of investors.\63\ 
Two commenters also noted that, as issuers of VRDOs, they have for a 
number of years voluntarily entered into continuing disclosure 
undertakings for those securities.\64\
---------------------------------------------------------------------------

    \62\ See Connecticut Letter at 1 and NFMA Letter at 1.
    \63\ See NFMA Letter at 1.
    \64\ See California Letter at 1 and Connecticut Letter at 1.
---------------------------------------------------------------------------

    Two commenters, however, disputed the assessment that extending 
paragraph (b)(5) to demand securities would not significantly increase 
the disclosure burdens for issuers and obligated persons.\65\ These 
commenters focused particularly on the impact the amendment would have 
on borrowers who access tax-exempt debt markets through demand 
securities that are fully backed by direct-pay letters of credit 
(``LOC-backed demand securities''). One of the commenters noted that 
many of these are non-governmental conduit borrowers \66\ who have no 
previous undertakings to provide continuing disclosure information and, 
for such entities, complying with paragraph (b)(5) of the Rule would 
not merely be an extension of preexisting obligations but a new and 
significant burden.\67\ Moreover, the two commenters opposing the 
proposed change stated that many obligated persons with respect to LOC-
backed demand securities do not prepare annual filings, such as audited 
financial statements, in the ordinary course of their business.\68\ 
They therefore believed that eliminating the exemption from paragraph 
(b)(5) would impose costs and burdens that could potentially force some 
conduit borrowers using LOC-backed demand securities to withdraw from 
the tax-exempt bond market.\69\
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    \65\ See CRRC Letter at 3-5 and NABL Letter at A-10.
    \66\ A ``conduit borrower'' is an obligated person for whose 
benefit a state, political subdivision, municipality, or 
governmental agency or authority may issue tax-exempt municipal 
bonds. The security for this type of issue is customarily the credit 
of the conduit borrower or pledged revenues from the project 
financed, rather than the credit of the issuer. See, e.g., 
definitions of ``conduit financing,'' ``conduit borrower,'' and 
``issuer'' in Glossary of Municipal Securities Terms (Second 
Edition--January 2004) of the MSRB, available at http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=c.
    \67\ See NABL Letter at A-2, n. 1.
    \68\ See CRRC Letter at 5 and NABL Letter at A-2.
    \69\ See CRRC Letter at 5 and NABL Letter at A-10. Two 
commenters also expressed concern that, in complying with the 
revised Rule, smaller and not-for-profit obligated persons could 
encounter similar costs and burdens. See NABL Letter at A-2 (noting 
that many small businesses and non-profit organizations utilize LOC-
backed demand securities in accessing the tax-exempt debt markets) 
and SIFMA Letter at 2-3. See also Section VI.B.2(c).
---------------------------------------------------------------------------

    As the Commission stated in the Proposing Release, it does not 
anticipate a significant increase in disclosure burdens with respect to 
demand securities.\70\ Those issuers with outstanding demand 
securities--including LOC-backed demand securities--will have the 
limited grandfather provision available to them, and thus likely will 
not be subject to an undertaking to provide continuing disclosures for 
those securities. The Commission acknowledges that, if issuers of 
demand obligations, or obligated persons, have not previously issued 
securities that were subject to the Rule (i.e., municipal securities 
other than demand securities), they will be entering into a continuing 
disclosure agreement for the first time and thereby will incur some 
costs and burdens to provide continuing disclosure documents to the 
MSRB.\71\ However, as the Commission noted in proposing these 
amendments, a number of issuers of VRDOs, and obligated persons, 
already have outstanding fixed rate municipal securities, and some of 
these securities likely are subject to continuing disclosure agreements 
under the Rule.\72\ Because any existing continuing disclosure 
agreement obligates an issuer or an obligated person to provide annual 
filings, event notices, and failure to file notices with respect to 
these fixed rate securities, providing disclosures by such issuers or 
obligated persons with respect to VRDOs is not expected to be a 
significant additional burden.\73\ As the Commission stated in 
proposing these amendments,\74\ it believes that any additional burden 
on issuers and obligated persons \75\ with respect to demand securities 
is, on balance, justified by the enhancements to investor protection 
that should result from the improved availability of information with 
respect to these securities as a result of the amendments.\76\ As noted 
above, a number of commenters supported this view.\77\
---------------------------------------------------------------------------

    \70\ See Proposing Release, supra note 2, 74 FR at 36837.
    \71\ Id.
    \72\ See Proposing Release, supra note 2, 74 FR at 36837.
    \73\ See infra Section V.D. for a discussion regarding burden on 
issuers and obligated persons that do not currently provide annual 
filings, event notices, or failure to file notices.
    \74\ See Proposing Release, supra note 2, 74 FR at 36837.
    \75\ The Commission estimates that the amendment to modify the 
exemption from the Rule for a primary offering of demand securities 
would increase the number of issuers with municipal securities 
offerings that are subject to the Rule annually by 20%. See infra 
Section V.D.
    \76\ For discussion of the burdens associated with the 
modification of the Rule as it relates to demand securities, see 
supra Section V.D.
    \77\ See, e.g., CHEFA Letter at 2, Connecticut Letter at 1, e-
certus Letter I at 11, Folts Letter at 1, ICI Letter at 5, NFMA 
Letter at 1, RBDA Letter at 2, and SIFMA Letter at 2.
---------------------------------------------------------------------------

    Regarding the concern that any new disclosure burdens may induce 
some obligated persons to withdraw from the tax-exempt municipal market 
because they do not prepare annual filings in the ordinary course of 
their business, the Commission notes that, for purposes of the Rule, 
annual filings are required only to the extent provided in the final 
official statements. Specifically, annual filings are composed of: (1) 
Audited financial statements, when and if available; and (2) other 
financial and operating data of the type included in the official 
statement. Pursuant to the undertaking contemplated by the Rule, annual 
financial information must be submitted for ``each obligated person for 
whom financial information or operating data is presented in the final 
official statement. * * * '' \78\ Annual financial information is 
defined as ``financial information or operating data * * * of the type 
included in the final official statement with respect to an obligated 
person. * * * '' \79\ As the Commission previously stated, the 
definition of annual financial information specifies both the timing of 
the information--that is, once a year--and, by referring to the final 
official statement, the type of financial information and operating 
data that is to be provided.\80\ If financial information or operating 
data concerning an obligated person is included in the final official 
statement, then annual financial information would consist of the same 
type of financial information or operating data.\81\
---------------------------------------------------------------------------

    \78\ 17 CFR 240.15c2-12(b)(5)(i)(A).
    \79\ 17 CFR 240.15c2-12(f)(9).
    \80\ See 1994 Amendments Adopting Release, supra note 8, 59 FR 
at 59598.
    \81\ Id. See paragraph (f)(3) of the Rule for the definition of 
``final official statement.'' 17 CFR 240.15c2-12(f)(3).

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[[Page 33106]]

    Further, pursuant to paragraph (b)(5)(i)(B) of the Rule, audited 
financial statements need to be submitted, pursuant to the issuer's and 
obligated person's undertaking in a continuing disclosure agreement, 
only ``when and if available.'' \82\ This limitation, which is 
consistent with the Commission's position in the 1994 Amendments 
Adopting Release, should mitigate some concerns of those obligated 
persons that do not prepare audited financial statements in the 
ordinary course of their business.\83\ Further, although not all 
issuers or obligated persons, in the ordinary course of their business, 
prepare audited financial statements or other financial and operating 
information of the type included in annual filings, a number of issuers 
and obligated persons do.\84\
---------------------------------------------------------------------------

    \82\ 17 CFR 240.15c2-12(b)(5)(i)(B).
    \83\ As discussed in the 1994 Amendments Adopting Release, the 
1994 Amendments ``[do] not adopt the proposal to mandate audited 
financial statements on an annual basis with respect to each issuer 
and significant obligor. Instead, the amendments require annual 
financial information, which may be unaudited, and may, where 
appropriate and consistent with the presentation in the final 
official statement, be other than full financial statements. * * * 
However, if audited financial statements are prepared, then when and 
if available, such audited financial statements will be subject to 
the undertaking and must be submitted to the repositories. Thus * * 
* the undertaking must include audited financial statements only in 
those cases where they otherwise are prepared.'' See 1994 Amendments 
Adopting Release, supra note 8, 59 FR at 59599.
    \84\ See http://www.emma.msrb.org for audited financial 
statements or other financial and operating information submitted to 
EMMA.
---------------------------------------------------------------------------

    The Commission acknowledges that issuers or obligated persons of 
demand obligations that assemble financial and operating data for the 
first time in response to their undertakings in a continuing disclosure 
agreement may incur incremental costs beyond those costs incurred by 
those issuers or obligated persons that already assemble this 
information. Also, smaller issuers or obligated persons may have 
relatively greater burdens than larger issuers or obligated persons. 
However, the overall burdens for these demand securities issuers or 
obligated persons in preparing financial information are expected to be 
commensurate with those of issuers or obligated persons that already 
are preparing financial information as part of their continuing 
disclosure undertakings.\85\ The Commission believes that the burdens 
that will be incurred in the aggregate by issuers or obligated persons, 
as a result of the amendments with respect to demand securities, may 
not be significant and, in any event, are justified by the benefits to 
investors of enhanced disclosure.\86\ The Commission further believes 
that the operations of an issuer or obligated person generally entail 
the preparation and maintenance of at least some financial and 
operating data.
---------------------------------------------------------------------------

    \85\ Further, issuers or obligated persons that assemble 
financial and operating data for the first time may face a greater 
burden than those issuers or obligated persons that already assemble 
this information. The amendments therefore initially may have a 
disparate impact on those issuers or obligated persons, including 
small entities, entering into a continuing disclosure agreement for 
the first time, as compared with those that already have outstanding 
continuing disclosure agreements.
    \86\ See infra Section V.D. As discussed therein, some 
commenters believed that the amendment could force some small 
entities to withdraw from the tax-exempt market because: (1) 
Disclosure of small issuers' or obligated persons' financial 
information would provide their large, national competitors with 
information about these small issuers or obligated persons, which 
they believed could result in a competitive disadvantage to them; 
and (2) small issuers or obligated persons would have to prepare 
costly audited financial statements. See, e.g., CRRC Letter at 3-4 
and WCRRC Letter at 1. As discussed above, the undertakings 
contemplated by the amendments (and Rule 15c2-12 in general) require 
annual financial information only to the extent provided in the 
final official statement, and audited financial statements only when 
and if available.
---------------------------------------------------------------------------

    The Commission also stated in the Proposing Release, and reiterates 
herein, its belief that the application of paragraph (b)(5) to demand 
securities will not significantly burden Participating Underwriters in 
connection with the initial issuance and remarketing of demand 
securities. Any primary offering, including a remarketing of demand 
securities that is a primary offering (other than those subject to the 
limited grandfather provision), that occurs on or after the compliance 
date of the Rule will require a Participating Underwriter (including a 
Participating Underwriter serving as a remarketing agent) \87\ to make 
a determination that an issuer or an obligated person has entered into 
a continuing disclosure agreement. Subsequent determinations for 
remarketings of the same issue of demand securities should not be 
burdensome because, once the Participating Underwriter has made such a 
determination for a particular issue of demand securities, at the time 
of a subsequent remarketing, the Participating Underwriter will be 
aware of the existence of the continuing disclosure agreement. 
Furthermore, remarketing agents that did not previously participate in 
an offering of such securities could confirm that an issuer or an 
obligated person has entered into an undertaking by obtaining an 
official statement from the issuer, the MSRB,\88\ or from a variety of 
vendors. Such an official statement by definition must include a 
description of the issuer's undertakings.\89\ In addition, a 
remarketing agent could obtain a copy of the actual continuing 
disclosure agreement from the issuer or obligated person at the time 
that it enters into a contract to act as a remarketing agent.\90\
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    \87\ 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 Proposing 
Release, supra note 2, 74 FR at 36836, n. 53. Further, a remarketing 
agent often serves as the Participating Underwriter in the initial 
issuance of the demand security.
    \88\ The MSRB makes official statements for public offerings of 
municipal securities available on the Internet through its EMMA 
system for free. 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). See also supra note 5 and 
MSRB Rule G-32.
    \89\ 17 CFR 240.15c2-12(f)(3).
    \90\ One commenter believed the elimination of the exemption for 
LOC-backed demand securities would substantially increase a 
Participating Underwriter's burden in offering and remarketing these 
securities because the Participating Underwriter must: (1) Determine 
whether information concerning the obligated person is material and 
(2) if material, review the offering document to assure that it 
includes financial or operating data about the obligated person. In 
addition, this commenter stated that a Participating Underwriter 
would be required by the antifraud provisions of the Securities Act 
of 1933 and the Exchange Act to reasonably investigate key 
representations about the obligated person in the offering document 
before passing the securities along to investors and periodically 
repeat its ``due diligence'' of the obligated person before acting 
as a remarketing agent for primary offerings of such demand 
securities. See NABL Letter at A-11. However, such obligations of a 
Participating Underwriter already exist under the antifraud 
provisions of the federal securities laws.
---------------------------------------------------------------------------

    Some commenters argued that the amendment is too broad.\91\ 
Specifically, these commenters stated that the amendment should not 
apply to conduit borrowers of LOC-backed demand securities, but rather 
to the letter of credit providers.\92\ They stated that, for

[[Page 33107]]

these securities, a bond trustee draws on the letters of credit issued 
by banks or financial institutions, rather than the underlying 
borrowers, for all payments of interest and principal, and to 
repurchase the securities if and when they are tendered.\93\ 
Consequently, information in disclosure documents for some LOC-backed 
demand securities relates to the entities issuing the letters of 
credit, and not the conduit borrowers.\94\ These commenters argued 
that, if the Commission applies paragraph (b)(5) of the Rule to LOC-
backed demand securities,\95\ the obligation to provide continuing 
disclosures should be imposed on the banks and financial institutions 
that provide credit enhancements, and not on the conduit borrowers.\96\
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    \91\ See CRRC Letter at 2, NABL Letter at 2, and WCRRC Letter at 
1 (endorsing CRRC Letter in its entirety). One of these commenters 
maintained that the Commission should not adopt the amendment 
relating to demand securities without Congressional authority. The 
commenter stated that the Commission does not have the ``statutory 
authority to regulate the content of prospectuses used to offer 
exempt securities, except possibly under the authority of the 
antifraud provisions of the federal securities laws.'' See NABL 
Letter at A-7. The Commission notes that the amendments do not 
address the contents of prospectuses used to offer exempt securities 
and, instead, are being adopted, among other things, pursuant to its 
authority under Section 15(c)(2)(D) of the Exchange Act, 15 U.S.C. 
78o(c)(2)(D), which grants the Commission authority to define, and 
to prescribe means reasonably designed to prevent, such acts and 
practices as are fraudulent, deceptive or manipulative.
    \92\ See CRRC Letter at 2 and NABL Letter at 2.
    Separately, another commenter remarked about the 
responsibilities of an issuer with respect to the underlying obligor 
of a demand security. The commenter stated that, ``if it is the 
SEC's intention to have issuers disclose information either in the 
official statement or on a continuing basis regarding the underlying 
obligor,'' issuers would be significantly burdened because they do 
not have such information first-hand. See GFOA Letter at 2. The 
Commission notes that its rulemaking does not amend provisions of 
Rule 15c2-12 relating to official statements. The Commission notes 
that, as with other conduit borrowings, issuers may require an 
obligated person of demand obligations to execute a continuing 
disclosure agreement as a condition of issuance, such that the 
underlying obligor bears the responsibility of providing continuing 
disclosures to the MSRB.
    \93\ Id. See also NABL Letter at A-1.
    \94\ See CRRC Letter at 2 and NABL Letter at A-2 and A-6.
    \95\ See CRRC Letter at 2-3 and NABL Letter at 1-2.
    \96\ See CRRC Letter at 3.
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    As noted in the Proposing Release, the Commission believes that 
information regarding conduit borrowers is material to investors in 
credit enhanced offerings and therefore should be included in the 
official statements.\97\ As the Commission has stated before in the 
context of municipal securities offerings as well as other types of 
securities offerings, the existence of credit enhancement is not a 
substitute for information about the underlying obligor or other 
obligated entity.\98\ For example, Regulation AB, relating to 
disclosures in offerings of asset-backed securities, requires 
disclosure about the underlying pool of assets in addition to 
disclosures about credit enhancement and credit enhancement 
providers.\99\ Furthermore, for VRDOs, as well as fixed rate 
securities, many governmental issuers and conduit borrowers routinely 
provide full disclosure about themselves in official statements, 
suggesting that they consider this information to be useful to 
investors.\100\ The Commission also notes that it is possible for the 
issuers of credit enhancements, including letters of credit providers, 
to default on their obligations\101\ or to have their ratings 
downgraded.\102\ The possibility of such occurrences supports the 
likelihood that investors would consider information concerning the 
underlying obligor important to making investment decisions.
---------------------------------------------------------------------------

    \97\ See Proposing Release, supra note 2, 74 FR at 36844, n. 
113, citing 1989 Adopting Release, supra note 8, 54 FR at 28812.
    \98\ See 1989 Adopting Release, supra note 8, 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.'')
    \99\ 17 CFR 229.1100-1123.
    \100\ For example, governmental obligors, non-profit health care 
facilities, colleges, and universities routinely provide disclosures 
about themselves in official statements. See, e.g., Connecticut 
Letter at 1; Official Statement dated November 4, 2009 for VRDOs 
issued by the Arizona Health Facilities Authority for the benefit of 
Catholic Healthcare West (available at http://emma.msrb.org/EP346945-EP47480-EP669523.pdf); Official Statement dated August 22, 
2008 for VRDOs issued by the Health and Educational Authority of the 
State of Missouri for the benefit of Saint Louis University 
(available at http://emma.msrb.org/OSPreview/OSPreview.aspx?documentId=MS271933&transactionId=MS274477); Official 
Statement dated October 12, 1994 for VRDOs of the City of Akron Ohio 
for its Sanitary Sewer System (available at http://emma.msrb.org/OSPreview/OSPreview.aspx?documentId=MS80311&transactionId=MS105003); 
and Official Statement dated April 15, 2005 for VRDOs of the 
Redevelopment Agency of the City and County of San Francisco 
Community Facilities District No. 7 for Hunters Point Shipyard Phase 
One Improvements (available at http://emma.msrb.org/MS233193-MS208501-MD405363.pdf).
    \101\ Since 1995, the Federal Deposit Insurance Corporation 
(``FDIC'') has taken the position that it may not honor unsecured 
letters of credit issued by financial institutions that are placed 
in FDIC receivership. See FDIC Statement of Policy regarding 
Treatment of Collateralized Letters of Credit after Appointment of 
the FDIC as Conservator or Receiver, 60 FR 27976, May 26, 1995, 
effective May 19, 1995.
    \102\ See Proposing Release, supra note 2, 74 FR at 36839. In 
addition to the ratings downgrades of almost all issuers of 
municipal bond insurance over the past two years, the ratings of 
many issuers of letters of credit on municipal bonds were downgraded 
by one or more credit rating agencies. See, e.g., Jack Herman, S&P 
Downgrades Ratings or Revises Outlooks on 22 Banks, The Bond Buyer, 
June 19, 2009 (``Standard & Poor's Wednesday downgraded its ratings 
or revised its outlooks on 22 U.S. banks--more than half of which 
have provided letters of credit on municipal securities--to reflect 
the ongoing change in the banking industry.''); Dan Seymour, 1st-
Half Credit Enhancers See a Topsy-Turvy World, The Bond Buyer, July 
16, 2009.
---------------------------------------------------------------------------

    With respect to demand securities, one commenter stated that the 
Rule should not be amended to apply continuing disclosure requirements 
to demand securities, because owners of demand securities can choose to 
terminate their investment by exercising the option to put such 
securities for repurchase at face value or more, at least as frequently 
as every nine months.\103\ The commenter argued that these investors 
can therefore sufficiently protect their investments.\104\ Further, the 
commenter noted that when investors need financial and operating data 
to evaluate their investments, they are able to get such information 
from conduit borrowers, who typically provide the information 
voluntarily in order to support pricing and remarketing.\105\ The 
commenter also questioned the need for the amendment when investors, as 
a condition to purchasing or maintaining an investment in demand 
securities, are free to demand undertakings to provide notices of 
certain events.\106\
---------------------------------------------------------------------------

    \103\ See NABL Letter at A-4--A-6.
    \104\ Id.
    \105\ See NABL Letter at A-8.
    \106\ See NABL Letter at A-8 and A-9.
---------------------------------------------------------------------------

    The Commission does not believe that an investor's ability to 
tender a demand security for repurchase obviates the need for 
continuing disclosures. While a holder of demand obligations, such as 
VRDOs, may tender these securities for repurchase at par value,\107\ 
when the investor is unable to obtain necessary information to make an 
informed decision as to whether to continue to hold demand securities, 
the investor may have no other option but to tender. However, the 
Commission does not believe that such outcome is in the interest of the 
investing public or the municipal securities market. Without adequate 
information about the issuer or obligated person, including annual 
financial information and audited annual financial statements, it would 
be difficult for an investor to evaluate whether to buy, hold, sell, or 
put the security. Moreover, most holders of VRDOs are money market 
funds\108\ subject to the requirements of Rule 2a-7 under Investment 
Company Act of 1940 (``Investment Company Act''),\109\ with an 
obligation to monitor the securities in their funds.\110\ The 
availability of continuing disclosure information should facilitate the 
fulfillment of these obligations. The Commission also notes that one 
commenter, whose membership includes many money market funds, stated 
that ``the availability of continuing disclosure information regarding 
VRDOs would greatly benefit investors by enhancing their ability to 
make and monitor their investment decisions and protect themselves from 
misrepresentations and questionable

[[Page 33108]]

conduct in this segment of the municipal securities market.'' \111\
---------------------------------------------------------------------------

    \107\ See 17 CFR 240.15c2-12(d)(1)(iii).
    \108\ See, e.g., Standard & Poor's, Variable Rate Demand 
Obligations--A Primer: A Short Guide to Variable Rate Demand 
Obligations and the S&P National AMT-Free Municipal VRDO Index, 
November 1, 2009 (available at http://www2.standardandpoors.com/spf/pdf/index/VRDO_Primer.pdf).
    \109\ 17 CFR 270.2a-7.
    \110\ 17 CFR 270.2a-7(c)(3)(iv).
    \111\ See ICI Letter at 6. See also Fidelity Letter at 2.
---------------------------------------------------------------------------

    Some commenters sought clarification with respect to the proposed 
amendment relating to demand securities. Specifically, some commenters 
asked the Commission to clarify the meaning of ``primary offering'' 
with respect demand securities \112\ and asked for guidance to 
distinguish remarketings that are primary offerings requiring 
continuing disclosure agreements from those that are not primary 
offerings.\113\ These comments appear to be based upon the concern that 
the amendments could require a broker, dealer, or municipal securities 
dealer to obtain continuing disclosure documents for demand securities 
that were issued prior to the compliance date of the amendments.
---------------------------------------------------------------------------

    \112\ See Kutak Letter at 2, NABL Letter at 4-5 and A-11, and 
SIFMA Letter at 2.
    \113\ Id.
---------------------------------------------------------------------------

    The Commission acknowledges that, although there may be beneficial 
effects from subjecting outstanding demand obligations to paragraphs 
(b)(5) and (c) of the Rule, regardless of their date of initial 
issuance, doing so may be unduly burdensome and costly for certain 
market participants. For example, if all outstanding issuances of 
demand securities, such as VRDOs which generally are long-term 
securities,\114\ became subject to paragraph (b)(5)(i)(C) of the Rule, 
it would be necessary for a Participating Underwriter, in the first 
remarketing of each issue of demand securities following the compliance 
date of the amendments, to reasonably determine that an issuer or 
obligated person has executed a continuing disclosure agreement. For 
such an agreement to be consistent with the Rule, a Participating 
Underwriter must reasonably determine that the issuer or obligated 
person has agreed to provide ``[a]nnual financial information for each 
obligated person for whom financial information or operating data is 
presented in the final official statement, or, for each obligated 
person meeting the objective criteria specified in the undertaking and 
used to select the obligated persons for whom financial information or 
operating data is presented in the final official statement.'' \115\ 
However, for outstanding issues of demand securities, referring back to 
information included in the final official statement may be problematic 
because that document may be many years old. Without the limited 
grandfather provision, issuers and obligated persons would be required 
under continuing disclosure agreements to update annual financial 
information that may no longer be prepared or available. In addition, 
application of the amendments to remarketings of demand securities 
occurring on or after the compliance date could necessitate a large 
number of issuers and obligated persons of demand securities to enter 
into continuing disclosure agreements in a very short time period, 
which could delay remarketings and temporarily negatively impact the 
market for demand securities.
---------------------------------------------------------------------------

    \114\ See supra Section II. for statistics on the amount of 
outstanding VRDOs.
    \115\ 17 CFR 240.15c2-12(b)(5)(i)(A).
---------------------------------------------------------------------------

    The Commission has considered the potentially significant 
difficulties and costs associated with implementing the amendment with 
respect to outstanding demand securities and the potential negative 
implications this may have on the demand securities market and 
investors.\116\ As a result, the Commission has revised its original 
proposal to include a limited grandfather provision so that paragraphs 
(b)(5) and (c) of the Rule are not applicable to demand obligations 
outstanding in the form of demand securities immediately prior to the 
compliance date of these amendments, and that have remained 
continuously outstanding in the form of demand securities.\117\ The 
Commission believes that the adoption of the limited grandfather 
provision strikes an appropriate balance between the need to improve 
disclosure available to investors and the recognition that the 
practical effects of applying paragraphs (b)(5) and (c) of the Rule to 
outstanding issues of demand securities could unduly burden certain 
issuers and obligated persons and thus may adversely impact the market. 
Although the Commission recognizes that the amendment to demand 
securities now is narrower than what was originally proposed, the 
Commission does not believe that the change detracts from the benefits 
of greater information about new issuances of demand obligations that 
the amendment will foster. The Commission believes that the burdens of 
continuing disclosure obligations, noted above, with respect to these 
securities justify the benefits, and the grandfather provision is 
consistent with other amendments that have been applied on a 
prospective basis.\118\ Further, the Commission notes that some issuers 
and obligated persons of demand securities also have issued fixed rate 
municipal securities, and thus are subject to existing continuing 
disclosure obligations.
---------------------------------------------------------------------------

    \116\ See infra Section VI.B. for a detailed description of 
costs associated with implementing this change.
    \117\ Two commenters also expressed confusion regarding the 
application of paragraph (b)(5)(i)(A) of the Rule to demand 
securities. Paragraph (b)(5)(i)(A) requires that continuing 
disclosure agreements include annual financial information for each 
obligated person for whom financial information or operating data is 
presented in the final official statement. These commenters 
specifically questioned how Participating Underwriters would comply 
with the requirement in the limited instances where no final 
official statement was or is produced with respect to a demand 
security or when the final official statement that is produced 
contains no information regarding the underlying obligor. See NABL 
Letter at 2-3 and A-9 and SIFMA Letter at 2. The Commission believes 
that demand securities are purchased primarily by tax-exempt money 
market funds and that money market funds typically require official 
statements. See, e.g., Kutak Letter at 2 (commenting that VRDOs are 
typically targeted to money market funds) and NABL Letter at A-1 
(acknowledging that demand securities are an important part of the 
investment portfolio of most tax-exempt money market funds).
    \118\ See also infra Section VI.B.4.
---------------------------------------------------------------------------

    In conclusion, the Commission continues to believe that any 
additional burden imposed on Participating Underwriters, issuers, 
obligated persons, the MSRB, or others as a result of the amendment to 
the Rule relating to demand securities is justified by the benefits to 
investors of enhanced disclosure with respect to this important and 
widely-held type of security. Eliminating the exemption for demand 
securities, subject to the limited grandfather provision regarding 
demand securities outstanding as of the day prior to the amendments' 
compliance date, will improve the availability of information about 
these securities and should reduce the likelihood that investors will 
be subject to fraud facilitated by inadequate disclosure. Further, 
access to more information will assist money market funds \119\ in 
complying with their obligations under Rule 2a-7 of the Investment 
Company Act.\120\ The Commission also believes that the amendment will 
assist a broker, dealer, or municipal securities dealer in fulfilling 
its responsibilities to its customers,\121\ specifically by 
facilitating the disclosure of important facts and complying with 
suitability and other sales practice obligations.\122\
---------------------------------------------------------------------------

    \119\ See supra note 47.
    \120\ 17 CFR 270.2a-7.
    \121\ For example, a broker, dealer, or municipal securities 
dealer with access to annual filings and event notices submitted to 
the MSRB will be able to use information disclosed in these filings 
and notices when deciding to recommend the purchase or sale of a 
particular demand security. See, e.g., MSRB Rule G-17.
    \122\ See, e.g., the 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).

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[[Page 33109]]

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

    The Commission is adopting the amendment to paragraph (b)(5)(i)(C) 
of the Rule \123\ 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,'' rather than ``in a timely manner'' as the 
Rule currently provides. The Commission also is adopting a 
substantially similar revision to the limited undertaking in paragraph 
(d)(2)(ii)(B) of the Rule.\124\
---------------------------------------------------------------------------

    \123\ 17 CFR 240.15c2-12(b)(5)(i)(C).
    \124\ 17 CFR 240.15c2-12(d)(2)(ii)(B). See supra note 16 for a 
description of Rule 15c2-12(d)(2).
---------------------------------------------------------------------------

    Eighteen commenters provided their views on the proposed ten 
business day time period for the submission of event notices pursuant 
to a continuing disclosure agreement.\125\ The majority of commenters 
opposed the proposal. Some commenters opposed establishing any outside 
time frame,\126\ while others specifically objected to the proposed ten 
business day time period, particularly in the context of certain 
events.\127\ One commenter cited the 1994 Amendments Adopting Release, 
in which the Commission stated that, at that time, it had not 
established a specific time frame with respect to submission of event 
notices because of the wide variety of events and circumstances the 
issuer could face.\128\ This commenter believed that this rationale 
``was sound logic in 1994, and that it should still apply in 2009.'' 
\129\ Another commenter stated that it disagreed ``with the SEC that 
there is systemic abuse with material events not being filed in a 
timely manner'' \130\ and argued that the Commission ``should not 
mandate a specific time frame for submissions.'' \131\
---------------------------------------------------------------------------

    \125\ See Halgren Letter, Los Angeles Letter, Portland Letter, 
CRRC Letter, WCRRC Letter, NFMA Letter, CHEFA Letter, NAHEFFA 
Letter, SIFMA Letter, Connecticut Letter, Kutak Letter, ICI Letter, 
Fidelity Letter, California Letter, San Diego Letter, NABL Letter, 
GFOA Letter, and Metro Water Letter. See also 1994 Amendments 
Adopting Release, supra note 8, 59 FR at 59601.
    \126\ See NABL Letter at 5-6, GFOA Letter at 2-3, and Metro 
Water Letter at 1-2.
    \127\ See Halgren Letter, Los Angeles Letter, Portland Letter, 
CRRC Letter, WCRRC Letter, NFMA Letter, CHEFA Letter, NAHEFFA 
Letter, SIFMA Letter, Connecticut Letter, Kutak Letter, California 
Letter, and San Diego Letter. See also the discussion below in this 
section regarding commenters' concerns about becoming aware of and 
submitting notices for events such as rating changes and trustee 
changes.
    \128\ See NABL Letter at 5-6.
    \129\ Id.
    \130\ See GFOA Letter at 2.
    \131\ Id.
---------------------------------------------------------------------------

    Four commenters expressed support for the ten business day time 
frame.\132\ Two of these commenters stated that the proposal ``would 
replace the imprecise `timely manner' language in the current Rule.'' 
\133\ These commenters also noted that ``the absence of a specific time 
period with respect to `timely' has resulted in event notices being 
submitted months after the events have occurred,'' \134\ which has been 
detrimental ``to investors who need this information to make informed 
investment decisions about when, and which, municipal securities to buy 
and sell.'' \135\ Further, they emphasized that they ``strongly support 
the establishment of a definitive timeframe by which event notices must 
be filed, and have repeatedly called for improvements to the timeliness 
of municipal securities disclosure.'' \136\
---------------------------------------------------------------------------

    \132\ See NFMA Letter at 1-2, SIFMA Letter at 3, ICI Letter at 
6-7, and Fidelity Letter at 2. Fidelity indicated in its letter that 
it assisted in the preparation of the ICI Letter II and expressed 
support for all of the statements made in the ICI Letter. See 
Fidelity Letter at 2.
    \133\ See ICI Letter at 6 and Fidelity Letter at 2.
    \134\ Id.
    \135\ Id.
    \136\ Id.
---------------------------------------------------------------------------

    These commenters noted that timely submission of event notices 
directly impacts the pricing of a municipal bond. They posited that 
``reducing the time between the event and the required notice better 
informs the market that an event occurred, which is essential to 
evaluating a bond's credit quality and pricing.'' \137\ They further 
noted that a definitive time frame provides more timely information to 
pricing evaluation services and relieves them of dependence on 
bondholders to disclose the required information to them.\138\ These 
commenters asserted that ``without the proper notification, bonds could 
be priced incorrectly until the disclosure had been made.'' \139\
---------------------------------------------------------------------------

    \137\ Id.
    \138\ Id.
    \139\ Id.
---------------------------------------------------------------------------

    As discussed in detail below, the Commission has considered the 
commenters' views and suggestions on this issue and continues to 
believe that the benefits of enabling investors to receive promptly 
information about important events affecting the issuer justify the 
incremental costs imposed on issuers and obligated persons as a result 
of the amendments. It has come to the Commission's attention,\140\ as 
supported by some commenters,\141\ that some event notices currently 
are not submitted until months after the events have occurred. Market 
participants, on the other hand, have emphasized the importance of the 
prompt availability of such information.\142\
---------------------------------------------------------------------------

    \140\ See Proposing Release, supra note 2, 74 FR at 36837, n. 
69. See, e.g., Elizabeth Carvlin, Trustee for Vigo County, Ind., 
Agency Taps Reserve Fund for Debt Service, The Bond Buyer, April 2, 
2004, at 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). See also Peter J. 
Schmitt, Estimating Municipal Securities Continuing Disclosure 
Compliance: A Litmus Test Approach (available at http://www.dpcdata.com/html/about-researchpapers.html).
    \141\ See supra note 134 and accompanying text.
    \142\ See Proposing Release, supra note 2, 74 FR 36838, n. 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 (``[F]iling issues are the sole cause of lack 
of transparency and disclosure availability in the industry. These 
filing issues include * * * late filing. * * *'').
---------------------------------------------------------------------------

    The Commission believes that delays in providing notice of the 
events set forth in paragraph (b)(5)(i)(C) of the Rule undermine the 
effectiveness of the Rule. Delays can, among other things, deny 
investors important information that they need to make informed 
decisions regarding whether to buy, sell or hold municipal securities. 
As noted above, two commenters echoed this sentiment by noting the 
importance of having timely submission of event notices to maintain the 
transparency of a municipal security's credit quality and pricing.\143\ 
The Commission anticipates that, in providing for a maximum time frame, 
the amendments should foster the availability of more current 
information about municipal securities, and thereby help promote 
greater transparency and further enhance investor confidence in the 
municipal securities market. Furthermore, more up-to-date information 
about municipal securities is likely to improve the transparency in the 
market, should increase the efficiency of markets in allocating capital 
at appropriate prices

[[Page 33110]]

that reflect the creditworthiness of issuers, which benefits issuers 
and investors alike, and should reduce the likelihood that investors 
will be subject to fraud facilitated by inadequate disclosure.
---------------------------------------------------------------------------

    \143\ See ICI Letter at 6 and Fidelity Letter at 2.
---------------------------------------------------------------------------

    The Commission further believes that more timely information will 
aid brokers, dealers, and municipal securities dealers in satisfying 
their obligation to have a reasonable basis to recommend the purchase 
or sale of municipal securities. The Commission notes that the 
amendment requires Participating Underwriters to reasonably determine 
that issuers and obligated persons have contractually agreed to submit 
event notices in timely manner no later than ``ten business days after 
the occurrence of the event,'' rather than simply in a ``timely 
manner.'' On the other hand, there will be a significant benefit to 
investors and municipal market participants, because they will have a 
greater assurance that information about municipal securities will be 
available 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 compliance date of these 
amendments would have committed to submit event notices in a timely 
manner, this amendment will 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 compliance date 
of these amendments.\144\
---------------------------------------------------------------------------

    \144\ The Commission notes that the ten business day time frame 
will not apply to continuing disclosure agreements entered into with 
respect to primary offerings that occurred prior to the compliance 
date of these amendments or to remarketings of demand securities 
that qualify for the limited grandfather provision. See infra 
Section III.G.
---------------------------------------------------------------------------

    One commenter suggested that the Commission leave the current 
``timely'' language in the Rule but provide examples of instances that 
it considers to be ``timely.'' \145\ The Commission believes that the 
suggestion solely to provide guidance would not effectively accomplish 
the Commission's goal of improving the timeliness of submissions. 
Moreover, as the Commission noted in the Proposing Release, there have 
been significant delays in the submission of event notices.\146\ As 
expressed by two commenters, ``the absence of a specific time period'' 
with respect to what constitutes timely submission of event notices has 
been a contributing factor to delays in submitting notices.\147\ While 
one commenter cautioned the Commission against ``trying to create a 
uniform standard for various events that are very different from each 
other,''\148\ it is the Commission's view that providing a specified 
time frame will provide clarity regarding the standard to be included 
in continuing disclosure agreements for timely submission of event 
notices in all circumstances. In some cases, however, particularly when 
issuers or obligated persons know about events well in advance, 
investors may view timely disclosure as occurring within a day or a few 
days of the event.
---------------------------------------------------------------------------

    \145\ See NABL Letter at 6.
    \146\ See supra note 140.
    \147\ See ICI Letter at 6 and Fidelity Letter at 3.
    \148\ See GFOA Letter at 2.
---------------------------------------------------------------------------

    Although a number of commenters did not oppose a specified time 
frame for submission of event notices, they also did not support the 
ten business day proposal. Some of their concerns were: (i) The 
impracticability of meeting the time frame because of limited staff and 
resources, especially for smaller issuers;\149\ (ii) the increased 
burdens and costs in connection with the additional monitoring and 
compliance necessary to submit notices within ten business days;\150\ 
(iii) the difficulty in reporting events within ten business days when 
the issuer does not control the information (e.g., rating changes, 
changes to the trustee, and changes to the tax status of bonds as a 
result of an IRS audit);\151\ and (iv) the use of the ``occurrence of 
the event'' as the trigger for the obligation to submit a notice.\152\
---------------------------------------------------------------------------

    \149\ See CRRC Letter, WCRRC Letter, Portland Letter at 2, 
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2, 
and NABL Letter at 5-6.
    \150\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter, 
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, and NABL 
Letter at 5-6.
    \151\ See Connecticut Letter at 1-2, California Letter at 1-2, 
San Diego Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA Letter at 2, 
Kutak Letter at 2, and GFOA Letter at 2-3.
    \152\ See California Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA 
Letter at 2, San Diego Letter at 1-2, GFOA Letter at 3, Kutak Letter 
at 2, and NABL Letter at 5-6.
---------------------------------------------------------------------------

    Many of these commenters focused their comments on their concerns 
about the difficulties associated with providing notice of specified 
events, particularly rating changes and trustee changes, within ten 
business days of their occurrence.\153\ These commenters noted that 
rating changes and trustee changes are not within the issuer's control 
and that, with respect to rating changes, rating organizations do not 
directly notify issuers of rating changes.\154\ As a result, these 
commenters believed that it would be difficult for most issuers to 
submit an event notice for a rating change within ten business days of 
its occurrence without incurring substantial costs associated with 
monitoring for rating changes.
---------------------------------------------------------------------------

    \153\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA 
Letter at 2-4, San Diego Letter at 1-2, CHEFA Letter at 2, Kutak 
Letter at 2, California Letter at 1-2, NABL Letter at 8, and GFOA 
Letter at 3-4.
    \154\ Id.
---------------------------------------------------------------------------

    Some commenters, who expressed concern about the ability of an 
issuer to learn of the event and then submit an event notice within the 
ten business day time frame, proposed alternative time periods ranging 
from 30 to 45 days from the event's occurrence.\155\ Others, however, 
recommended that the Commission reduce the time frame.\156\ Two of 
these commenters advocated a time frame of five business days from the 
occurrence of the event, which they noted is the amount of time 
permitted for submitting similar notices in the taxable debt 
market.\157\ Another commenter recommended a time frame of four 
business days from the occurrence of the event.'' \158\
---------------------------------------------------------------------------

    \155\ See Halgren Letter, Portland Letter at 2, NAHEFFA Letter 
at 4, and CHEFA Letter at 2.
    \156\ See ICI Letter at 7, Fidelity Letter at 2, and e-certus 
Letter at 8.
    \157\ See ICI Letter at 7 and Fidelity Letter at 3.
    \158\ See e-certus Letter I at 8.
---------------------------------------------------------------------------

    Several commenters who opposed the ten business day time frame 
suggested a number of modifications. Some of these commenters proposed 
changing the trigger for submission of an event notice from the 
occurrence of the event to the issuer's actual knowledge of the 
event.\159\ A number of commenters recommended removing ``rating 
changes'' from the list of disclosure events and requiring rating 
organizations to submit their rating changes directly to the MSRB's 
EMMA system.\160\ Finally, one commenter suggested that, instead of 
specifying a time period, the Commission should modify the Rule to: (1) 
State that ``issuers should disclose material events in a timely manner 
which in the normal course of business would be 10 business days;'' (2) 
allow the ten business days to run from the time the issuer learned of 
the event, or 30 calendar days from the event itself; and (3) ensure 
that in the instances where issuers do not have control of the 
information (e.g., a rating change due to the rating change of the 
credit enhancer), the issuer should not be responsible for submitting 
the information.\161\
---------------------------------------------------------------------------

    \159\ See Kutak Letter at 2, California Letter at 1-2, San Diego 
Letter at 1-2, and CHEFA Letter at 2.
    \160\ See Halgren Letter, Portland Letter at 2, Los Angeles 
Letter at 1-2, California Letter at 3, CHEFA Letter at 2, GFOA 
Letter at 3-4, and NABL Letter at 8.
    \161\ See GFOA Letter at 3.

---------------------------------------------------------------------------

[[Page 33111]]

    The Commission has considered commenters' concerns about the 
potential costs and burdens associated with the ten business day time 
period for submission of event notices. The Commission also has 
considered commenters' suggestion that the triggering event should be 
actual knowledge of the event rather than the event's occurrence. As 
the Commission noted in the Proposing Release, however, the events 
currently specified in paragraph (b)(5)(i)(C) of the Rule, and the 
additional event items included in the amendments, are significant and 
should become known to the issuer or obligated person 
expeditiously.\162\ For example, events such as payment defaults, 
tender offers, and bankruptcy filings generally involve the issuer's or 
obligated person's participation.\163\ Other events (e.g., failure of a 
credit or liquidity provider to perform) are of such importance that an 
issuer or obligated person likely will become aware of such 
events,\164\ or will expect an indenture trustee, paying agent, or 
other transaction participant to bring them to the issuer's or 
obligated person's attention, within a very short period of time.\165\ 
Indeed, issuers and obligated persons could seek to obtain contractual 
agreements to be advised of the occurrence of such events by those 
persons or entities that may be expected to have direct knowledge of 
the occurrence.
---------------------------------------------------------------------------

    \162\ See supra note 16 for a description of events currently 
contained in Rule 15c2-12(b)(5)(i)(C). See infra Section III.E. for 
a description of events added to the Rule by these amendments.
    \163\ In addition, as the Commission noted in the Proposing 
Release, involvement of the issuer or obligated person is often 
required for substitution of credit or liquidity providers; 
modifications to rights of security holders; release, substitution, 
or sale of property securing repayment of the securities; and 
optional redemptions. See Proposing Release, supra note 2, 74 FR at 
36838, n. 73. The Commission received no comments on this statement. 
See also Form Indenture and Commentary, National Association of Bond 
Lawyers, 2000.
    \164\ For example, as the Commission noted in the Proposing 
Release, issuers or obligated persons should have direct knowledge 
of principal and interest payment delinquencies, determinations of 
taxability from the IRS, tender offers that they initiate, and 
bankruptcy petitions that they file. The Commission received no 
comments on this statement.
    \165\ The Commission believes, as noted in the Proposing 
Release, 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. The 
Commission received no comments on this statement. The Commission 
notes that issuers and obligated persons may wish to consider 
negotiating a provision to include in indentures to which they are a 
party to require a trustee promptly to notify the issuer or 
obligated person in the event the trustee knows or has reason to 
believe that an event specified in paragraph (b)(5) of the Rule has 
or may have occurred.
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    Consistent with the Commission's discussion in the Proposing 
Release, rating changes may affect the market price of the security, 
and thus bondholders and prospective investors should have access to 
this information.\166\ While the Commission recognizes that an event 
such as a rating change is not directly within the issuer's control, 
Participating Underwriters today must reasonably determine that the 
issuer or obligated person has undertaken in a continuing disclosure 
agreement to provide notice of rating changes, if material.\167\ While 
the Commission notes that the obligation to provide notice of rating 
changes is not new for those issuers that have issued municipal 
securities subject to a continuing disclosure agreement, the ten 
business day time frame may cause some issuers to monitor more actively 
for rating changes than they do today. The amendments revise the Rule 
to require the Participating Underwriter to reasonably determine that 
the continuing disclosure agreement provide for submission of event 
notices, including rating changes and trustee changes (if material), 
within ten business days after the event's occurrence.
---------------------------------------------------------------------------

    \166\ See Proposing Release, supra note 2, 74 FR at 36840.
    \167\ See infra Section IV., discussing the obligations of 
underwriters of municipal securities under the antifraud provisions 
of the federal securities laws.
---------------------------------------------------------------------------

    Several commenters raised concerns about meeting the ten business 
day time frame because of limited resources and staff, particularly 
with respect to smaller issuers,\168\ and the increased burdens and 
costs associated with monitoring such events within the specified time 
frame. The Commission recognizes that some issuers, particularly 
smaller issuers, may require a greater effort initially to comply with 
their undertakings in continuing disclosure agreements that reflect the 
revised Rule.\169\ The Commission notes that information about rating 
changes by organizations that rate municipal securities is readily 
accessible by issuers through the rating agencies' Internet Web sites. 
In addition, issuers may be able to subscribe to a service that 
provides them with prompt rating updates for their securities. For 
other events that may be outside of the issuer's control, such as a 
trustee change, issuers can contractually arrange to be notified of 
such an event immediately.\170\ Accordingly, the Commission continues 
to expect that issuers and obligated persons generally will become 
aware of the Rule's disclosure events (or can make arrangements to 
ensure that they become aware) within ten business days after the 
event's occurrence and accordingly should be able to comply with their 
undertakings to submit event notices to the MSRB within the ten 
business day time frame.\171\
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    \168\ See CRRC Letter, WCRRC Letter, Portland Letter at 2, 
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2, 
and NABL Letter at 5-6.
    \169\ The Commission recognizes that issuers that enter into 
continuing disclosure agreements for the first time, particularly 
smaller issuers, initially may need to become familiar with the 
steps necessary to ascertain whether there has been a rating change, 
and that there are burdens associated with this.
    \170\ For example, under a trust indenture, the trustee may be 
obligated to notify an issuer before the trustee changes its name. 
See infra Section IV., discussing the obligations of underwriters of 
municipal securities under the antifraud provisions of the federal 
securities laws.
    \171\ As noted in the Proposing Release, 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 a Form 8-K. See 
Proposing Release, supra note 2, 74 FR at 36838, n. 76. 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 received no 
comments on these statements.
---------------------------------------------------------------------------

    The Commission believes that, on balance, the ten business day time 
frame is appropriate. By specifying a ten business day time frame, the 
Commission intends to strike a balance between the need for event 
notices to be disseminated promptly and the need to allow adequate time 
for an issuer or obligated person to become aware of the event and to 
prepare and file the notice. The Commission believes that the ten 
business day time frame provides a reasonable amount of time for 
issuers to comply with their undertakings, while also allowing event 
notices to be made available to investors, underwriters, and other 
market participants in a timely manner.

C. Materiality Determinations Regarding Event Notices

1. Deletion of the Materiality Condition Generally
    The Commission proposed to delete in certain instances the 
materiality condition found in paragraph (b)(5)(i)(C) of the Rule. 
Based on the Commission's experience with paragraph (b)(5)(i)(C), the 
Commission believes that notice of certain events currently listed 
therein need not be preceded by a materiality determination. These 
events include: (1) Principal and interest payment delinquencies with 
respect to the

[[Page 33112]]

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.
    A number of commenters expressed support for deletion of the 
materiality condition.\172\ Two of these commenters stated that ``these 
disclosure events are of such high consequence and relevance to 
investors in informing their investment decisions that they should be 
disclosed as a matter of course.'' \173\ Another commenter noted that 
``these events should always be provided to investors because their 
occurrence is always important to investors and other market 
participants.'' \174\ One commenter stated that the proposal ``to 
delete a materiality qualifier is not useful, but also would not unduly 
burden issuers or obligated persons except in three circumstances.\175\
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    \172\ See NFMA Letter at 2, SIFMA Letter at 3, e-certus Letter 
at 8, ICI Letter at 7-8, and Fidelity Letter at 3. See also 
California Letter at 2 and San Diego Letter at 2 (each of these 
commenters support elimination of the materiality qualifier for each 
of the six events set forth in the Proposing Release except for the 
event relating to rating changes); see infra Section III.C.2.e. for 
a discussion of rating changes.
    \173\ See ICI Letter at 7-8 and Fidelity Letter at 3.
    \174\ See SIFMA Letter at 8.
    \175\ See NABL Letter at 6-7. The three circumstances for which 
this commenter suggested retaining a materiality condition are: (i) 
Unscheduled draws of debt service reserves that reflect financial 
difficulties for LOC-backed demand securities; (ii) failed 
remarketings of LOC-backed demand securities; and (iii) defeasances. 
The Commission addresses each of these three circumstances later in 
this release. See infra Section III.C.2.
---------------------------------------------------------------------------

    Three commenters opposed the proposed change.\176\ One commenter 
stated that the elimination of the materiality condition for all the 
events included in paragraph (b)(5)(i)(C) of the Rule would ``increase 
issuers' administrative burden for monitoring the possible occurrence 
of these events.'' \177\ This commenter also believed that removal of 
the general materiality provision may result in the disclosure of non-
material events.\178\ Another commenter, while acknowledging the 
importance of these six events, argued that the materiality condition 
should be retained because ``there is a risk that dividing event 
notices into two categories may introduce confusion where none now 
exists.''\179\ Further, one commenter remarked that ``establishing 
materiality is important in order to ensure that relevant information 
is passed to investors'' and is ``best made on a case by case basis, 
along with advice of counsel.'' \180\
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    \176\ See Metro Water Letter at 2, Connecticut Letter at 2, and 
GFOA Letter at 4.
    \177\ See Metro Water Letter at 2.
    \178\ Id.
    \179\ See Connecticut Letter at 2.
    \180\ See GFOA Letter at 4.
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    The Commission believes that a materiality determination remains 
appropriate for specific events, as discussed below.\181\ However, 
under the amendments, for each event that no longer is subject to a 
materiality condition, a Participating Underwriter must reasonably 
determine that the issuer or obligated person has agreed to submit a 
notice to the MSRB within ten business days of the event's occurrence, 
without regard to its materiality. The Commission believes that each of 
these events by its nature is of such importance to investors that it 
should always be disclosed. In particular, these events are likely to 
have a significant impact on the value of the underlying securities. 
Moreover, the Commission believes that notice of these events should 
reduce the likelihood that investors will be subject to fraud 
facilitated by inadequate disclosure.\182\
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    \181\ The discussion in this section pertains to materiality 
determinations for events currently specified in paragraph 
(b)(5)(i)(C) of the Rule. For events to be added to the Rule by 
these amendments, the Commission discusses in Section III.E. below 
whether the materiality determination has been included for each 
such event.
    \182\ The Commission applied the same rationale discussed in 
this paragraph to determine which of the new event items that are 
being added to the Rule by these amendments should contain a 
materiality condition.
---------------------------------------------------------------------------

    Further, the Commission continues to believe that the removal of 
the materiality condition for the aforementioned events is not expected 
to significantly increase the burden on issuers and obligated persons. 
Because of the significant nature of these events and their importance 
to investors in the marketplace, the Commission believes that issuers 
and obligated persons generally are already providing notice of most of 
these events pursuant to existing continuing disclosure agreements. It 
is the Commission's view that removing the materiality condition for 
these six disclosure events will help ensure that important information 
about significant events regarding municipal securities is promptly 
provided to investors and other market participants in all instances. 
The availability of this information to investors will enable them to 
make informed investment decisions and should reduce the likelihood 
that investors will be subject to fraud facilitated by inadequate 
disclosure. Furthermore, this information will assist brokers, dealers 
and municipal securities dealers in satisfying their obligation to have 
a reasonable basis to recommend municipal securities to investors. 
Deletion of the materiality condition also could simplify a 
determination by an issuer or obligated person with respect to whether 
a notice must be filed and facilitate their providing such notice 
promptly. Accordingly, the Commission is adopting the amendment as 
proposed.
2. Deletion of Materiality Condition for Specific Events
    As noted above, some commenters generally supported the proposed 
revision to the Rule eliminating the general materiality condition from 
all events, but expressed concerns regarding its elimination for 
specific events. The Commission discusses these comments below but, for 
the reasons discussed, is adopting the amendment, as proposed.
a. Principal and Interest Payment Delinquencies
    One commenter suggested that, in light of the Commission's proposed 
amendment to delete the materiality condition from specified events, 
the definition of ``principal and interest payment delinquency'' should 
be clarified to take into account contractual grace periods and similar 
operational considerations, so that ``minor operational variances'' 
would not require event disclosure.\183\ Other commenters opposed the 
deletion of the materiality condition from the principal and interest 
payment delinquency event because otherwise it may include reporting of 
certain delays in payment that are the result of circumstances outside 
of the issuer's control or are very limited in time (e.g., 
technological glitches; a short-term disruption of the Federal Reserve 
Wire system; an error or lapse by the trustee or paying agent that is 
quickly corrected; or clerical error at the Depository Trust Company 
that is quickly corrected).\184\ Two of these commenters noted that 
these circumstances may result in a ``very short-term delay in 
crediting payments to bondholders'' and that ``in the past [they] would 
have treated such an event as not material.''\185\ Further, these two 
commenters argued that requiring submission of notices in these 
circumstances ``would create an

[[Page 33113]]

unwarranted implication that the issuer has suffered financial 
adversity.'' \186\
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    \183\ See Kutak Letter at 3.
    \184\ See California Letter at 2, San Diego Letter at 2, and 
GFOA Letter at 4.
    \185\ See California Letter at 2 and San Diego Letter at 2.
    \186\ Id.
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    The Commission notes that a payment default often negatively 
affects the market value of a municipal security and may have adverse 
consequences for an investor who has an immediate need for such funds. 
The Commission therefore believes that notice of any payment default 
with respect to securities covered by the Rule, including those 
defaults that are quickly remedied or that result from a technological 
glitch or similar error, is important information for investors. The 
Commission notes that issuers and obligated persons may include the 
reason for a payment default in the event notice submitted to the MSRB. 
Delayed payment--even for a short period of time--may impact investors' 
investment decisions by inhibiting their ability to promptly reinvest 
such payment or by leaving them unsure whether to buy, hold, or sell 
municipal securities. Accordingly, the Commission believes that notice 
of principal and interest payment delinquencies on municipal securities 
should always be provided to aid investors in making investment 
decisions and help protect them from fraud, as well as to assist 
brokers, dealers, and municipal securities dealers in satisfying their 
obligation to have a reasonable basis to recommend a municipal 
security.
b. Unscheduled Draws on Debt Service Reserves or Credit Enhancements 
Reflecting Financial Difficulties
    Unscheduled draws on debt service reserves and credit enhancements 
often adversely impact the market value of a municipal security and, in 
the Commission's view, should always be made available to investors and 
other market participants.\187\ These events likely indicate that the 
financial condition of a municipal securities issuer or obligated 
person has deteriorated and that there is, potentially, an increased 
risk of a payment default or, in some cases, 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, as well as the present financial condition of the provider 
of any credit enhancement.
---------------------------------------------------------------------------

    \187\ See Proposing Release, supra note 2, 74 FR at 36839.
---------------------------------------------------------------------------

    One commenter suggested that a materiality condition should be 
retained for unscheduled draws on debt-service reserves for LOC-backed 
demand securities.\188\ This commenter argued that materiality is 
necessary in this limited instance because the proposed amendment 
``would require notice of unscheduled draws on debt service reserves 
that reflect financial difficulties of the obligated person, even when 
not material to an investment in the securities because they are traded 
on the strength of a bank letter of credit.'' \189\
---------------------------------------------------------------------------

    \188\ See NABL Letter at 6-7.
    \189\ Id.
---------------------------------------------------------------------------

    The Commission notes that notice is needed only when an unscheduled 
draw on debt-service reserves or credit enhancement indicates financial 
difficulties ``with respect to the securities.'' Thus, an issuer or 
obligor must consider, under the facts and circumstances of a 
particular municipal security and its relevant governing documents, 
whether or not such unscheduled draw reflects financial difficulties 
with respect to that security--a limitation that should help address 
some concerns about removal of the materiality condition.
    The same commenter also suggested retaining the ``if material'' 
condition for LOC-backed demand securities because the deletion of this 
condition, coupled with the modification to the exemption for demand 
securities, ``would require notice of each failure to remarket 
securities when they are put, even though not material to an investor 
due to the existence of a letter of credit or other liquidity 
facility.'' \190\
---------------------------------------------------------------------------

    \190\ Id.
---------------------------------------------------------------------------

    The Commission does not agree with this commenter's conclusion. One 
purpose of a letter of credit or other liquidity facility for demand 
securities is to provide liquidity in the event that a new investor is 
not found at the time the securities are tendered for repurchase. A 
draw in such a situation does not necessarily reflect financial 
difficulties ``with respect to the securities'' of the credit 
enhancement provider or the obligated person, but may reflect 
underlying market conditions, as evidenced by failed remarketings 
during 2008 and 2009.\191\ In the event of a draw that does not reflect 
financial difficulties with respect to the securities, a notice would 
not be provided. A determination regarding the existence of financial 
difficulties must be made on a case-by-case basis, depending on the 
facts and circumstances surrounding such draws and failed remarketings.
---------------------------------------------------------------------------

    \191\ See, e.g., Richard Williamson, HOUSING: HFAs Still Facing 
VR Debt Woes; No Relief Till 2011 Even With U.S. Aid, The Bond 
Buyer, October 7, 2009; Frank Sulzberger and Andrew Flynn, Lessons 
From Tough Times: Understanding VRDO Failures, The Bond Buyer, July 
21, 2008 (``Until the recent credit crisis, few bonds had ever 
experienced a remarketing failure and when they did, liquidity 
providers were able to step in with little risk to their balance 
sheet. * * * In a normal market, the remarketing agent might step in 
and buy the tendered bonds, in order to prevent an actual draw on an 
LOC or credit facility. But this time around, the volume of the 
tenders and restrictions on their own liquidity made this choice 
difficult, if not impossible, for many remarketing agents.'')
---------------------------------------------------------------------------

    Finally, one commenter, who supported the deletion of the 
materiality condition, recommended deleting the phrase ``reflecting 
financial difficulties'' for events relating to unscheduled draws on 
debt-service reserves or credit enhancements.\192\ This commenter 
suggested that, even with the removal of the materiality condition from 
these event items, the phrase ``reflecting financial difficulties'' may 
allow an issuer, in certain circumstances, to make a judgment regarding 
whether the occurrence of such an event would require disclosure.\193\
---------------------------------------------------------------------------

    \192\ See Fidelity Letter at 2.
    \193\ See Fidelity Letter at 2.
---------------------------------------------------------------------------

    Although the Commission continues to believe that the disclosure of 
unscheduled draws is important to investors and other market 
participants, the Commission also recognizes that, in some 
circumstances, such draws are not the result of financial difficulties 
that would impact the creditworthiness of an issuer or obligated 
person, or the price of a municipal security. Accordingly, the 
Commission believes that the phrase ``reflecting financial 
difficulties'' should be retained in the Rule at this time.
c. Substitution of Credit or Liquidity Providers, or Their Failure to 
Perform
    One commenter opposed eliminating the materiality condition from 
this event, in light of the proposed ten business day frame for 
submitting event notices to the MSRB.\194\ This commenter acknowledged 
the importance of disclosing this information, but believed that as a 
result of the recent market turmoil, determining whether the occurrence 
of this event is material as a condition to providing notice remains 
important.\195\
---------------------------------------------------------------------------

    \194\ See GFOA Letter at 4. The commenter expressed concern 
about the removal of materiality condition in the context of the ten 
business day time frame. As the Commission noted earlier in this 
release, the events contained in paragraph (b)(5)(i)(C) of the Rule, 
which includes the substitution of credit or liquidity providers, or 
their failure to perform, are significant events that an issuer 
should become aware of within a very short period of time. See supra 
Section III.B.
    \195\ See GFOA Letter at 4.
---------------------------------------------------------------------------

    The Commission believes that the identity of credit or liquidity 
providers and their ability to perform is important

[[Page 33114]]

information for investors.\196\ The Commission understands that credit 
ratings of municipal securities are typically based on the higher of 
the obligor's rating or the rating of the credit provider \197\ and 
that, with occasional exceptions, credit enhancement is obtained from a 
credit provider with a higher rating than that of the obligor. When a 
credit enhancer such as a bond insurer is downgraded, the market value 
and the liquidity of the securities that it has enhanced generally 
decline.\198\ Similarly, the identity and ability of a liquidity 
provider to perform typically is critical to investors. Investors in 
demand securities, for example, depend on liquidity providers to 
satisfy holders' right to tender their securities for repurchase in a 
timely manner. Furthermore, substitution of credit or liquidity 
providers requires direct involvement of an issuer or obligated 
person.\199\ Thus, an issuer or obligated person would be aware of the 
impending occurrence of such an event and should be able to provide 
notice of the event within the ten business day time frame. As a 
result, the Commission believes that notice of substitution of credit 
or liquidity providers, or their failure to perform, should always be 
provided to aid investors in making investment decisions and 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.
---------------------------------------------------------------------------

    \196\ Two commenters recommended that the event notice 
pertaining to substitution of credit or liquidity providers or their 
failure to perform should be expanded to include any renewal, or 
modification, of any credit or liquidity facility or other 
agreements supporting or otherwise material to a municipal security. 
See ICI Letter at 8 and Fidelity Letter at 3. These commenters noted 
that changes to, or violations of, any of the credit or liquidity 
agreements pertaining to a municipal security can modify the 
security, thereby causing a mandatory tender event or impacting the 
prospects for its remarketing. In their view, these events can have 
significant implications for investors. The Commission, in this 
rulemaking, is taking a targeted approach at this time. The 
Commission will take these comments into account should it consider 
further improvements that could be made to the Rule.
    \197\ See, e.g., Proposing Release, supra note 2, 74 FR at 
36839, n. 80.
    \198\ See, e.g., Proposing Release, supra note 2, 74 FR at 
36839, n. 81.
    \199\ See, e.g., Richard Williamson, Houston Metro Seeks LOC for 
Light Rail, The Bond Buyer, April 16, 2008; and Elizabeth Carvlin, 
Trends in the Region: Bond Contracts Stand at Center of Detroit 
Airport Dispute, The Bond Buyer, September 11, 2002.
---------------------------------------------------------------------------

d. Defeasances
    One commenter expressly favored maintaining the materiality 
condition for notice of defeasances.\200\ This commenter believed that 
removal of the materiality condition ``would require notice of 
defeasances of securities regardless of how short the remaining term of 
the securities, and therefore would require an issuer to give notice 
whenever it creates a thirty-day or shorter escrow for refunded bonds 
in order to avoid giving notice of redemption before an issue of 
refunding bonds is closed.'' \201\
---------------------------------------------------------------------------

    \200\ See NABL Letter at 7. A defeasance typically is understood 
as the termination of the rights and interests of the bondholders 
and of their lien on the pledged revenues or other security in 
accordance with the terms of the bond contract for an issue of 
securities. See, e.g., the MSRB's definition of defeasance at http://www.msrb.org/msrb1/glossary/glossary_db.asp?sel=d.
    \201\ See NABL Letter at 7.
---------------------------------------------------------------------------

    Typically, because defeased municipal securities are secured by 
escrows of cash, or Treasury securities, sufficient to pay principal 
and interest to maturity or the appropriate call date, the value of 
municipal securities increases significantly when they are defeased. 
Information about such changes in the value of municipal securities--
positive as well as negative--is important to investors in making 
investment decisions, such as whether to sell their securities prior to 
the defeasance date and, if so, whether the sale price is appropriate. 
Also, notice of a defeasance should reduce the likelihood that 
investors will be subject to fraud facilitated by inadequate 
disclosure, by providing them with information concerning the 
defeasance so that they can better assess the value of their defeased 
municipal securities. Further, the Commission is of the view that, 
regardless of the length of the escrow period, notice of defeasance is 
justified, because of the significance of the event and because 
investors should be provided sufficient time to plan the re-investment 
of their funds. Consequently, the Commission believes that notice of 
defeasance should not be subject to a materiality condition and should 
be provided to the MSRB in each instance.
e. Rating Changes \202\
---------------------------------------------------------------------------

    \202\ See also supra Section III.B. for a discussion of rating 
changes in the context of the ten business day time frame.
---------------------------------------------------------------------------

    One commenter recommended that the term ``rating change'' should be 
defined if the materiality condition is removed from this event 
item.\203\ The commenter suggested that the Rule should be limited to 
those changes, for which the issuer or obligated person has actual 
knowledge, in the highest published rating relating to a given 
security, whether the underlying rating or the credit-enhanced 
rating.\204\ The commenter also stated that the term ``rating change'' 
should exclude changes in outlook, as well as changes in credit ratings 
of parties other than the issuer or obligated person, unless the issuer 
or obligated person has received specific notice of the change in such 
other party's rating.\205\ Some commenters argued that the proposed 
deletion of the materiality condition for this event item, together 
with the ten business day time frame to submit event notices to the 
MSRB, would create a substantially larger burden for issuers.\206\ The 
same commenters believed that rating changes should be removed from the 
list of disclosure events in the Rule entirely, and that rating 
organizations should be responsible for providing this information 
directly to the MSRB.\207\
---------------------------------------------------------------------------

    \203\ See Kutak Letter at 3-4.
    \204\ Id.
    \205\ Id.
    \206\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA 
Letter at 2-4, San Diego Letter at 1-2, California Letter at 1-2, 
NABL Letter at 8, and GFOA Letter at 3-4.
    \207\ See supra note 153 and accompanying text.
---------------------------------------------------------------------------

    The Commission notes that, as a practical matter, changes in credit 
ratings today are likely to impact the price of municipal securities, 
and thus investors in these securities, as well as market 
professionals, analysts, and others, should have access to this 
information.\208\ As discussed earlier, the continuing disclosure 
agreements that issuers have entered into pursuant to Participating 
Underwriters' obligations under the Rule already require them to submit 
event notices to the MSRB for rating changes, if material. The 
Commission acknowledges that removal of the materiality condition may 
increase the number of event notices submitted in connection with 
rating changes.\209\ However, the removal of the materiality condition 
from this event item will simplify the submission of event notices for 
ratings changes by removing the burden on issuers to make a 
determination as to whether or not such a change is material and thus 
requires submission of a event notice. The Commission notes that rating 
agencies typically indicate a rating change by changing the widely 
understood symbols used to indicate

[[Page 33115]]

rating categories, which should make a determination of the occurrence 
of a rating change very straightforward.\210\ Under the amendments, a 
notice of a rating change by any rating agency would be included even 
if another rating agency has not revised its rating of the municipal 
security.
---------------------------------------------------------------------------

    \208\ The Commision recently adopted amendments to its rules and 
forms, and is considering other amendments, to remove certain 
references to credit ratings by nationally recognized statistical 
rating organizations, in order to discourage undue investor reliance 
on them. See, e.g., Securities Exchange Act Release Nos. 58070 (July 
1, 2008), 73 FR 40088 (July 11, 2008), and 60789 (October 5, 2009), 
74 FR 52358 (October 9, 2009).
    \209\ See infra Section V.D. for discussion of the paperwork 
burden in connection with deletion of materiality condition.
    \210\ Ratings are expressed as letter grades that range, for 
example, from `AAA' to `D', and may include modifiers such as +, -, 
or numbers (e.g., 1, 2, 3) to communicate the agency's opinion of 
relative level of credit risk. See, e.g., http://www.moodys.com/, 
http://www.standardandpoors.com/ and http://www.fitchratings.com/. 
For purposes of Rule 15c2-12, ``ratings change'' does not include 
indicators of an increased likelihood of an impending ratings 
change, such as ``negative credit watch.''
---------------------------------------------------------------------------

    Three commenters argued that information about rating changes is 
already accessible to investors through the media or Internet.\211\ In 
the Commission's view, investors would benefit from being able to 
access a central source to determine whether there has been a rating 
change with respect to a particular municipal security, rather than 
relying on the media or accessing each rating organization's Internet 
Web site. Two of these commenters suggested a limited exemption from 
the Rule for rating changes involving municipal securities that are the 
result of rating changes involving the bond insurer or credit 
enhancer.\212\ The Commission does not believe that an exemption for 
bond insurers and credit enhancers from the Rule is appropriate. As 
discussed above, ratings for particular securities generally reflect 
the rating of the provider of credit enhancement, if any, in addition 
to the obligated person (or other source of payment).\213\ If a credit-
enhanced municipal bond is downgraded because of a rating change 
involving the bond insurer or credit enhancer, that is likely to impact 
the price of the security and is important information that should be 
disclosed to investors.
---------------------------------------------------------------------------

    \211\ See Portland Letter at 2, San Diego Letter at 2, and 
California Letter at 3.
    \212\ See Portland Letter at 2 and California Letter at 3.
    \213\ See supra Section III.C.2.b.
---------------------------------------------------------------------------

3. Retention of Materiality Condition for Specified Events
    Finally, the Commission is adopting, as proposed, amendments to 
paragraph (b)(5)(i)(C) and subparagraphs (2), (7), (8), and (10) 
thereunder with regard to the Participating Underwriter's obligations 
by specifying that a materiality determination is retained for event 
notices regarding (1) non-payment related defaults; (2) modifications 
to rights of security holders; (3) bond calls; and (4) the release, 
substitution, or sale of property securing repayment of the securities.
    Two commenters opposed retaining the materiality condition for 
notice of non-payment related defaults and for bond calls, which 
currently are set forth in paragraphs (b)(5)(i)(C)(2) and (8) of the 
Rule, respectively.\214\ These commenters remarked that violation of a 
legal covenant is an important component of an investor's analysis of a 
bond; disclosure of such events should not be discretionary; and bond 
calls are always material to investors.\215\
---------------------------------------------------------------------------

    \214\ See ICI Letter at 8 and Fidelity Letter at 3.
    \215\ Id.
---------------------------------------------------------------------------

    The Commission believes that a materiality condition should be 
retained for notice of non-payment related defaults and bond calls, 
respectively. Regularly scheduled sinking fund redemptions (a type of 
bond call) that occur when scheduled, for example, are ordinary course 
events that typically are known to bondholders.\216\ For such 
redemptions, the specific amounts to be redeemed and dates for such 
redemptions generally are included in official statements and usually 
this information will not be material to investors as they are already 
apprised of the occurrence of such redemptions in advance. The 
occurrence of other kinds of calls, such as optional calls and 
extraordinary calls, however, generally is not known to bondholders in 
advance. These typically are important events for investors because 
they may directly affect the value of the municipal security. Thus, 
such calls may be material and would need to be disclosed.
---------------------------------------------------------------------------

    \216\ The fact that a security may be redeemed prior to maturity 
in whole, in part, or in extraordinary circumstances is essential to 
an investor's investment decision about the security and is one of 
the facts a broker-dealer must disclose at the time of trade. See 
MSRB Interpretative Notice Concerning Disclosure of Call Information 
to Customers of Municipal Securities, MSRB, March 4, 1986.
---------------------------------------------------------------------------

    With respect to non-payment related defaults, under some 
circumstances, the occurrence of such defaults may not rise to the 
level of importance that they would need always to be disclosed to 
investors. For example, failure to comply with loan covenants to 
deliver updated insurance binders to the trustee or to take other 
ministerial actions by an annual deadline, if not cured within the 
period provided for in the loan documents, may constitute events of 
default, but such defaults may not be material to investors. On the 
other hand, failure to comply with covenants to maintain certain 
financial ratios or cash on hand, for example, may be of great 
importance to investors as they may be early warnings of a decline in 
the operations or financial condition of the issuer or obligated 
person. The Commission believes that this materiality determination is 
similarly appropriate in the context of modifications of rights of 
security holders and the release, substitution, or sale of property 
securing repayment of the securities. Accordingly, the Commission 
continues to believe that information about the four events for which 
the materiality conditions are retained is not necessarily important to 
investors and other market participants in all instances, and thus the 
Commission is retaining the materiality condition for these events.

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

    Currently, paragraph (b)(5)(i)(C)(6) of the Rule pertains to 
``adverse tax opinions or events affecting the tax-exempt status of the 
security.'' The Commission is adopting, with certain modifications from 
that proposed, an amendment to paragraph (b)(5)(i)(C)(6) of the Rule to 
require that Participating Underwriters reasonably determine that the 
issuer or obligated person has entered into a continuing disclosure 
agreement to submit a notice for ``[a]dverse 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 status of 
the security, or other material events affecting the tax status of the 
security.'' As discussed below, in adopting this amendment, the 
Commission is making certain changes to the text of the amendment from 
that which was proposed \217\ to clarify the use of the word 
``material'' in this event item and to replace the phrase ``tax-exempt 
status'' with ``tax status'' to focus the disclosure on information 
relevant to investors, whether the municipal security is taxable or 
tax-exempt.
---------------------------------------------------------------------------

    \217\ In the Proposing Release, the Commission proposed 
modifying paragraph (b)(5)(i)(C)(6) of the Rule so that continuing 
disclosure agreements would provide for the submission of a notice 
for ``[a]dverse 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.'' See Proposing Release, supra note 2, 74 FR at 36868.
---------------------------------------------------------------------------

    Four commenters expressed support for the proposed modifications to 
the list of adverse tax events included in the

[[Page 33116]]

Proposing Release.\218\ One of these commenters noted that investors 
have a strong interest in being informed of actions taken by the IRS 
that present a material risk to the tax-exempt status of their 
holdings.\219\ Several other commenters expressed concerns regarding 
the proposed items to be added to the disclosure for adverse tax 
events, particularly in light of the proposed removal of the 
materiality condition from this provision.\220\ One commenter 
recommended that the materiality condition be retained for all items in 
paragraph (b)(5)(i)(C)(6) of the Rule, other than a final determination 
of taxability.\221\ Other commenters, however, stated that the 
materiality condition should be retained for notice of all tax-related 
events.\222\ One commenter noted that the municipal market may be 
flooded with notices due to the generality and vagueness of the 
proposed tax disclosure items.\223\ This commenter further remarked 
that this provision will result in a ``flood of notices'' that could 
confuse and mislead investors, result in liquidations of municipal 
securities by multiple sellers simultaneously, or desensitize the 
market to such notices.\224\
---------------------------------------------------------------------------

    \218\ See SIFMA Letter at 3, NFMA Letter at 2, San Diego Letter 
at 2, and California Letter at 2.
    \219\ See SIFMA Letter at 3.
    \220\ See NABL Letter, Metro Water Letter, Connecticut Letter, 
Kutak Letter, and GFOA Letter.
    \221\ See NABL Letter at 7.
    \222\ See Metro Water Letter at 3, Connecticut Letter at 2, 
Kutak Letter at 4-7, and GFOA Letter at 4.
    \223\ See Kutak Letter at 4-7.
    \224\ Id.
---------------------------------------------------------------------------

    In addition, three commenters expressed concerns about the impact 
of the disclosure of event notices during the IRS's audit process.\225\ 
One commenter believed that an issuer's disclosure of event notices 
during the audit process could cause its bonds to be viewed unfavorably 
in the market and thus could result in higher borrowing costs for the 
issuer.\226\ Another commenter noted that disclosure of a pending audit 
``would have adverse consequences to the issuer long before the IRS 
finally determines whether any tax code violations actually have 
occurred,'' \227\ while a third commenter indicated that disclosure of 
an audit would ``confuse investors who may not be well versed in the 
IRS audit process.'' \228\
---------------------------------------------------------------------------

    \225\ See Kutak Letter at 5, GFOA Letter at 4, and Metro Water 
Letter at 3.
    \226\ See Kutak Letter at 5.
    \227\ See Metro Water Letter at 3.
    \228\ See GFOA Letter at 4.
---------------------------------------------------------------------------

    The Commission previously has noted that ``an `event' affecting the 
tax-exempt status of a security may include the commencement of 
litigation and other legal proceedings, including an audit by the 
Internal Revenue Service * * * .'' \229\ While the Commission continues 
to believe that ``an event affecting the tax-exempt status of the 
security'' can include an audit (and thus an audit should be the 
subject of an event notice when it is material), it agrees with the 
comment that not all audits indicate a risk to the security's tax 
status. At times, IRS staff conducts audits as part of project 
initiatives where it is not examining a specific problem or bond 
issue.\230\ On the other hand, some audits are targeted to examining 
specific bonds when, for example, IRS staff has received information 
from the public that has raised IRS staff concern.\231\ Thus, a 
determination by the issuer or obligated person in possession of the 
facts concerning the audit of a particular bond issue regarding whether 
a particular audit is material (and, thus, is an ``other material event 
affecting the tax status of the security'') is appropriate. In 
contrast, proposed and final determinations of taxability and Notices 
of Proposed Issue, which are determinations by the IRS that the IRS 
believes that a security is or may be taxable and has begun a formal 
administrative process in that regard, suggests that there could be a 
significant risk to the tax status of that security.\232\ Accordingly, 
the Commission believes that proposed and final determinations of 
taxability and Notices of Proposed Issue are of such importance to 
investors that they always should be disclosed pursuant to a continuing 
disclosure agreement.
---------------------------------------------------------------------------

    \229\ See 1994 Amendments Adopting Release, supra note 8, 59 FR 
at 59600. See also Proposing Release, supra note 2 74 FR at 36840.
    \230\ See, e.g., IRS FY 2010 Tax-Exempt Bonds Work Plan, IRS 
(available at https://www.irs.gov/pub/irs-tege/fy_2010_teb_workplan.pdf).
    \231\ Id.
    \232\ See Proposing Release, supra note 2, 74 FR at 36841.
---------------------------------------------------------------------------

    Retail and institutional investors consider the tax status of a 
municipal security, specifically the issuance of IRS notices, to be of 
great importance when making the decision to invest in tax-exempt bonds 
as opposed to other fixed-income securities.\233\ This is a view 
supported by several commenters.\234\ The financial significance of the 
municipal security's tax-exempt status is reflected directly in the 
interest rate on a tax-exempt municipal bond, which generally is 
significantly lower than the interest rate on a comparable taxable 
bond.\235\ Accordingly, investors are particularly sensitive to factors 
that could affect the tax-exempt status of interest earned on their 
municipal securities, because that status goes directly to the value of 
their investment.\236\ Further, a determination by the IRS staff that 
interest on a security purchased as tax-exempt may, in fact, be taxable 
may not only reduce the security's market value, but also may adversely 
affect each investor's federal and, in some cases, state income tax 
liability.\237\ A security's tax-exempt status is also important to 
many mutual funds whose governing documents, with certain exceptions, 
limit their investment to tax-exempt municipal securities.\238\ Mutual 
funds may liquidate securities that become taxable, which could have 
adverse consequences for the fund and its holders and could cause 
adverse effects if many holders attempt at the same time to liquidate 
similar securities, which at times could be illiquid. Therefore, retail 
and institutional investors alike are very interested in events that 
could adversely affect the tax status of the bonds that they own or may 
wish to purchase.
---------------------------------------------------------------------------

    \233\ See Proposing Release, supra note 2, 74 FR at 36841, n. 
89.
    \234\ See NFMA Letter at 2 and SIFMA Letter at 3. See also 
California Letter at 2, and San Diego Letter at 2.
    \235\ See, e.g., SIFMA, ``About Municipal Bonds--The Advantages 
of Tax Exemption,'' available at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcatid=53&id=233; Morgan Stanley Smith 
Barney, ``Tax-Free Municipal Bonds--Frequently Asked Questions,'' 
(question 4. Why is it better for me to own municipals when 
municipal bond rates are lower than taxable bond (Treasury bonds, 
corporate bonds) rates?), available at: http://www.morganstanleyindividual.com/markets/bondcenter/school/faq/default.asp#4.
    \236\ See Proposing Release, supra note 2, 74 FR at 36841, n. 
90.
    \237\ 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. See Proposing Release, 
supra note 2, 74 FR at 36841.
    \238\ See Proposing Release, supra note 2, 74 FR at 36841, n. 
92.
---------------------------------------------------------------------------

    Moreover, as the Commission noted in the Proposing Release, despite 
the possibility that the issuance of proposed and final determinations 
of taxability and Notices of Proposed Issue could adversely affect the 
tax-exempt status of a bond and thus could significantly affect the 
pricing of such municipal security,\239\ it has been reported that 
notices regarding such tax events are not always submitted.\240\ The 
Commission

[[Page 33117]]

believes that the issuance of proposed and final determinations of 
taxability and Notices of Proposed Issue by the IRS are important 
information that should be made available to investors and, 
accordingly, should be part of the continuing disclosure agreement 
obtained by a Participating Underwriter. The Commission believes that 
the IRS has issued a relatively small number of such determinations 
with respect to municipal securities when considered in light of the 
size of this market sector.\241\ As a result, few issuers or obligated 
persons should be affected by adding proposed and final determinations 
of taxability and Notices of Proposed Issue to this event item. One 
commenter noted that disclosure of the issuance of proposed or final 
determinations of taxability and of material audits often results in a 
higher interest rate for VRDOs, resulting in an increased cost to the 
issuer.\242\ That change in the interest rate supports the view that 
investors place a high degree of importance on events that may impact 
the tax status of their bonds. Thus, the Commission believes that 
disclosure in all instances of proposed and final determinations of 
taxability, Notices of Proposed Issue, and other material events 
affecting the tax status of a security, such as material audits, would 
help apprise investors of important information with respect to these 
securities.
---------------------------------------------------------------------------

    \239\ See Proposing Release, supra note 2, 74 FR at 36842, n. 
100.
    \240\ See Proposing Release, supra note 2, 74 FR at 36842, n. 
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). See also supra note 140.
    \241\ See Proposing Release, supra note 2, 74 FR at 36853, which 
notes that for Paperwork Reduction Act purposes, 130 event notices 
relating adverse tax events, including IRS determinations, are 
estimated to be submitted to the MSRB.
    \242\ See Kutak Letter at 5.
---------------------------------------------------------------------------

    Two commenters expressed specific concerns regarding the deletion 
of the materiality condition for submission of notices relating to 
adverse tax events.\243\ One commenter believed that submitting a 
notice for all proposed tax determinations could limit the issuer's 
ability to negotiate with the IRS.\244\ Another commenter remarked that 
without a materiality condition, disclosure of adverse tax events may 
mislead and confuse investors and could affect perceptions with respect 
to all of the issuer's securities, imposing interest and other costs 
that could limit future market access.\245\ Other commenters, however, 
supported the proposed deletion of the materiality condition.\246\
---------------------------------------------------------------------------

    \243\ See Metro Water Letter at 3 and Kutak Letter at 4-7.
    \244\ See Metro Water Letter at 3.
    \245\ See Kutak Rock Letter at 4-7.
    \246\ See ICI Letter at 2, NFMA Letter at 2 and SIFMA Letter at 
3.
---------------------------------------------------------------------------

    As noted above, the Commission disagrees that disclosure of adverse 
tax events would ``unnecessarily alarm investors,'' as one commenter 
argued.\247\ Because investors place a high degree of importance on the 
tax status of their municipal securities, and the tax status of a 
security significantly affects the market price of a security, the 
Commission believes that disclosing a potential threat to that status 
is necessary and that investors have a keen interest in being informed 
of such events. Furthermore, the Commission believes that the failure 
to disclose adverse tax events potentially could mislead investors who 
would have no reason to know or other means to discover that the tax 
status of their bonds may be in doubt and the market value of those 
securities may be at risk.
---------------------------------------------------------------------------

    \247\ See Connecticut Letter at 2.
---------------------------------------------------------------------------

    One commenter noted that the text of the amendment in the Proposing 
Release included a materiality condition for one provision that 
impliedly applies to other provisions of paragraph (b)(5)(i)(C)(6) of 
the Rule.\248\ This commenter suggested that the Commission clarify 
that the materiality condition applies to all tax events, except for a 
final determination of taxability.\249\ As discussed above, the 
Commission does not believe that it is appropriate to provide for a 
materiality condition in the case of proposed or final IRS 
determinations of taxability. In the Commission's view, these IRS 
determinations are of such importance to investors that they always 
should be disclosed. However, in response to this commenter's 
recommendation, the Commission is revising the amendment to paragraph 
(b)(5)(i)(C)(6) from that proposed to clarify its original intention 
that the event item pertains to ``other material events affecting the 
tax status of the security'' (emphasis added). The Commission agrees 
with the commenter that it would be appropriate to clarify this phrase 
so that notices of events not specified in the Rule that affect the tax 
status of a security are required only if these events are material to 
investors.
---------------------------------------------------------------------------

    \248\ See SIFMA Letter at 3.
    \249\ Id.
---------------------------------------------------------------------------

    Finally, in February 2009, Congress enacted the American Recovery 
and Reinvestment Act of 2009 (``ARRA''),\250\ which authorized the 
issuance of Build America Bonds and other taxable municipal bonds with 
associated tax credits or direct federal payments to the issuer 
(collectively, ``ARRA Bonds'').\251\ Because ARRA Bonds are municipal 
securities, Participating Underwriters would need to comply with the 
Rule's provisions, including paragraph (b)(5)(i)(C), when these bonds 
are the subject of a primary offering. Thus, a Participating 
Underwriter will be required to reasonably determine that an issuer or 
an obligated person has entered into a continuing disclosure agreement 
to submit continuing disclosure documents to the MSRB. ARRA Bonds are 
required to comply with many of the same provisions of the Internal 
Revenue Code as are tax-exempt bonds, such as restrictions on 
arbitrage.\252\ The benefits granted to ARRA Bonds (e.g., tax credits 
and related federal payments to issuers) are only authorized for bonds 
that comply with the provisions of the Internal Revenue Code that grant 
these benefits.\253\ Furthermore, like tax-exempt municipal bonds, 
adverse tax opinions, proposed or final determinations of taxability, 
Notices of Proposed Issue, or other material notices or determinations 
by the IRS with respect to the tax status of the securities, or other 
material events affecting the tax status of the security, may be 
applicable to ARRA Bonds. To clarify the applicability of paragraph 
(b)(5)(i)(C)(6) of the Rule, as amended, to ARRA Bonds, the Commission 
is adopting, for purposes of this paragraph, the phrase ``tax status,'' 
rather than ``tax-exempt status,'' of the security. The Commission 
believes that this limited change will clarify that Participating 
Underwriters

[[Page 33118]]

of ARRA Bonds are required to reasonably determine that issuers or 
obligated persons of such bonds have entered into a continuing 
disclosure agreement to submit to the MSRB, among other things, the 
tax-related disclosure events included in paragraph (b)(5)(i)(C)(6) of 
the Rule. For investors who hold ARRA Bonds with associated tax 
credits, the consequence of an issuer's failure to comply with the 
applicable requirements of the Internal Revenue Code is the loss of the 
benefit of a tax credit.\254\ For investors who hold tax-exempt 
municipal securities, the consequence of an issuer's failure to comply 
with federal tax provisions is the loss of the benefit of tax-exempt 
interest income. In the Commission's view, the consequences to 
investors who hold either ARRA bonds or tax-exempt municipal securities 
are comparable. Therefore, the Commission believes that this minor 
revision to this disclosure event will allow investors in ARRA Bonds, 
like investors in tax-exempt bonds, to have timely access to important 
information concerning risks that may affect the tax status of their 
securities.
---------------------------------------------------------------------------

    \250\ Public Law 111-5, 123 Stat. 115 (2009).
    \251\ The American Recovery and Reinvestment Act of 2009 
introduced three new categories of tax-advantaged taxable bonds--
Build America Bonds (I.R.C. Sec.  54AA), Qualified School 
Construction Bonds (I.R.C. Sec.  54F), and Recovery Zone Economic 
Development Bonds (I.R.C. Sec. Sec.  1400U-2). In addition, the ARRA 
expanded the authority to issue taxable New Clean Renewable Energy 
Bonds (I.R.C. Sec.  54C), Qualified Energy Conservation Bonds 
(I.R.C. Sec.  54D) and Qualified Zone Academy Bonds (I.R.C. Sec.  
54E). This followed the introduction of taxable Qualified Forestry 
Conservation Bonds (I.R.C. Sec.  54B) in the Heartland, Habitat, 
Harvest, and Horticulture Act of 2008. Taxpayers who hold such bonds 
on a ``credit allowance date'' generally are allowed a specified 
credit against their federal income tax liability (with the notable 
exceptions being Build America Bonds for which the issuer has 
elected to receive payments from the U.S. Treasury under I.R.C. 
Sec.  54AA(g)(1), referred to herein as ``Direct-Pay BABs,'' and 
Recovery Zone Economic Development Bonds). In addition, the tax 
credits may be ``stripped'' from the underlying taxable bonds (see 
I.R.C. Sec. Sec.  54A(i), 54AA(f)(2)), either by the issuer or by a 
holder in the secondary market, and sold to different investors 
pursuant to Treasury Department regulations to be issued.
    \252\ See, e.g., Section 54AA of ARRA (Build America Bonds); 
I.R.C. Sec.  1400U-2(b) (Recovery Zone Economic Development Bonds); 
I.R.C. Sec. Sec.  54A and 54C (New Clean Renewable Energy Bonds); 
IRC sections 54A and 54C (Qualified Energy Conservation Bonds); 
I.R.C. Sec. Sec.  54A and 54E (Qualified Zone Academy Bonds); I.R.C. 
Sec. Sec.  54A and 54F (Qualified School Construction Bonds). See 
also, IRS Notice 2009-26--Build America Bonds and Direct Payment 
Subsidy Implementation.
    \253\ See Public Law 111-5, 123 Stat. 115 (2009).
    \254\ See, e.g., I.R.C. Sec. Sec.  54A and 54AA.
---------------------------------------------------------------------------

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

    The Commission is adopting, as proposed, the amendments adding four 
new events to paragraph (b)(5)(i)(C) of the Rule. These additional 
events are: (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. The Commission believes that the amendments relating to 
submission of events that are added to the Rule are justified by the 
transparency benefits that will result to investors, broker-dealers, 
analysts, and others.
1. Tender Offers
    The Commission is adopting, as proposed, the amendment to add 
tender offers to the list of events in paragraph (b)(5)(i)(C)(8) of the 
Rule.\255\ Under the amendment, a Participating Underwriter must 
reasonably determine that the issuer or obligated person has agreed in 
its continuing disclosure agreement to provide notice of tender offers 
to the MSRB. A number of commenters supported the addition of this 
event item.\256\ Two commenters stated that notice of a tender offer 
will provide meaningful information regarding a particular bond.\257\
---------------------------------------------------------------------------

    \255\ In passing the Williams Act, Public Law 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. Municipal securities, however, generally 
are not subject to Commission rules governing tender offers, 
including rules that set forth disclosure, time periods, and other 
requirements governing tender offers by issuers.
    \256\ See ICI Letter at 8, Fidelity Letter at 2, NFMA Letter at 
2, and SIFMA Letter at 4.
    \257\ See ICI Letter at 8 and Fidelity Letter at 2.
---------------------------------------------------------------------------

    Some commenters, while supporting the amendment to add tender 
offers, recommended modifying this disclosure event. One commenter 
noted that it is not uncommon for tender offers to be made only to 
select municipal security holders.\258\ This commenter stated that, in 
this instance, there is no reason to inform other security holders of a 
limited tender offer, unless the offer would have a material impact on 
those holders.\259\ Accordingly, the commenter recommended restricting 
notice to only those tender offers made to all holders.\260\ Further, 
this commenter and three other commenters suggested that the Commission 
add a materiality qualifier to the provision.\261\
---------------------------------------------------------------------------

    \258\ See NABL Letter at 7.
    \259\ Id.
    \260\ Id.
    \261\ See Connecticut Letter at 2, GFOA Letter at 4, Metro Water 
Letter at 2, and NABL Letter at 7.
---------------------------------------------------------------------------

    The Commission continues to believe that notice of the occurrence 
of any tender offer should be made available to all bondholders because 
this information is important to an investor's ability to make an 
informed and timely decision regarding the security that is the subject 
of the tender offer. Even when tender offers are made to a limited 
number of bondholders, they may be material to other bondholders' 
evaluation of their investment. For example, a tender offer may be made 
to fewer than all bondholders by an obligated person facing financial 
difficulties. In such instance, those holders who are not invited to 
participate in the tender offer would have the option to consider and 
react (i.e., buying, selling, or holding such securities) to the 
information contained in the notice about such a tender offer.\262\
---------------------------------------------------------------------------

    \262\ In addition, two commenters recommended that the 
Commission provide a definition of ``tender offer'' for purposes of 
the Rule. See Kutak Letter at 4 and GFOA Letter at 4. Although the 
term ``tender offer'' has not been defined, the Commission notes 
that the meaning of ``tender offer'' for municipal securities 
purposes is no different from the meaning of ``tender offer'' for 
other securities subject to the tender offer provisions of the 
Exchange Act and related rules. See generally Rule 14d-1(g) under 
the Exchange Act. 17 CFR 240.14d-1(g). One of these commenters also 
suggested that the tender agent, rather than issuer, should submit 
the notice to the MSRB. See GFOA Letter at 4. The Commission notes, 
however, that an issuer already may negotiate to designate a tender 
agent to submit a tender offer notice to the MSRB on its behalf. See 
17 CFR 240.15c2-12(b)(5)(i).
---------------------------------------------------------------------------

    Further, during a tender offer, some investors presently may be 
left in doubt as to whether their securities are subject to the offer 
because information about the tender offer is not readily available to 
them.\263\ To determine the facts about a tender offer, it often is 
necessary for investors to seek pertinent information directly from the 
issuer or other obligated person. Currently, some investors may not be 
able to learn of the existence of a tender offer in a timely fashion, 
which may impair such investors' ability to react to the offer (i.e., 
buying, selling, holding, and if the offer is available to them, 
tendering securities).\264\ Consequently, the Commission believes that 
notice of the existence of a tender offer in a timely manner and in any 
event within ten business days of its occurrence would help to improve 
the timely availability of tender offer information so that investors 
would be offered the opportunity to make informed, timely decisions 
about whether to buy, sell, hold or tender their securities.\265\ 
Furthermore, the Commission believes that such communication provides 
market participants with relevant

[[Page 33119]]

information about the offer and should reduce the likelihood that 
investors will be subject to fraud facilitated by inadequate 
disclosure.\266\
---------------------------------------------------------------------------

    \263\ See Proposing Release, supra note 2, 74 FR at 36843.
    \264\ Tender offers typically require an investor to respond 
within a limited time frame. See Proposing Release, supra note 2, 74 
FR at 36843, n. 104.
    \265\ The amendment retains 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. See supra Section III.C.3. Thus, unlike with respect to 
tender offers, the issuer will be able to make a materiality 
determination with respect to submitting 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 (e.g., sinking fund redemptions) are 
generally included in official statements. Therefore, information 
about such events should already be available to investors. Similar 
information regarding tender offers is not currently as readily 
available to investors.
    \266\ The recent events in the market for ARS illustrate the 
need to provide timely notice (i.e., within ten business days) of 
the occurrence of a tender offer. Since approximately mid-February 
of 2008, the market for ARS has experienced severe illiquidity, with 
adverse consequences to investors who purchased what they may have 
believed to be liquid, cash equivalent investments. In response, 
some issuers and obligated persons offered to purchase some or all 
of their outstanding ARS from investors. See Proposing Release, 
supra note 2, 74 FR at 36843, n. 107. Notices about these tender 
offers, however, may not always be widely disseminated. See 
Proposing Release, supra note 2, 74 FR at 36843, n. 107.
---------------------------------------------------------------------------

2. The Occurrence of Bankruptcy, Insolvency, Receivership, or Similar 
Events Regarding an Issuer or an Obligated Person
    The Commission is adopting, as proposed, the amendment to add new 
paragraph (b)(5)(i)(C)(12) to the Rule, which requires a Participating 
Underwriter to reasonably determine that an issuer or obligated person 
has agreed in its continuing disclosure agreement to provide notice 
about bankruptcy, insolvency, receivership or a similar event with 
respect to the issuer or an obligated person. The Commission also is 
adopting, as proposed,\267\ the Note to new paragraph (b)(5)(i)(C)(12), 
which explains that such an event will be considered to have occurred 
in the following instances: 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 of 
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.\268\ Most commenters 
supported the addition of bankruptcy to the list of disclosure 
events.\269\
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    \267\ The Commission is correcting a typographical error in the 
Note to state ``plan of reorganization'' rather than ``plan or 
reorganization.''
    \268\ 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. See also Proposing Release, supra 
note 2, 74 FR at 36844.
    \269\ See GFOA Letter at 4, NFMA Letter at 2, Connecticut Letter 
at 2, ICI Letter at 8, Fidelity Letter at 2, NABL Letter at 8, 
California Letter at 2, and San Diego Letter at 2.
---------------------------------------------------------------------------

    As the Commission noted in the Proposing Release, although 
municipal issuers and obligated persons are rarely involved in 
bankruptcy, insolvency, receivership, or similar events, the occurrence 
of these events can significantly impact the value of the municipal 
securities.\270\ Thus, information about these events is important to 
investors and other market participants.\271\ Being informed about the 
occurrence of these events will allow investors to make informed 
decisions about whether to buy, sell, or hold the municipal 
security.\272\
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    \270\ See Proposing Release, supra note 2, 74 FR at 36844. Under 
paragraph (b)(5)(i)(C)(2) of the Rule, 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.'' See 
National Association of Bond Lawyers (``NABL'') Form Indenture, 
dated June 1, 2002 (``NABL Form Indenture''). However, this may not 
uniformly be the case. This amendment, therefore, will help improve 
the availability of notice of these events to all investors and 
market participants.
    \271\ See Proposing Release, supra note 2, 74 FR at 36844, n. 
112.
    \272\ As the Commission noted in the Proposing Release, it 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 8, 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. The Commission 
received no comments on these statements.
---------------------------------------------------------------------------

    Some commenters, however, opposed the addition of bankruptcy to the 
list of disclosure events if it was not limited by a materiality 
condition.\273\ One of these commenters also stated that the bankruptcy 
provision should apply only to those obligated persons covered by 
paragraph (b)(5)(i)(A) of the Rule (i.e., those obligated persons for 
whom annual financial information or operating data is presented in the 
final official statement).\274\ This commenter believed that, without 
such a revision, this disclosure event could result in an obligation to 
provide a notice with respect to events that are largely irrelevant to 
the decision to buy, hold, or sell a particular issue of municipal 
securities.\275\ In addition, this commenter believed that issuers or 
other obligated persons may be required to undertake perpetual due 
diligence of all obligated persons to determine whether any such events 
have occurred, including those obligated persons for whom financial or 
operating data is not included in the final official statement.\276\
---------------------------------------------------------------------------

    \273\ See Connecticut Letter at 2, GFOA Letter at 4, Metro Water 
Letter at 2, and NABL Letter at 8.
    \274\ See NABL Letter at 8-9.
    \275\ Id.
    \276\ Id.
---------------------------------------------------------------------------

    The Commission believes that it is unnecessary to include a 
materiality condition for this event item. Bankruptcies and similar 
events involving municipal issuers or obligated persons are significant 
occurrences that are likely to affect the value of a particular 
security. Investors should be informed about such events so that they 
can make their own evaluation about the event's importance under the 
particular facts and circumstances. Moreover, since such bankruptcies 
and similar events are relatively rare,\277\ the Commission believes 
that the burden on issuers or obligated persons to provide notice will 
be modest and is justified by the potential significance of these 
events to investors.
---------------------------------------------------------------------------

    \277\ To illustrate, it has been reported that there were 183 
municipal bankruptcies from 1980 to early 2007. See Sylvan G. 
Feldstein, The Handbook of Municipal Bonds, April 25, 2008 (Wiley).
---------------------------------------------------------------------------

    The Commission also does not believe that it is necessary to limit 
paragraph (b)(5)(i)(C)(12) to obligated persons for whom annual 
financial information and operating data is included in the final 
official statement. The Commission believes that there are a variety of 
methods by which issuers or obligated persons could avoid having to 
monitor directly the activities of other obligated persons, such as 
obtaining, at the time of a primary offering, an agreement from 
obligated persons for whom annual financial information and operating 
data are not included in the final official statement that they will 
provide information pertaining to a bankruptcy, insolvency, 
receivership or similar event to the party responsible for filing event 
notices.

[[Page 33120]]

3. Merger, Consolidation, Acquisition, and Sale of All or Substantially 
All Assets
    The Commission is adopting, as proposed, the amendment to add new 
paragraph (b)(5)(i)(C)(13) to the Rule, which requires a Participating 
Underwriter to reasonably determine that the continuing disclosure 
agreement provides for the submission of notice 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.\278\
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    \278\ The Commission also 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.
---------------------------------------------------------------------------

    A number of commenters supported adding mergers, consolidations, 
acquisitions and substantial asset sales to the list of disclosure 
events in paragraph (b)(5)(i)(C) of the Rule.\279\ In addition, one of 
these commenters recommended deleting the ``ordinary course'' and ``if 
material'' qualifiers from the proposed rule text, because these 
transactions ``are rarely, if ever, in the ``ordinary course of 
business'' or ``immaterial.'' \280\
---------------------------------------------------------------------------

    \279\ See Kutak Letter at 4, NFMA Letter at 2, SIFMA Letter at 
4, Connecticut Letter, GFOA Letter at 4, ICI Letter at 8-9, and 
Fidelity Letter at 3. Two of these commenters recommended that this 
provision also provide for the submission of additional information 
pertaining to such transactions, including offer prices, changes in 
offer prices, withdrawal rights, identity of the offeror, the 
ability of the offeror to finance the offer, conditions of the 
offer, time frame of the transaction, and manner of tendering 
securities and method of acceptance. See ICI Letter at 8-9 and 
Fidelity Letter at 3. The Commission is taking a targeted approach 
at this time. These suggested modifications would require more 
detailed disclosures than the Commission intended for purposes of 
this rulemaking. Nevertheless, some issuers may voluntarily decide 
to incorporate some or all of this information in an event notice 
that is submitted pursuant to a continuing disclosure agreement.
    \280\ See Fidelity Letter at 2.
---------------------------------------------------------------------------

    The Commission believes that notice of the events specified in this 
new Rule provision is important information for investors and market 
participants.\281\ While these corporate-type events are believed to be 
rare among governmental issuers,\282\ they are not uncommon for 
obligated persons, such as health care institutions, other non-profit 
entities, and for-profit businesses.\283\ As the Commission noted in 
the Proposing Release, these events may signal that a significant 
change in the obligated person's corporate structure could occur or has 
occurred.\284\ In such cases, investors reasonably expect to be 
informed about the identity and financial condition of the obligated 
person who would be responsible, following the event, for the payment 
of the subject security.
---------------------------------------------------------------------------

    \281\ See supra note 271 (suggesting that disclosure information 
should include information relating to material acquisitions and 
dispositions).
    \282\ See Proposing Release, supra note 2, 74 FR at 36845, n. 
117.
    \283\ See Proposing Release, supra note 2, 74 FR at 36845, n. 
118.
    \284\ See Proposing Release, supra note 2, 74 FR at 36845.
---------------------------------------------------------------------------

    In addition, the Commission believes that it is appropriate to 
retain the ``ordinary course'' and ``if material'' conditions because 
some events, such as small acquisitions, may occur occasionally, but 
have little or no effect on the value of the municipal security or on 
an investor's decision whether to buy, sell or hold the security. 
Similarly, some obligated persons, such as large health care or senior 
living organizations may be permitted under their loan documents to 
sell small parcels of real estate that are not necessary to their 
operations or to change the legal structure of one or more of their 
component entities (such as a single nursing home), if certain 
covenants are met. Requiring notices to be filed in the case of all 
such actions or events that occur would impose a burden on such 
obligated persons, while providing little useful information to 
investors.
    Two commenters opposed adding mergers and acquisitions to the list 
of disclosure events.\285\ They argued that providing notice of a 
merger or acquisition, particularly for closely-held companies, upon 
signing of the relevant agreement would be ``anti-competitive,'' 
because such agreements often are signed prior to public announcement 
and are contingent on approval of the municipality and the lender. In 
their view, such notice could allow competitors to interfere with the 
transaction's consummation prior to its closing.\286\ However, the 
Commission believes that competition in the market for corporate 
control could be enhanced, not reduced, by the possibility of 
disclosure, creating more open conditions for the sale of privately-
held companies. The Commission further notes that parties to mergers 
and acquisition agreements generally may, subject to legal obligations, 
include remedies in such agreements that are designed to balance the 
conflicting interests of the buyer and the seller. As noted in the 
Proposing Release, the Commission believes that notice of such mergers, 
consolidations, acquisitions and substantial asset sales, if material, 
is important to investors in assessing the value of their 
investments.\287\ These transactions may have an impact on the issuer's 
or obligated person's financial condition, which, in turn, would have 
an impact on the price of the municipal securities issued by such 
parties and could change the identity of the obligor itself. 
Accordingly, the Commission believes that these disclosures are 
justified in light of the importance of this information to investors.
---------------------------------------------------------------------------

    \285\ See CRRC Letter at 5 and WCRRC Letter.
    \286\ Id.
    \287\ See also Proposing Release, supra note 2, 74 FR at 36845.
---------------------------------------------------------------------------

    One commenter noted that the disclosure item pertaining to mergers, 
consolidations, acquisitions and substantial asset sales should be 
revised so that it only applies with respect to those obligated persons 
covered by paragraph (b)(5)(i)(A) of the Rule (i.e., those obligated 
persons for whom annual financial information or operating data is 
presented in the final official statement).\288\ This commenter

[[Page 33121]]

believed that issuers or other obligated persons may be required to 
undertake perpetual due diligence on all obligated persons to determine 
whether any such events occurred, including those for whom financial or 
operating data is not included in the final official statement.\289\
---------------------------------------------------------------------------

    \288\ See NABL Letter at 8. This commenter and several other 
commenters suggested that the Commission add the ``if material'' 
qualifier to this event item. See Connecticut Letter at 2, GFOA 
Letter at 4, Metro Water Letter at 2, and NABL Letter at 7. The 
Commission points out, however, that new paragraph (b)(5)(i)(C)(13) 
contains a materiality condition. As the Commission noted in the 
Proposing Release, it does not believe that all mergers, 
consolidations, acquisitions, and substantial asset sales are 
necessarily of sufficient importance that information pertaining to 
them needs to be made available in every instance. For example, a 
merger could involve the combination of a shell corporation or a 
small entity into a very large health care organization that is a 
conduit borrower. Such mergers 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, generally would not be important to investors. See 
Proposing Release, supra note 2, 74 FR at 36845. The Commission 
received no comments on this statement.
    \289\ See NABL Letter at 8.
---------------------------------------------------------------------------

    Similar to the Commission's discussion in the context of the 
bankruptcy and insolvency disclosure event, the Commission does not 
believe that it is appropriate to limit paragraph (b)(5)(i)(C)(13) to 
obligated persons for whom annual financial information and operating 
data is presented in the final official statement. The Commission 
believes that there are a variety of methods by which issuers or 
obligated persons could avoid having to monitor directly the activities 
of other obligated persons, such as obtaining, at the time of a primary 
offering, an agreement from obligated persons for whom annual financial 
information and operating data are not included in the final official 
statement that they will provide information pertaining to a merger, 
consolidation, acquisition or substantial asset sale to the party 
responsible for filing event notices. The Commission also notes that a 
merger, consolidation, acquisition or substantial asset sale involving 
an obligated person would not trigger an event notice if such 
transaction by an obligated person does not meet the materiality 
standard.
4. Successor, Additional, or Change in Trustee
    Finally, the Commission is adopting, as proposed, the amendment to 
add new paragraph (b)(5)(i)(C)(14) to the Rule, which requires that a 
Participating Underwriter must reasonably determine that the continuing 
disclosure agreement provides for the submission of notice of an 
appointment of a successor or additional trustee, or a change of name 
of a trustee, if material. Most commenters expressed general support 
for the addition of this event item to the Rule.\290\
---------------------------------------------------------------------------

    \290\ See Connecticut Letter at 2, NFMA Letter at 2, SIFMA 
Letter at 4, ICI Letter at 8, Fidelity Letter at 3, and GFOA Letter 
at 4.
---------------------------------------------------------------------------

    Two commenters, however, expressed concern regarding the increased 
costs and burdens that some issuers would incur to report changes 
pertaining to trustees within the Rule's ten business day time 
frame.\291\ One of these commenters noted that, ``in the case of the 
small less sophisticated borrower * * * obligors do not have the 
resources available to track and report on changes in the trustee on a 
timely basis or to determine the materiality of a name change.'' \292\ 
The other commenter noted that ``turmoil in the banking sector has 
meant frequent cha[n]ges in trustees,'' and that ``many issuers and 
obligated persons are not informed of these changes within the proposed 
ten-day time frame, much less in sufficient time to identify the need 
to file a notice and prepare the relevant notice within such time 
period.'' \293\ These commenters recommended either that knowledge of 
the event rather than the occurrence of the event trigger the time 
period to disclose the event, or that the trustee disclose the changes 
directly to the MSRB.\294\
---------------------------------------------------------------------------

    \291\ See CHEFA Letter at 3 and NAHEFFA Letter at 4.
    \292\ See CHEFA Letter at 3.
    \293\ See NAHEFFA Letter at 4.
    \294\ Id.
---------------------------------------------------------------------------

    The Commission continues to believe in the importance of an 
investor's ability to be informed about material changes in a trustee's 
identity, given the significance of trustees for bondholders.\295\ A 
trustee makes critical decisions that impact investors and is under a 
duty to represent the interests of bondholders. For example, a trustee 
often must determine whether: Proposed amendments to the governing 
documents of the municipal security are permissible without bondholder 
consent; parity obligations may be issued; security may be released; or 
a default event has occurred.\296\ 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.\297\ A trustee also may be responsible for providing 
information requested by investors. Often, the trustee serves as the 
issuer's dissemination agent for continuing disclosures. Although under 
normal circumstances the identity of the trustee may have little or no 
influence on a decision to buy or sell a security, bondholders would 
need to know who to contact, particularly when an issuer or other 
obligated person may be experiencing financial difficulty. The 
Commission is currently unaware of any method by which investors, 
particularly individual investors, have a consistent means of obtaining 
up-to-date information about changes to the identity of the trustee. In 
the Commission's view, these factors support the need for investors to 
know the identity of the trustee.
---------------------------------------------------------------------------

    \295\ See Proposing Release, supra note 2, 74 FR at 36845-46.
    \296\ See NABL Form Indenture, supra note 270.
    \297\ Id.
---------------------------------------------------------------------------

    The Commission believes that issuers and other obligated persons 
could take steps to become aware promptly of any change of trustee or 
in the name of a trustee by obtaining an agreement from the trustee to 
provide advance notice of such an event to them, e.g., by having the 
indenture specify that the trustee will immediately provide this 
information to the issuer or obligated person.\298\ Furthermore, the 
addition of a substitute or additional trustee generally involves the 
participation of the issuer.\299\ In such an event, the issuer would 
likely have adequate time to comply with its undertaking to submit 
notice of a change in trustee event within the requisite ten business 
day time frame in order for investors to become aware of the identity 
of the new trustee. Finally, an issuer or other obligated person could 
elect to designate the trustee as its agent to provide notice of such 
an event directly to the MSRB.\300\
---------------------------------------------------------------------------

    \298\ See infra Section IV., discussing the obligations of 
underwriters of municipal securities under the antifraud provisions 
of the federal securities laws, and note 351.
    \299\ See, e.g., NABL Form Indenture, supra note 270.
    \300\ Rule 15c2-12(b)(5)(i) permits an issuer or obligated 
person to provide documents to the MSRB either directly or 
indirectly through an indenture trustee or a designated agent. See 
17 CFR 240.15c2-12(b)(5)(i).
---------------------------------------------------------------------------

    A few commenters expressed concerns about the inclusion of a 
materiality condition in this provision.\301\ Two commenters noted that 
small or less sophisticated issuers may have difficulty determining the 
materiality of a trustee's name change.\302\ Another commenter 
suggested not including the materiality condition because it believed 
that all trustee changes are material and ``it is critical that 
investors are informed of such changes as their rights are generally 
exercised through the actions of the trustee.'' \303\ One commenter 
suggested that the Commission also should require that the event notice 
include the trustee's new contact information.\304\
---------------------------------------------------------------------------

    \301\ See CHEFA Letter at 3, NAHEFFA Letter at 4, and Fidelity 
Letter at 3.
    \302\ See CHEFA Letter at 3 and NAHEFFA Letter at 4.
    \303\ See Fidelity Letter at 3.
    \304\ See NFMA Letter at 2. Issuers should consider including 
the trustee's updated contact and identification information in any 
notice regarding a change in the trustee.
---------------------------------------------------------------------------

    As noted in the Proposing Release, the Commission believes that 
whether a change involving a trustee is material

[[Page 33122]]

must be determined through a review of the particular facts and 
circumstances surrounding such an event.\305\ It is possible that a 
change is so minor that it would not be material. 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.\306\ On the other hand, when a trustee transfers all or 
part of its trust operations to a different organization, on account of 
a merger or otherwise, the Commission believes that it is important for 
a bondholder to be able to determine the identity of the new trustee.
---------------------------------------------------------------------------

    \305\ See Proposing Release, supra note 2, 74 FR at 36845, n. 
122.
    \306\ The Commission received no comments on this example.
---------------------------------------------------------------------------

F. Other Comments

    Several commenters advocated additional changes to the Rule. Two 
commenters suggested that the Commission establish a definitive time 
period within which the delivery of required ongoing financial 
information should be provided.\307\ Some commenters also suggested 
that the Commission add other disclosure events to the Rule. These 
events included: (i) Long-term funding commitments for payments; \308\ 
(ii) potential termination liabilities for an issuer's interest rate 
swaps; \309\ (iii) the creation of any material financial obligation 
(including contingent obligations); \310\ (iv) a ``catch all'' event 
subject to a materiality determination; \311\ (v) clarification of the 
tax-exempt status of a bond; \312\ (vi) modifications to escrow 
agreements or escrows; \313\ (vii) various events related to swap 
transactions; \314\ (viii) the conversion of bank bonds to a loan or 
term note; \315\ and (ix) the termination of a conditional liquidity 
facility.\316\ Two commenters requested that the Commission provide 
interpretative guidance clarifying that climate risk disclosure is 
material information that should be disclosed to bondholders.\317\ 
Finally, one commenter recommended that the Rule should require every 
continuing disclosure agreement to include language that successor 
parties will be bound by the terms of the agreement.\318\
---------------------------------------------------------------------------

    \307\ See e-certus Letter I at 9 and Fidelity Letter at 3-4.
    \308\ See Shalanca Letter at 1.
    \309\ See Folts Letter at 1.
    \310\ See ICI Letter at 9 and Fidelity Letter at 3.
    \311\ Id.
    \312\ Id.
    \313\ Id.
    \314\ See NFMA Letter at 3.
    \315\ Id.
    \316\ Id.
    \317\ See T.R. Rose and Sierra Letter and NRDC Letter.
    \318\ See Fidelity Letter at 4.
---------------------------------------------------------------------------

    Other commenters proffered additional recommendations to improve 
the municipal securities market in general and its transparency. In 
this regard, three commenters suggested that the Commission petition 
Congress to repeal the Tower Amendment, which restricts the Commission 
from directly imposing disclosure requirements on municipal 
issuers.\319\ One commenter recommended that the Commission establish 
specific ``listing'' and ``de-listing'' conditions for the MSRB's EMMA 
system.\320\ Another commenter suggested creating a 48-hour right of 
rescission for retail bond buyers to rescind a transaction if the 
seller has misrepresented information about a particular bond 
offering.\321\ Finally, one commenter suggested the creation of an on-
line marketplace for bond dealers and individuals to buy or sell 
municipal securities.\322\
---------------------------------------------------------------------------

    \319\ See e-certus Letter I at 3, ICI Letter at 10-11, and 
Fidelity Letter at 3.
    \320\ See e-certus Letter I at 10.
    \321\ See Becker Letter.
    \322\ See Boatwright Letter.
---------------------------------------------------------------------------

    The Commission welcomes the foregoing views and suggestions to 
revise Rule 15c2-12 and improve the transparency and other aspects of 
the market for municipal securities. As evidenced by its adoption of 
the 2008 Amendments and today's amendments, the Commission is committed 
to considering proposals to further enhance the scope of municipal 
market disclosures and their dissemination to investors. Although the 
Commission, in this rulemaking, is taking a targeted approach at this 
time, it will consider commenters' views as it continues its efforts to 
bring greater transparency and other improvements to the municipal 
securities market.

G. Compliance Date and Transition

    The amendments to Rule 15c2-12 will impact only those continuing 
disclosure agreements that are entered into in connection with primary 
offerings of municipal securities that are subject to the Rule and that 
occur on or after the December 1, 2010 compliance date of these 
amendments. The Commission understands that existing undertakings by 
issuers and obligated persons that were entered into prior to the 
compliance date of these amendments do 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 the 
amendments added to paragraph (b)(5)(i)(C) of the Rule. In addition, 
such existing undertakings provide for the submission of the events 
specified in paragraph (b)(5)(i)(C) of the Rule, ``if material.'' 
Further, a Participating Underwriter in remarketings of demand 
securities that are outstanding in the form of demand securities on the 
day preceding the compliance date of these amendments, and that 
continuously have remained outstanding in the form of demand 
securities, is not required to reasonably determine that the issuer or 
other obligated person has entered into a continuing disclosure 
agreement, as prescribed by the amended Rule. Likewise, in the case of 
municipal securities subject to a continuing disclosure agreement 
entered into prior to the compliance date of these amendments, the 
recommending broker, dealer, or municipal securities dealer will 
receive notice solely of those events covered by that continuing 
disclosure agreement, namely, the eleven events specified in the Rule 
prior to today's amendments. These continuing disclosure agreements do 
not cover any of the items to be added to the Rule by the amendments. 
Thus, in the case of continuing disclosure agreements entered into 
prior to the compliance date of these amendments, it is not necessary 
for the recommending broker, dealer, or municipal securities dealer to 
have procedures in place that provide reasonable assurance that it 
receive prompt notice of the events added to the Rule by these 
amendments.
    The Commission requested comment on the impact of the amendments 
with respect to brokers, dealers, and municipal securities dealers that 
recommend the purchase or sale of municipal securities. The Commission 
received one comment \323\ in response to its inquiry 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 as discussed above) than continuing 
disclosure agreements entered into on or after the compliance date of 
these amendments. This commenter recommended that the Commission 
require that each continuing disclosure agreement entered into by an 
issuer after

[[Page 33123]]

the compliance date of these amendments should, by its terms, amend all 
prior continuing disclosure agreements entered into by the issuer to 
incorporate the new requirements of the amended Rule.\324\ The 
Commission observes that, under the commenter's suggestion, the effect 
would be to mandate the amendment of existing contracts. The Commission 
believes that the better course is to apply the amendments to 
continuing disclosure agreements entered into on or after the 
compliance date. While the Commission is mindful of the implications of 
differing disclosure obligations that will occur over time as a result 
of this decision, this difference should diminish as existing municipal 
securities mature or are redeemed.
---------------------------------------------------------------------------

    \323\ See Fidelity Letter at 5.
    \324\ Id.
---------------------------------------------------------------------------

    Four commenters concurred with the Commission's proposed compliance 
date of no earlier than three months after adoption of the 
amendments.\325\ The Commission also received comments suggesting 
various time frames for the compliance date of the amendments. One 
commenter recommended a compliance date no later than three months 
after Commission approval,\326\ and another commenter recommended no 
later than nine months after Commission approval.\327\ Two commenters 
suggested a time frame of no earlier than six months after the adoption 
of the amendments by the Commission.\328\ These two commenters believed 
that this suggested time frame is necessary to provide issuers, brokers 
and dealers with sufficient time to familiarize themselves with new 
amendments to the Rule and to establish processes to comply with the 
new amendments.\329\ In addition, one of these commenters suggested an 
even further unspecified delay for implementation of the amendments 
pertaining to demand securities.\330\
---------------------------------------------------------------------------

    \325\ See Kutak Letter, CHEFA Letter, Fidelity Letter at 2, and 
ICI Letter at 10.
    \326\ See NFMA Letter at 3.
    \327\ See MSRB Letter at 2.
    \328\ See NABL Letter at 10 and GFOA Letter at 5.
    \329\ Id.
    \330\ See NABL Letter at 10.
---------------------------------------------------------------------------

    The Commission has considered commenters' various recommendations 
and believes that a compliance date of approximately six months from 
the date of the Commission's approval of the amendments is appropriate. 
The Commission believes that this six month period should be sufficient 
time for the MSRB to make the necessary modifications to its EMMA 
system, for Participating Underwriters to revise their procedures to 
comply with the Rule, as revised, and for issuers and obligated persons 
to become aware of the amendments and plan for their implementation. 
Accordingly, the Commission is establishing December 1, 2010 as the 
compliance date of these amendments.

IV. Interpretive Guidance With Respect to Obligations of Participating 
Underwriters

    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.\331\ Municipal security holders' access to meaningful 
information promotes informed investment decision-making about whether 
to buy, sell, or hold municipal securities \332\ and better protection 
against misrepresentation and fraud. Availability of that information 
also will aid brokers, dealers, and municipal securities dealers in 
complying with their obligations 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.\333\ 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.\334\
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    \331\ See Proposing Release, supra note 2, 74 FR at 36847. See 
also 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), E-mail from Peter J. Schmitt, CEO, DPC Data 
Inc., to the Commission, Rule--Comments, dated September 19, 2008, 
regarding the 2008 Proposed Amendments, and Peter J. Schmitt, 
Estimating Municipal Securities Continuing Disclosure Compliance: A 
Litmus Test Approach (available at http://www.dpcdata.com/html/about-researchpapers.html).
    \332\ See, e.g., 2008 Amendments Adopting Release, supra note 8, 
73 FR at 76129.
    \333\ See 1994 Amendments Adopting Release, supra note 8, 59 FR 
at 59594-5. The Commission notes that demand securities are subject 
to paragraph (b)(5), as well as paragraph (c), of the Rule as a 
result of the amendments being adopted today.
    \334\ The Commission received no comments on this statement.
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    In prior releases, the Commission set forth its interpretations of 
the obligations of municipal underwriters under the antifraud 
provisions of the federal securities laws.\335\ 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, 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.\336\ 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.\337\
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    \335\ See 1988 Proposing Release, supra note 58; the 1989 
Adopting Release, supra note 8, 54 FR at 28811-12; and Securities 
Exchange Act Release No. 33741 (March 9, 1994), 59 FR 12748 (March 
17, 1994) (``1994 Interpretive Release'') (reaffirming the 
Commission's interpretation of the obligations of municipal 
underwriters under the antifraud provisions of the federal 
securities laws).
    \336\ See 1989 Adopting Release, supra note 8, 54 FR at 28811. 
See also 1988 Proposing Release, supra note 128, 53 FR at 37787.
    \337\ In light of the underwriters' obligation, as discussed in 
the 1988 Proposing Release, supra note 335, 53 FR at 37787-91, the 
1989 Adopting Release, supra note 8, 54 FR 28811-12, and in the 1994 
Interpretive Release, supra note 335, 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 a disclaimer by an 
underwriter 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 therefor, is 
misleading and should not be included in official statements. See 
1994 Interpretive Release, supra note 335, 59 FR 12758 n. 103.
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    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.\338\ 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.\339\ 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

[[Page 33124]]

informational undertakings in the continuing disclosure agreement.\340\ 
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, 
therefore, should be disclosed in the final official statement.\341\ 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 to comply with their undertakings to 
provide secondary market disclosure.\342\ Moreover, such disclosure 
would assist underwriters and others in assessing the reliability of 
issuers' or obligated persons' disclosure representations.\343\ 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.
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    \338\ See 1988 Proposing Release, supra note 335, 53 FR at 
37790.
    \339\ Pursuant to the 2008 Amendments, the MSRB is the sole 
information repository.
    \340\ Rule 15c2-12(f)(3), 17 CFR 15c2-12(f)(3).
    \341\ See 1994 Amendments Adopting Release, supra note 8, 59 FR 
at 59594-5.
    \342\ Id. at 59595.
    \343\ Id.
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    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.\344\ 
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. 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.\345\ 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); (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.\346\ Sole reliance on the 
representations of the issuer will not suffice.\347\
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    \344\ See 1988 Proposing Release, supra note 58, 53 FR at 37789, 
and 1989 Adopting Release, supra note 8, 54 FR 28811-12.
    \345\ Id.
    \346\ Id.
    \347\ See 1988 Proposing Release, supra note 58, 53 FR at 37789.
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    The Commission has determined further to expound upon its prior 
interpretations regarding municipal underwriters' 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 an issuer's or obligated 
person's ongoing disclosure representations, if such issuer or 
obligated person has a history of persistent and material breaches or 
has not remedied such past failures by the time the offering 
commences.\348\ The Commission believes that if the underwriter finds 
that the issuer or obligated person has on multiple occasions during 
the previous five years \349\ failed to provide on a timely basis 
continuing disclosure documents, including event notices and failure to 
file notices, as required in a continuing disclosure agreement for a 
prior offering, 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 
also is doubtful that an underwriter could meet the reasonable belief 
standard without the underwriter affirmatively inquiring as to that 
filing history.\350\ The underwriter's reasonable belief should 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.\351\
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    \348\ See 1994 Amendments Adopting Release, supra note 8, 59 FR 
at 59595.
    \349\ 17 CFR 240.15c2-12(f)(3).
    \350\ 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.
    \351\ In connection with event notices concerning the 
appointment of a successor or additional trustee or the name change 
of a trustee, if an issuer or obligated person obtains a contractual 
commitment from the trustee specifying that the trustee will provide 
notice of a change in the trustee's name to the MSRB or the issuer 
or obligated person, the trustee fails to provide such notice, and 
the issuer or obligated person otherwise is unaware of the trustee's 
name change, the Commission believes that the underwriter may take 
the trustee's failure to notify into account as a substantial 
mitigating factor in forming a reasonable belief as to the accuracy 
and completeness of the issuer's or obligated person's 
representation regarding compliance with its undertakings.
     Moreover, for so long as an issuer or obligated person 
establishes and maintains policies and procedures reasonably 
designed in light of the relevant facts and circumstances to ensure 
compliance with its undertaking to provide notice of a rating change 
with respect to its municipal security to the MSRB in a timely 
manner, not in excess of ten business days after the occurrence of 
the rating change, and the issuer or obligated person regularly 
reviews the effectiveness of its policies and procedures and takes 
prompt action to remedy any deficiencies, the Commission believes 
that an underwriter, in forming a reasonable belief as to the 
accuracy and completeness of the issuer's or obligated person's 
representations regarding compliance with its undertakings, may take 
into account the issuer's or obligated person's policies and 
procedures, regular reviews, and prompt remedial action as a 
substantial mitigating factor in the event of the issuer's or 
obligated person's unintentional failure to provide such notice in 
the prescribed manner.
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    In the Proposing Release, the Commission solicited comment 
regarding alternative or additional ways in which an underwriter could 
satisfy its obligations, including obligations to ascertain if issuers 
or obligated persons are abiding by their municipal disclosure 
commitments.\352\ The Commission specifically requested that commenters 
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.
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    \352\ See Proposing Release, supra note 2, 74 FR at 36848.
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    The Commission received comments expressing concern that it can be 
labor intensive and costly,\353\ and even impossible,\354\ for an 
underwriter to make a reasonable determination that an issuer or an 
obligated person would provide continuing disclosure information 
pursuant to the Commission's interpretation. These commenters 
particularly pointed to the difficulties underwriters face in examining 
event disclosures for sufficiency.\355\ The commenters also

[[Page 33125]]

noted that, because underwriters are expected to examine disclosures 
over a five-year period preceding new offerings, they need to continue 
to depend on the Nationally Recognized Municipal Securities Information 
Repository (``NRMSIR'') network for such information, which entails 
searching for various filings in each of the NRMSIRs.\356\ 
Consequently, the commenters suggested that underwriters be permitted 
to rely on representations by issuers or obligated persons that they 
are in compliance with previous disclosure commitments as a basis for 
forming a reasonable determination that such persons would comply going 
forward.\357\
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    \353\ See RBDA Letter at 2.
    \354\ See NABL Letter at 11-12 and SIFMA Letter at 4.
    \355\ See NABL Letter at 11-12, RBDA Letter at 2-3, and SIFMA 
Letter at 4.
    \356\ See RBDA Letter at 2 and SIFMA Letter at 4.
    \357\ See NABL Letter at 12, RBDA Letter at 3, and SIFMA Letter 
at 4. Further, one commenter asked the Commission to clarify that 
underwriters may take into account the significance, materiality, 
and extenuating circumstances of an issuer's or obligated person's 
non-compliance with event disclosure provisions of continuing 
disclosure agreements. See NAHEFA Letter at 4. As the Commission has 
stated above, an underwriter's determination to recommend any 
municipal security must be on a ``reasonable basis.'' Therefore, the 
underwriter may consider such factors.
---------------------------------------------------------------------------

    The Commission believes that the interpretation included in the 
Proposing Release is warranted, and it reiterates that interpretation 
in this Adopting Release. The Commission continues to believe that the 
benefits to investors from its interpretation justify the effort 
required of underwriters to determine whether an issuer has a history 
of repeatedly and materially breaching its undertakings.\358\ The 
Commission has considered the comments described above and believes 
that it is appropriate to add to its interpretation to address the 
circumstances and extent of underwriter reliance on information 
provided by issuers and obligated persons concerning event disclosures, 
as raised by these comments.
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    \358\ Since the Commission has not applied the primary market 
provisions of the Rule to demand securities, the definition of 
``final official statement'' does not apply to demand securities. 
The Commission notes, however, that investors may have an 
expectation that official statements for demand securities will 
contain comparable information (such as a failure to comply, in all 
material respects, with any previous continuing disclosure 
undertakings) to that referred in the definition of ``final official 
statement'' under the Rule.
---------------------------------------------------------------------------

    The Commission acknowledges that it may not be possible in some 
cases for an underwriter independently to determine whether some 
events, for which an event notice is necessary, have occurred.\359\ In 
order to obtain this information, an underwriter may take steps, such 
as asking questions of an issuer and, where appropriate, obtaining 
certifications from an issuer, obligated person or other appropriate 
party about facts, such as the occurrence of specific events listed in 
paragraph (b)(5)(i)(C) of the Rule (without regard to materiality), 
that the underwriter may need to know in order to form a reasonable 
belief in the accuracy and completeness of an issuer's or obligated 
person's ongoing disclosure representations. However, as discussed 
above, the underwriter may not rely solely upon the representations of 
an issuer or obligated person concerning the materiality of such events 
or that it has, in fact, provided annual filings or event notices to 
the parties identified in its continuing disclosure agreements (i.e., 
NRMSIRs, MSRB, and State Information Depositories).\360\ Instead, an 
underwriter should obtain evidence reasonably sufficient to determine 
whether and when such annual filings and event notices were, in fact, 
provided.\361\ The underwriter therefore must rely upon its own 
judgment, not solely on the representation of the issuer or obligated 
person, as to the materiality of any failure by the issuer or obligated 
person to comply with a prior undertaking.\362\
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    \359\ Some of such information, such as the receipt of proposed 
or final determinations of taxability, may be known solely to the 
issuer or obligated person.
    \360\ Therefore, the underwriter may not likewise rely solely on 
a written certification from an issuer or obligated person that it 
has provided all filings or notices.
    \361\ For example, for annual filings and event notices due 
prior to July 1, 2009, an underwriter could reasonably rely upon 
information obtained from NRMSIRs and SIDs. In addition, an 
underwriter could rely upon other evidence that such information was 
provided, such as a certified copy of the annual filing or an event 
notice from a responsible issuer official, representative of an 
obligated person, or a designated agent and a receipt from a 
delivery service or other evidence that the information had, in 
fact, been sent. For filings made on or after July 1, 2009, however, 
an underwriter should examine the filings available on the MSRB's 
EMMA system. If the underwriter finds that some annual filings or 
event notices appear to be missing, it may request the issuer 
official or representative of an obligated person to provide a 
written certification and evidence showing whether and when such 
information was provided to the MSRB.
    \362\ The Commission notes that the definition of ``final 
official statement'' in the Rule provides for the inclusion of any 
instances in the previous five years in which each person specified 
pursuant to Rule 15c2-12(b)(5)(ii) failed to comply, in all material 
respects, with any previous undertakings in a written contract or 
agreement specified in Rule 15c2-12(b)(5)(i).
---------------------------------------------------------------------------

    The Commission notes that the obligation of a Participating 
Underwriter to determine whether an issuer or an obligated person has 
filed continuing disclosure documents is not new but dates back to when 
paragraph (b)(5) of the Rule was adopted in 1994.\363\ Moreover, the 
Commission notes that the launch of the MSRB's EMMA system should 
assist underwriters in complying with their obligations. To the extent 
underwriters must rely on NRMSIRs for disclosures made prior to the 
creation of EMMA,\364\ the Commission notes that such reliance is time-
limited. Since final official statements of offerings subject to the 
Rule must disclose the failures of an issuer or obligated person to 
comply with continuing disclosure undertakings only for the previous 
five years, underwriters presumably will no longer need to rely on 
various NRMSIRs within approximately four years.\365\
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    \363\ See 1994 Amendments Adopting Release, supra note 8.
    \364\ See 2008 Amendments Adopting Release, supra note 8.
    \365\ Since EMMA became effective as of July 1, 2009, continuing 
disclosure documents for approximately the past year can be found 
centrally within that system. Id.
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V. Paperwork Reduction Act

    The Rule, as amended, contains ``collection of information 
requirements'' within the meaning of the Paperwork Reduction Act of 
1995 (``PRA'').\366\ In accordance with 44 U.S.C. 3507 and 5 CFR 
1320.11, the Commission 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.
---------------------------------------------------------------------------

    \366\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission solicited comments on the 
collection of information requirements. The Commission noted that the 
estimates of the effect that the amendments will have on the collection 
of information were based on data from various sources, including the 
most recent PRA submission for Rule 15c2-12. As discussed above, the 
Commission received twenty-nine comment letters on the proposed 
rulemaking. Of the comment letters the Commission received, some 
commenters addressed the collection of information aspects of the 
proposal.\367\ The Commission recently received data from the MSRB 
reflecting the number of submissions to its EMMA system's continuing 
disclosure service for the eight-month period from July 1, 2009, 
through February 28, 2010.\368\ This data includes

[[Page 33126]]

the number of annual filings, event notices, and failure to file 
notices that were submitted to EMMA during this period. Because the 
EMMA system is now in operation and issuers or their agents are 
submitting continuing disclosure documents to it, the MSRB is able to 
provide the Commission with numbers for continuing disclosure documents 
for an eight-month period, based on its actual experience with the new 
system. When the eight months of EMMA data is annualized, the resulting 
estimate corresponds closely with the Commission's collection of 
information for estimates of continuing disclosure submissions in the 
Proposing Release.\369\ The Commission is revising its estimates 
contained in the Proposing Release slightly, however, to provide 
estimates based on eight months of actual data provided by the MSRB for 
annual filings, event notices, and failure to file notices.\370\
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    \367\ See NABL Letter, e-certus Letter I, SIFMA Letter, GFOA 
Letter, Connecticut Letter, California Letter, San Diego Letter, 
NAHEFFA Letter, CHEFA Letter, Kutak Letter, Halgren Letter, Los 
Angeles Letter, ICI Letter, Fidelity Letter, Metro Water Letter, 
NFMA Letter, CRRC Letter, and WCRRC Letter.
    \368\ See e-mail from Ernesto A. Lanza, General Counsel, MSRB, 
to Martha M. Haines, Assistant Director and Chief, Office of 
Municipal Securities, Division, Commission, dated March 3, 2010 
(providing statistics relating to the number of submissions to the 
MSRB's EMMA continuing disclosure service). The MSRB commenced 
operating the continuing disclosure service of the EMMA system on 
July 1, 2009.
    \369\ See infra notes 417, 418, and 421.
    \370\ See id. See also infra Section V.D.
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A. Summary of Collection of Information

    Pursuant to paragraph (b) of Rule 15c2-12, a Participating 
Underwriter 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. Under paragraph (c) of the Rule, a broker-dealer that recommends 
the purchase or sale of a municipal security is required to 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.
    Under the amendments, the Commission is modifying paragraph 
(d)(1)(iii) of the Rule by adopting changes to paragraph (d)(5) to the 
Rule, thereby applying paragraphs (b)(5) and (c) of the Rule to a 
primary offering of demand securities in authorized denominations of 
$100,000 or more (i.e., demand securities). This change applies to any 
initial offering and remarketing that is a primary offering of demand 
securities occurring on or after the compliance date of the amendments. 
However, to address commenters' concerns about the impact of the 
proposal on existing demand securities, the amendment does not apply to 
remarketings of demand securities that are outstanding in the form of 
demand securities on the day preceding the amendments' compliance date 
and that continuously have remained outstanding in the form of demand 
securities (i.e., such securities can qualify for a limited grandfather 
provision).\371\
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    \371\ See supra Section III.A.
---------------------------------------------------------------------------

    Under paragraph (b)(5)(i)(C) of Rule 15c2-12, a Participating 
Underwriter is required to reasonably determine that the issuer or 
obligated person has undertaken in a continuing disclosure agreement to 
provide an event notice to the MSRB upon any of 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.\372\ Under the amendments, the 
Commission is deleting the ``if material'' condition that existed in 
the Rule with respect to these events.
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    \372\ 17 CFR 240.15c2-12(b)(5)(i)(C).
---------------------------------------------------------------------------

    The Commission, however, is retaining the ``if material'' condition 
regarding certain other events listed in paragraph (b)(5)(i)(C) of the 
Rule. A Participating Underwriter will continue to be required to 
reasonably determine that the issuer or obligated person has undertaken 
in a continuing disclosure agreement to provide notice to the MSRB with 
respect to the following events, if material: (1) Non-payment related 
defaults; (2) modifications to rights of security holders; (3) bond 
calls; and (4) release, substitution, or sale of property securing 
repayment of the securities.
    In addition, under the amendments, the Commission is adding 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 status of the securities, or 
other material events affecting the tax status of the security; (2) 
tender offers; (3) bankruptcy, insolvency, receivership or similar 
event of the 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, under the amendments, Participating Underwriters will 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 
simply in ``a timely manner.''

B. 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 Rule for demand securities, the 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 
or obligated persons. The amendments should assist investors and other 
municipal securities market participants to obtain information about 
municipal securities, including demand securities, and thus facilitate 
their investment decisions and reduce the likelihood of fraud 
facilitated by inadequate disclosure. In addition, the amendments 
should provide brokers, dealers, and municipal securities dealers with 
access to important information about municipal securities

[[Page 33127]]

that they can use to carry out their obligations under the securities 
laws. This information may 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, the Commission and its 
staff, and the public generally.

C. Respondents

    The paperwork collection associated with the Commission's 
amendments to Rule 15c2-12 applies to broker-dealers, issuers of 
municipal securities, and the MSRB. Although in the Proposing Release 
the Commission estimated that its proposed amendments would not change 
the number of broker-dealer respondents, the Commission estimated that 
there would be an increase in the number of issuer respondents. Because 
the proposed amendments would have expanded the types of securities 
covered under subparagraphs (b)(5) and (c) of the Rule, there would 
have been an increase in the number of issuers having a paperwork 
burden. As discussed below, the Commission estimated 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.\373\ In the Proposing Release, the 
Commission estimated that the number of respondents impacted by the 
paperwork collection associated with the Rule would consist of 250 
broker-dealers,\374\ 12,000 issuers,\375\ and the MSRB.\376\ The 
Commission included these estimates of the number of respondents in the 
Proposing Release and received no comments on them. The Commission 
continues to believe that they are appropriate.
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    \373\ See Proposing Release, supra note 2, 74 FR at 36849-50. 
See also infra note 402 and accompanying text.
    \374\ As discussed in the Proposing Release and below, the 
Commission estimates that 250 broker-dealers will serve as 
Participating Underwriters in offerings of municipal securities and 
will have a paperwork collection burden as a result of the 
amendments. This estimate is based on the Commission's 2008 PRA 
submission (defined below) that included the estimated number of 
broker-dealers that would serve as Participating Underwriters in 
offerings of municipal securities in any given year and would 
therefore be subject to a collection of information burden under 
Rule 15c2-12. Although this estimate of 250 broker-dealers was 
included in the 2008 PRA submission, the estimated number of broker-
dealers that could serve as Participating Underwriters in offerings 
of municipal securities is not expected to change from the 2008 PRA 
submission or as a result of the amendments. See Proposing Release, 
supra note 2, 74 FR at 36849-50. See also PRA-2008-revised 15c2-12 
Justification, Municipal Securities Disclosure (OMB Control No. 
3235-0372), OMB, available at http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=200812-3235-013 (``2008 PRA submission'').
    \375\ As discussed in the Proposing Release and below, the 
Commission estimates that 12,000 issuers will have a paperwork 
collection burden as a result of the amendments. This estimate is 
based on the Commission's 2008 PRA submission that included the 
estimate of 10,000 issuers that would have a paperwork burden under 
Rule 15c2-12 in any given year and is not expected to change from 
the 2008 PRA submission. See 2008 PRA submission, supra note 374. In 
the Proposing Release, this estimate of 10,000 issuers was estimated 
to increase by 20%, to 12,000 issuers, as described below, to 
account for the proposed amendment to the Rule relating to demand 
securities. As described below, the final amendments will not change 
the estimated number of issuers that will submit annual financial 
information, material event notices, and failure to file notices to 
the MSRB. See Proposing Release, supra note 2, 74 FR at 36850, n. 
151 and accompanying text, for a discussion of how the Commission 
arrived at its estimate of a 20% increase in the number of issuers 
as a result of the proposed amendment relating to demand securities. 
See also infra note 402.
    \376\ See Proposing Release, supra note 2, 74 FR at 36849-50. 
See also 2008 PRA submission, supra note 374.
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    As discussed above, the Commission is revising its amendment to the 
Rule's exemption for demand securities to include a limited grandfather 
provision for remarketings of currently outstanding demand 
securities.\377\ The Commission believes that fewer issuers initially 
will be affected by the amendments than estimated in the Proposing 
Release as a result of the limited grandfather provision, which could 
result in a somewhat lower number of issuer respondents that are 
subject to the collection of information under the Rule than estimated 
in the Proposing Release. However, the Commission notes that the 
effects of the limited grandfather provision will diminish over time as 
demand securities mature or are redeemed and new demand securities that 
are subject to the Rule amendments are issued. In addition, the 
Commission has no reason to believe the overall number of issuers of 
demand securities will change materially going forward as a result of 
these amendments. Because of the effects of the limited grandfather 
provision will diminish over time, the Commission continues to believe 
that 12,000 issuer respondents is an appropriate estimate.
---------------------------------------------------------------------------

    \377\ See infra Section III.A.
---------------------------------------------------------------------------

D. Total Annual Reporting and Recordkeeping Burden

    The Commission estimates the aggregate information collection 
burden for the amended Rule to consist of the following:
1. Broker-Dealers
    As discussed in the Proposing Release, the Commission estimated 
that approximately 250 broker-dealers potentially could serve as 
Participating Underwriters in an offering of municipal securities.\378\ 
The Commission received no comments on this estimate. The Commission 
has reviewed this estimate and continues to believe that, under the 
amendments, the maximum number of broker-dealers subject to a paperwork 
burden will be 250.
---------------------------------------------------------------------------

    \378\ See Proposing Release, supra note 2, 74 FR at 36850.
---------------------------------------------------------------------------

a. Amendment To Modify the Exemption for Demand Securities
    As discussed in the Proposing Release, the Commission estimated 
that the total annual burden on all 250 broker-dealers under the Rule 
is 250 hours (1 hour annually per broker-dealer).\379\ In the Proposing 
Release, the Commission estimated that the amendment to modify the 
exemption from the Rule for a primary offering of demand securities 
would increase the number of issuers with municipal securities 
offerings that are subject to the Rule annually by 20%.\380\ This 
percentage was based on the Commission's estimate of the ratio of 
demand securities outstanding to the municipal securities market 
generally.\381\
---------------------------------------------------------------------------

    \379\ Id.
    \380\ See also infra note 402 and accompanying text for a 
description of how the Commission arrived at its estimate of a 20% 
increase in the number of issuers as a result of the amendment 
relating to demand securities.
    \381\ Id.
---------------------------------------------------------------------------

    As noted above, the Commission is adopting a limited grandfather 
provision with respect to currently outstanding demand securities. 
Although the Commission believes that the limited grandfather provision 
initially could result in a somewhat lower number of issuer 
respondents, for the reasons noted above, it continues to believe that 
a 20% increase in the number of issuers with offerings subject to the 
Rule is appropriate.\382\
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    \382\ As discussed in Section V.D.2., infra, the Commission in 
the Proposing Release solicited comment on the estimated 20% 
increase in the number of issuers affected by a paperwork burden and 
received no comments on this estimate. As discussed below, the 
Commission continues to believe that this estimate is appropriate.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, the Commission estimated 
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-

[[Page 33128]]

dealer by 20%, or .20 hours,\383\ and the total estimated annual 
paperwork burden for all broker-dealers by 20%, or 50 hours.\384\ This 
increased burden represents the additional time broker-dealers would 
need annually to review the continuing disclosure agreements associated 
with the offerings of demand securities subject to the amended Rule. As 
discussed in the Proposing Release and below,\385\ the Commission notes 
that the continuing disclosure agreements that are reviewed by broker-
dealers as part of their obligation under the Rule tend to be form 
agreements. The amendments to the Rule that the Commission is adopting 
will result in minor changes to certain provisions of these agreements. 
However, because these continuing disclosure agreements tend to be 
standard form agreements, the Commission does not believe that there 
will be a substantial increase in the annual hourly burden for broker-
dealers under the amendments.
---------------------------------------------------------------------------

    \383\ 20% or .20 hours (12 minutes = 60 minutes x .20 (20%). See 
Proposing Release, supra note 2, 74 FR at 36850.
    \384\ 250 hours (total annual burden for all broker-dealers 
under the Rule prior to the amendments) 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 those 
remarketings of demand securities that are now subject to the Rule. 
See Proposing Release, supra note 2, 74 FR at 36850.
    \385\ See infra Section V.E.2.a. See also Proposing Release, 
supra note 2, 74 FR at 36850.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission solicited comments on 
broker-dealers' collection of information burdens, including those 
relating to the amendment to modify the exemption for demand 
securities. One commenter believed that the proposal failed to assess 
the ``substantial additional time and expense'' required by 
Participating Underwriters and remarketing agents to review and verify 
disclosure about obligated persons in offerings of demand securities, 
unless the amendments to the Rule were clarified to exclude offerings 
of LOC-backed demand securities without primary or continuing 
disclosure about the underlying obligor.\386\ This comment appears to 
relate to a Participating Underwriter's review of issuers' primary 
offering disclosure. As discussed in Section III above, the amendments 
are not eliminating the exemption for demand securities from paragraphs 
(b)(1)-(4) of the Rule, which relate to primary offering disclosure. As 
a result, Participating Underwriters in offerings of demand securities 
will continue to be exempt from the primary offering provisions of the 
Rule. For this reason, the Commission does not believe that a 
Participating Underwriter will incur ``substantial additional time and 
expense'' in connection with the amendments, as suggested by the 
commenter. The Commission has considered this comment, reviewed its 
estimate in the Proposing Release in light of the comment, and believes 
that it is unnecessary to revise the total hourly burden for broker-
dealers from its estimate in the Proposing Release.
---------------------------------------------------------------------------

    \386\ See NABL Letter at 12-13.
---------------------------------------------------------------------------

    Therefore, the Commission continues to believe that its estimate 
that 250 broker-dealers will incur an estimated average burden of 300 
hours per year to comply with the Rule, as amended, is 
appropriate.\387\
---------------------------------------------------------------------------

    \387\ 250 hours (total estimated annual hourly burden for all 
broker-dealers under the Rule prior to the amendments) + 50 hours 
(total estimated additional annual hourly burden for all broker-
dealers under the amendments) = 300 hours.
---------------------------------------------------------------------------

b. Amendments to Events To Be Disclosed Under a Continuing Disclosure 
Agreement
    As described above, the amendments to paragraph (b)(5)(i)(C) of the 
Rule add four new disclosure events to the Rule, as well as amend an 
existing disclosure event, and modify the number of events that are 
subject to a materiality determination. In addition, the amendments to 
paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of the Rule change the timing 
for filing event notices from ``in a timely manner'' to ``in a timely 
manner not to exceed ten business days.'' The amendments do not change 
a broker-dealer's obligation 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.\388\ Accordingly, because the broker-dealer 
already is under an obligation to reasonably determine that an 
appropriate undertaking has been made, the Commission does not believe 
that the amendments relating to the timing and scope of event notices 
will affect the annual paperwork burden for broker-dealers. In the 
Proposing Release, the Commission solicited comments on broker-dealers' 
collection of information requirements, including this estimate 
relating to the amendments to events to be disclosed under a continuing 
disclosure agreement. The Commission received no comments on this 
estimate and continues to believe that it is appropriate.
---------------------------------------------------------------------------

    \388\ The Commission notes that, while the amendments do not 
change this obligation, broker-dealers will need to reasonably 
determine that the written agreement or contract entered into by an 
issuer or obligated person contains the change to the timing for 
filing event notices (i.e., not in excess of ten business days of 
the occurrence of the event), as well as the new and revised 
disclosure events.
---------------------------------------------------------------------------

c. One-Time Paperwork Burden
    The Commission estimates that a broker-dealer will incur a one-time 
paperwork burden to have its internal compliance attorney prepare and 
issue a notice advising its employees about the final revisions to Rule 
15c2-12. In the Proposing Release, the Commission estimated that it 
would take a broker-dealer's internal compliance attorney approximately 
30 minutes to prepare and issue such a notice.\389\ The Commission 
believes that the task of preparing and issuing a notice advising the 
broker-dealer's employees about the amendments is consistent with the 
type of compliance work that a broker-dealer typically handles 
internally. In the Proposing Release, the Commission solicited comments 
on broker-dealers' collection of information requirements, including 
this estimate relating to broker-dealers' one-time paperwork burden. 
The Commission received no comments on this estimate. Consistent with 
its estimate in the Proposing Release, the Commission estimates that 
250 broker-dealers will each incur a one-time, first-year burden of 30 
minutes to prepare and issue this notice.
---------------------------------------------------------------------------

    \389\ See Proposing Release, supra note 2, 74 FR at 36850-51.
---------------------------------------------------------------------------

d. Total Annual Burden for Broker-Dealers
    Under the amendments, the total burden on broker-dealers is 
estimated to be 425 hours for the first year \390\ and 300 hours for 
each subsequent year.\391\ The Commission included these estimates in 
the Proposing Release and solicited comments on them. In addition to 
the comment discussed above relating to broker-dealers' obligations 
with respect to demand securities, one commenter stated generally that 
its ``review of [the Proposing Release] does not suggest any 
unnecessary burden on municipal underwriters.'' \392\ This commenter 
observed that, ``[b]y contrast, [the Proposing Release] suggests that 
past practices have been too lax, and the Commission is simply making 
underwriters' due diligence burden reasonable.'' \393\ This commenter 
supported the proposal and suggested

[[Page 33129]]

additional changes to strengthen Participating Underwriters' 
obligations under the Rule.\394\ The Commission has considered all of 
the comments relating to the paperwork collection burden applicable to 
broker-dealers and, for the reasons discussed above, continues to 
believe that its estimates are appropriate.\395\
---------------------------------------------------------------------------

    \390\ (250 (broker-dealers impacted by the amendments) x 1.20 
hours) + (250 (broker-dealers impacted by the amendments) x .5 hour 
(estimate for one-time burden to issue notice regarding broker-
dealer's obligations under the amendments)) = 425 hours.
    \391\ 250 (broker-dealers impacted by the amendments) x 1.20 
hours = 300 hours.
    \392\ See e-certus Letter I at 9.
    \393\ Id.
    \394\ See e-certus Letter I at 9-11.
    \395\ In the Proposing Release, the Commission provided 
interpretive guidance with respect to the obligations of 
Participating Underwriters under the federal securities laws. In 
connection with this interpretation, the Commission solicited 
comment regarding alternative or additional ways in which an 
underwriter could satisfy its obligations, including obligations to 
ascertain if issuers or obligated persons are abiding by their 
municipal disclosure commitments. See Proposing Release, supra note 
2, 74 FR at 36848. The Commission received comments in response to 
this solicitation, which are discussed in Section IV of this 
release.
---------------------------------------------------------------------------

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 impose a paperwork burden on issuers 
of municipal securities.\396\ In the Proposing Release, the Commission 
provided estimates regarding the number of annual filings, event 
notices, and failure to file notices that issuers would submit under 
the proposed amendments. These estimates were based on the best 
estimates of the MSRB staff at that time, which were made prior to the 
MSRB's experience with its new EMMA system. The Commission recently 
received data from the MSRB reflecting the number of submissions to the 
EMMA system's continuing disclosure service for the eight-month period 
from July 1, 2009, through February 28, 2010 (``Sample Period'').\397\ 
This data includes the number of annual filings, event notices, and 
failure to file notices that were submitted during this Sample Period. 
To provide PRA estimates that are based on the MSRB's actual experience 
with respect to submissions of annual filings, event notices, and 
failure to file notices to its EMMA system, the Commission has elected 
to use the data obtained for the Sample Period to revise its estimates 
in the Proposing Release.\398\ Because the Sample Period is less than a 
full year,\399\ the Commission has annualized these numbers for the 
purpose of revising its PRA estimates below.\400\
---------------------------------------------------------------------------

    \396\ For purposes of this section, the term ``issuers'' refers 
to issuers and obligated persons.
    \397\ See supra note 368.
    \398\ The Commission's estimates in the Proposing Release are 
somewhat lower than those derived from the Sample Period for annual 
filings and event notices and somewhat higher for failure to file 
notices, see infra notes 417, 418, and 421.
    \399\ The Commission notes that, although the MSRB is able to 
provide actual numbers of continuing disclosure documents that it 
has received for the Sample Period, it is unable to provide any 
actual or estimated number of issuers that have submitted continuing 
disclosure documents to the EMMA system. This is because issuers 
submit their filings using the CUSIP number for the security. 
Because issuers could have several issuances of outstanding bonds, 
they could submit documents under more than one CUSIP number. 
Because of the potential for over-counting the number of issuers 
with a paperwork burden if the Commission were to rely on CUSIP 
numbers as a proxy for the number of affected issuers, it has 
elected to base its estimates for the number of issuers with a 
paperwork burden on estimates included in the Proposing Release.
    \400\ The Commission notes that annualizing the data provided by 
the MSRB for the Sample Period could have some limitations, 
particularly since the Sample Period covered the period of 
implementation of the EMMA system. Notwithstanding these 
limitations, the Commission has reviewed the eight months of data 
provided by the MSRB during the Sample Period and did not identify 
any particular trends in the data that would suggest that 
annualizing these numbers would result in an underestimate of number 
of filings that the MSRB would receive during a twelve-month period. 
Therefore, the Commission believes that annualizing this data 
provides a reasonable basis for revising its PRA estimates.
---------------------------------------------------------------------------

a. Amendment To Modify the Exemption for Demand Securities

    The Commission believes that the amendment to delete paragraph 
(d)(1)(iii) from the Rule, which contains an exemption from the Rule 
for a primary offering of demand securities, and add new paragraph 
(d)(5) to the Rule to apply paragraphs (b)(5) and (c) of the Rule to 
demand securities, will increase the number of issuers with a paperwork 
burden under the Rule. In the Proposing Release, the Commission 
estimated that the Rule affected approximately 10,000 issuers.\401\ 
Using the estimate of 10,000 issuers, the Commission estimated in the 
Proposing Release, and estimates again now, that the number of issuers 
with paperwork burden as a result of the amendments will increase by 
approximately 20% \402\ to 12,000 issuers.\403\ These additional 
issuers will increase the aggregate number of annual filings, event 
notices, and failure to file notices submitted each year. As noted 
above, the Commission is revising its amendment to the exemption for 
demand securities in the Rule to include a limited grandfather 
provision for remarketings of currently outstanding demand 
securities.\404\ Also as noted above, the Commission believes that 
initially the limited grandfather provision could result in a somewhat 
lower number of issuer respondents that are subject to the collection 
of information under the Rule than was estimated in the Proposing 
Release. However, the Commission notes that the effects of the limited 
grandfather provision will diminish over time as demand securities 
mature or are redeemed. In addition, the Commission has no reason to 
believe that the overall number of issuers of demand securities will 
change materially going forward as a result of these amendments. 
Because of this factor, the Commission continues to believe that 12,000 
issuer respondents is an appropriate estimate.
---------------------------------------------------------------------------

    \401\ See Proposing Release, supra note 2, 74 FR at 36851. See 
also supra note 375 for an explanation of the estimate of 10,000 
issuers.
    \402\ Id. As described in the Proposing Release, in 2008, there 
were approximately 2,000 offerings of demand securities. See also 
Two Decades of Bond Finance: 1989-2008, The Bond Buyer/Thomson 
Reuters 2009 Yearbook 7 (Matthew Kreps ed., SourceMedia, Inc.) 
(2009). To provide conservative estimates, the Commission 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 estimated 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 that would have a burden under Rule 15c2-12 
(10,000 (number of issuers affected by the Rule prior to the 
amendments)/2,000 (number of additional issuers under the amendments 
to the Rule) x 100 = 20%). The Commission notes that the above-
referenced publication has not been updated and, accordingly 
believes that this estimate, which is predicated on 2,000 offerings 
of demand securities, continues to be based on the most recent 
information available.
    \403\ 10,000 (number of issuers affected by the Rule prior to 
the amendments) x 1.20 (20% increase) = 12,000. The Commission 
acknowledges that greater precision in determining the number of 
issuers that will have a burden under the amendment is not possible. 
For purposes of this analysis, the Commission 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. The Commission realizes 
that this assumption may result in an overestimate of the number of 
issuers with a burden.
    \404\ See supra Section III.A.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission stated that the revision 
to the Rule's exemption for demand securities would not alter the 
Commission's previous PRA estimates of 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).\405\ Thus, the 
Commission estimated that the aggregate number of annual filings, event 
notices, and failure to file notices submitted by issuers also would 
increase by 20% from the previous estimates.\406\ In the Proposing

[[Page 33130]]

Release, the Commission solicited comments on issuers' collection of 
information requirements. The Commission received comments relating to 
the hourly burdens associated with this amendment. These comments are 
addressed in Section V.D.2.a.i, below.
---------------------------------------------------------------------------

    \405\ See Proposing Release, supra note 2, 74 FR at 36851.
    \406\ The Commission believes that this estimated 20% increase 
in the number of each type of continuing disclosure document filed 
is appropriate since it maintains a corresponding relationship 
between the number of issuers and the number of each type of 
document submitted by these issuers, as discussed in the Proposing 
Release. See Proposing Release, supra note 2, 74 FR at 36850, n.151.
---------------------------------------------------------------------------

i. Comments Relating to Paperwork Burdens in Connection With the 
Amendment Relating to Demand Securities
    Several commenters offered their views on the impact of the 
proposal to modify the exemption for demand securities.\407\ Of these 
commenters, one expressed concern that the revision of the exemption 
for demand securities could have an ``insurmountable administrative 
burden'' on smaller issuers and non-profit obligated persons that 
issued securities before the compliance date of the proposed 
amendments.\408\ This commenter believed that the proposal could be 
difficult for these entities to comply with, if they were required to 
enter into continuing disclosure agreements years after the original 
issuance of the bonds.\409\ Although this commenter did not 
specifically define what it meant by ``administrative burden,'' this 
commenter may be concerned about the paperwork collection hourly burden 
on smaller issuers and obligated persons resulting from this amendment.
---------------------------------------------------------------------------

    \407\ See, e.g., SIFMA Letter, NABL Letter, GFOA Letter 
(expressed support for the statements made in the NABL Letter), CRRC 
Letter, and WCRRC Letter (WCRRC endorsed all of the positions 
expressed in the CRRC Letter) (the concerns expressed by CRRC and 
WCRRC are discussed in infra Sections V.D.2.b and V.E.2.c).
    \408\ See SIFMA Letter.
    \409\ Id.
---------------------------------------------------------------------------

    As proposed by the Commission, the amendment would have applied to 
any initial offering and remarketing that is a primary offering of 
demand securities occurring on or after the compliance date of the 
amendments. However, to address commenters' concerns about the impact 
of the proposal on outstanding demand securities, the Commission is 
adopting a limited grandfather provision that provides that the 
amendments will not apply to a remarketing of demand securities that 
were issued prior to the amendments' compliance date and that 
continuously have remained outstanding as demand securities. While the 
Commission continues to acknowledge that the amendment will place some 
additional burden on issuers of demand securities issued on or after 
the compliance date of the amendments,\410\ the amendment as adopted is 
forward-looking and generally will not apply to securities issued 
before the compliance date of the proposed amendments. Therefore, the 
Commission does not believe that the amendments will create an 
``insurmountable administrative burden'' for issuers, including smaller 
issuers and obligated persons, as expressed by the above commenter. The 
Commission believes that the limited grandfather provision should 
largely alleviate the concerns expressed by this commenter with respect 
to demand securities that are currently outstanding.
---------------------------------------------------------------------------

    \410\ Issuers of demand securities with fixed-rate debt 
outstanding already would be subject to a continuing disclosure 
agreement in which they undertake to provide continuing disclosure 
documents, so they would be subject to minimal--if any--increased 
burdens. See supra Section V.D.2.a.
---------------------------------------------------------------------------

    As the Commission stated in the Proposing Release, and reiterates 
here, it does not anticipate a significant increase in disclosure 
burdens with respect to demand securities.\411\ The Commission 
acknowledges that, if issuers or obligated persons with respect to 
demand securities have not previously issued securities subject to 
continuing disclosure agreements, they will be entering into such 
agreements for the first time and thereby will incur some time and 
expense to provide continuing disclosure documents to the MSRB.\412\ 
The Commission believes that its estimate of a 20% increase in the 
number of issuers or obligated persons that may be affected by the Rule 
appropriately reflects the increase in the number of issuers that will 
have a paperwork burden. The commenter did not dispute this estimate. 
In addition, as the Commission noted in proposing these amendments, 
many issuers and obligated persons with respect to demand securities 
are likely to have outstanding fixed rate securities and already have 
entered into continuing disclosure agreements consistent with the 
Rule.\413\ Because any existing continuing disclosure agreement would 
obligate an issuer or an obligated person to provide annual filings, 
event notices, or failure to file notices with respect to these fixed 
rate securities, providing disclosures with respect to these demand 
securities is not expected to be a significant additional burden.
---------------------------------------------------------------------------

    \411\ See supra notes 402 to 406 and accompanying text.
    \412\ Id.
    \413\ See Proposing Release, supra note 2, 74 FR at 36837.
---------------------------------------------------------------------------

    Another commenter stated that the Proposing Release ``largely 
failed to assess the substantial additional time and expense required 
by issuers and other obligated persons to prepare (and for underwriters 
and remarketing agents to professionally review and check) disclosure 
about obligated persons in offerings of demand securities, unless the 
proposed amendments are clarified so as not to preclude offerings of 
LOC-backed demand securities without primary or continuing disclosure 
about the underlying obligor.'' \414\ As discussed above, the 
amendments are not eliminating the exemption for demand securities from 
paragraphs (b)(1) through (b)(4) of the Rule, which relate to primary 
offering disclosure. As a result, under the amendments, issuers of 
demand securities will not have a paperwork burden with respect to 
primary offering disclosures. Accordingly, the commenter's concern 
appears misplaced.
---------------------------------------------------------------------------

    \414\ See NABL Letter (the GFOA Letter expressed support for the 
statements made in the NABL Letter). The Commission notes that this 
commenter disputed that the Commission's 45 minute estimate in 
connection with the amendment to the time frame for the submission 
of event notices. This comment is addressed in infra Section 
V.D.2.b.i.
---------------------------------------------------------------------------

ii. Annual Filings
    Under the amendment to modify the Rule's exemption for demand 
securities, the Commission estimates that 12,000 municipal issuers with 
continuing disclosure agreements will prepare and submit approximately 
22,909 annual filings yearly.\415\
---------------------------------------------------------------------------

    \415\ 19,091 (12,791 (total annual filings submitted to the MSRB 
during the Sample Period)/.67) (annualized number of annual filings 
submitted to the MSRB based on the Sample Period) x 1.20 (20% 
increase in filings under the amendments) = 22,909 annual filings 
(estimated number of annual filings under the amendments). In the 
Proposing Release, the Commission estimated 18,000 annual filings 
would be submitted to the MSRB under the amendments. The Commission 
is revising this estimate to 22,909 filings to reflect actual 
filings submitted to the MSRB. This revised estimate is higher than 
the Commission's estimate in the Proposing Release by 4,909 annual 
filings or by approximately 27.27%.
---------------------------------------------------------------------------

    As discussed in the Proposing Release, the Commission estimated, 
and continues to believe, that an issuer will require approximately 45 
minutes to prepare and submit annual filings to the MSRB in an 
electronic format.\416\ Therefore, under the amendments, the total 
burden on issuers of municipal securities to prepare and submit 22,909 
annual filings to the MSRB in an electronic format is estimated to be 
17,182 hours.\417\ Other than as noted

[[Page 33131]]

above, the Commission received no other comments on its estimates to 
prepare and submit annual filings under the amendment for demand 
securities. The Commission has considered the comments received and 
believes that its estimates, as revised to take into account the data 
provided by the MSRB, are appropriate.
---------------------------------------------------------------------------

    \416\ The Commission received comments relating to the time it 
would take an issuer to prepare and submit an event notice under the 
amendments. These comments are addressed in infra Section V.D.2.b.
    \417\ 22,909 (estimated number of annual filings under the 
amendments) x .75 hours (45 minutes) (estimated time to prepare and 
submit annual filings under the amendments) = 17,181.75 (rounded to 
17,182 hours). In the Proposing Release, the Commission estimated 
number of hours to prepare and submit annual filings under the 
amendment would be 13,500 hours. The Commission is revising this 
estimate to 17,182 hours. This revised estimate is higher than the 
estimate in the Proposing Release by 3,682 hours or by approximately 
27.27%.
---------------------------------------------------------------------------

iii. Event Notices
    Under the amendment to modify the Rule's exemption for demand 
securities, the Commission estimates that the 12,000 municipal issuers 
with continuing disclosure agreements will prepare and submit 
approximately 74,605 event notices yearly.\418\ As the Commission 
discussed in the Proposing Release, the Commission estimated, and 
continues to believe, that the process for an issuer to prepare and 
submit event notices to the MSRB in an electronic format will require 
approximately 45 minutes.\419\ Since the amendments to the Rule do not 
change the way event notices are prepared and submitted, the Commission 
estimates that an issuer still will require approximately 45 minutes to 
prepare and submit an event notice. Therefore, under the amendments, 
the total burden on issuers of municipal securities to prepare and 
submit 74,605 event notices to the MSRB is estimated to be 55,954 
hours.\420\ The Commission received comments relating to its estimates 
to prepare and submit event notice filings generally under the proposed 
amendments. These comments are addressed in Section V.D.2.b, below.
---------------------------------------------------------------------------

    \418\ 62,171 (41,654 (total number of event notice filings 
submitted to the MSRB during the Sample Period)/.67) (annualized 
number of event notices submitted to MSRB based on the sample 
period) x .1.20 (20% increase in filings under the amendments) = 
74,605 event notices (estimated number of event notices under the 
amendments)). In the Proposing Release, the Commission estimated 
72,000 event notice filings would be submitted to the MSRB under the 
amendments. The Commission is revising its estimate to 74,605 event 
notice filings. This estimate is higher than the estimate in the 
Proposing Release by 2,605 event notices or approximately 3.62%. In 
its analysis of the data the Commission received from the MSRB for 
the Sample Period, the Commission noted that the MSRB received a 
significant number of event notices for bond calls relative to the 
event notices for other events. The Commission, however, did not 
identify any particular trend for this event item in the data that, 
in its view, would lead to an underestimate of event notices that 
would be submitted in connection with the amendments. The 
Commission's estimates of the number of additional event notices 
associated with the amendments relating to the materiality condition 
and number of additional event disclosure items contained in 
paragraph (b)(5)(i)(C) of the Rule are discussed in Section V.D.2.b, 
infra. As discussed below, the total number of event notices 
estimated to be submitted to the MSRB in connection with the 
amendments is 81,362 notices.
    \419\ See Proposing Release, supra note 2, 74 FR at 36851-52.
    \420\ 74,605 (estimated number of event notices under the 
amendments) x .75 hours (45 minutes) (estimated time to prepare and 
submit material event notices under the amendments) = 55,953.7 hours 
(rounded to 55,954 hours). In the Proposing Release, the Commission 
estimated that municipal issuers would spend 54,000 hours to prepare 
and submit event notices to the MSRB. The Commission is revising its 
estimate to 55,954 hours. This estimate is higher than the estimate 
in the Proposing Release by 1,954 hours or 3.62%.
---------------------------------------------------------------------------

iv. Failure To File Notices
    Under the amendment to modify the exemption for demand securities, 
the Commission estimates that the 12,000 municipal issuers with 
continuing disclosure agreements will prepare and submit approximately 
1,458 failure to file notices yearly.\421\ As the Commission discussed 
in the Proposing Release, since the amendments to the Rule will not 
change the way failure to file notices are prepared and submitted, the 
Commission estimated, and continues to believe, that an issuer will 
require approximately 30 minutes to prepare and submit a failure to 
file notice.\422\ Therefore, under the amendments, the total burden on 
issuers of municipal securities to prepare and submit 1,458 failure to 
file notices to the MSRB is estimated to be 729 hours.\423\ The 
Commission received no comments on its estimates to prepare and submit 
failure to file notices and believes that its estimates, as revised to 
take into account the data provided by the MSRB, are appropriate.
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    \421\ 1,215 (814 (total number of failure to file notice filings 
submitted to the MSRB during the Sample Period)/.67 (annualized 
number failure to file notices submitted to MSRB) x 1.20 (20% 
increase in filings) = 1,458 failure to file notices (estimated 
number of failure to file notices under the amendments)). In the 
Proposing Release, the Commission estimated that issuers would 
prepare and submit 2,400 failure to file notices. The Commission is 
revising its estimate to 1,458 failure to file notices. This 
estimate is lower than the estimate in the Proposing Release by 942 
failure to file notices or by 60.75%.
    \422\ See Proposing Release, supra note 2, 74 FR at 36852.
    \423\ 1,458 (estimated number of failure to file notices under 
the amendments) x .5 hours (30 minutes) (estimated time to prepare 
and submit failure to file notices under the amendments) = 729 
hours. In the Proposing Release, the Commission estimated that 
issuers would spend 1,200 hours to prepare and submit failure to 
file notices. The Commission is revising its estimate to 729 hours. 
This estimate is lower than the estimate in the Proposing Release by 
471 hours or by 39.25%.
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b. Amendments to Event Notice Provisions of the Rule
    Under the amendment to paragraph (b)(5)(i)(C) of the Rule, a 
Participating Underwriter will be required to reasonably determine that 
an issuer or obligated person has entered into a continuing disclosure 
agreement that, among other things, provides for the submission of an 
event notice to the MSRB in an electronic format upon the occurrence of 
certain specified events, either in each instance that the event occurs 
or subject to a materiality determination, as set forth in the amended 
Rule. The amendments also add to the Rule four new event disclosure 
items and revise an existing event disclosure item. In addition, the 
amendments to paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) amend the Rule 
to provide that a Participating Underwriter must reasonably determine 
that an issuer of municipal securities or obligated person has 
undertaken, in a written agreement or contract for the benefit of 
holders of municipal securities, to provide event notices in a timely 
manner ``not in excess of ten business days after the occurrence of the 
event,'' rather than simply in a timely manner.
    As discussed above, the Commission estimates that the amendment to 
modify the Rule's exemption for demand securities will increase the 
number of event notices to be prepared and submitted to an aggregate of 
74,605 event notices annually.\424\ The Commission believes that the 
amendments to paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of the Rule 
also will increase the annual paperwork burden for issuers because of 
the increase in the number of event notices to be prepared and 
submitted, as discussed below.\425\
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    \424\ See supra note 418 and accompanying text.
    \425\ Id.
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i. Time Frame for Submitting Event Notices Under a Continuing 
Disclosure Agreement
    The amendments revise paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of 
the Rule to state that notice of an event should be provided ``in a 
timely manner not in excess of ten business days after the occurrence 
of the event'' instead of simply in ``a timely manner.'' As noted 
above, the Commission estimates that an issuer can prepare and submit 
an event notice in 45 minutes.\426\ The amendment to the Rule providing 
for a ten business day time limit for submission of event notices will 
not change this estimated burden of 45 minutes, which is the amount of 
time estimated under the Rule's previous paperwork collection to 
prepare and submit event notices. Rather, the overall change in burden 
results from the fact

[[Page 33132]]

that more event notices are expected to be filed as a result of the 
amendments, as discussed in Section V.D.2.a.iii., above.\427\
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    \426\ See supra note 405 and accompanying text.
    \427\ See supra note 419 and accompanying text.
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    Several commenters offered their views on the impact of the 
proposal to establish a ten business day time frame for the submission 
of event notices.\428\ A number of these commenters expressed concern 
that the requirement would increase the burden for issuers.\429\ The 
concerns expressed by these commenters included: (i) The 
impracticability of meeting the ten business day time period because of 
limited staff and resources, especially for smaller issuers; \430\ (ii) 
the increased burdens and costs due to the additional monitoring to 
comply with the ten business day time frame; \431\ (iii) the difficulty 
in reporting events in which the issuer does not control the 
information (e.g., rating changes, changes to the trustee, changes to 
tax status of bonds under an IRS audit) within the ten business day 
time period; \432\ and (iv) the use of the ``occurrence of the event'' 
as the trigger for the obligation to submit a notice.\433\ Many of 
these commenters focused their concerns on the potential burdens 
associated with reporting rating changes within the ten business day 
time frame.\434\ These commenters noted that ratings information is not 
within the issuer's control and that rating organizations do not 
directly notify issuers of rating changes.\435\
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    \428\ See, e.g., Halgren Letter, Los Angeles Letter, Portland 
Letter, CRRC Letter, WCRRC Letter, NFMA Letter, CHEFA Letter, 
NAHEFFA Letter, SIFMA Letter, Connecticut Letter, Kutak Letter, ICI 
II Letter, Fidelity Letter, California Letter, San Diego Letter, 
NABL Letter, GFOA Letter, and Metro Water Letter.
    \429\ See Halgren Letter, Los Angeles Letter, CRRC Letter, WCRRC 
Letter, CHEFA Letter, NAHEFFA Letter, SIFMA Letter, Connecticut 
Letter, Kutak Letter, California Letter, San Diego Letter, NABL 
Letter, GFOA Letter, and Metro Water Letter.
    \430\ See CRRC Letter, WCRRC Letter, Portland Letter at 2, 
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2, 
and NABL Letter at 5-6.
    \431\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter, 
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, and NABL 
Letter at 5-6, and 8-9.
    \432\ See Connecticut Letter at 1-2, California Letter at 1-2, 
San Diego Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA Letter at 2, 
Kutak Letter at 2, and GFOA Letter at 2-3.
    \433\ See California Letter at 1-2, NAHEFFA Letter at 2-4, CHEFA 
Letter at 2, San Diego Letter at 1-2, GFOA Letter at 3, Kutak Letter 
at 2, and NABL Letter at 5-6.
    \434\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA 
Letter at 2-4, San Diego Letter at 1-2, California Letter at 1-2, 
and GFOA Letter at 3-4.
    \435\ Id.
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a. Discussion of Comments Relating to Impracticability of Meeting Time 
Frame Due to Limited Staff and Resources, Especially for Smaller 
Issuers
    The Commission has considered commenters' concerns about the 
potential costs and burdens associated with the ten business day time 
frame for submission of event notices, especially for smaller issuers 
with limited staff and resources. As discussed above, the Commission 
estimates that 12,000 issuers will file 74,605 event notices annually. 
Thus, an issuer will file on average approximately 6 event notices each 
year (74,605/12,000 = 6.05) and spend a total of approximately 4.5 
hours annually on average preparing them.\436\ The Commission does not 
believe that spending approximately 4.5 hours annually on average 
preparing and submitting event notices would be particularly burdensome 
for issuers, even those with limited staff and resources.\437\
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    \436\ The Commission estimates that issuers will spend 
approximately 45 minutes on average to prepare and submit each event 
notice. The comments that the Commission received relating to this 
estimate are discussed below.
    \437\ The Commission also notes that Rule 15c2-12 currently 
provides a limited exemption, contained in paragraph (d)(2) of the 
Rule, which provides that paragraph (b)(5) of the Rule does not 
apply to a primary offering if the conditions contained therein are 
met. This limited exemption from the Rule is intended to assist 
small governmental jurisdictions that issue municipal securities 
and, as a result of this exemption, most small issuers do not have a 
paperwork burden under the Rule.
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b. Discussion of Comments Relating to Issuers' Increased Burdens and 
Costs Due to Additional Monitoring, Lack of Issuer Control Over Events, 
and Use of ``Occurrence of the Events'' as the Trigger
    The Commission has considered comments that the Commission did not 
fully account for the increased burdens and costs due to additional 
monitoring to comply with the ten business day time frame, particularly 
with respect to rating changes.\438\ As noted above, one or more 
commenters believed that the ``actual knowledge'' of the occurrence of 
the event should be used as the trigger for the obligation to submit an 
event notice.\439\ These commenters expressed their concerns relatively 
generally, and in most cases did not present any specific evidence to 
support their conclusions or alternatives to the Commission's 
estimates.
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    \438\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter, 
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, NABL Letter 
at 5-6, 13, Connecticut Letter at 3, California Letter at 3, San 
Diego Letter at 1-2, GFOA Letter at 2, and SIFMA Letter at 3.
    \439\ See, e.g., Kutak Letter at 1. See also NAHEFFA Letter, 
California Letter, San Diego Letter, CHEFA Letter, GFOA Letter, 
Metro Water Letter, and NABL Letter.
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    The Commission has considered the comments and believes that most 
of the events currently specified in paragraph (b)(5)(i)(C) of the 
Rule, and the additional event items included in the amendments, are 
significant and should become known to the issuer or obligated person 
expeditiously.\440\ Further, many events, such as payment defaults, 
tender offers, and bankruptcy filings, generally involve the issuer's 
or obligated person's participation.\441\ Other events (e.g., failure 
of a credit or liquidity provider to perform) are of such importance 
that an issuer or obligated person likely will become aware of such 
events,\442\ or will expect an indenture trustee, paying agent, or 
other transaction participant to bring them to the issuer's or 
obligated person's attention within a very short period of time.\443\
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    \440\ See supra note 372 and accompanying text for a description 
of events currently contained in Rule 15c2-12(b)(5)(i)(C). See supra 
Section III.E. for a description of events added to the Rule by 
these amendments. The only events specified in the Rule that may not 
be known to an issuer or obligated person expeditiously are rating 
changes and trustee name changes.
    \441\ In addition, as the Commission noted in the Proposing 
Release, involvement of the issuer or obligated person is often 
required for substitution of credit or liquidity providers; 
modifications to rights of security holders; release, substitution, 
or sale of property securing repayment of the securities; and 
optional redemptions. See Form Indenture and Commentary, National 
Association of Bond Lawyers, 2000.
    \442\ For example, as the Commission noted in the Proposing 
Release, issuers or obligated persons should have direct knowledge 
of principal and interest payment delinquencies, proposed or final 
determinations of taxability from the IRS, tender offers that they 
initiate, and bankruptcy petitions that they file.
    \443\ 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. 
The Commission notes that issuers and obligated persons may wish to 
consider negotiating a provision in indentures to which they are a 
party to require a trustee promptly to notify the issuer or 
obligated person in the event the trustee knows or has reason to 
believe that an event specified in paragraph (b)(5) of the Rule has 
or may have occurred.
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    One commenter also expressed concern that the addition of 
paragraphs (b)(5)(i)(C)(12) of the Rule (pertaining to notices of 
bankruptcy, insolvency, receivership or similar event of an issuer or 
obligated person) and (b)(5)(i)(C)(13) of the Rule (pertaining to 
notices of mergers, consolidations and acquisitions or asset sales with 
respect to an issuer or obligated person) would impose a burden on 
issuers to undertake continuous monitoring of obligated

[[Page 33133]]

persons to determine whether such events occurred unless limited to 
certain obligated persons and accompanied by a materiality 
condition.\444\ As discussed above,\445\ bankruptcies and similar 
events involving municipal issuers or obligated persons are relatively 
rare and issuers may avoid directly monitoring obligated persons by 
obtaining an agreement from them at the time of the primary offering to 
notify the party responsible for making event notice filings of such an 
event if and when it occurs.\446\ Similar to its discussion regarding 
bankruptcies and similar events, the Commission believes that there are 
a variety of methods by which issuers and obligated persons could avoid 
having to directly monitor the activities of other obligated persons, 
such as obtaining, at the time of the primary offering, an agreement 
from them to provide information pertaining to a merger, consolidation, 
acquisition or similar asset sale to the party responsible for filing 
event notices.\447\
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    \444\ See NABL Letter at 8-9.
    \445\ See supra Section III.E.2.
    \446\ Id.
    \447\ Id.
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    One commenter believed that the time that would be required for 
issuers and other obligated persons to establish and implement 
procedures to provide notice of rating changes within ten business days 
after their occurrence exceeds the Commission's estimate of 45 minutes 
per event notice filing.\448\ This commenter believed that the 
Commission's estimates did not include the time necessary to monitor 
for rating changes, and that issuers would spend 26 to 52 hours per 
year on such monitoring.\449\ Another commenter stated that, during the 
2008-2009 fiscal year, it filed 169 separate ``material event notices'' 
relating to rating changes and that submission of such notices consumed 
340 to 420 hours of staff time.\450\ This commenter further believed 
that the ten business day time frame would exacerbate its burden since 
it would have to devote more staff time to monitor for rating changes. 
A third commenter believed that the ten business day time frame for 
submission of event notices for rating changes would double compliance 
time.\451\
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    \448\ See NABL Letter at 5-6.
    \449\ Id.
    \450\ See California Letter at 3. See also San Diego Letter at 2 
(expressing similar concern that complying preparing and submitting 
event notices for rating changes required a ``significant commitment 
of staff time and resources.'').
    \451\ See Halgren Letter at 1.
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    The Commission notes that issuers and obligated persons, under 
current continuing disclosure agreements, contract to provide event 
notices, including those relating to rating changes, ``in a timely 
manner.'' The amendments add a maximum time frame of ten business days 
for submission of an event notice, and the Commission acknowledges that 
some issuers may have to monitor for certain events more frequently 
than in the past, if they have been interpreting ``in a timely manner'' 
as allowing them to submit event notices more than ten business days 
after the event occurred. The Commission's PRA estimate encompasses the 
average amount of time spent monitoring for all of the events in the 
Rule. As noted above, most of the Rule's events, except perhaps rating 
changes and, in some cases, trustee name changes, should become known 
to the issuer prior to the event, or immediately or within a short 
period of time after the event.\452\ While the commenters asserted, 
either generally or based on their own experience, that the Commission 
underestimated the time required to monitor for rating changes, the 
Commission emphasizes that the continuing disclosure agreements that 
issuers enter into under the current Rule already require them to 
submit notices for rating changes, which necessarily entails some 
degree of monitoring.\453\ Furthermore, information about rating 
changes is readily available on the Internet Web sites of the rating 
agencies.
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    \452\ With respect to one commenter's assertion that monitoring 
for rating changes would take 26-52 hours each year, the Commission 
notes that 45 minutes per event notice is an average. With respect 
to the comment that, during the fiscal year 2008-2009, one commenter 
spent 340-420 hours of staff time preparing and submitting notices 
of rating changes, the Commission notes that this commenter is one 
of the very largest municipal securities issuers and, as such, 
likely has a large number of issues of municipal securities 
outstanding with a variety of credit ratings that may change at a 
variety of times. Accordingly, this issuer likely spends much more 
time than the average issuer preparing and submitting event notices. 
In addition, the Commission notes that the time period referenced by 
this commenter encompasses the period prior to the establishment of 
the MSRB's EMMA system as a single repository for continuing 
disclosure, when issuers submitted continuing disclosure documents 
to four information repositories. Accordingly, the Commission would 
expect that the time spent by the average issuer to monitor for 
rating changes would be substantially less than the estimate 
provided by this commenter.
    \453\ See 17 CFR 240.15c2-12.
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    With respect to changes in trustees, the Commission believes that 
issuers can minimize monitoring burdens simply by adding a notice 
provision to the trust indenture that requires the trustee to provide 
the issuer with notice of the appointment of a new trustee or any 
change in the trustee's name.
    The Commission continues to expect that issuers and obligated 
persons generally will become aware of events subject to event notices 
well within the ten business day time frame for submission of event 
notices to the MSRB.\454\ The Commission believes that its burden 
analysis takes into account compliance by issuers with the ten business 
day time frame for preparing and submitting event notices, including 
with respect to rating changes and trustee changes. The Commission 
stresses that its estimate is an average of the burden associated with 
all event notices referenced in the Rule. Although some issuers may 
need to monitor more actively for certain events than they have in the 
past, in particular for ratings changes, the Commission believes its 45 
minute estimate continues to reflect, on average, the amount of time 
required to prepare and submit an event notice, as most event notices 
concern events that are within the issuer's control and therefore 
require little if any monitoring.
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    \454\ 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 a 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).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission continues to believe 
that, with respect to the amendment to the Rule regarding the ten 
business day time frame for submission of event notices, its estimated 
burden of 45 minutes to prepare and submit an event notice is 
appropriate.
ii. Modification With Regard to Those Events for Which a Materiality 
Determination Is Necessary
    As discussed above, the Commission believes that it is appropriate 
to delete the condition in paragraph (b)(5)(i)(C) of the Rule that 
previously provided that notice of all of the listed events need be 
made only ``if material.'' In connection with the deletion of the 
materiality condition, the Commission reviewed each of the Rule's 
specified events to determine whether a materiality determination 
should be retained, and proposed to do so where appropriate.\455\ As a 
result, for those events listed in paragraph (b)(5)(i)(C) for which the 
materiality condition no longer applies, the Participating Underwriter 
must reasonably determine that the issuer or other obligated person has 
agreed to submit event notices to the MSRB

[[Page 33134]]

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.\456\
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    \455\ The discussion in this section pertains to materiality 
determinations for events previously specified in paragraph 
(b)(5)(i)(C) of the Rule. For new events being added to the Rule as 
a result of these amendments, a materiality determination 
discussion, if any, is included in the applicable section for each 
new event.
    \456\ See supra Section III.C.3. for a discussion of the 
Commission's rationale regarding why it retained a materiality 
condition for these events.
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    Prior to the Commission's consideration of the Proposing Release, 
the Commission staff was advised that the total number of event notices 
as a result of the change to the materiality condition would increase 
by no more than 1,000, taking into account the revised exemption for 
demand securities.\457\ Thus, in the Proposing Release, the Commission 
conservatively estimated that this change to the materiality condition 
would increase the total number of event notices to be submitted 
annually by issuers by 1,000 notices. The Commission received no 
comments on this estimate. Although the Commission has slightly 
increased the total number of continuing disclosure documents it 
expects the MSRB to receive based on actual submissions the MSRB 
received during the Sample Period,\458\ it continues to believe that 
its estimate of 1,000 notices in connection with a change to the 
materiality condition is appropriate.
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    \457\ 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. 
As noted in the Proposing Release, although the MSRB staff believed 
that the potential increase could be much smaller, the Commission is 
continuing to use the estimate of 1,000 event notices to provide a 
conservative estimate. See Proposing Release, supra note 2, 74 FR at 
36853.
    \458\ See supra Section V.D.2.
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    Several commenters offered their views on the impact of the 
proposal to delete the condition in paragraph (b)(5)(i)(C) of the Rule 
that previously provided that notice of all of the listed events need 
be made only ``if material.'' \459\ Two of these commenters expressed 
concern that this change would increase the burden for issuers, but did 
not specify whether the Commission's estimate of increased burdens was 
inaccurate, or offer an alternative estimate.\460\
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    \459\ See, e.g., NABL Letter, Metro Water Letter, California 
Letter, ICI Letter, and SIFMA Letter.
    \460\ See NABL Letter and Metro Water Letter.
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    One commenter believed that the proposal to delete the ``if 
material'' qualification could burden issuers in certain 
circumstances.\461\ Another commenter believed the deletion of the 
materiality condition would increase monitoring burdens and require 
disclosure of events that otherwise would not be disclosed.\462\ These 
commenters, however, did not specifically call into question the 
Commission's burden estimate, or offer an alternative estimate. The 
Commission has reviewed its estimates in light of commenters' views and 
believes that they do not reflect any new or additional burden that is 
not contemplated by the Commission's estimates.
---------------------------------------------------------------------------

    \461\ See NABL Letter at 6-7. The three circumstances where the 
commenter believes a materiality qualifier should be retained are: 
(1) With respect to LOC-backed demand securities, notices of 
unscheduled draws on debt service reserves that reflect financial 
difficulties of the obligated person because they might not be 
material to an investment in the securities because they are traded 
on the strength of a bank letter of credit; (2) with respect to 
demand securities, generally, require notice of each failure to 
remarket securities when they are put, because they might not be 
material to an investor due to the existence of a letter of credit 
or other liquidity facility; and (3) notice of defeasances of 
securities, because they might not be material to an investor if the 
remaining term of the securities is very short.
    \462\ See Metro Water Letter at 2.
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iii. Amendment to the Submission of Event Notices Regarding Adverse Tax 
Events Under a Continuing Disclosure Agreement
    Paragraph (b)(5)(i)(C)(6) of the Rule contemplates an event notice 
in the case of certain adverse tax events. Under the amendments, 
paragraph (b)(5)(i)(C)(6) of the Rule refers specifically to ``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 status of the securities, or other material events affecting 
the tax status of the security.'' As discussed above,\463\ the 
Commission believes that the amendment to paragraph (b)(5)(i)(C)(6) of 
the Rule clarifies that IRS 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 status of a 
municipal security are events that should be disclosed under a 
continuing disclosure agreement. As discussed in the Proposing Release, 
the Commission estimated that the amendment 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.\464\
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    \463\ See supra Section III.D.
    \464\ Prior to the Commission's consideration of the proposed 
amendments, in conversations with the Commission 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. 
See Proposing Release, supra note 2, 74 FR at 36853, n. 188.
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    As described in greater detail above, the Commission is making a 
few changes to the proposed text of the Rule to clarify the use of the 
word ``material'' in this event item and to replace the phrase ``tax-
exempt status'' with ``tax status'' to provide greater clarity with 
respect to the application of this disclosure event to a particular 
kind of taxable municipal security. The Commission does not believe 
that these changes will affect its estimate of 130 additional event 
notices.
    As discussed in Section III.D above, several commenters offered 
their views on the impact of the proposal to amend the Rule 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.'' \465\ One commenter noted that the municipal 
market may be flooded with notices due to the generality and vagueness 
of the proposed tax disclosure items, but did not specifically call 
into question the Commission's burden estimate or offer an alternative 
estimate.\466\ In addition, none of the other commenters specifically 
called into question the Commission's estimate of 130 additional 
notices. The Commission has reviewed its estimate in light of these 
comments and believes that its estimate of 130 notices for this 
disclosure event item remains appropriate.
---------------------------------------------------------------------------

    \465\ See, e.g., Connecticut Letter at 2, Metro Letter at 2, 
NABL Letter at 7, Kutak Letter at 5-6, and GFOA Letter at 2.
    \466\ See Kutak Letter at 4-7.
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iv. Tender Offers
    Paragraph (b)(5)(i)(C)(8) of the Rule refers to notice of an event 
in the case of bond calls. Paragraph (b)(5)(i)(C)(8) of the Rule is 
amended to include tender offers as a disclosure event. The inclusion 
of tender offers as an event item expands the circumstances in which 
issuers undertake to submit an event notice to the MSRB. As discussed 
in the Proposing Release, the Commission estimated that this amendment 
would increase the total number of event notices to be submitted by 
issuers annually by approximately

[[Page 33135]]

100 notices.\467\ The Commission received no comments on this estimate 
and continues to believe that this estimate is appropriate.
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    \467\ See Proposing Release, supra note 2, 74 FR at 36853. Based 
on industry sources that include lawyers, trade associations and 
vendors of municipal disclosure information, the Commission 
estimated that there are typically no more than 100 tender offers 
annually in the municipal securities market.
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v. The Occurrence of Bankruptcy, Insolvency, Receivership or Similar 
Event of the Obligated Person
    Under the amendments, paragraph (b)(5)(i)(C)(12) is being added to 
the Rule to provide for the submission of an event notice in the case 
of bankruptcy, insolvency, receivership or similar event of the 
obligated person. Adding bankruptcy, insolvency, receivership or 
similar event of the obligated person as a disclosure event expands the 
circumstances in which obligated persons undertake to submit an event 
notice to the MSRB. Based on industry sources, the Commission estimated 
in the Proposing Release that this amendment would increase the total 
number of event notices submitted by obligated persons annually by 
approximately 24 notices.\468\
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    \468\ This estimate was based on the following: (i) 917 (number 
of issuances of municipal securities that defaulted during the 1990s 
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 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 will file) = 24 notices. The 
Commission notes that not all issuers or obligated persons that 
default eventually enter bankruptcy so the number of actual notices 
may be less.
---------------------------------------------------------------------------

    Several commenters offered their views on the impact of the 
proposal to add bankruptcy, insolvency, receivership or similar event 
of the obligated person as a new disclosure event.\469\ One of these 
commenters expressed concern that the event item, unless revised, could 
increase the burdens for issuers to engage in continuous monitoring of 
obligated persons in certain circumstances.\470\ The Commission has 
discussed this comment in Sections III.E.2 and V.D.2.b, above. None of 
these commenters, however, called into question the Commission's 
estimate of 24 additional event notices or offered an alternative 
estimate. The Commission has reviewed its estimate in light of these 
comments and believes that its estimate of 24 notices for this 
disclosure event remains appropriate.
---------------------------------------------------------------------------

    \469\ See Connecticut Letter at 2, GFOA Letter at 4, Metro Water 
Letter at 2, and NABL Letter at 8.
    \470\ See NABL Letter at 8.
---------------------------------------------------------------------------

vi. Merger, Consolidation, Acquisition, or Sale of All or Substantially 
All Assets
    Under the amendments, paragraph (b)(5)(i)(C)(13) is being added to 
the Rule to provide for the submission of event notices 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 addition to the Rule of this 
disclosure event will expand the circumstances in which issuers will 
undertake to submit an event notice to the MSRB. The Commission 
believes that this amendment will increase the total number of event 
notices submitted by issuers annually. Based on industry sources, the 
Commission estimated in the Proposing Release that adding the new event 
item in paragraph (b)(5)(i)(C)(13) of the Rule would increase the total 
number of event notices submitted by issuers annually by approximately 
1,783 notices.\471\
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    \471\ See Proposing Release, supra note 2, 74 FR at 36853. This 
estimate was based 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 estimate of the percentage of mergers 
in the municipal industry was 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 banking and insurance, which accounted for 19% of 
reported merger transactions. As discussed in the Proposing Release, 
the Commission notes that each of the mergers reported under the 
other industry segments may not involve entities that have issued 
municipal securities so the number of affected municipal securities 
issuers may be less.
---------------------------------------------------------------------------

    Several commenters offered their views on the impact of the 
proposal to add a new disclosure event in the case of a merger, 
consolidation, acquisition or sale of all or substantially all 
assets.\472\ One of these commenters expressed concern that the event 
item, unless revised, could increase the burdens for issuers to engage 
in continuous monitoring of obligated persons in certain 
circumstances.\473\ The Commission has discussed this comment in 
Sections III.E.3 and V.D.2.b, above. None of these commenters, however, 
called into question the Commission's estimate of 1,783 additional 
event notices, or offered an alternative estimate. The Commission has 
reviewed its estimate in light of these comments and believes that its 
estimate of 1,783 notices for this disclosure event remains 
appropriate.
---------------------------------------------------------------------------

    \472\ See Kutak Letter at 4, NFMA Letter at 2, SIFMA Letter at 
4, Connecticut Letter, GFOA Letter at 4, ICI Letter at 8-9, Fidelity 
Letter at 3, CRRC Letter at 5, and WCRRC Letter.
    \473\ See NABL Letter at 8.
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vii. Successor or Additional Trustee, or Change in Trustee Name
    Under the amendments, paragraph (b)(5)(i)(C)(14) is being added to 
the Rule to provide for the submission of an event notice in the case 
of the appointment of a successor or additional trustee or the change 
of name of a trustee, if material. Adding this event item to the Rule 
expands the circumstances in which issuers undertake to submit an event 
notice to the MSRB. As the Commission noted in the Proposing Release, 
the Commission believes that trustee changes occur infrequently and a 
change affecting the largest trustee of municipal securities provides a 
reasonable and conservative estimate of the number of additional event 
notices that will be submitted annually under this amendment to the 
Rule.\474\ The largest trustee was involved in approximately 31% of the 
municipal issuances in 2008,\475\ and the Commission continues to 
believe that this represents a reasonable estimate of the percentage of 
issuers covered by the largest trustee. Thus, the Commission estimates 
that a change to the largest trustee will impact approximately 31%, or 
3,720 issuers. The Commission believes this serves as a conservative 
proxy for the number of event notices to be submitted regarding a 
change in trustee.\476\ Therefore, the Commission estimates that adding 
the new event item contained in paragraph (b)(5)(i)(C)(14) of the Rule 
will increase the total number of event notices

[[Page 33136]]

submitted by issuers annually by approximately 3,720 notices.\477\
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    \474\ See Proposing Release, supra note 2, 74 FR at 36854.
    \475\ 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).
    \476\ This estimate is based on the following: 12,000 (estimated 
number of issuers under 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.
    \477\ This estimate is based on the following: 3,720 (estimated 
number of issuers that will be impacted by a change to the largest 
trustee of municipal securities) x 1 (estimated number of event 
notices that an issuer will file) = 3,720 notices. The Commission 
believes that the actual number of changes involving the trustee, 
which occur annually, is likely to be significantly less than 3,720. 
However, to provide a conservative estimate for the paperwork 
burden, the estimate takes into account a change involving the 
largest trustee.
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    Two commenters expressed concern regarding the increased costs and 
burdens that some issuers would incur to report changes pertaining to 
trustees within the Rule's ten business day time frame.\478\ These 
comments are addressed in Section V.D.2.b, above. None of these 
commenters, however, called into question the Commission's estimate of 
3,720 notices, or offered an alternative estimate. The Commission has 
reviewed its estimate in light of these comments and believes that its 
estimate of 3,720 notices for this disclosure event remains 
appropriate.
---------------------------------------------------------------------------

    \478\ See CHEFA Letter at 3 and NAHEFFA Letter at 4.
---------------------------------------------------------------------------

c. Total Burden on Issuers for Amendments to Event Notices
    In the Proposing Release, the Commission estimated and continues to 
believe that the process for an issuer to prepare and submit event 
notices to the MSRB in an electronic format will require approximately 
45 minutes.\479\ As discussed above, the amendment to modify the Rule's 
exemption for demand securities will increase total number of issuers 
affected by the Rule to 12,000 issuers,\480\ the total number of event 
notices submitted by issuers to 74,605 notices,\481\ and the annual 
paperwork burden for issuers to submit event notices to 55,954 
hours.\482\
---------------------------------------------------------------------------

    \479\ See Proposing Release, supra note 2, 74 FR at 36851.
    \480\ See supra note 375.
    \481\ See supra note 418.
    \482\ See supra note 420.
---------------------------------------------------------------------------

    Under the amendments to paragraph (b)(5)(i)(C) of the Rule, the 
Commission estimates that the 12,000 municipal issuers with continuing 
disclosure agreements will prepare an additional 6,757 event notices 
annually,\483\ raising the total number of event notices prepared by 
issuers annually to approximately 81,362.\484\ This increase in the 
number of event notices will result in an increase of 5,068 hours in 
the annual paperwork burden for issuers to submit event notices.\485\ 
In total, the amendments will result in an annual paperwork burden of 
approximately 61,022 hours (55,954 hours + 5,068 hours) for issuers to 
submit notices to the MSRB.
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    \483\ 1,000 (estimated number of additional notices due to 
change to materiality condition) + 130 (estimated number of 
additional adverse tax event notices) + 100 (estimated number of 
tender offers event notices) + 24 (estimated number of bankruptcy/
insolvency event notices) + 1,783 (estimated number of merger or 
acquisition event notices) + 3,720 (estimated number of appointment/
change of trustee event notices) = 6,757 (total estimated number of 
additional event notices that will be prepared under the 
amendments). See also Proposing Release, supra note 2, 74 FR at 
36854.
    \484\ 72,000 (number of event notices estimated under the Rule 
under the amendments modifying the exemption for event notices in 
the Proposing Release) + 2,605 (revised number of event notices 
under amendments modifying the exemption for demand securities 
exemption) + 6,757 (total number of additional event notices that 
will be prepared under the amendments to the event notice provisions 
of the Rule) = 81,362 event notices. This estimate is higher than 
the estimate in the Proposing Release by 2,605 filings or 3.31%. See 
supra notes 418, 483, and accompanying text.
    \485\ 6,757 (total number of additional event notices that will 
be prepared under the amendments to the event notice provisions of 
the Rule) x .75 hours (45 minutes) (estimated time to prepare an 
event notice) = 5,067.75 hours (rounded to 5,068 hours). See supra 
note 483 and accompanying text.
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d. Total Burden for Issuers
    Accordingly, under the amendments, the total burden on issuers to 
submit annual filings, event notices and failure to file notices will 
be 78,933 hours.\486\
---------------------------------------------------------------------------

    \486\ 17,182 hours (estimated burden for issuers to submit 
annual filings) + 61,022 hours (estimated burden for issuers to 
submit event notices) + 729 hours (estimated burden for issuers to 
submit failure to file notices) = 78,933 hours. This estimate is 
higher than the estimate in the Proposing Release by 5,165 hours or 
7%. See supra notes 417, 420, 423, 485 and accompanying text.
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3. MSRB
    As discussed in the Proposing Release, the Commission estimated, 
and continues to believe, that the MSRB will incur an annual burden of 
approximately 7,000 hours to collect, index, store, retrieve, and make 
available the pertinent documents under the Rule.\487\ The Commission 
anticipates that the amendment to modify the Rule's exemption for 
demand securities will increase filings to the MSRB by approximately 
20% annually.\488\ In addition, the Commission estimates that the 
amendments to the event notice provisions of the Rule will increase 
filings submitted to the MSRB approximately 9% annually.\489\ 
Accordingly, the Commission estimates that the total burden on the MSRB 
of collecting, indexing, storing, retrieving and disseminating 
information requested by the public also will increase by approximately 
29% (20% + 9%) or 2,030 hours (7,000 hours x .29). Thus, the Commission 
estimates that the total burden on the MSRB as a result of the 
amendments will be 9,030 hours annually.\490\ The Commission included 
these estimates in the Proposing Release and received no comments on 
them. The Commission continues to believe that these estimates are 
appropriate.
---------------------------------------------------------------------------

    \487\ See Proposing Release, supra note 2, 74 FR at 36854. This 
estimate is further described in the Commission's 2008 PRA 
submission. See 2008 PRA submission, supra note 374.
    \488\ See supra note 402 and accompanying text.
    \489\ 6,757 (estimated additional event notices under the final 
event notice amendments)/77,000 (estimated number of continuing 
disclosure documents submitted under the Rule prior to the 
amendments (60,000 (event notices) + 15,000 (annual filings) + 2,000 
(failure to file notices) = 77,000)) = .087 x 100 = approximately 
9%. For additional information regarding PRA estimates related to 
Rule 15c-12 prior to the amendments, including the estimate of 
77,000, see 2008 PRA submission, supra note 374.
    \490\ Annual burden for MSRB: 7,000 hours (annual burden under 
the Rule prior to the amendments) + 2,030 hours (additional hourly 
burden under amendments) = 9,030 hours.
---------------------------------------------------------------------------

4. Annual Aggregate Burden for Amendments
    The Commission estimates that, as a result of the amendments, the 
ongoing annual aggregate information collection burden under the Rule 
will be 88,263 hours.\491\
---------------------------------------------------------------------------

    \491\ 300 hours (total estimated burden for broker-dealers) + 
78,933 hours (total estimated burden for issuers) + 9,030 hours 
(total estimated burden for MSRB) = 88,263 hours. This estimate is 
higher than the estimate in the Proposing Release by 5,165 hours or 
6.22%.
---------------------------------------------------------------------------

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 amendments since there is 
no change to 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 
included this cost burden estimate in the Proposing Release and 
received no specific comments on it. However, the Commission received 
one comment relating to broker-dealers' costs under the Rule.\492\ This 
commenter believed that the Commission underestimated the additional 
burdens and costs that the amendments would impose on Participating 
Underwriters to review disclosure about obligated persons in offerings 
for demand securities, unless the amendments to the Rule were clarified 
for offerings of LOC-backed demand securities.\493\
---------------------------------------------------------------------------

    \492\ See NABL Letter.
    \493\ See NABL Letter at 12-13.

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[[Page 33137]]

    In the Proposing Release, the Commission solicited comment 
regarding the accuracy of its cost burden estimates in connection with 
the revised collection of information that would apply to broker-
dealers.\494\ Although the commenter noted above provided general 
comments relating to broker-dealers' burdens and costs under the Rule, 
which are addressed in Section V.D.1.a, it did not offer specific 
information or data that conflicts with the Commission's estimates nor 
did it provide alternative estimates. Also, this commenter made a 
similar statement with respect to burdens on issuers with respect to 
demand securities, which the Commission addressed in Section V.D.2.a.i 
above, and its response is also applicable here.
---------------------------------------------------------------------------

    \494\ See Proposing Release, supra note 2, 74 FR at 36858.
---------------------------------------------------------------------------

    In addition, the Commission believes that the MSRB may incur costs 
to modify the indexing system of its EMMA system to accommodate the 
amendments to the Rule that incorporate additional disclosure events. 
As discussed in the Proposing Release, based on information provided to 
the Commission staff by MSRB, the Commission estimated that the MSRB's 
costs to update its EMMA system to accommodate the new or revised 
disclosure events would be no more than approximately $10,000.\495\ The 
Commission also included this cost estimate in the Proposing Release 
and received no comments on it. The Commission continues to believe 
that this estimate is appropriate.
---------------------------------------------------------------------------

    \495\ See Proposing Release, supra note 2, 74 FR at 36855, n. 
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.
---------------------------------------------------------------------------

2. Issuers
a. Current Issuers
    The Commission expects that some issuers that already submit 
continuing disclosure documents to the MSRB in an electronic format 
(referred to herein as ``current issuers'') may be subject to some 
costs associated with the 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 will 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 may 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. As discussed in the 
Proposing 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.\496\ The Commission also 
estimated that event notices and failure to file notices consist of one 
to two pages.\497\ 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 included this cost 
estimate in the Proposing Release and received no comments on it. The 
Commission believes that this estimate is still accurate.
---------------------------------------------------------------------------

    \496\ See Proposing Release, supra note 2, 74 FR at 36855.
    \497\ Id.
---------------------------------------------------------------------------

    In addition, the Commission estimated that an issuer submits three 
event notices to the MSRB annually.\498\ As discussed above, the 
Commission recently received updated information from the MSRB relating 
to the actual number of annual filings, event notices and failure to 
file notices submitted to its EMMA system during the Sample Period. 
Based on this information from the MSRB, the Commission is updating its 
PRA estimates of the total number of event notices that will be 
submitted by issuers. The Commission also is updating its estimate to 
reflect that an issuer on average will submit five event notices to the 
MSRB annually plus an additional notice as a result of the new event 
items.\499\ Under the amendments, some current issuers will need to 
prepare additional event notices for submission to the MSRB. Some 
current issuers may need to submit these additional event notices to a 
third party for conversion into an electronic format for submission to 
the MSRB. The Commission estimated that the number of additional event 
notices that an issuer will need to submit annually under the 
amendments is one, increasing the total estimate to six notices per 
year.\500\ Each of these issuers will incur an annual cost of $8 to 
convert the additional event notice into an electronic format for 
submission to the MSRB.\501\ The Commission believes that current 
issuers that already have the technological resources to convert 
continuing disclosure documents into an electronic format for 
submission to the MSRB will not incur any additional external costs 
associated with the amendments. The Commission included this $8 cost 
estimate in the Proposing Release and received no comments on it.
---------------------------------------------------------------------------

    \498\ Id.
    \499\ See discussion of estimate of the average number of event 
notices to be submitted by each issuer, supra Section V.D.2.b.
    \500\ 6,757 (estimated additional event notices submitted under 
amendments)/12,000 (estimated number of issuers under amendments) = 
.563 notices per issuer (rounded up to 1) (estimated number of 
additional event notices submitted annually per issuer).
    \501\ $8 (cost to have third party convert an event notice or 
failure to file notice into an electronic format) x 1 (estimated 
number of additional event or failure to file notices filed per year 
per issuer) = $8.
---------------------------------------------------------------------------

    As the Commission noted in the Proposing Release, there may be some 
costs incurred by issuers to revise their current template for 
continuing disclosure agreements to reflect the amendments to the 
Rule.\502\ 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 amendments. Based on industry 
sources and as discussed in the Proposing Release, the Commission 
believes that continuing disclosure agreements are form 
agreements.\503\ Additionally, based on industry sources, the 
Commission estimates that it will take an outside attorney 
approximately 15 minutes to revise the template for continuing 
disclosure agreements for a current issuer.\504\ Thus, the Commission 
estimates that, for each current issuer, the approximate cost to revise 
a continuing disclosure agreement to reflect the amendments will be 
approximately $100,\505\ for a one-time total cost of $1,000,000 \506\ 
for all current issuers. The Commission included these cost estimates 
in the Proposing Release and received no specific comments on them.
---------------------------------------------------------------------------

    \502\ See Proposing Release, supra note 2, 74 FR at 36855.
    \503\ Id.
    \504\ Id. Continuing disclosure agreements are prepared and 
executed at the time of an offering of municipal securities, when an 
issuer has already retained bond counsel for other purposes. 
Accordingly, the Commission believes that there should only be 
minimal incremental costs for an outside attorney to revise the 
template for continuing disclosure agreements.
    \505\ 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 amendments to the Rule) = $100. The $400 per hour estimate 
for an outside attorney's work is based on industry sources.
    \506\ $100 (estimated cost to revise a continuing disclosure 
agreement in accordance with the amendments to the Rule) x 10,000 
(number of current issuers) = $1,000,000.

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[[Page 33138]]

b. Demand Securities Issuers
    As discussed above, the Commission estimates that the amendments 
relating to demand securities will increase the number of issuers 
affected by the Rule by approximately 20% or 2,000 issuers or obligated 
persons (referred to herein as ``demand securities issuers'').\507\ As 
discussed in the Proposing Release, demand securities issuers may have 
some external costs associated with the preparation and submission of 
annual filings, event notices and failure to file notices.\508\
---------------------------------------------------------------------------

    \507\ See supra Section V.D.2.a.
    \508\ See supra note 402 and accompanying text.
---------------------------------------------------------------------------

    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 
amendments, Participating Underwriters will need to reasonably 
determine that these demand securities issuers have entered into 
continuing disclosure agreements. This change applies to any initial 
offering and remarketing that is a primary offering of demand 
securities occurring on or after the compliance date of the 
amendments.\509\ However, to accommodate commenters' concerns about the 
proposal's impact on existing demand securities, the amendment does not 
apply to remarketings of demand securities that are outstanding in the 
form of demand securities on the day preceding the amendments' 
compliance date and that continuously have remained outstanding in the 
form of demand securities.
---------------------------------------------------------------------------

    \509\ As noted above, the compliance date of the amendments to 
the Rule is December 1, 2010.
---------------------------------------------------------------------------

    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 amendments. Based on industry 
sources, the Commission believes that continuing disclosure agreements 
are form agreements. Also, based on industry sources, the Commission 
estimates that it will take an outside attorney approximately 1.5 hours 
to draft a continuing disclosure agreement. Thus, the Commission 
estimates that the cost of preparing a continuing disclosure agreement 
for each demand securities issuer will be approximately $600,\510\ for 
a one-time total cost of $1,200,000 \511\ for all demand securities 
issuers, if an outside counsel prepares the agreement. The Commission 
included these estimates in the Proposing Release and did not receive 
any comments on them. The Commission continues to believe they are 
appropriate.
---------------------------------------------------------------------------

    \510\ 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 industry sources. See supra note 504.
    \511\ $600 (cost for continuing disclosure agreement) x 2,000 
(number of demand securities issuers) = $1,200,000.
---------------------------------------------------------------------------

    The Commission believes that demand securities issuers generally 
will not incur any other external costs associated with the preparation 
of annual filings, event notices (including notices for the new event 
disclosure items included in the amendments) and failure to file 
notices. The Commission believes that demand securities issuers will 
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.\512\
---------------------------------------------------------------------------

    \512\ See supra Section V.D.2.a.
---------------------------------------------------------------------------

    The Commission believes that the only external costs demand 
securities issuers may incur in connection with the submission of 
continuing disclosure documents to the MSRB will be the costs 
associated with converting them into an electronic format. The 
Commission believes that many issuers of municipal securities already 
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. Demand securities 
issuers that presently do not have the ability to prepare their annual 
filings, event notices or failure to file notices in an electronic 
format may incur some costs to obtain electronic copies of such 
documents if they are prepared by a third party (e.g., an accountant or 
attorney) or, alternatively, to have a paper copy converted into an 
electronic format. These costs may vary depending on how the demand 
securities issuer elects 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 may vary depending on the issuer's 
current technological resources. An issuer also could elect to use a 
designated agent to submit its continuing disclosure documents to the 
MSRB.
    As discussed in the Proposing Release, the Commission estimated 
that 30% of issuers would elect to use designated agents to submit 
continuing disclosure documents to the MSRB.\513\ 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 industry sources, the Commission estimated this fee to range from 
$100 to $500 per year depending on the designated agent an issuer 
uses.\514\ Accordingly, the Commission estimated that the high end of 
the total annual cost that may be incurred by demand securities issuers 
that use the services of a designated agent will be $300,000.\515\ The 
Commission included these estimates in the Proposing Release and 
received no comments on them. The Commission continues to believe they 
are appropriate.
---------------------------------------------------------------------------

    \513\ See Proposing Release, supra note 2, 74 FR at 36856.
    \514\ This estimated range of the annual fee for the services of 
a designated agent is based on industry sources in December 2008.
    \515\ 2,000 (number of demand securities 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.
---------------------------------------------------------------------------

    The cost for an issuer to have a third-party vendor convert its 
paper continuing disclosure documents into an appropriate electronic 
format may vary depending on the type of resources that are required. 
One method would be to scan paper-based continuing disclosure documents 
into an electronic format. As discussed in the Proposing 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.\516\ The Commission included these estimates in the Proposing 
Release and received no comments on them. As discussed above, the 
Commission now estimates that an issuer will file five event notices. 
The Commission believes that these estimates are appropriate. Under the 
amendments, the Commission estimates that the maximum number of event 
notices and failure to file notices submitted by issuers will increase 
to six.\517\ Accordingly, the Commission

[[Page 33139]]

estimates that the maximum external costs for a demand securities 
issuer that elects to have a third party scan continuing event notices 
or failure to file notices into an electronic format under the 
amendments is $48.\518\
---------------------------------------------------------------------------

    \516\ See Proposing Release, supra note 2, 74 FR at 36856.
    \517\ 6,757 (estimated additional event notices submitted under 
the amendments)/12,000 (estimated number of issuers under the 
amendments) = .563 notices per issuer (rounded up to 1) (estimated 
number of additional event notices submitted annually per issuer). 
To provide a conservative estimate, the Commission estimates that 
each issuer will submit one additional event notice as a result of 
the amendments.
    \518\ The maximum cost is the cost to scan and convert six event 
or failure to file notices: 6 (number of notices submitted annually) 
x $8 (cost to scan and convert each notice) = $48.
---------------------------------------------------------------------------

    As discussed in the Proposing 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.\519\ The Commission included these estimates 
in the Proposing Release and received no comments on them. The 
Commission continues to believe that these estimates are appropriate. 
Although the amendments will increase the number of issuers submitting 
annual filings each year, the number of annual filings each issuer 
submits will not increase. Thus, the Commission expects that the number 
of annual filings submitted yearly, per issuer, under the amendments 
will remain unchanged. Accordingly, the Commission estimates that the 
maximum external costs for a demand securities issuer that elects to 
have a third party scan its annual filings into an electronic format 
will be $128.\520\
---------------------------------------------------------------------------

    \519\ See Proposing Release, supra note 2, 74 FR at 36856.
    \520\ The maximum cost is the cost to scan and convert two 
annual filings: 2 (number of annual filings submitted annually) x 
$64 (cost to scan and convert each annual filing) = $128.
---------------------------------------------------------------------------

    Alternatively, a demand securities issuer that currently does not 
have the appropriate technology to convert paper continuing disclosure 
documents into an electronic format could elect to purchase the 
necessary resources to do so.\521\ As discussed in the Proposing 
Release, the Commission estimated that an issuer's initial cost to 
acquire these technological resources could range from $750 to 
$4,300.\522\ Some demand securities issuers, however, 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 an electronic format. In the Proposing 
Release, the Commission estimated that an issuer's cost to update or 
acquire this software could range from $50 to $300.\523\ The Commission 
included these estimates in the Proposing Release and received no 
comments on them. The Commission continues to believe that these 
estimates are appropriate.
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    \521\ Generally, the technological resources necessary to 
convert 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.
    \522\ See Proposing Release, supra note 2, 74 FR at 36857.
    \523\ Id.
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    In addition, demand securities issuers without direct Internet 
access may incur some costs to obtain such access to submit the 
documents. As discussed in the Proposing 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.\524\ In the event that a demand securities issuer 
does not have Internet access, it may incur costs in obtaining such 
access, which the Commission estimated to be approximately $50 per 
month, based on its limited inquiries to Internet service 
providers.\525\ 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 amendments.\526\ 
The Commission included this estimate in the Proposing Release and 
received no comments on it. The Commission continues to believe that 
this estimate is appropriate.
---------------------------------------------------------------------------

    \524\ Id.
    \525\ Id.
    \526\ Id.
---------------------------------------------------------------------------

    The Commission estimated in the Proposing Release that the costs to 
some of the demand securities issuers to acquire the technology 
necessary to convert continuing disclosure documents into an electronic 
format to submit to the MSRB may include: (i) Approximately $8 per 
notice to use a third-party vendor to scan an event notice or failure 
to file notice, and approximately $64 to use a third-party vendor to 
scan an average-sized annual financial statement; (ii) approximately 
$750 to $4,300 to acquire the technological resources to convert 
continuing disclosure documents into an electronic format; (iii) 
approximately $50 to $300 solely to upgrade or acquire the software to 
submit documents in an electronic format; and (iv) approximately $50 
per month to establish Internet access. The Commission included these 
estimates in the Proposing Release and received no comments on them. 
The Commission continues to believe that they are appropriate.\527\
---------------------------------------------------------------------------

    \527\ Id.
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    For a demand securities 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 estimated 
total maximum external cost such issuer would incur will be $776 per 
year.\528\ 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 
estimated total maximum external cost such demand securities issuer 
would incur will be $4,900 for the first year and $600 per year 
thereafter.\529\ To provide a conservative estimate for PRA purposes, 
the Commission estimated that any demand securities issuers that incur 
costs associated with converting continuing disclosure documents into

[[Page 33140]]

an electronic format will choose the Category 2 option.\530\ The 
Commission estimated that approximately no more than 400 demand 
securities issuers will incur costs associated with acquiring 
technological resources to convert continuing disclosure documents into 
an electronic format.\531\ The Commission included these estimates in 
the Proposing Release and received no comments on them. The Commission 
continues to believe they are appropriate.
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    \528\ See Proposing Release, supra note 2, 74 FR at 36857. The 
total maximum external cost for a Category 1 demand securities 
issuer is 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 event notices or failure to file 
notices into an electronic format) x 6 (maximum estimated number of 
event or failure to file notices filed per year per issuer)] + [$50 
(estimated monthly Internet charge) x 12 months] = $776. The 
Commission estimates that an issuer will file one to eight 
continuing disclosure documents per year. These documents generally 
will consist of no more than two annual filings and six event or 
failure to file notices. The Commission estimates the maximum number 
of documents filed annually per issuer as follows: 7 documents 
(consisting of 2 annual filings and 5 event or failure to file 
notices) + 1 document (consisting of the additional event notice 
that would be filed under the amendments). In the Proposing Release, 
the Commission estimated that the maximum number of documents filed 
annually per issuer would be $760. This estimate was based on 5 
documents (consisting of 2 annual filings and 3 event or failure to 
file notices) + 1 document (consisting of the additional event 
notice that would be filed under the amendments). As discussed 
above, the Commission is updating this number to reflect more 
current data submitted to the MSRB. See supra note 368 and 
accompanying text. The above cost estimate is higher than the 
estimate in the Proposing Release by $16 or 2.1%.
    \529\ See Proposing Release, supra note 2, 74 FR at 36857. The 
total maximum external cost for a Category 2 demand securities 
issuer is to 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 will have only the 
cost of obtaining Internet access. $50 (estimated monthly Internet 
charge) x 12 months = $600.
    \530\ See Proposing Release, supra note 2, 74 FR at 36857.
    \531\ 2,000 demand securities issuers x 20% = 400 demand 
securities issuers. The Commission used a 20% estimate in the 
Proposing Release. The Commission believes that this estimate is 
still appropriate.
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    In addition, the Commission estimates that the aggregate maximum 
annual costs for those demand securities issuers that need to acquire 
technological resources to submit documents to the MSRB will be 
approximately $1,960,000 \532\ for the first year after the adoption of 
the amendments and approximately $240,000 \533\ for each year 
thereafter. The Commission included these cost burden estimates in the 
Proposing Release and received no comments on them. The Commission 
continues to believe that these estimates are appropriate.
---------------------------------------------------------------------------

    \532\ 400 (Category 2 issuers) x $4,900 = $1,960,000.
    \533\ 400 (Category 2 issuers) x $600 = $240,000.
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c. Current Issuers and Demand Securities Issuers
    Some current issuers and demand securities issuers may incur a one-
time external cost associated with the amendment to revise the time 
frame for submitting event notices 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 issuers and demand securities 
issuers may incur a one-time external cost associated with becoming 
apprised of the appointment of a new trustee or for the change in the 
trustee's name. One way an issuer may become apprised of such a change 
would be for its counsel to add a notice provision to the issuer's 
trust indenture that requires the trustee to provide the issuer with 
notice of the appointment of a new trustee or any change in the 
trustee's name. Based on industry sources, the Commission estimates 
that it will take an outside attorney approximately 15 minutes to draft 
and add a provision to an indenture agreement requiring notice of a 
change of trustee or to the trustee's name. Thus, the Commission 
estimates that the approximate cost of adding this notice provision to 
an issuer's trust indenture will be approximately $100 per issuer,\534\ 
for a one-time annual cost of $1,200,000 \535\ for all issuers. The 
Commission included these cost burden estimates in the Proposing 
Release and received no comments on them. The Commission continues to 
believe they are appropriate.
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    \534\ 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 industry sources.
    \535\ $100 (estimated cost to have outside counsel add a notice 
provision to a trust indenture) x 12,000 (number of issuers under 
the amendments) = $1,200,000.
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    As discussed in the Proposing Release, the Commission solicited 
comment regarding the accuracy of its cost burden estimates in 
connection with the revised collection of information applicable to 
issuers. As noted above, although some commenters offered general 
comments relating to issuers' burdens and costs under the Rule, they 
did not quantify these burdens or costs. For example, some commenters 
expressed the view that the Commission underestimated the burdens or 
costs that would be imposed on issuers and obligated persons as a 
result of the amendments.\536\ A number of commenters expressed concern 
about additional burdens or costs, which they believed issuers would 
incur as a result of the ten business day time frame for submitting 
notices for events outside of the issuer's control.\537\ These 
commenters also remarked that these increased burdens or costs would be 
particularly difficult for small issuers.\538\ Although these 
commenters provided general views relating to issuers' burdens and 
costs under the Rule, which are addressed in Section V.D.2 above, they 
did not offer specific information or data that conflicted with the 
Commission's cost estimates nor did they provide alternative estimates. 
As discussed above, the Commission agrees that some issuers, including 
small issuers, will have increased burdens and costs under the Rule. 
However, for the reasons discussed in Section V.D.2 above, the 
Commission continues to believe that these burdens and costs are 
accounted for in the Commission's PRA burden analysis.
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    \536\ See Connecticut Letter at 3 (``I suspect that the 
Commission has underestimated the true costs of some of these 
proposals''), NABL Letter at 12-13 (``The Commission's estimates of 
costs and other regulatory impacts * * * greatly underestimate the 
likely impact of the amendments''), and GFOA Letter at 5 (``The 
SEC's estimated time needed and costs associated with implementing 
the proposals are a fraction of what issuers will likely incur. This 
is true for both small and large issuers, as compliance costs and 
monitoring will increase, as will an issuer's need to retain bond 
counsel'').
    \537\ See Halgren Letter at 1-2, Kutak Letter at 2, NAHEFFA 
Letter at 3, Los Angeles Letter at 2, San Diego Letter at 3, 
California Letter at 2-3, CHEFA Letter at 2-3, CRRC Letter at 5, 
WCRRC Letter at 1, and Connecticut Letter at 3. See supra Section 
V.D.2.i.a.c.
    \538\ Id.
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    In addition to the commenters discussed above, two commenters 
opposed the proposed amendment to modify the exemption for demand 
securities because they viewed it as imposing an audit requirement on 
small issuers.\539\ One of these commenters stated that the proposal 
could increase costs to a small issuer by $30,000-40,000 annually to 
prepare audited or consolidated financial statements.\540\ The 
commenter believed that such costs could force small demand securities 
issuers to withdraw from the tax-exempt municipal market and thus 
recommended that the Commission withdraw the proposed amendment to 
modify the exemption for demand securities or create a limited 
exception for LOC-backed demand securities.\541\
---------------------------------------------------------------------------

    \539\ See CRRC Letter at 5 and WCRRC Letter at 1 (generally 
expressed support for comments in CRRC Letter).
    \540\ Id.
    \541\ Id.
---------------------------------------------------------------------------

    As discussed further in Section III.A. above, the Commission notes 
that, for purposes of paragraph (b)(5)(i)(B) of the Rule, audited 
financial statements need to be submitted, pursuant to the issuer's and 
obligated person's undertaking in a continuing disclosure agreement, 
only ``when and if available.'' \542\ This limitation, which is 
consistent with the Commission's position in the 1994 Amendments 
Adopting Release, should mitigate some concerns of those obligated 
persons that do not prepare audited financial statements in the 
ordinary course of their business.\543\ Further, although not all 
issuers or obligated persons, in the ordinary course of their business, 
prepare audited financial statements or other financial

[[Page 33141]]

and operating information of the type included in annual filings, a 
number of issuers and obligated persons do.\544\
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    \542\ 17 CFR 240.15c2-12(b)(5)(i)(B). See also supra Section 
III.A. concerning audited financial statements and 1994 Amendments 
Adopting Release, supra note 8, 59 FR at 59599.
    \543\ As discussed in the 1994 Amendments Adopting Release, the 
1994 Amendments ``[do] not adopt the proposal to mandate audited 
financial statements on an annual basis with respect to each issuer 
and significant obligor. Instead, the amendments require annual 
financial information, which may be unaudited, and may, where 
appropriate and consistent with the presentation in the final 
official statement, be other than full financial statements. * * * 
However, if audited financial statements are prepared, then when and 
if available, such audited financial statements will be subject to 
the undertaking and must be submitted to the repositories. Thus * * 
* the undertaking must include audited financial statements only in 
those cases where they otherwise are prepared.'' See 1994 Amendments 
Adopting Release, supra note 8, 59 FR at 59599.
    \544\ See http://www.emma.msrb.org for audited financial 
statements or other financial and operating information submitted to 
EMMA.
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    The Commission acknowledges that issuers or obligated persons of 
demand obligations that assemble financial and operating data for the 
first time in response to their undertakings in a continuing disclosure 
agreement may incur incremental costs beyond those costs incurred by 
those issuers or obligated persons that already assemble this 
information.\545\ Also, smaller issuers or obligated persons may have 
relatively greater burdens than larger issuers or obligated persons. 
However, the overall burdens for these demand securities issuers or 
obligated persons in preparing financial information are expected to be 
commensurate with those of issuers or obligated persons that already 
are preparing financial information as part of their continuing 
disclosure undertakings.\546\ The Commission believes that the burdens 
that will be incurred in the aggregate by issuers or obligated persons, 
as a result of the amendments with respect to demand securities, may 
not be significant and, in any event, are justified by the benefits to 
investors of enhanced disclosure.\547\
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    \545\ The Commission, however, believes that the operations of 
an issuer or obligated person generally entail the preparation and 
maintenance of at least some financial and operating data.
    \546\ Further, issuers or obligated persons that assemble 
financial and operating data for the first time may face a greater 
burden than those issuers or obligated persons that already assemble 
this information. The amendments therefore initially may have a 
disparate impact on those issuers or obligated persons, including 
small entities, entering into a continuing disclosure agreement for 
the first time, as compared with those that already have outstanding 
continuing disclosure agreements.
    \547\ See supra Section V.D. As discussed therein, some 
commenters believed that the amendment could force some small 
entities to withdraw from the tax-exempt market because: (1) 
Disclosure of small issuers' or obligated persons' financial 
information would provide their large, national competitors with 
information about these small issuers or obligated persons, which 
they believed could result in a competitive disadvantage to them; 
and (2) small issuers or obligated persons would have to prepare 
costly audited financial statements. See, e.g., CRRC Letter at 3-4 
and WCRRC Letter at 1. As discussed above, the undertakings 
contemplated by the amendments (and Rule 15c2-12 in general) require 
annual financial information only to the extent provided in the 
final official statement, and audited financial statements only when 
and if available.
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    As indicated above, another commenter stated its view that the 
proposed amendments would increase an issuer's need to retain bond 
counsel.\548\ To the extent that bond counsel will need to be retained 
to revise the continuing disclosure agreement or add a notice provision 
to the issuer's trust indenture, the Commission has provided estimates 
relating to these costs in Section V.E.2, above.
---------------------------------------------------------------------------

    \548\ See GFOA Letter at 5.
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F. Retention Period of Recordkeeping Requirements

    The amendments do not contain any recordkeeping requirements. 
However, as a self-regulatory organization subject to Rule 17a-1 under 
the Exchange Act,\549\ the MSRB is 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 amendments to the 
Rule contain no recordkeeping requirements for any other persons.
---------------------------------------------------------------------------

    \549\ 17 CFR 240.17a-1.
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G. Collection of Information Is Mandatory

    The collection of information is mandatory.

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

    The collection of information will not be confidential and will be 
publicly available. The collection of information will be accessible 
through the MSRB's EMMA system and thus will be publicly available via 
the Internet.

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

A. Background

    Rule 15c2-12 is intended to enhance disclosure and deter fraud in 
the municipal securities market by establishing standards for 
obtaining, receiving and disseminating information about municipal 
securities by their underwriters.\550\ The amendments to Rule 15c2-12 
revise certain requirements regarding the information that a 
Participating Underwriter 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 amendments: (1) Narrow a previously-existing exemption from the 
Rule for demand securities, subject to the limited grandfather 
provision; (2) specify that the time period as to which the 
Commission's rules require a Participating Underwriter to reasonably 
determine that the issuer or obligated person has agreed to provide 
notice of specified events in a timely manner must not be in excess of 
ten business days after the event's occurrence; (3) eliminate 
materiality qualifications for certain events triggering a notice to 
the MSRB; and (4) add additional events to the list of events for which 
a notice is provided.
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    \550\ See 1989 Adopting Release, 1994 Amendments Adopting 
Release, and 2008 Amendments Adopting Release, supra note 8.
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    The Commission is deleting the exemption for demand securities set 
forth in paragraph (d)(1)(iii) of the Rule and adding new paragraph 
(d)(5) to the Rule, thereby making the continuing disclosure provisions 
of paragraphs (b)(5) and (c) of the Rule apply to a primary offering of 
demand securities,\551\ subject to the limited grandfather provision 
described below. This change applies to any primary offering of demand 
securities (including a remarketing that is a primary offering) 
occurring on or after the compliance date of the final amendments.\552\ 
The Commission's amendment differs from the amendment the Commission 
originally proposed in that it includes a ``limited grandfather 
provision'' for remarketings of currently outstanding demand 
securities. Specifically, the continuing disclosure provisions will not 
apply to remarketings of demand securities that are outstanding in the 
form of demand securities on the day preceding the compliance date of 
the final amendments and that continuously have remained outstanding in 
the form of demand securities. This amendment will increase the amount 
of information in the market relating to primary offerings of demand 
securities occurring on or after the compliance date and will provide 
investors with valuable information, thereby enabling them to make 
better informed investment decisions relating to whether they should 
buy, sell, or hold such securities and reduce the likelihood that 
investors will be subject to fraud facilitated by inadequate 
disclosure.
---------------------------------------------------------------------------

    \551\ See supra note 38 and accompanying text.
    \552\ As noted in Section III.G., the compliance date for the 
amendments to the Rule is December 1, 2010.
---------------------------------------------------------------------------

    The amendment to the Rule regarding notice of specified events ``in 
a timely manner not in excess of ten business days'' after the event's 
occurrence will have the effect of establishing a definitive time frame 
for the submission of event notices. This provision will supplement the 
``in a timely manner'' language that existed in the Rule prior to these 
amendments, which allowed for the possibility of event notices being 
submitted to the MSRB at inconsistent times for similar events, because 
each issuer could decide for itself what constitutes ``in a timely 
manner.''

[[Page 33142]]

Because the Rule did not contain a specific time frame for submission 
of event notices, investors could not be certain whether or not an 
event had occurred over an indefinite period in the past. This 
amendment still requires Participating Underwriters to reasonably 
determine that a continuing disclosure agreement provides for timely 
disclosure, but sets an outside time frame of ten business days after 
the event's occurrence for submission of an event notice. To the extent 
that issuers provide disclosure within ten business days, consistent 
with their continuing disclosure agreements, there likely will be more 
certainty for investors concerning when they will receive information 
concerning such events and, on the whole, more timely information to 
investors and the municipal securities market generally. More up-to-
date information about municipal securities can serve to protect 
investors from fraud facilitated by inadequate disclosure and assist 
investors in determining whether the price of a municipal security is 
appropriate.
    The amendment to remove the ``materiality'' condition for six 
specified events in paragraph (b)(5)(i)(C) of the Rule will have the 
effect of increasing the disclosure of such events to investors and the 
municipal securities market generally.\553\ In addition, issuers and 
obligated persons no longer will have to separately analyze whether 
each occurrence of such events is material.
---------------------------------------------------------------------------

    \553\ These events are: (1) Principal and interest payment 
delinquencies; (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.
---------------------------------------------------------------------------

    In addition, the amendment to modify paragraph (b)(5)(i)(C)(6) of 
the Rule, which relates to a Participating Underwriter's obligation to 
reasonably determine that the issuer or obligated person has undertaken 
in a continuing disclosure agreement to provide notice to the MSRB of 
certain tax events, will have the effect of enhancing the disclosure of 
events that are important to investors in determining whether the tax 
status of their municipal securities is at risk.
    The amendment to modify paragraph (b)(5)(i)(C) of the Rule adds 
four new event items to be disclosed to investors.\554\ The disclosure 
of these events will provide investors and the market with important 
information regarding municipal securities.
---------------------------------------------------------------------------

    \554\ These events are: (1) Tender offers; (2) bankruptcy, 
insolvency, receivership or similar event of the obligated person; 
(3) 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 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.
---------------------------------------------------------------------------

    These 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 can make more knowledgeable investment 
decisions, effectively manage and monitor their investments, and help 
reduce the likelihood of fraud facilitated by inadequate disclosure. In 
addition, the amendments are intended to help brokers, dealers, and 
municipal securities dealers to satisfy their obligation to have a 
reasonable basis on which to recommend a municipal security.
    The Commission is sensitive to the costs and benefits that result 
from its rules. In the Proposing Release, the Commission identified 
certain costs and benefits of the amendments as proposed and requested 
comment on all aspects of its cost-benefit analysis, including the 
identification and assessment of any cost and benefits not discussed in 
the analysis. The Commission sought comment on the value of the 
benefits identified and the accuracy of its cost estimates. The 
Commission also encouraged commenters to provide relevant data. The 
Commission received some comments relating to the Commission's cost-
benefit analysis. For the reasons discussed below, the Commission 
continues to believe that its estimates of the benefits and costs of 
the amendments to the Rule 15c2-12, as set forth in the Proposing 
Release, are appropriate.

B. Benefits

    The Commission discusses below the benefits of the Rule for each 
amendment to the Rule.
1. Increased Disclosure Relating to Demand Securities
    The Commission is modifying the Rule's exemption for primary 
offerings of demand securities (including any remarketing that is a 
primary offering) to narrow the Rule's prior exemption, which will 
result in the greater availability of information about these 
securities to investors, broker-dealers, municipal securities analysts, 
and the securities markets generally. In addition, under this 
amendment, a broker, dealer or municipal securities dealer that 
recommends the purchase or sale of demand securities will need to have 
procedures in place that provide reasonable assurance that it will 
receive prompt notice of event notices and failure to file 
notices.\555\
---------------------------------------------------------------------------

    \555\ See 17 CFR 240.15c2-12(c).
---------------------------------------------------------------------------

    The greater availability of information regarding demand securities 
should increase the efficiency of markets in allocating capital at 
appropriate prices that reflect the creditworthiness of issuers and 
increase the efficiency of prices in the secondary market, benefiting 
issuers and investors alike, and should also benefit investors by 
allowing them to make more informed decisions whether to buy, sell or 
hold these securities. This greater availability of information is also 
likely to benefit brokers, dealers, or municipal securities dealers by 
reducing their costs in forming a reasonable basis for recommending 
demand securities. Specifically, these market participants will have 
more information about these securities to draw upon when they are 
deciding whether or not to recommend demand securities to investors. 
Greater availability of information also will benefit broker-dealers 
and municipal securities dealers by reducing their costs in 
establishing secondary market quotations for demand securities. In 
addition, greater transparency in the market due to the applicability 
of the continuing disclosure requirements to demand securities should 
reduce the likelihood that investors will be subject to fraud 
facilitated by inadequate disclosure, resulting in potentially reduced 
costs associated with such fraud.
    By 2009, the outstanding amount of VRDOs was estimated to be 
approximately $400 billion, which is a significant percentage of the 
municipal securities market.\556\ The Commission recognizes that some 
issuers of demand securities voluntarily provide continuing disclosure 
documents, notwithstanding the exemption for demand securities that 
existed prior to the amendments. Therefore, the above-referenced 
benefits will result primarily from the additional disclosure that is 
provided by issuers of demand securities that did not previously 
provide continuing disclosure documents.
---------------------------------------------------------------------------

    \556\ See Andrew Ackerman, ``Concerns Raised on VRDOs,'' The 
Bond Buyer, June 9, 2009.
---------------------------------------------------------------------------

    A number of commenters were supportive of applying the continuing 
disclosure to demand securities.\557\

[[Page 33143]]

Several commenters agreed that the amendments relating to demand 
securities are critical to assist investors in making informed 
investment decisions.\558\ One commenter noted that the market for 
demand securities was among the sectors most affected by the recent 
market turmoil and, consequently, stated its view that there is 
``little justification for exempting VRDOs from continuing disclosure 
requirements.'' \559\ Similarly, another commenter stated that, during 
the recent market downturn, investors in demand securities were well 
served by those issuers or obligated persons who voluntarily provided 
continuing disclosures about these securities, despite the Rule's 
exemption.\560\ Another commenter believed that, because many VRDO 
issuers already are subject to requirements for continuing disclosure 
and the submission of material event notices for their fixed rate debt, 
the submission of information with respect to their VRDOs will not be a 
significant burden and will provide access to information about these 
securities to a much broader segment of the market.\561\
---------------------------------------------------------------------------

    \557\ See California Letter at 1, CHEFA Letter at 2, Connecticut 
Letter at 1, DAC Letter at 3, e-certus Letter I at 11, Fidelity 
Letter at 3, Folts Letter at 1, ICI Letter at 2, NFMA Letter at 1, 
RBDA Letter at 2, and SIFMA Letter at 2.
    \558\ See, e.g., ICI Letter at 5, SIFMA Letter at 2, and RBDA 
Letter at 2.
    \559\ See RBDA Letter at 2.
    \560\ See CHEFA Letter at 2.
    \561\ See NMFA Letter at 1.
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2. More Timely Disclosure
    Establishing an outside timeframe of ten business days after the 
occurrence of the specified event to submit an event notice will help 
improve the timeliness of the dissemination of the information to 
investors and the market. The more timely availability of event notices 
will help improve the efficient pricing of municipal securities and 
will benefit investors by allowing them to make more informed 
investment decisions and to do so with greater certainty as to the 
timeliness of available information. The more timely availability of 
event notices also will contribute to the speedier dissemination of 
event notices to the market, which may, in turn, trigger important 
contractual rights that may have otherwise been delayed. In addition, 
the increased availability of up-to-date information about municipal 
securities is likely to improve the transparency in the market; should 
increase the efficiency of markets in allocating capital at appropriate 
prices that reflect the creditworthiness of issuers, which benefits 
issuers and investors alike; and should reduce the likelihood that 
investors will be subject to fraud facilitated by inadequate 
disclosure.
    Four commenters supported the proposal to establish a ten business-
day timeframe for the submission of event notices pursuant to a 
continuing disclosure agreement.\562\ Two of these commenters indicated 
that the benefits of the proposed amendment include more timely and 
efficient access to comprehensive and accurate information about 
municipal securities, which is critical to investors.\563\ These 
commenters also noted that the establishment of a definitive timeframe 
by which event notices are to be submitted better informs the market 
that an event has occurred, which assists in the efficient pricing of 
their municipal securities.\564\ Two commenters also noted that the 
definitive time frame provides more timely information to pricing 
evaluation services and relieves investors of dependence on bondholders 
to disclose information to these services.\565\
---------------------------------------------------------------------------

    \562\ See NFMA Letter at 1-2, SIFMA Letter at 3, ICI Letter at 
6-7, and Fidelity Letter at 3-4.
    \563\ See ICI Letter at 1 and Fidelity at 2.
    \564\ Id.
    \565\ Id.
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3. Increased Disclosure Due to the Deletion of the Materiality 
Condition for Six Events
    The Commission is adopting the proposal to delete the ``if 
material'' condition with respect to notice for six of the Rule's 
disclosure events.\566\ The deletion of the materiality condition for 
these six events will benefit issuers by eliminating the costs 
presently incurred by an issuer in making such a determination. 
Further, because issuers will not need to make a materiality 
determination, this Rule revision is likely to help speed the 
disclosure of these six events to investors and other market 
participants and help improve the efficient pricing of municipal 
securities. Greater certainty that information about these events will 
be disclosed pursuant to continuing disclosure agreements also is 
likely to help improve the transparency of the municipal security's 
pricing. The greater availability of information regarding events that 
have an immediate effect on the valuation of the security will help 
reduce the likelihood of fraud facilitated by inadequate disclosure, 
and in return will help reduce costs associated with such fraud.
---------------------------------------------------------------------------

    \566\ See supra note 553 describing the events.
---------------------------------------------------------------------------

    A number of commenters supported the deletion of the ``if 
material'' qualification for these six events and believed that this 
change would be beneficial.\567\ For example, one commenter believed 
that notice of these events should always be provided because their 
occurrence is always important to investors and other market 
participants. The commenter also noted that, in all probability, the 
amendment will not result in many changes to current practice.\568\ Two 
other commenters also agreed that these events are important to 
investors, and generally should be known immediately to issuers.\569\ 
Another two commenters concurred that many disclosure events are of 
such high consequence and relevance to investors in informing their 
investment decisions that they should be disclosed as a matter of 
course.\570\ These commenters also supported the unqualified disclosure 
of two events, i.e., bond calls and non-payment related defaults, for 
which a materiality condition is retained.\571\
---------------------------------------------------------------------------

    \567\ See California Letter at 2, San Diego Letter at 2, SIFMA 
Letter at 3, ICI Letter at 7-8, and Fidelity Letter at 3.
    \568\ See SIFMA Letter at 3.
    \569\ See California Letter at 2 and San Diego Letter at 2.
    \570\ See ICI Letter at 7-8 and Fidelity Letter at 3.
    \571\ Id.
---------------------------------------------------------------------------

4. Increased Disclosure of Tax-Related Events
    The amendments also 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 
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 status of the security, or other material 
events affecting the tax status of the security. The improved 
disclosure of the tax status of municipal securities will benefit 
investors by helping to ensure that the information about the tax 
status of the municipal security is reflected in the price of the 
security in a timely manner.
    Two commenters agreed that the amendment will benefit investors and 
the market. One commenter stated that the tax status of tax-exempt debt 
is of critical concern to many municipal investors, particularly 
municipal mutual funds, and that an adverse tax opinion likely will 
substantially decrease the market value and liquidity of a 
security.\572\ Thus, the subsequent sale of the affected security could 
have a significant financial impact on

[[Page 33144]]

investors.\573\ A second commenter believed that investors have a 
strong interest in being informed of actions taken by the IRS that 
present a material risk to the tax-exempt status of their 
holdings.\574\
---------------------------------------------------------------------------

    \572\ See NFMA Letter at 2.
    \573\ Id.
    \574\ See SIFMA Letter at 3.
---------------------------------------------------------------------------

5. Increased Disclosure of Additional Events
    The amendments also add four new event items to Rule 15c2-12. The 
amendments add the disclosure of tender offers to the provision of the 
Rule that currently applies only to bond calls.\575\ Information 
regarding a tender offer, which necessitates that an investor decide 
whether or not to tender within the prescribed time period, will 
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 amendment 
should help reduce the possibility of investor confusion regarding 
whether a certain municipal security is the subject of a tender offer.
---------------------------------------------------------------------------

    \575\ See supra Section III.E.1.
---------------------------------------------------------------------------

    The amendments also add the disclosure of bankruptcy, insolvency, 
receivership or similar event of the obligated person.\576\ While these 
events are uncommon in the municipal market, their improved disclosure 
can have a significant effect on the price of the municipal securities.
---------------------------------------------------------------------------

    \576\ See supra Section III.E.2.
---------------------------------------------------------------------------

    In addition, the amendments add the disclosure 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.\577\ As with bankruptcy, 
insolvency, receivership or similar event of the obligated person, the 
improved disclosure of the consummation of a material merger, 
consolidation, or acquisition or the sale of all or substantially all 
of the assets of the obligated person can have a significant effect on 
the price of the municipal securities. This amendment is likely to help 
improve investors' and other market participants' ability to obtain 
knowledge of the identity of the entity that will have responsibility 
for municipal security repayment obligations after the transaction is 
consummated. In addition, investors and other market participants will 
have the opportunity to review the creditworthiness and other aspects 
of the acquiring entity that support repayment of the security 
following the transaction.
---------------------------------------------------------------------------

    \577\ See supra Section III.E.3.
---------------------------------------------------------------------------

    The addition of these new disclosure events to the Rule will help 
improve the informativeness of the municipal security prices with 
respect to these events, which will benefit investors, issuers, broker-
dealers, municipal securities analysts and other market participants. 
In addition, greater transparency should reduce the likelihood of fraud 
facilitated by inadequate disclosure, and in return will help reduce 
costs associated with such fraud.
    Under the amendments, the appointment of a successor or additional 
trustee or the change of name of a trustee, if material, is added to 
the list of events contained in the Rule. As discussed earlier, the 
trustee of a municipal security performs important functions for 
investors in that security, including providing information to 
bondholders.\578\ This amendment is likely to benefit investors by 
helping reduce the costs associated with determining the identity of 
and contact information for the most current trustee and that of any 
new trustee.
---------------------------------------------------------------------------

    \578\ See supra Section III.E.4.
---------------------------------------------------------------------------

    Several commenters supported the addition of the new event items to 
the Rule.\579\ For example, two commenters believed that disclosure of 
trustee-related events will provide meaningful insights and information 
regarding a particular bond.\580\ One of these commenters particularly 
noted that it was critical that investors are informed of trustee name 
changes since bondholders' rights are generally exercised through the 
actions of the trustee.\581\ Another commenter noted that disclosure of 
trustee-related events will likely always be of importance to both 
retail and institutional investors.\582\
---------------------------------------------------------------------------

    \579\ See ICI Letter at 8, Fidelity Letter at 2-3, Connecticut 
Letter at 2, NFMA Letter at 2, and SIFMA Letter at 4.
    \580\ See ICI Letter at 8 and Fidelity Letter at 2.
    \581\ See Fidelity Letter at 3.
    \582\ See NFMA Letter at 2.
---------------------------------------------------------------------------

B. Costs

    The Commission discusses below the costs of the amendments to the 
Rule for various market participants.
1. Broker-Dealers
    Broker-dealers are not likely to incur significant additional 
recurring external or internal costs in connection with the 
implementation of the Rule, as amended, because the amendments will not 
significantly alter the Rule's existing requirements for broker-
dealers. As discussed above, broker-dealers acting as Participating 
Underwriters have an existing obligation to reasonably determine that 
issuers or obligated persons have undertaken in their continuing 
disclosure agreements to provide notice to the MSRB of specified 
events. The Commission does not expect that the addition of several new 
disclosure events to the Rule and a provision establishing the time 
frame for submission of such notices are likely to significantly alter 
broker-dealers' obligations under the Rule and thus their costs. As a 
practical matter, broker-dealers' obligations affected by the 
amendments involve verifying that the continuing disclosure agreement 
contains an undertaking by the issuer or obligated person to provide 
notice to the MSRB of the events that are listed in the Rule, including 
the new events, within ten business days after the event's occurrence. 
Moreover, because continuing disclosure documents generally are form 
documents, a broker-dealer simply will need to make sure that the 
continuing disclosure agreement reflects the amendments to the Rule.
    The amendments also modify the Rule's exemption for demand 
securities. This change applies to any initial offering and remarketing 
that is a primary offering of demand securities occurring on or after 
the compliance date of the amendments and does not apply to 
remarketings of demand securities that are outstanding in the form of 
demand securities on the day preceding the compliance date and that 
continuously have remained outstanding in the form of demand securities 
(i.e., the limited grandfather provision).
    Although the amendments relating to demand securities are not 
likely to result in external recurring costs for broker-dealers, 
broker-dealers may incur an increase in internal recurring costs 
because the proposals will increase the number of municipal securities 
offerings subject to the Rule's disclosure requirements. As noted 
above, the Commission estimates that the modification of the exemption 
for demand securities will increase the number of issuers with 
municipal securities offerings subject to the Rule by 20%.\583\ The 
Commission estimates

[[Page 33145]]

that the annual information collection burden for each broker-dealer 
under this amendment will be 1.20 hours (1 hour and 12 minutes).\584\ 
Accordingly, the Commission estimates that it will cost each broker-
dealer $349 annually to comply with the Rule, which represents a cost 
increase of $79 annually over each broker-dealer's current annual 
cost.\585\
---------------------------------------------------------------------------

    \583\ See supra Section V.D.2.a. As noted above, adoption of the 
limited grandfather provision will not materially affect the 
Commission's estimate of the number of demand securities issuers 
that will be affected by the amendments. Therefore, the Commission 
is retaining its estimate that there will be a 20% increase in the 
number of issuers affected by the amended Rule.
    \584\ Id.
    \585\ 1.20 hours (estimated annual information collection burden 
for each broker-dealer) x $291 (hourly cost for a broker-dealer's 
internal compliance attorney) = $349. The hourly rate for the 
compliance attorney is from SIFMA's Management & Professional 
Earnings in the Securities Industry 2009, 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 
amendments: $349 (annual cost under amendments) - $270 (previous 
annual cost) = $79. This estimated cost for broker-dealers also 
accounts for their review of continuing disclosure agreements in 
connection with remarketings of demand securities that are primary 
offerings. The Commission has slightly revised this cost estimate 
upward from the estimate contained in the Proposing Release to 
reflect updated hourly rate information from SIFMA for 2009.
---------------------------------------------------------------------------

    In addition, the Commission estimates that a broker-dealer may 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 final revisions to Rule 15c2-12. The Commission 
estimates that it will take internal counsel approximately 30 minutes 
to prepare this memorandum,\586\ for a cost of approximately $146.\587\ 
The Commission further believes that the ongoing obligations of broker-
dealers under the Rule will be handled internally because compliance 
with these obligations is consistent with the type of work that a 
broker-dealer typically handles in-house.
---------------------------------------------------------------------------

    \586\ See supra Section V.D.1.c.
    \587\ .5 hours (estimated annual information collection burden 
for each broker-dealer) x $291 (hourly cost for a broker-dealer's 
internal compliance attorney) = $146. The hourly rate for the 
compliance attorney is from SIFMA's Management & Professional 
Earnings in the Securities Industry 2009, 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. The Commission has slightly revised this cost 
estimate upward from the estimate contained in the Proposing Release 
to reflect updated hourly rate information from SIFMA for 2009.
---------------------------------------------------------------------------

    The Commission included these specific cost estimates in the 
Proposing Release and received no comments on them.\588\
---------------------------------------------------------------------------

    \588\ These cost estimates correspond with the burden estimates 
set forth in Section V.D.1., above. Therefore, to the extent the 
Commission received comments that generally relate to broker-
dealers' costs under the Rule, they are discussed above, and the 
responses to those comments are incorporated herein by reference. 
The Commission does not believe that these comments affect these 
cost estimates.
---------------------------------------------------------------------------

2. Issuers
a. Current Issuers
    Some current issuers are likely to be subject to some internal and 
external costs associated with the amendments. The costs for current 
issuers will result from the amendments relating to the new and 
modified event notice provisions and the elimination of the materiality 
determination for certain of the Rule's events.\589\ Current issuers 
will incur internal costs associated with the preparation of the 
additional event notices that may result from these changes to the 
Rule. Current issuers also will incur costs if they issue demand 
obligations, as discussed in the next sub-section. As noted above, the 
revisions to the Rule regarding the ten business day time frame for 
submission of event notices and the elimination of the materiality 
condition for many of the Rule's disclosure events will not change the 
substance of an event notice, the method for filing an event notice, or 
the location to which an event notice will be submitted. Consequently, 
issuers may not incur costs associated with the new ten business day 
time frame for submission of event notices. As discussed above, some 
issuers, including small issuers, may need to submit event notices more 
promptly than they do now and may need to monitor events not within 
their direct control, such as a rating change, that will prompt 
submission of an event notice.
---------------------------------------------------------------------------

    \589\ The amendments include a materiality condition for two of 
the new disclosure events. A materiality determination may result in 
costs to investors, market professionals and others to the extent 
that the issuer or obligated person determines that the event is not 
material and thus does not submit a notice to the MSRB. If 
investors, market professionals and others would consider the 
information important and have access to it, they may reach a 
different investment decision.
---------------------------------------------------------------------------

    The Commission also believes that current issuers may incur some 
internal labor costs associated with the preparation and submission of 
additional event notices. As discussed above,\590\ the Commission 
estimates that a current issuer will submit a maximum of one additional 
event notice annually.\591\ Thus, the Commission estimates that the 
maximum annual labor cost to prepare and submit the additional event 
notice is approximately $44 per current issuer.\592\
---------------------------------------------------------------------------

    \590\ See supra Section V.E.2.a.
    \591\ This estimate includes additional event notices that may 
be submitted as a result of the modification of the materiality 
condition in paragraph (b)(5)(i)(C) of the Rule.
    \592\ 1 (maximum estimated number of additional material event 
notices submitted per year per issuer) x $59 (hourly wage for a 
compliance clerk) x .75 hours (45 minutes) (estimated time for 
compliance clerk to prepare and submit a material event notice) = 
$44.25 (rounded to $44). The $59 per hour estimate for a compliance 
clerk is from SIFMA's Office Salaries in the Securities Industry 
2009, 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 Commission has slightly revised 
this cost estimate downward from the estimate contained in the 
Proposing Release to reflect updated hourly rate information from 
SIFMA for 2009. To provide an estimate of total costs for issuers 
that will not be under-inclusive, the Commission elected to use the 
higher end of the estimate of annual submissions of continuing 
disclosure documents.
---------------------------------------------------------------------------

    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 will be costs associated 
with any additional submissions of event notices and failure to file 
notices. As noted above, the Commission estimates that each current 
issuer will submit one additional event notice annually as a result of 
the amendments.\593\ If a 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 will 
have an additional annual cost of $8 per notice.\594\ 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 will be no additional external costs associated with such 
conversion. Further, some current issuers may incur a one-time cost of 
$100 associated with a revision to the template for continuing 
disclosure agreements.\595\
---------------------------------------------------------------------------

    \593\ See supra Section V.E.2.a. These cost estimates correspond 
with the burden estimates set forth in Section V.D.2., above. 
Therefore, to the extent the Commission received comments that 
generally relate to issuers' costs under the Rule, they are 
discussed above, and the responses to those comments are 
incorporated herein by reference. The Commission does not believe 
that these comments affect these cost estimates.
    \594\ Id.
    \595\ Id. The Commission estimates that there is an approximate 
cost of $100 associated with revising the issuer's continuing 
disclosure agreement by the current issuer's outside counsel to 
conform the agreement to the amendments. Thus, the total cost for 
revising continuing disclosure agreements for all current issuers by 
the current issuers' outside counsel will be approximately 
$1,000,000.
---------------------------------------------------------------------------

    The Commission included these specific cost estimates in the 
Proposing Release and received no comments on them.\596\
---------------------------------------------------------------------------

    \596\ The Commission has slightly revised these cost estimates 
upward from the estimates contained in the Proposing Release to 
reflect updated hourly rate information from SIFMA for 2009.

---------------------------------------------------------------------------

[[Page 33146]]

b. Demand Securities Issuers
    As discussed above, the Commission estimates that the modification 
of the Rule's exemption for demand securities will increase the number 
of issuers affected by the Rule by approximately 20% or 2,000 
issuers.\597\ These demand securities issuers are likely to have some 
costs associated with the preparation and submission of continuing 
disclosure documents. Also as discussed in the PRA section above, the 
Commission estimates that each demand securities issuer may have a one-
time external cost of $600 associated with preparing into a continuing 
disclosure agreement.\598\
---------------------------------------------------------------------------

    \597\ See supra Section V.C.
    \598\ See supra Section V.E.2.b. The Commission estimated that 
there is an approximate cost of $600 associated with drafting a 
continuing disclosure agreement by the demand securities issuer's 
outside counsel. Thus, the total cost for preparing continuing 
disclosure documents for all demand securities issuers by the demand 
securities issuers' outside counsel will be approximately 
$1,200,000.
---------------------------------------------------------------------------

    Other external costs for demand securities issuers are likely to be 
the costs associated with converting continuing disclosure documents 
into an electronic format to submit to the MSRB. As noted in the PRA 
section above, 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.\599\ Demand securities 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 may 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 will vary 
depending on how the demand securities issuer elects to convert its 
continuing disclosure documents into an electronic format. An issuer 
may elect to have a third-party vendor transfer its paper continuing 
disclosure documents into the appropriate electronic format. An issuer 
also may decide to undertake the work internally, and its costs will 
vary depending on the issuer's current technological resources. An 
issuer also may use the services of a designated agent to submit its 
continuing disclosure documents to the MSRB. In the Proposing 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.\600\ 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. The Commission 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 demand securities 
issuers.\601\
---------------------------------------------------------------------------

    \599\ Id.
    \600\ See Proposing Release, supra note 2, 74 FR at 36862.
    \601\ See supra Section V.E.2.b.
---------------------------------------------------------------------------

    The Commission estimates that some demand securities issuers may 
have to convert continuing disclosure documents into an electronic 
format to submit to the MSRB. The costs associated with this conversion 
may include: (i) Approximately $8 per notice to use a third-party 
vendor to scan a event notice or failure to file notice, and 
approximately $64 to use a third-party vendor to scan an average-sized 
annual financial statement; (ii) approximately $750 to $4,300 to 
acquire technological resources to convert continuing disclosure 
documents into an electronic format; (iii) approximately $50 to $300 
solely to upgrade or acquire the software to submit documents in an 
electronic format; and (iv) approximately $50 per month to establish 
Internet access.\602\
---------------------------------------------------------------------------

    \602\ Id.
---------------------------------------------------------------------------

    Based on the PRA section above, the Commission estimates that 
Category 1 demand securities issuers will incur a total maximum 
external cost of $776 per year.\603\ The Commission estimates that 
Category 2 demand securities issuers will incur a total maximum 
external cost of $4,900 for the first year and $600 per year 
thereafter.\604\ As noted above, the Commission estimates that any 
demand securities issuer that incurs costs associated with converting 
continuing disclosure documents into the MSRB's prescribed electronic 
format will choose the more expensive Category 2 option.\605\ The 
Commission estimates that approximately 400 demand securities issuers 
will incur costs associated with acquiring technological resources to 
convert continuing disclosure documents into an electronic format.\606\ 
In addition, the Commission estimates that the maximum annual costs for 
those demand securities issuers that need to acquire technological 
resources to submit documents to the MSRB will be approximately 
$1,960,000 for the first year after the adoption of the amendments and 
approximately $240,000 for each year thereafter.\607\
---------------------------------------------------------------------------

    \603\ A Category 1 demand securities issuer is one that does not 
have Internet access and needs to have a third party convert 
continuing disclosure documents into an electronic format. See supra 
Section V.E.2.b.
    \604\ A Category 2 demand securities issuer is one that does not 
have Internet access and elects to acquire the technological 
resources to convert continuing disclosure documents into an 
electronic internally. See supra Section V.E.2.b.
    \605\ Id.
    \606\ 2,000 demand securities issuers x 20% = 400 demand 
securities issuers.
    \607\ See supra Section V.E.2.b.
---------------------------------------------------------------------------

    The Commission included these specific cost estimates in the 
Proposing Release and received no comments on them.\608\
---------------------------------------------------------------------------

    \608\ These cost estimates correspond with the burden estimates 
set forth in supra Section V.D.2. Therefore, to the extent the 
Commission received comments that generally relate to issuers' costs 
under the Rule, they are discussed above, and the responses to those 
comments are incorporated herein by reference. The Commission does 
not believe that these comments affect these cost estimates.
---------------------------------------------------------------------------

c. Current Issuers and Demand Securities Issuers
    Lastly, as discussed in the PRA section above, some current issuers 
and some demand securities issuers are likely to incur external costs 
associated with the amendment to revise the timing for submitting event 
notices from ``in a timely manner'' to ``in a timely manner not to 
exceed ten business days after the occurrence of the event.'' \609\ In 
particular, some current issuers and some demand securities issuers may 
incur external costs associated with monitoring the appointment of a 
new trustee or a change in the trustee's name. One way an issuer may 
monitor such a change would be for its counsel to add a notice 
provision to the issuer's trust indenture that requires the trustee to 
provide the issuer with notice of the appointment of a new trustee or 
any change in the trustee's name. The Commission estimates that the 
approximate cost of adding this notice provision to an issuer's trust 
indenture will be approximately $100 per issuer,\610\ for a one-time 
annual cost of $1,200,000 \611\ for all issuers. The Commission 
included these specific cost estimates in the Proposing Release and 
received no comments on them.\612\
---------------------------------------------------------------------------

    \609\ See supra Section V.E.2.c.
    \610\ Id.
    \611\ Id.
    \612\ Id. These cost estimates correspond with the burden 
estimates set forth in supra Section V.D.2. Therefore, to the extent 
the Commission received comments that generally relate to issuers' 
costs under the Rule, they are discussed above, and the responses to 
those comments are incorporated herein by reference. The Commission 
does not believe that these comments affect these cost estimates.

---------------------------------------------------------------------------

[[Page 33147]]

    In addition to the burdens and costs discussed in the PRA section 
above, the Commission received several comments relating to other costs 
and burdens associated with the proposed amendments. Several commenters 
expressed general concerns about the burdens and costs associated with 
the establishment of a maximum ten business day time frame for the 
submission of event notices. Some of these concerns included the 
impracticability of meeting the time frame because of limited staff and 
resources, especially for smaller issuers,\613\ and the increased 
burdens and costs in connection with the additional monitoring and 
compliance necessary to submit notices within ten business days.\614\ 
Other commenters expressed concerns relating to the submission of event 
notices for information that the issuer does not control (e.g., rating 
changes, changes to the trustee, and changes to the tax status of bonds 
as a result of an IRS audit) within the ten business day time 
frame.\615\ In particular, many of these commenters expressed concerns 
regarding the costs associated with the reporting of rating changes 
within the ten business day time frame. These commenters noted that 
rating changes are not within the issuer's control and that rating 
organizations do not directly notify issuers of rating changes.\616\ As 
a result, these commenters believed that it would be difficult for most 
issuers to meet the proposed ten business day time frame without 
incurring substantial costs associated with monitoring for rating 
changes,\617\ such as devoting more staff to the task of monitoring for 
rating changes and/or subscribing to a service that will provide 
issuers notice of rating changes.
---------------------------------------------------------------------------

    \613\ See CRRC Letter, WCRRC Letter, Portland Letter at 2, 
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2, 
and NABL Letter at 5-6.
    \614\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter, 
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, and NABL 
Letter at 5-6.
    \615\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA 
Letter at 2-4, San Diego Letter at 1-2, California Letter at 1-2, 
NABL Letter at 8, and GFOA Letter at 3-4.
    \616\ Id.
    \617\ See, e.g., Halgren Letter at 1.
---------------------------------------------------------------------------

    The foregoing comments chiefly relate to concerns regarding 
submission of notices for events outside of the issuer's control. In 
this regard, the Rule currently contains a disclosure event relating to 
rating changes and so the concerns raised by these commenters are 
inherent in the Rule as it existed prior to the amendments, except that 
the amendments provide for event notices to be submitted within ten 
business days of the event's occurrence. In addition, for some event 
items, including rating changes, a materiality condition no longer will 
be a part of the Rule. Ratings for municipal issuers are available on 
the Internet Web sites of the rating agencies and thus issuers should 
be able to ascertain readily whether a rating change has occurred. In 
addition, issuers may be able to subscribe to a service that provides 
them with prompt rating updates for their securities. The Commission 
notes, however, that some issuers may have to monitor for these events 
more frequently than in the past. However, as discussed above, the 
Commission believes that its estimate of the time that issuers will 
spend, on average, to prepare and submit notices of events, including 
rating changes, is appropriate. With respect to the concern that some 
issuers will have to pay a vendor to provide them with notice of rating 
changes, the Commission reiterates that information regarding rating 
changes is available for free on the Internet Web sites of the rating 
agencies.
    Several commenters also expressed general concerns about the costs 
of the amendment that eliminates the materiality condition from certain 
events. For example, one commenter believed that removal of the ``if 
material'' condition from some events creates a risk of dividing events 
into two disclosure categories that could cause confusion.\618\ Two 
commenters believed that there are circumstances when an event, such as 
delinquent payments, are beyond an issuer's control and do not 
represent a financial failure on the issuer's part.\619\ According to 
these commenters, in the past they would have treated such events as 
immaterial.\620\ These commenters believed that if issuers have to file 
notice in such circumstances, it could create an unwarranted 
implication that the issuer has suffered financial adversity.\621\ Some 
commenters believed that the materiality qualification should be 
retained or included for certain specified events to prevent a large 
volume of notices that are irrelevant to investors' decision to buy, 
sell or hold municipal securities.\622\
---------------------------------------------------------------------------

    \618\ See Connecticut Letter at 2.
    \619\ See California Letter at 2 and San Diego Letter at 2.
    \620\ Id.
    \621\ Id.
    \622\ See NABL Letter at 8 and Kutak Letter at 4.
---------------------------------------------------------------------------

    In addition, several commenters expressed concerns about the costs 
associated with the revised disclosure item regarding adverse tax 
events. For example, one commenter stated that the Rule should not be 
expanded to include notice of routine reviews and random audits because 
they would unnecessarily alarm investors.\623\ Some commenters believed 
that disclosure of potential taxability determinations could limit 
issuers' options to negotiate settlements with the IRS in ways that do 
not present material risk to bondholders\624\ and could affect market 
perceptions of municipal issuers' securities, which would impose 
increased interest rates and other costs to issuers, and would limit 
future market access.\625\ Some of these commenters believed that the 
proposal would lead to a flood of information about preliminary 
taxability actions \626\ that could confuse and mislead investors \627\ 
or desensitize investors regarding adverse tax event 
determinations.\628\ One of these commenters suggested that event 
notices regarding adverse tax events should include a materiality 
condition.\629\
---------------------------------------------------------------------------

    \623\ See Connecticut Letter at 2.
    \624\ See Metro Letter at 2, Kutak Letter at 5, and NABL Letter 
7.
    \625\ See Metro Letter at 2 and Kutak Letter at 5.
    \626\ See Kutak Letter at 6.
    \627\ See Kutak Letter at 6, NABL Letter at 7, and GFOA Letter 
at 4.
    \628\ See Kutak Letter at 6.
    \629\ See NABL Letter at 7.
---------------------------------------------------------------------------

    Furthermore, as discussed in Section III.A. above, several 
commenters expressed general concerns about the costs of the proposal 
relating to the modification of the exemption for demand securities. 
For example, one commenter noted that the elimination of the Rule's 
exemption for demand securities from the Rule would impose such 
insurmountable administrative costs that small issuers and non-profit 
organizations would refuse to enter continuing disclosure 
agreements.\630\ Similarly, some commenters also believed that the 
elimination of the exemption for demand securities would hinder or 
prevent many issuers, particularly small issuers and non-profits, from 
using LOC-backed demand securities to access the tax-exempt 
markets.\631\ They opined that local communities would be hurt as a 
result of the proposed amendment to delete the exemption for demand 
securities because small issuers and obligated persons that rely on the 
exemption will have to pass along to users of their service any 
increased costs that they

[[Page 33148]]

may incur.\632\ One of the commenters remarked that many non-
governmental conduit borrowers \633\ have no previous undertakings to 
provide continuing disclosure information and, for such persons, 
complying with paragraph (b)(5) of the Rule would not merely be an 
extension of pre-existing obligations but a new and significant 
burden.\634\
---------------------------------------------------------------------------

    \630\ See SIFMA Letter at 2-3.
    \631\ See CRRC Letter at 3-5, NABL Letter A-9--A-12, and WCRRC 
Letter at 1.
    \632\ See CRRC Letter at 3-5 and WCRRC Letter at 1.
    \633\ See NABL Letter at A-2, n. 1.
    \634\ Id.
---------------------------------------------------------------------------

    Moreover, two commenters stated that many obligated persons of LOC-
backed demand securities do not prepare annual filings, such as audited 
financial statements, in the ordinary course of their business.\635\ As 
discussed in the PRA section above, one of these commenters believed 
that they would incur $30,000-$40,000 per year to prepare audited or 
consolidated financial statements.\636\ The commenters therefore 
believed that eliminating the exemption for demand securities would 
impose administrative costs and burdens that could potentially force 
some conduit borrowers of LOC-backed demand securities to withdraw from 
the tax-exempt bond market.\637\
---------------------------------------------------------------------------

    \635\ See CRRC Letter at 5 and NABL Letter at A-2.
    \636\ See CRRC Letter at 5. See also supra note 539 and 
accompanying text.
    \637\ See CRRC Letter at 5 and NABL Letter at A-10. Two 
commenters also expressed concern that, in complying with the 
revised Rule, smaller and not-for-profit obligated persons could 
encounter similar administrative costs and burdens. See NABL Letter 
at A-2 (noting that many small businesses and non-profit 
organizations utilize LOC-backed demand securities in accessing the 
tax-exempt debt markets) and SIFMA Letter at 2-3.
---------------------------------------------------------------------------

    As discussed in Section III.A. above, the Commission has considered 
the comments concerning the costs and burden on demand securities 
issuers and obligated persons. In response to commenters' concerns, the 
Commission has revised the proposal relating to demand securities to 
include a limited grandfather provision. The Commission notes that a 
number of demand securities issuers and obligated persons, including 
some small issuers and non-profit organizations, do voluntarily enter 
into continuing disclosure agreements.\638\ Further, many demand 
securities issuers and obligated persons are likely also to have 
outstanding fixed rate securities \639\ that are subject to continuing 
disclosure agreements. Because any such existing continuing disclosure 
agreement would obligate an issuer or an obligated person to provide 
annual filings, event notices, or failure to file notices with respect 
to these fixed rate securities, providing disclosures with respect to 
demand securities should not be a significant additional burden for 
issuers and obligated persons that already have outstanding fixed rate 
securities.
---------------------------------------------------------------------------

    \638\ Id.
    \639\ See Proposing Release, supra note 2, 74 FR at 36837.
---------------------------------------------------------------------------

    Regarding the concern that any new disclosure burdens may induce 
some obligated persons to withdraw from the tax-exempt municipal market 
because they do not prepare annual filings in the ordinary course of 
their business, the Commission notes that, for purposes of the Rule, 
annual filings are required only to the extent provided in the final 
official statements.\640\ Further, pursuant to paragraph (b)(5)(i)(B) 
of the Rule, audited financial statements need to be submitted, 
pursuant to the issuer's and obligated person's undertaking in a 
continuing disclosure agreement, only ``when and if available.'' \641\ 
This limitation, which is consistent with the Commission's position in 
the 1994 Amendments Adopting Release, should mitigate some concerns of 
those obligated persons that do not prepare audited financial 
statements in the ordinary course of their business.\642\ Further, 
although not all issuers or obligated persons, in the ordinary course 
of their business, prepare audited financial statements or other 
financial and operating information of the type included in annual 
filings, a number of issuers and obligated persons do.\643\
---------------------------------------------------------------------------

    \640\ See supra Section III.A. for additional discussion 
concerning the provision of annual filings and audited financial 
statements.
    \641\ 17 CFR 240.15c2-12(b)(5)(i)(B). See also supra Section 
III.A.
    \642\ As discussed in the 1994 Amendments Adopting Release, the 
1994 Amendments ``[do] not adopt the proposal to mandate audited 
financial statements on an annual basis with respect to each issuer 
and significant obligor. Instead, the amendments require annual 
financial information, which may be unaudited, and may, where 
appropriate and consistent with the presentation in the final 
official statement, be other than full financial statements. * * * 
However, if audited financial statements are prepared, then when and 
if available, such audited financial statements will be subject to 
the undertaking and must be submitted to the repositories. Thus * * 
* the undertaking must include audited financial statements only in 
those cases where they otherwise are prepared.'' See 1994 Amendments 
Adopting Release, supra note 8, 59 FR at 59599.
    \643\ See http://www.emma.msrb.org for audited financial 
statements or other financial and operating information submitted to 
EMMA.
---------------------------------------------------------------------------

    The Commission acknowledges that issuers or obligated persons of 
demand obligations that assemble financial and operating data for the 
first time in response to their undertakings in a continuing disclosure 
agreement may incur incremental costs beyond those costs incurred by 
those issuers or obligated persons that already assemble this 
information.\644\ Also, smaller issuers or obligated persons may have 
relatively greater burdens than larger issuers or obligated persons. 
However, the overall burdens for these demand securities issuers or 
obligated persons in preparing financial information are expected to be 
commensurate with those of issuers or obligated persons that already 
are preparing financial information as part of their continuing 
disclosure undertakings.\645\ The Commission believes that the burdens 
that will be incurred in the aggregate by issuers or obligated persons, 
as a result of the amendments with respect to demand securities, may 
not be significant and, in any event, are justified by the benefits to 
investors of enhanced disclosure.\646\
---------------------------------------------------------------------------

    \644\ The Commission, however, believes that the operations of 
an issuer or obligated person generally entail the preparation and 
maintenance of at least some financial and operating data.
    \645\ Further, issuers or obligated persons that assemble 
financial and operating data for the first time may face a greater 
burden than those issuers or obligated persons that already assemble 
this information. The amendments therefore initially may have a 
disparate impact on those issuers or obligated persons, including 
small entities, entering into a continuing disclosure agreement for 
the first time, as compared with those that already have outstanding 
continuing disclosure agreements.
    \646\ See supra Section V.D. As discussed therein, some 
commenters believed that the amendment could force some small 
entities to withdraw from the tax-exempt market because: (1) 
Disclosure of small issuers' or obligated persons' financial 
information would provide their large, national competitors with 
information about these small issuers or obligated persons, which 
they believed could result in a competitive disadvantage to them; 
and (2) small issuers or obligated persons would have to prepare 
costly audited financial statements. See, e.g., CRRC Letter at 3-4 
and WCRRC Letter at 1. As discussed above, the undertakings 
contemplated by the amendments (and Rule 15c2-12 in general) require 
annual financial information only to the extent provided in the 
final official statement, and audited financial statements only when 
and if available.
---------------------------------------------------------------------------

3. MSRB
    Since the number of continuing disclosure documents submitted will 
increase as a result of the amendments, the MSRB may incur costs 
associated with the amendments. The Commission estimates that these 
costs for the MSRB may include: (i) The cost to hire additional 
clerical personnel at an estimated annual cost of $119,770 to process 
the additional submissions associated with the amendments; \647\

[[Page 33149]]

and (ii) the cost to update its EMMA system to accommodate indexing 
information in connection with the changes to the Rule's disclosure 
events. Based on information provided to the Commission staff by the 
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 final changes to the disclosure events would be 
approximately $10,000.\648\ Therefore, in connection with the 
amendments, the MSRB would incur a one-time cost of approximately 
$10,000 as well as a recurring annual cost of approximately 
$119,770.\649\
---------------------------------------------------------------------------

    \647\ 2,030 hours (estimated additional annual number of hours 
worked by a compliance clerk) x $59 (hourly wage for a compliance 
clerk) = $119,770 (annual salary for compliance clerk). The $59 per 
hour estimate for a compliance clerk is from SIFMA's Office Salaries 
in the Securities Industry 2009, 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 will incur on an 
annual basis under the amendments. The Commission has slightly 
revised this cost estimate downward from the estimate contained in 
the Proposing Release to reflect updated hourly rate information 
from SIFMA for 2009. See supra Section V.D.3.
    \648\ See Proposing Release, supra note 2, 74 FR at 36855, n. 
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.
    \649\ See supra notes 487 through 490.
---------------------------------------------------------------------------

    The Commission received a comment letter from the MSRB relating to 
its costs associated with the proposed amendments.\650\ The MSRB stated 
that, in determining whether to approve or modify the proposed 
amendments, the Commission should note that changes to the manner of 
providing disclosures under the Rule or to the parties expected to make 
submissions, i.e., if third parties were to submit event notices rather 
than issuers or obligated persons, may have an impact on the design and 
timing of necessary EMMA system changes to implement the revised 
continuing disclosure provisions.\651\ The MSRB also stated that the 
Commission should verify that any such revisions can reasonably be 
implemented; that the revisions would improve the efficiency, 
timeliness and public access process; and that no direct charges would 
be imposed on the MSRB for revisions such as third-party 
submissions.\652\ Further, the MSRB noted that certain revisions would 
likely result in a longer planning, development and implementation time 
frame and could result in greater development and operational 
costs.\653\
---------------------------------------------------------------------------

    \650\ See MSRB Letter at 2.
    \651\ Id.
    \652\ Id.
    \653\ Id.
---------------------------------------------------------------------------

C. Limited Grandfather Provision Relating to Modification of Exemption 
for Demand Securities

    As discussed in Section III.A. above, the Commission is revising 
the amendment relating to demand securities from that proposed in the 
Proposing Release to include a limited grandfather provision, so that 
paragraphs (b)(5) and (c) will not apply to demand securities 
outstanding as of November 30, 2010. The Commission believes that the 
limited grandfather provision strikes an appropriate balance between 
the need to improve disclosure available to investors and the 
recognition that the practical effects of applying paragraphs (b)(5) 
and (c) of the Rule to outstanding issues of demand securities could 
unduly burden issuers and obligated persons and thus may adversely 
impact the market. As the Commission noted in Section III.A. above, 
there would be benefits to making outstanding demand obligations 
subject to paragraphs (b)(5) and (c) of the Rule because greater 
information about these securities would be available to investors on a 
timely basis. However, demand securities, such as VRDOs, generally are 
long-term securities. If an outstanding demand security became subject 
to paragraph (b)(5)(i)(C) of the Rule, a Participating Underwriter, in 
the first remarketing of the VRDO following the compliance date of the 
amendments, would have to reasonably determine that an issuer or an 
obligated person has executed a continuing disclosure agreement to 
provide annual financial information for each obligated person for whom 
financial information or operating data is presented in the final 
official statement.
    For an outstanding issue of demand securities, however, referring 
back to information included in the final official statement may be 
problematic, if not impossible, because the official statement may be 
years old. Thus, its information would be out-of date, thereby 
increasing the underwriter's cost of complying with Rule 15c2-12 
substantially. In addition, the official statement may be difficult to 
obtain if the remarketing agent was not the underwriter of the original 
offering. Further, absent the limited grandfathering provision, the 
issuer or the obligated person of such security, pursuant to its 
continuing disclosure undertaking, would have needed to update annual 
financial information that may no longer be prepared or available, 
which may also be a potentially costly undertaking. In addition, 
application of the amendments to remarketings of demand securities 
occurring on or after the compliance date would necessitate a large 
number of issuers or obligated persons of demand securities entering 
into continuing disclosure agreements in a very short time period, 
which could delay remarketings and temporarily disrupt the markets for 
demand securities. The Commission believes that the benefits of 
applying paragraphs (b)(5) and (c) of the Rule to demand securities 
outstanding prior to the compliance date would not justify the high 
cost of such change to both Participating Underwriters and issuers or 
obligated persons of such securities and therefore is adopting the 
limited grandfather provision. The Commission further notes that some 
issuers or obligated persons of demand securities also have issued 
fixed rate municipal securities and, in that case, continuing 
disclosures about those issuers or obligated persons should be 
available to investors.

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

    Section 3(f) of the Exchange Act \654\ 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, in addition to the protection of investors, 
whether the action would promote efficiency, competition, and capital 
formation. In addition, Section 23(a)(2) of the Exchange Act \655\ 
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.
---------------------------------------------------------------------------

    \654\ 15 U.S.C. 78c(f).
    \655\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The municipal securities market is comprised of approximately 
51,000 issuers that are states and local governments or their agencies 
and instrumentalities. As discussed in more detail above, there are 
approximately $400 billion of new issuances of municipal securities 
annually and approximately $2.8 trillion of municipal securities are 
outstanding.\656\ There are two primary types of municipal securities: 
general obligation bonds and revenue bonds. General obligation bonds 
are backed by the full faith and credit of the issuer and are also 
usually secured by specific tax levies. In contrast, revenue bonds are 
generally secured by a pledge of specific revenues of the issuer, which 
are typically

[[Page 33150]]

derived from the facility financed by the bonds (for example, water 
rates may be used to pay principal and interest on the bonds issued to 
pay for construction of a water system). Revenue bonds are further 
divided into two general types: Governmental and private purpose. 
Governmental bonds are issued to finance the needs of the states or 
local governments, their agencies and instrumentalities. Private 
purpose bonds (often referred to as conduit bonds), however, are issued 
to provide the benefit of a tax-exempt interest rate to a private 
entity as permitted by various provisions of the Internal Revenue Code. 
The obligation to pay conduit bonds rests entirely on the private 
borrower, such as 501(c)(3) hospitals, colleges and universities, the 
owners of low and moderate income housing projects and of small 
industrial facilities.
---------------------------------------------------------------------------

    \656\ See supra Section II.
---------------------------------------------------------------------------

    As described above, because of the diversity of disclosure 
practices, the Commission believes that the informational efficiency of 
the municipal bond market could be improved. As a result, the 
Commission believes that the amendments are appropriate to enhance the 
efficiency of the municipal securities market, particularly in the 
sense of informational efficiency. Informational efficiency helps 
investors efficiently allocate capital, since it helps to ensure that a 
security's price accurately reflects important information. When 
accurate information is available, the municipal security's price 
serves to convey aggregate information to investors, further 
facilitating investment decisions. The amendments encourage disclosure 
of information that, in the Commission's view, reasonable investors 
consider important in their transaction decisions. The amendments 
strengthen the municipal disclosure process because of the new events 
being added to paragraph (b)(5)(i)(C) of the Rule. In addition, 
inclusion of the provision that submissions of event notices to the 
MSRB be made in a timely manner not in excess of ten business days of 
the event's occurrence, and the deletion of the exemption for demand 
securities (other than those demand securities that qualify for the 
limited grandfather provision), also is expected to promote the 
efficiency of the municipal securities market, as described above 
including in the cost-benefit section. Currently, the Rule does not 
contain a specific time frame within which event notices must be 
provided to the MSRB pursuant to a continuing disclosure agreement. 
Thus, the Commission believes that the revision relating to the time 
frame for submission of event notices will help individuals and others 
to obtain greater information about municipal securities within ten 
business days 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 now included as event items in 
the Rule. Further, certain events listed in paragraph (b)(5)(i)(C) of 
the Rule will now be disclosed without the issuer first having to make 
a materiality determination.
    Moreover, the Rule's exemption for demand securities has been 
narrowed, although a limited grandfather provision is in place for many 
pre-existing demand obligations.\657\ As a consequence of the 
amendments, in some cases, greater information about municipal 
securities and their issuers will 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 are expected to have 
access to important 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 the likelihood of fraud facilitated by inadequate disclosure. To 
the extent that greater information efficiency ultimately allows for 
better allocation of investments in the municipal securities market, 
the amendments are expected to promote allocative efficiency as well.
---------------------------------------------------------------------------

    \657\ As discussed above, although it may be optimal for all 
outstanding demand obligations to be subject to paragraph (b)(5) and 
(c) of the Rule, the application of the continuing disclosure 
requirements of the Rule to all outstanding demand securities issued 
prior to the compliance date may be burdensome for issuers and 
Participating Underwriters because they would need to enter into a 
continuing disclosure agreement for any remarketing that is a 
primary offering that occurs on or after the compliance date, which, 
potentially, could temporarily disrupt the market for demand 
securities.
---------------------------------------------------------------------------

    The Commission considers the existing state of the municipal 
securities market to be a competitive one, given the large number and 
diversity of issuers, and the volume of municipal securities regularly 
issued and remarketed, as noted above, despite certain characteristics 
of municipal bonds, discussed below, that lead to a certain degree of 
non-fungibility and market segmentation. The size of the municipal 
securities market--with approximately 51,000 issuers, $400 billion of 
new issuances annually, and approximately $2.8 trillion in securities 
outstanding--suggests that the market for issuance and purchase of 
municipal securities may be highly competitive. Additionally, investors 
can substitute to some degree their portfolios between municipal 
securities and other securities, particularly fixed-income securities 
of comparable credit quality. Depending on the municipality, these may 
include U.S. Treasury obligations, corporate bonds, and, more recently, 
taxable bonds known as Build America Bonds. Such substitutability 
implies that municipal issuers must currently compete not only with 
each other but also with other comparable opportunities available to 
investors. Relative to this existing competitive benchmark, the 
Commission believes that the amendments promote competition in the 
purchase and sale of municipal securities, as described below.
    Because of the limited grandfather provision and the transition 
aspects of the amendments discussed in Section IV above, a number of 
issuers will have differing disclosure undertakings. In this regard, 
some issuers of demand securities will qualify for the limited 
grandfather provision. In addition, the Commission recognizes that by 
not applying the amendments to continuing disclosure agreements entered 
into prior to the amendments' compliance date, for a period of time 
there will be municipal securities that are subject to differing 
disclosure. This circumstance may cause some confusion and thus could 
lead to some inefficiency with respect to investors and broker-dealers 
who otherwise would prefer uniform disclosure. Because of the nature of 
the market for demand securities, the Commission does not believe that 
it is appropriate to impose requirements that would mandate revisions 
to existing continuing disclosure agreements.
    The Commission believes that the amendments will promote 
competition in the purchase and sale of municipal securities due to the 
greater availability and timeliness of information as a result of the 
amendments. Competition is generally more robust when many willing 
buyers and many willing sellers transact with full information. 
Competition in the municipal securities market is generally based on 
the premise that investors are informed of

[[Page 33151]]

the various attributes of the investment instruments, and issuers are 
competing for investors. Even with multiple sellers and buyers, if 
there are high search costs (that is, if investors have to incur high 
costs to gather relevant information), these costs can be a barrier to 
effective competition. The Commission believes that its amendments will 
tend to remove this barrier. As a result, more investors may be 
attracted to this market sector and broker-dealers and municipal 
issuers can compete for their business.
    The amendments are designed to encourage improvement in the 
completeness and timeliness of issuer disclosures and thus foster 
additional interest in municipal securities by retail and institutional 
customers. In addition, the greater availability of information about 
municipal securities will be beneficial to vendors of municipal 
securities information as they develop their value-added products. 
Thus, the amendments will promote competition among those vendors of 
municipal securities information that utilize the information provided 
to the MSRB pursuant to continuing disclosure agreements and compete 
with each other in creating and offering for sale value-added products 
relating to municipal securities. As discussed above,\658\ the 
amendments may result in some additional cost and hourly burdens for 
broker-dealers, issuers and the MSRB.
---------------------------------------------------------------------------

    \658\ See supra Sections V.E.1. and V.E.2.
---------------------------------------------------------------------------

    By providing more timely disclosure of important information to an 
important segment of the capital markets as a whole, the Commission 
believes that these amendments also will improve the allocative 
efficiency of capital formation both within the municipal segment of 
the fixed income market and within the municipal bond market, in 
particular. Allocative efficiency of capital is enhanced when investors 
are able to make better-informed investment decisions since capital 
should flow to its most efficient use. The amendments will 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, and the Commission has 
provided a limited grandfathering provision. The Commission believes 
that the limited grandfather provision strikes an appropriate balance 
between the need to improve disclosure available to investors and the 
recognition that the practical effects of applying paragraphs (b)(5) 
and (c) of the Rule to outstanding issues of demand securities could 
unduly burden issuers and obligated persons and thus may adversely 
impact the market. In addition, the amendments will 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. To assess the effect of 
the amended Rule on capital formation, the Commission has evaluated the 
benefits of enhanced disclosure on the allocative efficiency of the 
capital market.
    In the Proposing Release, the Commission considered the proposed 
amendments in light of the standards set forth in the above-noted 
Exchange Act provisions. The Commission solicited comment on whether, 
if adopted, the proposal would result in any anti-competitive effects 
or would promote efficiency, competition or capital formation. The 
Commission asked commenters to provide empirical data or other facts to 
support their views on any anti-competitive effects or any burdens on 
efficiency, competition or capital formation that might result from the 
proposed amendments. The Commission received some comments about the 
competitive effects of the proposed amendments.
    As discussed above,\659\ some commenters believed that the 
elimination of the Rule's exemption for demand securities would force 
some issuers, particularly small issuers and non-profit organizations, 
to choose between accepting the burdens of complying with the 
continuing disclosure provisions of the Rule and withdrawing from the 
tax-exempt market.\660\ Two of these commenters argued that the 
proposed amendment would have a chilling effect on competition for 
small issuers and obligated persons because it would favor their large 
national competitors that are either already reporting companies or 
have superior financial and employee resources to comply with the 
Rule.\661\ In their view, the proposed amendment would force small and 
local businesses that rely on the exemption for demand securities to 
choose between giving up their proprietary financial information and 
accessing tax-exempt financing. Revelation of this financial 
information, in their view, would favor competitors, relative to the 
status quo.\662\ They opined that there could be a negative impact on 
capital formation if these businesses decided to forego tax exempt 
financing and were unable to obtain other sources of lending and if 
investors were not afforded the opportunity to acquire the securities 
that these businesses otherwise would have issued.\663\
---------------------------------------------------------------------------

    \659\ See supra Section III.A.
    \660\ See NABL Letter A-9-A-12, CRRC Letter at 3-5, and WCRRC 
Letter at 1.
    \661\ See CRRC Letter at 3-5, and WCRRC Letter at 1.
    \662\ Id.
    \663\ See CRRC Letter at 3-5, and WCRRC Letter at 1.
---------------------------------------------------------------------------

    The Commission acknowledges that for those primary offerings of 
demand securities that no longer will be exempt from the Rule and for 
which the issuer is not currently submitting continuing disclosure 
documents to the MSRB, the practice will be different than it was prior 
to the amendments. In such cases, Participating Underwriters will need 
to reasonably determine that the issuer or obligated person has 
undertaken, in a continuing disclosure agreement, to provide continuing 
disclosure documents to the MSRB. This change applies to any initial 
offering and remarketing that is a primary offering of demand 
securities unless the limited grandfather provision applies. Those 
issuers that have not previously issued securities covered by the Rule 
will be entering into a continuing disclosure agreement for the first 
time and thereby will incur some costs to provide continuing disclosure 
documents to the MSRB. Although the Commission recognizes that, if some 
small entities elected to forego tax-exempt financing because of the 
impact of the amendments, the amendments could have an adverse impact 
on those entities; however, it believes that any additional burden on 
issuers and obligated persons is, on balance, justified by the improved 
availability of information with respect to demand securities. This 
conclusion, moreover, is supported by a number of commenters.\664\ 
Therefore, while the Commission is mindful of the additional burdens 
that may befall certain competitors in the market, based on its 
analysis as well as other comments submitted, the Commission continues 
to believe the overall result of the amendments will be to promote 
competition in the municipal securities market.
---------------------------------------------------------------------------

    \664\ See, e.g., CHEFA Letter at 2, Connecticut Letter at 1, e-
certus Letter I at 11, Folt Letter at 1, ICI Letter at 5, NFMA 
Letter at 1, RBDA Letter at 2, and SIFMA Letter at 2.
---------------------------------------------------------------------------

    In addition, as the Commission previously noted, a number of 
issuers and obligated persons of demand securities are likely to have 
outstanding fixed rate securities. Some of these securities, in turn, 
likely would be subject to continuing disclosure agreements under the 
Rule. Because any

[[Page 33152]]

existing continuing disclosure agreement would obligate an issuer or an 
obligated person to provide annual filings, event notices, or failure 
to file notices with respect to these fixed rate securities, providing 
disclosures with respect to demand securities is not expected to be a 
significant additional burden for these issuers and obligated persons.
    Regarding the concern that any new disclosure burdens may induce 
some obligated persons to withdraw from the tax-exempt municipal market 
because they do not prepare annual filings in the ordinary course of 
their business, the Commission notes that, for purposes of the Rule, 
annual filings are required only to the extent provided in the final 
official statement.\665\ Further, pursuant to paragraph (b)(5)(i)(B) of 
the Rule, audited financial statements need to be submitted, pursuant 
to the issuer's and obligated person's undertaking in a continuing 
disclosure agreement only ``when and if available.'' \666\ This 
limitation, which is consistent with the Commission's position in the 
1994 Amendments Adopting Release, should mitigate some concerns of 
those obligated persons that do not prepare audited financial 
statements in the ordinary course of their business.\667\ Further, 
although not all issuers or obligated persons, in the ordinary course 
of their business, prepare audited financial statements or other 
financial and operating information of the type included in annual 
filings, a number of issuers and obligated persons do.\668\
---------------------------------------------------------------------------

    \665\ See supra Section III.A. for additional discussion 
concerning the provision of annual filings and audited financial 
statements.
    \666\ 17 CFR 240.15c2-12(b)(5)(i)(B). See also supra Section 
III.A. concerning audited financial statements and 1994 Amendments 
Adopting Release, supra note 8, 59 FR at 59599.
    \667\ As discussed in the 1994 Amendments Adopting Release, the 
1994 Amendments ``[do] not adopt the proposal to mandate audited 
financial statements on an annual basis with respect to each issuer 
and significant obligor. Instead, the amendments require annual 
financial information, which may be unaudited, and may, where 
appropriate and consistent with the presentation in the final 
official statement, be other than full financial statements. * * * 
However, if audited financial statements are prepared, then when and 
if available, such audited financial statements will be subject to 
the undertaking and must be submitted to the repositories. Thus * * 
* the undertaking must include audited financial statements only in 
those cases where they otherwise are prepared.'' See 1994 Amendments 
Adopting Release, supra note 8, 59 FR at 59599.
    \668\ See http://www.emma.msrb.org for audited financial 
statements or other financial and operating information submitted to 
EMMA.
---------------------------------------------------------------------------

    The Commission acknowledges that issuers or obligated persons of 
demand obligations that assemble financial and operating data for the 
first time in response to their undertakings in a continuing disclosure 
agreement may incur incremental costs beyond those costs incurred by 
those issuers or obligated persons that already assemble this 
information.\669\ Also, smaller issuers or obligated persons may have 
relatively greater burdens than larger issuers or obligated persons. 
However, the overall burdens for these demand securities issuers or 
obligated persons in preparing financial information are expected to be 
commensurate with those of issuers or obligated persons that already 
are preparing financial information as part of their continuing 
disclosure undertakings.\670\ The Commission believes that the burdens 
that will be incurred in the aggregate by issuers or obligated persons, 
as a result of the amendments with respect to demand securities, may 
not be significant and, in any event, are justified by the benefits to 
investors of enhanced disclosure.\671\
---------------------------------------------------------------------------

    \669\ The Commission, however, believes that the operations of 
an issuer or obligated person generally entail the preparation and 
maintenance of at least some financial and operating data.
    \670\ Further, issuers or obligated persons that assemble 
financial and operating data for the first time may face a greater 
burden than those issuers or obligated persons that already assemble 
this information. The amendments therefore initially may have a 
disparate impact on those issuers or obligated persons, including 
small entities, entering into a continuing disclosure agreement for 
the first time, as compared with those that already have outstanding 
continuing disclosure agreements.
    \671\ See supra Section V.D. As discussed therein, some 
commenters believed that the amendment could force some small 
entities to withdraw from the tax-exempt market because: (1) 
Disclosure of small issuers' or obligated persons' financial 
information would provide their large, national competitors with 
information about these small issuers or obligated persons, which 
they believed could result in a competitive disadvantage to them; 
and (2) small issuers or obligated persons would have to prepare 
costly audited financial statements. See, e.g., CRRC Letter at 3-4 
and WCRRC Letter at 1. As discussed above, the undertakings 
contemplated by the amendments (and Rule 15c2-12 in general) require 
annual financial information only to the extent provided in the 
final official statement, and audited financial statements only when 
and if available.
---------------------------------------------------------------------------

    Two commenters viewed the addition of the event item for mergers, 
acquisitions, and substantial asset sales as ``anti-competitive,'' 
because they believed that disclosure of such events by closely held 
companies prior to public announcement would allow competitors to 
interfere with the transaction.\672\ However, the Commission believes 
that competition in the market for corporate control would be enhanced, 
not reduced, by the possibility of disclosure creating more open 
conditions for the sale of privately held-companies. The Commission 
further notes that parties to mergers and acquisition agreements 
generally may, subject to legal obligations, include remedies in such 
agreements that are designed to balance the conflicting interests of 
the buyer and the seller.
---------------------------------------------------------------------------

    \672\ Id.
---------------------------------------------------------------------------

    For the foregoing reasons, pursuant to Section 3(f) of the Exchange 
Act, the Commission has considered the amendments to the Rule and 
believes that they, on balance, should promote efficiency and capital 
formation and increase competition. In addition, pursuant to Section 
23(a)(2) of Exchange Act, the Commission does not believe that they 
impose a burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.

VIII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with the provisions of the Regulatory 
Flexibility Act (``RFA'').\673\ It relates to amendments to Rule 15c2-
12 \674\ under the Exchange Act.\675\ The amendments revise 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: (1) Require a Participating 
Underwriter 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 (2) 
modify the list of events for which notices are to be provided. In 
addition, the amendments modify the condition that event notices are to 
be submitted to the MSRB ``if material,'' for some, but not all, of the 
Rule's specified events. Further, the amendments revise an exemption 
from the Rule for demand securities, by making the offering of those 
securities subject to the continuing disclosure obligations set forth 
in the Rule. This change applies to any initial offering and 
remarketing that is a primary offering of demand securities occurring 
on or after the compliance date of the amendments.\676\ However, to 
address commenters' concerns about the impact of the

[[Page 33153]]

amendments on existing demand securities, the amendment does not apply 
to remarketings of demand securities that are outstanding in the form 
of demand securities on the day preceding the amendments' compliance 
date and that continuously have remained outstanding in the form of 
demand securities.
---------------------------------------------------------------------------

    \673\ 5 U.S.C. 604(a).
    \674\ 17 CFR 240.15c2-12.
    \675\ 15 U.S.C. 78a et seq. See also Proposing Release, supra 
note 2, 74 FR at 36836.
    \676\ As noted above, the compliance date of the amendments to 
the Rule is December 1, 2010.
---------------------------------------------------------------------------

A. Need for Amendments to Rule 15c2-12

    The main purpose of the amendments 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 of, and subsequent 
recommendation of transactions in, municipal securities for which 
adequate information is not available on an ongoing basis.
    The amendments 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. 
Previously, the Rule stated that event notices were to be provided ``in 
a timely manner.'' In 1994, the Commission adopted amendments to Rule 
15c2-12 and noted at that time that it had not established a specific 
time frame with respect to ``timely'' because of the wide variety of 
events and issuer circumstances.\677\ 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.\678\ It has been 
reported that there have been some instances in which event notices 
were not submitted until months after the events occurred.\679\ The 
Commission believes that such delays can deny investors important 
information that they need to make informed decisions regarding whether 
to buy, sell, or hold municipal securities. Moreover, notice of 
important events can aid investors in determining whether the price 
that they pay or receive for their municipal security transactions is 
appropriate.\680\
---------------------------------------------------------------------------

    \677\ See 1994 Amendments, supra note 7, 59 FR at 59601
    \678\ Id.
    \679\ See Proposing Release, supra note 2, 74 FR at 36837.
    \680\ Id.
---------------------------------------------------------------------------

    The Commission believes that codifying in the Rule a specific time 
within which event notices are to be provided to the MSRB, in 
accordance with the continuing disclosure agreement, should result in 
these notices being made available more promptly than at present. 
Accordingly, the amendments 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 the Rule's 
specified events in a timely manner not in excess of ten business days 
after the event's occurrence. The Commission believes that this change 
will help promote more timely disclosure of this important information 
to municipal security investors.
    Paragraph (b)(5)(i)(C)(6) of the Rule currently 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 Commission is adopting, with 
certain modifications from that proposed, an amendment to paragraph 
(b)(5)(i)(C)(6) of the Rule to require that Participating Underwriters 
reasonably determine that the issuer or obligated person has entered 
into a continuing disclosure agreement to submit a notice for 
``[a]dverse 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 status of the security, or other material 
events affecting the tax status of the security.'' 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.\681\ 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.\682\ Therefore, retail and institutional 
investors alike are very interested in events that could adversely 
affect the tax-exempt status of the municipal securities that they own 
or may wish to purchase.\683\
---------------------------------------------------------------------------

    \681\ See Proposing Release, supra note 2, 74 FR at 36840-41.
    \682\ Id.
    \683\ Id.
---------------------------------------------------------------------------

    Under the Rule, as amended, a materiality determination is no 
longer 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.\684\ The Commission believes that these events are 
of such importance to investors that notice of their occurrence should 
always be provided pursuant to a continuing disclosure agreement. 
Furthermore, the Commission believes that eliminating the necessity to 
make a materiality decision upon the occurrence of these events will 
simplify issuer compliance with the terms of their continuing 
disclosure agreements and will help to make such filings available more 
promptly to investors and others.
---------------------------------------------------------------------------

    \684\ See Proposing Release, supra note 2, 74 FR at 36839-40.
---------------------------------------------------------------------------

    The amendments also add the following events, for which disclosure 
notices are to be provided pursuant to a continuing disclosure 
agreement: (i) Tender offers (paragraph (b)(5)(i)(C)(8) of the Rule); 
\685\ (ii) bankruptcy, insolvency, receivership or similar event of the 
obligated person (paragraph (b)(5)(i)(C)(12) of the Rule); \686\ (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 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); \687\ 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.\688\ The 
Commission believes that there is a need to make available to all 
investors this important information because it can affect their 
investment decisions and the value of their municipal securities. The 
Commission further believes that the addition of these four events 
disclosure items to the Rule will substantially improve the

[[Page 33154]]

availability of important information in the municipal securities 
market.
---------------------------------------------------------------------------

    \685\ See Proposing Release, supra note 2, 74 FR at 36842-46.
    \686\ Id.
    \687\ Id.
    \688\ Id.
---------------------------------------------------------------------------

    Finally, the amendments 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 suggest a need to increase the availability of information to 
investors regarding demand securities.\689\ Furthermore, the recent 
period of turmoil in the market for municipal auction rate securities 
and demand securities also suggests that the Rule's exemption for 
demand securities is no longer appropriate and that the exemption 
should be modified to apply paragraphs (b)(5) and (c) of the Rule, 
relating to the submission of continuing disclosure documents and 
recommendations by brokers, dealers, and municipal securities dealers, 
respectively, to primary offerings of demand securities.\690\
---------------------------------------------------------------------------

    \689\ See Proposing Release, supra note 2, 74 FR at 36835-37.
    \690\ Id.
---------------------------------------------------------------------------

B. Objectives

    The purpose of the amendments 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. Significant Issues Raised by Public Comment

    In the Proposing Release, the Commission requested comment on 
matters discussed in the IRFA.\691\ No commenter suggested that the 
Rule would have a significant impact on smaller broker-dealers, who are 
not entities directly subject to the Rule. As discussed in greater 
detail above, several commenters raised concerns regarding the impact 
of the proposed amendments on small issuers, although they are not 
directly subject to the rule.\692\
---------------------------------------------------------------------------

    \691\ See Proposing Release, supra note 2, 74 FR at 36867.
    \692\ See CRRC Letter, WCRRC Letter, Kutak Letter, CHEFA Letter, 
NAHEFFA Letter, Connecticut Letter, SIFMA Letter, NABL Letter, and 
GFOA Letter. See supra Sections III.B., III.E., and V.D.
---------------------------------------------------------------------------

D. Small Entities Subject to the Rule

    The amendments apply directly to any broker, dealer, or municipal 
securities dealer that acts as a Participating Underwriter in a primary 
offering of municipal securities with an aggregate principal amount of 
$1,000,000 or more and indirectly issuers of such securities.
    The RFA defines ``small entity'' to mean ``small business,'' 
``small organization,'' or ``small government jurisdiction.'' \693\ The 
Commission's rules define ``small business'' and ``small organization'' 
for purposes of the RFA for each of the types of entities the 
Commission regulates.
---------------------------------------------------------------------------

    \693\ 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.'' \694\
---------------------------------------------------------------------------

    \694\ 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.'' \695\
---------------------------------------------------------------------------

    \695\ 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.'' \696\
---------------------------------------------------------------------------

    \696\ 17 CFR 230.157. See also 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    Based on information obtained by the Commission's staff, the 
Commission estimates that 250 broker-dealers, including municipal 
securities dealers, would be Participating Underwriters within the 
meaning of Rule 15c2-12.\697\ 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.\698\ The Commission did not receive any comments on this 
issue.
---------------------------------------------------------------------------

    \697\ See supra Section V.C.
    \698\ See Proposing Release, supra note 2, 74 FR at 36866.
---------------------------------------------------------------------------

    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.'' \699\ Currently, there are approximately 51,000 state 
and local issuers of municipal securities \700\ that are subject to the 
amendments. The Commission estimates that approximately 40,000 state 
and local issuers are ``small'' entities for purposes of the RFA. 
However, the Commission believes that most issuers of municipal 
securities qualify for the limited exemption in paragraph (d)(2) of the 
Rule.\701\ In the 2008 Amendments Adopting Release, the Commission 
estimated that 10,000 issuers would enter into continuing disclosure 
agreements that provide for their submitting continuing disclosure 
documents to the MSRB.\702\ Under the amendment to narrow the Rule's 
exemption for demand securities, the number of affected issuers is 
estimated to increase to 12,000 issuers.\703\ Some of these issuers may 
be small issuers.
---------------------------------------------------------------------------

    \699\ 5 U.S.C. 601(5).
    \700\ See Securities Exchange Act Release No. 33741 (March 9, 
1994), 59 FR 12748 (March 17, 1994).
    \701\ Specifically, Rule 15c2-12(d)(2) provides an exemption 
from the application of paragraph (b)(5) of the Rule (Rule's 
provision regarding Participating Underwriters obligations with 
respect to continuing disclosure agreements) 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).
    \702\ See 2008 Adopting Release, supra note 7, 73 FR at 76121.
    \703\ See Proposing Release, supra note 2, 74 FR at 36850.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on the 
above estimates. The Commission received no comments responding to 
these estimates and continues to believe that they are appropriate.

E. Reporting, Recordkeeping and Other Compliance Requirements

    The amendments apply to all small entities that are currently 
subject to Rule 15c2-12. Because small entities already may submit 
notices to the MSRB to disclose events already covered by the Rule, 
these entities should be able to prepare notices for events that are 
incorporated into the Rule by the amendments. The Commission expects 
that adding the new disclosure events will increase costs incurred by 
small entities, to the extent that their primary offerings of municipal 
securities are covered by the Rule, because they potentially will have 
to provide a greater number of event notices than they do currently.

F. Action To Minimize Effect on Small Entities and Consideration of 
Alternatives

    In connection with the final revisions to the Rule, the Commission 
considered the above comments and the following alternatives:
    (1) Establishing differing compliance or reporting requirements or 
timetables

[[Page 33155]]

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.
    As noted above, breaker-dealers who are the entities directly 
subject to the Rule are not likely to be significantly affected by the 
amendments. The Commission notes, however, that it has adopted a 
delayed compliance date of December 1, 2010, to allow broker-dealers, 
and other entities indirectly affected by the Rule, additional time to 
familiarize themselves with the amendments and to give the MSRB time to 
make the necessary system changes to its EMMA system. As for issuers 
who are not directly subject to the Rule, the Commission notes that 
Rule 15c2-12 currently provides differing compliance criteria for 
larger and smaller issuers because 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 documents, does not apply to a 
primary offering if the conditions contained therein are met.\704\ 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 amendments 
balance the informational needs of investors and others with regard to 
municipal securities issued by small governmental jurisdictions with 
the impact effects of the amendments on such small issuers.\705\
---------------------------------------------------------------------------

    \704\ See 17 CFR 240.15c2-12(d)(2).
    \705\ The Commission also notes that the Rule's exemption for 
primary offerings of municipal securities that have an aggregate 
principal amount of less than $1,000,000 may also apply to small 
issuers and small governmental jurisdictions. See 17 CFR 240.15c2-
12(a).
---------------------------------------------------------------------------

    Further, the Commission believes that, in the case of those issuers 
that do not qualify for the exemption in paragraph (d)(2) of the Rule 
and that issue securities after the amendments compliance date, there 
should be comparable standards for municipal securities disclosure 
events. The Commission nevertheless recognizes that by not applying the 
amendments to continuing disclosure requirements entered into prior to 
the amendments' compliance date, for a period of time there will be 
municipal securities that are subject to differing disclosure. The 
Commission is mindful of the potential difficulties presented by 
revising continuing disclosure agreements that reflect contractual 
commitments entered into by the municipal issuer at the time of the 
security's issuance. These differences in disclosure that will result 
from applying the amendments to new issuances and not to municipal 
securities outstanding prior to the compliance date will, however, 
diminish over time. With respect to the clarification, consolidation, 
or simplification of disclosure for small entities, the Commission 
notes that, although the amendments are uniform for large and small 
issuers, they are largely based on existing requirements.

IX. 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 adopting amendments 
to Sec.  240.15c2-12 of Title 17 of the Code of Federal Regulations in 
the manner set forth below.

Text of Rule Amendments

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.


0
For the reasons set out in the preamble, Title 17, Chapter II, of the 
Code of Federal Regulations is amended as follows.

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

0
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.
* * * * *

0
2. Section 240.15c2-12 is amended by the following:
0
A. Revise the introductory text of paragraph (b)(5)(i)(C), and 
paragraphs (b)(5)(i)(C)(2), (b)(5)(i)(C)(6), (b)(5)(i)(C)(7), 
(b)(5)(i)(C)(8), (b)(5)(i)(C)(10), and (b)(5)(i)(C)(11);
0
B. Add new paragraphs (b)(5)(i)(C)(12), (13) and (14);
0
C. Revise paragraph (d)(1)(ii);
0
D. Remove paragraph (d)(1)(iii);
0
E. Revise paragraph (d)(2)(ii)(B); and
0
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 status of the security, or other 
material events affecting the tax 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) of this section, 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 of 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

[[Page 33156]]

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)(1) through (b)(4), this 
section shall 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; provided, however, that paragraphs (b)(5) and (c) of 
this section shall not apply to such securities outstanding on November 
30, 2010, for so long as they continuously remain in authorized 
denominations of $100,000 or more and 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

0
3. Part 241 is amended by adding Release No. 34-62184A and the release 
date of May 26, 2010, to the list of interpretative releases.

    By the Commission.

    Dated: May 26, 2010.
Elizabeth M. Murphy,
Secretary.

    Note: Exhibit A to the Preamble will not appear in the Code of 
Federal Regulations

Exhibit A

Key to Comment Letters Cited in Adopting Release Amendment to 
Municipal Securities Disclosure (File No. S7-15-09)

    1. Letter from Bill Boatwright, Wealth Advisor, UBS Financial 
Services, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated 
July 16, 2009 (``Boatwright Letter'').
    2. Letter from James R. Folts, Investor, to Elizabeth M. Murphy, 
Secretary, Commission, dated August 4, 2009 (``Folts Letter'').
    3. Letter from Leonard Becker, Investor, to Elizabeth M. Murphy, 
Secretary, Commission, dated August 12, 2009 (``Becker Letter'').
    4. Letter from Charles Halgren, Financial Analyst, to Elizabeth 
M. Murphy, Secretary, Commission, dated August 18, 2009 (``Halgren 
Letter'').
    5. Letter from Philip A. Shalanca, Retired School Business 
Administrator, to Elizabeth M. Murphy, Secretary, Commission, dated 
August 30, 2009 (``Shalanca Letter'').
    6. Letter from Glenn Byers, Assistant Treasurer and Tax 
Collector, County of Los Angeles, to Mary Schapiro, Chairman, 
Commission, dated August 31, 2009 (``Los Angeles Letter'').
    7. Letter from Kenneth L. Rust, Chief Administrative Officer, 
City of Portland, Oregon (``Portland''), and Eric H. Johansen, Debt 
Manager, Portland, to Elizabeth M. Murphy, Secretary, Commission, 
dated September 1, 2009 (``Portland Letter'').
    8. Letter from Jerry Moffatt, State President, California Refuse 
Recycling Council (``CRRC''), and Doug Button, North District 
President, CRRC, to Elizabeth M. Murphy, Secretary, Commission, 
dated September 2, 2009 (``CRRC Letter'').
    9. Letter from Lisa S. Good, Executive Director, National 
Federation of Municipal Analysts (``NFMA''), to Elizabeth M. Murphy, 
Secretary, Commission, dated September 2, 2009 (``NFMA Letter'').
    10. Letter from Connecticut Health and Educational Facilities 
Authority (``CHEFA''), to Elizabeth M. Murphy, Secretary, 
Commission, dated September 4, 2009 (``CHEFA Letter'').
    11. Letter from Robert Donovan, Executive Director, Rhode Island 
Health and Educational Building Corporation, on behalf of the 
National Association of Health and Education Facilities Finance 
Authorities (``NAHEFFA''), to Elizabeth M. Murphy, Secretary, 
Commission, dated September 4, 2009 (``NAHEFFA Letter'').
    12. Letter from Brian G. Thomas, Assistant General Manager/Chief 
Financial Officer, The Metropolitan Water District of Southern 
California (``Metro Water''), to Elizabeth M. Murphy, Secretary, 
Commission, dated September 4, 2009 (``Metro Water Letter'').
    13. Letter from Trish Roath, Executive Director, CRRC, Kristan 
Mitchell, Executive Director, Oregon Refuse & Recycling Association, 
and Brad Lovas, Executive Director, Washington Refuse & Recycling 
Association, on behalf of West Coast Refuse & Recycling Coalition 
(``WCRRC''), to Elizabeth M. Murphy, Secretary, Commission, dated 
September 7, 2009 (``WCRRC Letter'').
    14. Letter from Ronald A. Stack, Chair, Municipal Securities 
Rulemaking Board (``MSRB''), to Elizabeth M. Murphy, Secretary, 
Commission, dated September 8, 2009 (``MSRB Letter I'').
    15. Letter from Richard T. McNamar, President, e-certus, Inc. 
(``e-certus''), to Elizabeth M. Murphy, Chairman, Commission, dated 
September 8, 2009 (``e-certus Letter I'').
    16. Letter from Leon J. Bijou, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA''), to Elizabeth M. Murphy, Secretary, 
Commission, dated September 8, 2009 (``SIFMA Letter'').
    17. Letter from Michael Decker, Co-Chief Executive Officer, 
Regional Bond Dealers Association (``RBDA''), and Mike Nicholas, Co-
Chief Executive Officer, RBDA, to Elizabeth M. Murphy, Secretary, 
Commission, dated September 8, 2009 (``RBDA Letter'').
    18. Letter from Denise L. Nappier, Treasurer, State of 
Connecticut, to Elizabeth M. Murphy, Secretary, Commission, dated 
September 8, 2009 (``Connecticut Letter'').
    19. Letter from Daniel C. Lynch, Kutak Rock LLP, to Elizabeth M. 
Murphy, Secretary, Commission, dated September 8, 2009 (``Kutak 
Letter'').
    20. Letter from Tom Sanzillo, Consultant, T.R. Rose Associates, 
Mark Kresowick, Corporate Accountability Representative, Sierra 
Club, and Lisa Anne Hamilton, Counsel, to Elizabeth M. Murphy, dated 
September 8, 2009 (``T.R. Rose and Sierra Letter'').
    21. Letter from Paula Stuart, Chief Executive Officer, Digital 
Assurance Certification, LLC (``DAC''), to Elizabeth M. Murphy, 
Secretary, Commission, dated September 8, 2009 (``DAC Letter'').
    22. Letter from Karrie McMillan, General Counsel, Investment 
Company Institute (``ICI''), to Elizabeth M. Murphy, Secretary, 
Commission, dated September 8, 2009 (``ICI Letter'').
    23. Letter from Mark Paxson, General Counsel, Office of 
California State Treasurer, to Elizabeth M. Murphy, Secretary, 
Commission, dated September 8, 2009 (``California Letter'').
    24. Letter from Donald F. Steuer, Chief Financial Officer, 
County of San Diego, to Elizabeth M. Murphy, Secretary, Commission, 
dated September 8, 2009 (``San Diego Letter'').
    25. Letter from Scott C. Goebel, Senior Vice President and 
General Counsel, FMR Co., Fidelity Investments (``Fidelity''), to 
Elizabeth M. Murphy, Secretary, Commission, dated September 11, 2009 
(``Fidelity Letter'').
    26. Letter from William A. Holby, President, National 
Association of Bond Lawyers (``NABL''), to Elizabeth M. Murphy, 
Secretary, Commission, dated September 23, 2009 (``NABL Letter'').
    27. Letter from Frank R. Hoadley, Chairman, Governmental Debt 
Management Committee, Government Finance Officers Association 
(``GFOA''), to Elizabeth M. Murphy, Secretary, Commission, dated 
September 24, 2009 (``GFOA Letter'').
    28. Letter from Richard T. McNamar, President, e-certus, Inc. 
(``e-certus''), to

[[Page 33157]]

Elizabeth M. Murphy, Secretary, Commission, dated October 14, 2009 
(``e-certus Letter II'').
    29. Letter from Peter Lehner, Executive Director, Natural 
Resources Defense Council (``NRDC''), to Elizabeth M. Murphy, 
Secretary, Commission, dated December 15, 2009 (``NRDC Letter'').

[FR Doc. 2010-13165 Filed 6-9-10; 8:45 am]
BILLING CODE 8010-01-P