[Federal Register Volume 63, Number 140 (Wednesday, July 22, 1998)]
[Notices]
[Pages 39321-39322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19445]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40197; File No. SR-MSRB-98-04]
Self-Regulatory Organizations, Municipal Securities Rulemaking
Board; Order Granting Approval of Proposed Rule Change Relating to Rule
G-32, on Disclosures in Connection with New Issues
July 14, 1998.
I. Introduction
On March 25, 1998, the Municipal Securities Rulemaking Board
(``Board'' or ``MSRB'') submitted to the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend Rule G-32, on
disclosures in connection with new issues. The proposed rule change
provides an alternate method of compliance by brokers, dealers and
municipal securities dealers with their obligation to deliver official
statements in final form to customers by settlement for certain new
issues of variable rate demand obligations. Notice of the proposed rule
change appeared in the Federal Register on April 28, 1998.\3\ The
Commission received one comment letter which endorsed the proposed rule
change.\4\ This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ CFR 240.19b-4.
\3\ See Securities Exchange Act Rel. No. 39900 (April 22, 1998),
63 FR 23315.
\4\ See letter from Sarah M. Starkweather, Vice President and
Associate General Counsel, The Bond Market Association (``TBMA''),
to Jonathan G. Katz, Secretary, SEC, dated May 19, 1998.
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II. Description of the Proposal
The Board amended Rule G-32, on disclosures in connection with new
issues, that would permit brokers, dealers and municipal securities
dealers (``dealers''), selling variable rate demand obligations
(``VRDO's'') to customers during the underwriting period, to deliver a
preliminary official statement by no later than settlement and to send
the official statement in final form within one business day of receipt
from the issuer, provided these VRDOs qualify for the exemption
provided under subparagraph (d)(1)(iii) of Rule 15c2-12 under the Act
(``Rule 15c2-12'').
In 1989, the Commission promulgated Rule 15c2-12,\5\ which requires
underwriters in primary offerings subject to the rule, among other
things, to contract with issuers to receive final official statements
within seven business days after any final agreement to purchase, offer
or sell municipal securities and to receive these statements in
sufficient time to accompany any confirmation that requests payment
from any customer. Commenters questioned applying this provision of the
rule to VRDOs. In response, the Commission provided an exemption to the
rule for obligations that can be tendered by their holders for purchase
by the issuer or its agent at least as frequently as every nine months
and that are in authorized denominations of $100,000 or more (``Exempt
VRDOs''). This exemption reflects the fundamental structural
differences between VRDOs and other traditional municipal securities.
For most VRDO issues, particularly those that fall within the Exempt
VRDO category, the purchase contract is not executed until the issue
closing date or the immediately preceding day.\6\ Thus, in the vast
majority of these issues, the Bond Delivery Period, the period between
the purchase date and the closing date, is at most one business day. As
issuers typically do not authorized the printing of the official
statement in final form until the execution of the purchase contract,
underwriters usually do not receive the official statement in final
form until the closing date at the earliest and, in many instances, the
printed version is not available until after the closing date, at which
point the issuer has already delivered the Exempt VRDOs to the
underwriters.
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\5\ Securities Exchange Act Release No. 26985 (June 28, 1989),
54 FR 28700 (July 10, 1989).
\6\ This compressed time frame arises as a result of the fact
that, as securities bearing short-term yields sold at par, the
market dictates that pricing (i.e., the setting of the interest rate
borne by the securities during the initial rate period) and
settlement occur on a same-day or next-day basis.
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At the time Rule 15c2-12 was drafted, the industry's standard Bond
Delivery Period was two or more weeks.\7\ For example, the seven
business day time frame of paragraph (b)(3) of Rule 15c2-12 presumably
anticipated a typical Bond Delivery Period of at least one and one-half
weeks, because the final official statement is generally expected to be
available at least by closing of the underwriting transaction.
Presumably, Rule G-32's official statement delivery obligation was
premised, at least in part, on this industry standard.
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\7\ Standard industry practice dictated that issuers deliver the
securities to the underwriters two or more weeks after the sale date
for the securities.
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In 1997, the Board launch a review of the underwriting process
which focused on, among other things, the manner and timeliness of
delivery of official statements from issuers to underwriters under Rule
15c2-12 and from underwriters to the Board of Rule G-36.\8\ The Board
found that, in some instances, issuers do not meet their contractual
obligations entered into with underwriters pursuant to Rule 15c2-12
deliver official statements within seven business days after the date
of final agreement to purchase, offer or sell the municipal securities.
The Board noted that, if issuers are not meeting the current delivery
requirement under Rule 15c2-12, it is possible that final official
statements also are not being prepared in time to deliver to customers
by settlement as required under Rule G-32.
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\8\ See MSRB Reports, Vol. 17, No. 2 (June 1997) at 3-16.
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Thus, the Board determined that, because the Bond Delivery Period
for Exempt VRDOs is at most one business day, it is often not possible
for dealers to settle with customers, who expect to receive delivery of
their securities on the issue date, without causing a violation of the
requirement that they deliver the official statement in final form to
such customers by settlement. As a result, the Board amended Rule G-32
to permit a dealer, selling new issue Exempt VRDOs, to deliver the
official statement in preliminary form to the
[[Page 39322]]
customer by settlement, together with a written notice that the
official statement in final form will be sent to the customer within
one business day of receipt. Thereafter, once the dealer receives the
official statement in final form, it must send a copy to the customer
within one business day of receipt. If no official statement in
preliminary form is being prepared, the dealer would only be obligated
to deliver by settlement the written notice regarding the official
statement in final form and to send the official statement in final
form upon receipt.\9\
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\9\ As in the current rule, if no official statement in final
form is being prepared, such dealer would deliver to the customer by
settlement the official statement in preliminary form, if any, and
written notice to the effect that an official statement in final
form is not being prepared. If neither a final nor a preliminary
official statement is being prepared, the dealer would only be
obligated to deliver by settlement the written notice to the effect
that no official statement in final form is being prepared.
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The amendment provides an alternate method of compliance with Rule
G-32 in the case of Exempt VRDOs where the final official statement is
either unavailable or incomplete. However, in those limited
circumstances where dealers may in fact receive the official statement
in final form in sufficient time to deliver it to customers by
settlement (e.g., if an issuer approves completion of the official
statement in final form prior to execution of the purchase contract),
dealers must comply with the existing provision of the rule by
delivering the official statement in final form to the customer by
settlement. If the final official statement is available or if the
issuer approves the final official statement prior to settlement, then
the existing provision of the rule would control. The dealer's
compliance in this case would not be optional.
III. Discussion
The Commission believes the proposed rule change is consistent with
the Act and the rules and regulations promulgate thereunder.\10\
Specifically, the Commission believes that approval of the proposed
rule change is consistent with Section 15B(b)(2)(C) \11\ of the Act.
This proposed rule change should remove any potential timing
discrepancies concerning dealer and customer receipt of official
statements. The rule clarifies dealers' disclosure requirements; if a
dealer receives an official statement from the issuer, concerning
exempt VRDOs, then it must deliver this official statement within one
business day of receipt.
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\10\ The Commission has considered the proposed rule's impact on
efficiency, competition and capital formation. The amendment
conforms the requirements of MSRB Rule G-32 with those of SEC Rule
15c2-12. Making the rules consistent lessens the dealers' burden of
complying with one rule while attempting to avoid violating the
other. Also, the dealer's procedural and operational efficiency
should be enhanced as the date for determining compliance will be
that of receipt of some type of notification from the issuer, which
should make for ease of recordkeeping and review. 15 U.S.C. 78c(f).
\11\ Section 15B(b)(C) requires the Commission to determine that
the Board's rules are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
municipal securities, to remove impediments to and perfect the
mechanism of a free and open market in municipal securities, and, in
general, to protect investors and the public interest.
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The Commission recognizes the Board's effort to make the disclosure
requirements in Rule G-32 consistent with the requirements delineated
in Rule 15c2-12 under the Act. The Commission understands that the use
of securities with a demand feature (e.g. VRDOs) allows issuers to
acquire the necessary financing while protecting against interest rate
risk. These types of obligations permit the issuer to convert
outstanding debt from short-term variable rate notes to long-term fixed
rates.\12\ It is possible that the maturities or reset dates of these
VRDOs could be so brief (i.e, one day) that the issuer is unable to
provide an official statement at settlement. Given the sophisticated
nature of these instruments and the rapidity with which they can be
converted, the Commission urges dealers to facilitate full and timely
disclosure to investors. While the requirements of Rule 15c2-12 are
inapplicable to these obligations, sound business practice and general
antifraud provisions of the federal securities laws should dictate
access to and disclosure of information covered by this rule.
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\12\ See supra note 5 at p. 28810.
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IV. Conclusion
For the above reasons, the Commission believes that the proposed
rule change is consistent with the provision of the Act, and in
particular with Section 15B(b)(2)(C).
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-MSRB-98-04), is hereby
approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-19445 Filed 7-21-98; 8:45 am]
BILLING CODE 8010-01-M
