33100 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

1 17 CFR 240.15c2–12. 

2See 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. 

3Copies 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. 

4See infra note 28 and accompanying text for a 

description of demand securities. 

5See 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. 

6See 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). 

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. 

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 § 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

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. 

The Commission received twentynine 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 brokerdealers, 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. 

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

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

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 


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Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 33101 

7See also Proposing Release, supra note 2, 74 FR 

36831. 

8See 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’’). 

9See 1989 Adopting Release, supra note 8. 

10 17 CFR 240.15c2–12(a). 

11 17 CFR 240.15c2–12(b)(5). 

12See 1994 Amendments Adopting Release and 

2008 Amendments Adopting Release, supra note 8. 

13The 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). 

14On 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.’’ 

18According 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. 

19See 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. 

20See 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. 

21See 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. 

22See, 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). 

23See 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’’). 

Continued 

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. 

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 15c2–129 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

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

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, 


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33102 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

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). 

24See Standard and Poor’s Report, supra note 23. 

See also Proposing Release, supra note 2, 74 FR at 

36834. 

25See Joe Mysak, Subprime Finds New Victim as 

Muni Defaults Triple, Bloomberg News, May 30, 

2008. 

26See 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). 

27See, e.g., Mary Williams Walsh, State Debt 

Woes Grow Too Big to Camouflage, The New York 

Times, March 30, 2010. 

28 17 CFR 240.15c2–12(d)(1)(iii). 

29See Proposing Release, supra note 2, 74 FR at 

36834–5. 

30The 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. 

31See Two Decades of Bond Finance: 1989–2008, 

The Bond Buyer/Thomson Reuters 2009 Yearbook 

4 (Matthew Kreps ed., Source Media, Inc.) (2009). 

32See Thomson Reuters, ‘‘A Decade of Municipal 

Bond Finance’’ (available at http://www.bondbuyer.

com/marketstatistics/decade_1). 

33According 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 Email 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. 

34See 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. 

35See 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. 

36See, 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. 

37See 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 

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

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

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. 

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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Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 33103 

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). 

38See 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). 

39See Proposing Release, supra note 2, 74 FR at 

36836. 

40See 1989 Adopting Release, supra note 8, 54 FR 

at 28808, n. 68. See also Proposing Release, supra 

note 2, 74 FR at 36836. 

41See 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. 

42See 1989 Adopting Release, supra note 8, 54 FR 

at 28808 and n. 68. See also Proposing Release, 

supra note 2, 74 FR at 36836. 

43The 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). 

44See 1994 Amendments Adopting Release, 

supra note 8. 

45As 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. 

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. 

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.’’ 

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

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 


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33104 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

46See Proposing Release, supra note 2, 74 FR at 

36835, n. 45. 

47See Proposing Release, supra note 2, 74 FR at 

36836. 

48See supra note 28 and accompanying text. 

49See supra note 14 and accompanying text. 

50See supra note 38 for a description of Rule 

15c2–12(c). 

51See Rule 15c2–12(f)(7) for the definition of 

primary offering. 17 CFR 240.15c2–12(f)(7). 

52See supra note 41. 

53As noted in Section III.G., the compliance date 

of the amendments to the Rule adopted herein is 

December 1, 2010. 

54See infra notes 111 and 112 and accompanying 

text, as well as the paragraph following the 

accompanying text. 

55See 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. 

57The 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. 

58See 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. 

59See ICI Letter at 5. See also SIFMA Letter at 

2 and RBDA Letter at 2. 

60See RBDA Letter at 2. See also Fidelity Letter 

at 2. 

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

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. 

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. 

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

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 


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Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 33105 

61See CHEFA Letter at 2. 62See Connecticut Letter at 1 and NFMA Letter 

at 1. 

63See NFMA Letter at 1. 

64See California Letter at 1 and Connecticut 

Letter at 1. 

65See CRRC Letter at 3–5 and NABL Letter at A– 

10. 

66A ‘‘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. 

67See NABL Letter at A–2, n. 1. 

68See CRRC Letter at 5 and NABL Letter at A– 

2. 

69See 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). 

70See Proposing Release, supra note 2, 74 FR at 

36837. 

71 Id. 

72See Proposing Release, supra note 2, 74 FR at 

36837. 

73See 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. 

74See Proposing Release, supra note 2, 74 FR at 

36837. 

75The 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. 

76For discussion of the burdens associated with 

the modification of the Rule as it relates to demand 

securities, see supra Section V.D. 

77See, 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. 

78 17 CFR 240.15c2–12(b)(5)(i)(A). 

79 17 CFR 240.15c2–12(f)(9). 

80See 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). 

disclosure documents, despite the 

Rule’s exemption.61

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

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 taxexempt bond market.69

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

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


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33106 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

82 17 CFR 240.15c2–12(b)(5)(i)(B). 83As 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. 

84See http://www.emma.msrb.org for audited 

financial statements or other financial and 

operating information submitted to EMMA. 

85Further, 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. 

86See 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. 

87A 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. 

88The 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 Internetbased 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). 90One 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. 91See 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. 92See CRRC Letter at 2 and NABL Letter at 2. 

Separately, another commenter remarked about 

the responsibilities of an issuer with respect to the 

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

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. 

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

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 


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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. 

94See CRRC Letter at 2 and NABL Letter 

at A–2 and A–6. 

95See CRRC Letter at 2–3 and NABL Letter 

at 1–2. 

96See CRRC Letter at 3. 

97See Proposing Release, supra note 2, 74 FR at 

36844, n. 113, citing 1989 Adopting Release, supra 

note 8, 54 FR at 28812. 

98See 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. 

100For example, governmental obligors, nonprofit 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). 

101Since 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. 

102See 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 TopsyTurvy World, The Bond Buyer, July 16, 2009. 

103See NABL Letter at A–4—A–6. 

104 Id. 105See NABL Letter at A–8. 106See NABL Letter at A–8 and A–9. 107See 17 CFR 240.15c2–12(d)(1)(iii). 108See, 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). 

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 LOCbacked 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

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 obligations101 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. 

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

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 funds108

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 


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33108 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

111See ICI Letter at 6. See also Fidelity Letter at 

2. 

112See Kutak Letter at 2, NABL Letter at 4–5 and 

A–11, and SIFMA Letter at 2. 

113 Id. 

114See supra Section II. for statistics on the 

amount of outstanding VRDOs. 

115 17 CFR 240.15c2–12(b)(5)(i)(A). 

116See infra Section VI.B. for a detailed 

description of costs associated with implementing 

this change. 

117Two 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 taxexempt 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). 

118See also infra Section VI.B.4. 

119See supra note 47. 

120 17 CFR 270.2a–7. 

121For 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. 

122See, 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). 

conduct in this segment of the 

municipal securities market.’’ 111

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. 

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. 

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. 

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


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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). 125See 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. 126See NABL Letter at 5–6, GFOA Letter at 2–3, 

and Metro Water Letter at 1–2. 

127See 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. 

128See NABL Letter at 5–6. 

129 Id. 

130See GFOA Letter at 2. 

131 Id. 

132See 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. 

133See ICI Letter at 6 and Fidelity Letter at 2. 

134 Id. 

135 Id. 

136 Id. 

137 Id. 

138 Id. 

139 Id. 

140See 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). 

141See supra note 134 and accompanying text. 

142See 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 TaxSupported 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. * * *’’). 

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

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

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

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

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

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

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 


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33110 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

144The 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. 

145See NABL Letter at 6. 

146See supra note 140. 

147See ICI Letter at 6 and Fidelity Letter at 3. 

148See GFOA Letter at 2. 

149See 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. 

150See 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. 

151See 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. 

152See 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. 

153See 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. 155See Halgren Letter, Portland Letter at 2, 

NAHEFFA Letter at 4, and CHEFA Letter at 2. 156See ICI Letter at 7, Fidelity Letter at 2, and ecertus Letter at 8. 

157See ICI Letter at 7 and Fidelity Letter at 3. 

158See e-certus Letter I at 8. 

159See Kutak Letter at 2, California Letter at 1– 

2, San Diego Letter at 1–2, and CHEFA Letter at 2. 

160See 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. 

161See GFOA Letter at 3. 

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. 

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

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. 

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

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. 

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

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


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162See 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. 

164For 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. 

165The 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. 

166See Proposing Release, supra note 2, 74 FR at 

36840. 

167See infra Section IV., discussing the 

obligations of underwriters of municipal securities 

under the antifraud provisions of the federal 

securities laws. 

168See 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. 

169The 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. 

170For 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. 

171As 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 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. 

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. 

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

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 


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172See 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. 

173See ICI Letter at 7–8 and Fidelity Letter at 3. 

174See SIFMA Letter at 8. 

175See 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. 

176See Metro Water Letter at 2, Connecticut Letter 

at 2, and GFOA Letter at 4. 

177See Metro Water Letter at 2. 

178 Id. 

179See Connecticut Letter at 2. 

180See GFOA Letter at 4. 

181The 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. 

182The 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. 

183See Kutak Letter at 3. 

184See California Letter at 2, San Diego Letter at 

2, and GFOA Letter at 4. 

185See California Letter at 2 and San Diego Letter 

at 2. 

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

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

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

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 


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186 Id. 

187See Proposing Release, supra note 2, 74 FR at 

36839. 

188See NABL Letter at 6–7. 

189 Id. 

190 Id. 

191See, 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.’’) 

192See Fidelity Letter at 2. 

193See Fidelity Letter at 2. 

194See 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. 

195See GFOA Letter at 4. 

unwarranted implication that the issuer 

has suffered financial adversity.’’ 186

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. 

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

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

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. 

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

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

The Commission believes that the 

identity of credit or liquidity providers 

and their ability to perform is important 


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196Two 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. 

197See, e.g., Proposing Release, supra note 2, 74 

FR at 36839, n. 80. 

198See, e.g., Proposing Release, supra note 2, 74 

FR at 36839, n. 81. 

199See, 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. 

200See 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. 

201See NABL Letter at 7. 

202See also supra Section III.B. for a discussion 

of rating changes in the context of the ten business 

day time frame. 

203See Kutak Letter at 3–4. 

204 Id. 

205 Id. 

206See 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. 

207See supra note 153 and accompanying text. 

208The 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). 

209See infra Section V.D. for discussion of the 

paperwork burden in connection with deletion of 

materiality condition. 

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. 

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

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

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

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 


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210Ratings 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.’’ 

211See Portland Letter at 2, San Diego Letter at 

2, and California Letter at 3. 

212See Portland Letter at 2 and California Letter 

at 3. 

213See supra Section III.C.2.b. 

214See ICI Letter at 8 and Fidelity Letter at 3. 215 Id. 216The 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. 

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 taxexempt 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. 

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. 

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. 

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

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. 

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 taxexempt 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 ‘‘taxexempt status’’ with ‘‘tax status’’ to focus 

the disclosure on information relevant 

to investors, whether the municipal 

security is taxable or tax-exempt. 

Four commenters expressed support 

for the proposed modifications to the 

list of adverse tax events included in the 


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33116 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

218See SIFMA Letter at 3, NFMA Letter at 2, San 

Diego Letter at 2, and California Letter at 2. 219See SIFMA Letter at 3. 220See NABL Letter, Metro Water Letter, 

Connecticut Letter, Kutak Letter, and GFOA Letter. 221See NABL Letter at 7. 222See Metro Water Letter at 3, Connecticut Letter 

at 2, Kutak Letter at 4–7, and GFOA Letter at 4. 223See Kutak Letter at 4–7. 224 Id. 225See Kutak Letter at 5, GFOA Letter at 4, and 

Metro Water Letter at 3. 226See Kutak Letter at 5. 227See Metro Water Letter at 3. 

228See GFOA Letter at 4. 

229See 1994 Amendments Adopting Release, 

supra note 8, 59 FR at 59600. See also Proposing 

Release, supra note 2 74 FR at 36840. 

230See, 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. 

232See Proposing Release, supra note 2, 74 FR at 

36841. 

233See Proposing Release, supra note 2, 74 FR at 

36841, n. 89. 

234See NFMA Letter at 2 and SIFMA Letter at 3. 

See also California Letter at 2, and San Diego Letter 

at 2. 

235See, 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. 

236See Proposing Release, supra note 2, 74 FR at 

36841, n. 90. 

237For 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. 

238See Proposing Release, supra note 2, 74 FR at 

36841, n. 92. 

239See Proposing Release, supra note 2, 74 FR at 

36842, n. 100. 

240See 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 

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

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

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. 

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 taxexempt bonds as opposed to other fixedincome 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. 

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 


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letter was issued in January, 2002). See also supra 

note 140. 

241See 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. 

242See Kutak Letter at 5. 

243See Metro Water Letter at 3 and Kutak Letter 

at 4–7. 

244See Metro Water Letter at 3. 

245See Kutak Rock Letter at 4–7. 

246See ICI Letter at 2, NFMA Letter at 2 and 

SIFMA Letter at 3. 

247See Connecticut Letter at 2. 

248See SIFMA Letter at 3. 

249 Id. 

250Public Law 111–5, 123 Stat. 115 (2009). 

251The American Recovery and Reinvestment Act 

of 2009 introduced three new categories of taxadvantaged taxable bonds—Build America Bonds 

(I.R.C. § 54AA), Qualified School Construction 

Bonds (I.R.C. § 54F), and Recovery Zone Economic 

Development Bonds (I.R.C. §§ 1400U–2). In 

addition, the ARRA expanded the authority to issue 

taxable New Clean Renewable Energy Bonds (I.R.C. 

§ 54C), Qualified Energy Conservation Bonds (I.R.C. 

§ 54D) and Qualified Zone Academy Bonds (I.R.C. 

§ 54E). This followed the introduction of taxable 

Qualified Forestry Conservation Bonds (I.R.C. 

§ 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. § 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. §§ 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. 

252See, e.g., Section 54AA of ARRA (Build 

America Bonds); I.R.C. § 1400U–2(b) (Recovery 

Zone Economic Development Bonds); I.R.C. §§ 54A 

and 54C (New Clean Renewable Energy Bonds); IRC 

sections 54A and 54C (Qualified Energy 

Conservation Bonds); I.R.C. §§ 54A and 54E 

(Qualified Zone Academy Bonds); I.R.C. §§ 54A and 

54F (Qualified School Construction Bonds). See 

also, IRS Notice 2009–26—Build America Bonds 

and Direct Payment Subsidy Implementation. 

253See Public Law 111–5, 123 Stat. 115 (2009). 

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. 

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

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. 

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. 

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 taxexempt 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 taxexempt 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 


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254See, e.g., I.R.C. §§ 54A and 54AA. 

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. 

256See ICI Letter at 8, Fidelity Letter at 2, NFMA 

Letter at 2, and SIFMA Letter at 4. 

257See ICI Letter at 8 and Fidelity Letter at 2. 

258See NABL Letter at 7. 

259 Id. 

260 Id. 

261See Connecticut Letter at 2, GFOA Letter at 4, 

Metro Water Letter at 2, and NABL Letter at 7. 

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). 

263See Proposing Release, supra note 2, 74 FR at 

36843. 

264Tender offers typically require an investor to 

respond within a limited time frame. See Proposing 

Release, supra note 2, 74 FR at 36843, n. 104. 

265The 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. 

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 taxexempt 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 taxexempt bonds, to have timely access to 

important information concerning risks 

that may affect the tax status of their 

securities. 

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, brokerdealers, 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

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

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

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 


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266The 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. 

267The Commission is correcting a typographical 

error in the Note to state ‘‘plan of reorganization’’ 

rather than ‘‘plan or reorganization.’’ 

268See 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. 

269See 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. 

270See 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 ‘‘nonpayment 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. 

271See Proposing Release, supra note 2, 74 FR at 

36844, n. 112. 

272As 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. 

273See Connecticut Letter at 2, GFOA Letter at 4, 

Metro Water Letter at 2, and NABL Letter at 8. 

274See NABL Letter at 8–9. 

275 Id. 

276 Id. 

277To 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). 

information about the offer and should 

reduce the likelihood that investors will 

be subject to fraud facilitated by 

inadequate disclosure.266

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

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

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

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. 

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. 


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33120 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

278The 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. 

279See 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. 

280See Fidelity Letter at 2. 

281See supra note 271 (suggesting that disclosure 

information should include information relating to 

material acquisitions and dispositions). 

282See Proposing Release, supra note 2, 74 FR at 

36845, n. 117. 

283See Proposing Release, supra note 2, 74 FR at 

36845, n. 118. 

284See Proposing Release, supra note 2, 74 FR at 

36845. 

285See CRRC Letter at 5 and WCRRC Letter. 

286 Id. 

287See also Proposing Release, supra note 2, 74 

FR at 36845. 

288See 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 

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

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

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. 

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. 

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 


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Release, supra note 2, 74 FR at 36845. The 

Commission received no comments on this 

statement. 

289See NABL Letter at 8. 

290See 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. 

291See CHEFA Letter at 3 and NAHEFFA Letter 

at 4. 

292See CHEFA Letter at 3. 

293See NAHEFFA Letter at 4. 

294 Id. 

295See Proposing Release, supra note 2, 74 FR at 

36845–46. 

296See NABL Form Indenture, supra note 270. 

297 Id. 

298See infra Section IV., discussing the 

obligations of underwriters of municipal securities 

under the antifraud provisions of the federal 

securities laws, and note 351. 

299See, e.g., NABL Form Indenture, supra note 

270. 

300Rule 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). 

301See CHEFA Letter at 3, NAHEFFA Letter at 4, 

and Fidelity Letter at 3. 

302See CHEFA Letter at 3 and NAHEFFA Letter 

at 4. 

303See Fidelity Letter at 3. 

304See 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. 

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

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

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

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. 

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

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

As noted in the Proposing Release, the 

Commission believes that whether a 

change involving a trustee is material 


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305See Proposing Release, supra note 2, 74 FR at 

36845, n. 122. 

306The Commission received no comments on 

this example. 

307See e-certus Letter I at 9 and Fidelity Letter 

at 3–4. 

308See Shalanca Letter at 1. 

309See Folts Letter at 1. 

310See ICI Letter at 9 and Fidelity Letter at 3. 

311 Id. 

312 Id. 

313 Id. 

314See NFMA Letter at 3. 

315 Id. 

316 Id. 

317See T.R. Rose and Sierra Letter and NRDC 

Letter. 

318See Fidelity Letter at 4. 

319See e-certus Letter I at 3, ICI Letter at 10–11, 

and Fidelity Letter at 3. 

320See e-certus Letter I at 10. 

321See Becker Letter. 

322See Boatwright Letter. 323See Fidelity Letter at 5. 

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. 

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

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 ‘‘delisting’’ 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

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 


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Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 33123 

324 Id. 325See Kutak Letter, CHEFA Letter, Fidelity 

Letter at 2, and ICI Letter at 10. 326See NFMA Letter at 3. 327See MSRB Letter at 2. 328See NABL Letter at 10 and GFOA Letter at 5. 329 Id. 330See NABL Letter at 10. 

331See 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/aboutresearchpapers.html). 

332See, e.g., 2008 Amendments Adopting Release, 

supra note 8, 73 FR at 76129. 

333See 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. 

334The Commission received no comments on 

this statement. 

335See 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). 

336See 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. 

338See 1988 Proposing Release, supra note 335, 

53 FR at 37790. 

339Pursuant to the 2008 Amendments, the MSRB 

is the sole information repository. 

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. 

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

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

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

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 


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33124 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

340Rule 15c2–12(f)(3), 17 CFR 15c2–12(f)(3). 

341See 1994 Amendments Adopting Release, 

supra note 8, 59 FR at 59594–5. 

342 Id. at 59595. 

343 Id. 

344See 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. 

347See 1988 Proposing Release, supra note 58, 53 

FR at 37789. 

348See 1994 Amendments Adopting Release, 

supra note 8, 59 FR at 59595. 

349 17 CFR 240.15c2–12(f)(3). 

350The 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. 

352See Proposing Release, supra note 2, 74 FR at 

36848. 

353See RBDA Letter at 2. 

354See NABL Letter at 11–12 and SIFMA Letter 

at 4. 

355See NABL Letter at 11–12, RBDA Letter at 2– 

3, and SIFMA Letter at 4. 

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. 

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

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

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. 

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 


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356See RBDA Letter at 2 and SIFMA Letter at 4. 

357See 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. 

358Since 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. 

359Some of such information, such as the receipt 

of proposed or final determinations of taxability, 

may be known solely to the issuer or obligated 

person. 

360Therefore, 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. 

361For 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. 

362The 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). 

363See 1994 Amendments Adopting Release, 

supra note 8. 

364See 2008 Amendments Adopting Release, 

supra note 8. 365Since EMMA became effective as of July 1, 

2009, continuing disclosure documents for 

approximately the past year can be found centrally 

within that system. Id. 

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

367See 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. 

368See e-mail from Ernesto A. Lanza, General 

Counsel, MSRB, to Martha M. Haines, Assistant 

Continued 

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

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. 

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

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

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. 

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 


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33126 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

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. 

369See infra notes 417, 418, and 421. 

370See id. See also infra Section V.D. 

371See supra Section III.A. 

372 17 CFR 240.15c2–12(b)(5)(i)(C). 

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

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 noncompetitively 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

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. 

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 


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373See Proposing Release, supra note 2, 74 FR at 

36849–50. See also infra note 402 and 

accompanying text. 

374As discussed in the Proposing Release and 

below, the Commission estimates that 250 brokerdealers 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’’). 

375As 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. 

376See Proposing Release, supra note 2, 74 FR at 

36849–50. See also 2008 PRA submission, supra 

note 374. 

377See infra Section III.A. 

378See Proposing Release, supra note 2, 74 FR at 

36850. 

379 Id. 

380See 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. 

382As 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. 

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 brokerdealers,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. 

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. 

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. 

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 brokerdealer).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

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

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 brokerVerDate Mar<15>2010 14:07 Jun 09, 2010 Jkt 220001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 E:\FR\FM\10JNR2.SGM 10JNR2

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383 20% or .20 hours (12 minutes = 60 minutes 

× .20 (20%). See Proposing Release, supra note 2, 

74 FR at 36850. 

384 250 hours (total annual burden for all brokerdealers under the Rule prior to the amendments) × 

.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. 

385See infra Section V.E.2.a. See also Proposing 

Release, supra note 2, 74 FR at 36850. 

386See NABL Letter at 12–13. 

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 brokerdealers under the amendments) = 300 hours. 

388The Commission notes that, while the 

amendments do not change this obligation, brokerdealers 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. 

389See Proposing Release, supra note 2, 74 FR at 

36850–51. 

390 (250 (broker-dealers impacted by the 

amendments) × 1.20 hours) + (250 (broker-dealers 

impacted by the amendments) × .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) × 1.20 hours = 300 hours. 

392See e-certus Letter I at 9. 

393 Id. 

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 brokerdealers 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 brokerdealers 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 brokerdealers under the amendments. 

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. 

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

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 brokerdealer’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. 

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 brokerdealer’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. 

d. Total Annual Burden for BrokerDealers 

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 


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394See 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. 

396For purposes of this section, the term ‘‘issuers’’ 

refers to issuers and obligated persons. 

397See supra note 368. 

398The 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. 

399The 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. 

400The 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. 

401See 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) × 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) × 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. 

404See supra Section III.A. 

405See Proposing Release, supra note 2, 74 FR at 

36851. 

406The 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, 

Continued 

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

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

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. 

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 


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as discussed in the Proposing Release. See 

Proposing Release, supra note 2, 74 FR at 36850, 

n.151. 

407See, 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). 

408See SIFMA Letter. 

409 Id. 

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. 

411See supra notes 402 to 406 and accompanying 

text. 

412 Id. 

413See Proposing Release, supra note 2, 74 FR at 

36837. 

414See 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. 

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) × 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%. 

416The 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) × .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 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. 

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. 

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. 

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. 

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 LOCbacked 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. 

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

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 


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Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 33131 

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%. 

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) × 

.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. 

419See Proposing Release, supra note 2, 74 FR at 

36851–52. 

420 74,605 (estimated number of event notices 

under the amendments) × .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%. 

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) × 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%. 

422See Proposing Release, supra note 2, 74 FR at 

36852. 

423 1,458 (estimated number of failure to file 

notices under the amendments) × .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%. 

424See supra note 418 and accompanying text. 

425 Id. 

426See supra note 405 and accompanying text. 

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. 

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. 

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. 

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

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 


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427See supra note 419 and accompanying text. 

428See, 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. 

429See 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. 

430See 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. 

431See 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. 

432See 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. 

433See 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. 

434See 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. 

436The 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. 

437The 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. 

438See 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. 

439See, 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. 

440See 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. 

442For 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. 

443The Commission believes that indenture 

trustees generally would be aware of principal and 

interest payment delinquencies; material nonpayment 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. 

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

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

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

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. 

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

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 


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444See NABL Letter at 8–9. 

445See supra Section III.E.2. 

446 Id. 

447 Id. 

448See NABL Letter at 5–6. 

449 Id. 

450See 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.’’). 

451See Halgren Letter at 1. 

452With 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. 

453See 17 CFR 240.15c2–12. 

454Those 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). 

455The 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. 

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

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

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. 

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. 

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 


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33134 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

456See supra Section III.C.3. for a discussion of 

the Commission’s rationale regarding why it 

retained a materiality condition for these events. 

457Telephone 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. 

458See supra Section V.D.2. 

459See, e.g., NABL Letter, Metro Water Letter, 

California Letter, ICI Letter, and SIFMA Letter. 

460See NABL Letter and Metro Water Letter. 

461See 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. 

462See Metro Water Letter at 2. 

463See supra Section III.D. 

464Prior 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. 

465See, e.g., Connecticut Letter at 2, Metro Letter 

at 2, NABL Letter at 7, Kutak Letter at 5–6, and 

GFOA Letter at 2. 

466See Kutak Letter at 4–7. 

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

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. 

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

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. 

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

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. 

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 


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Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 33135 

467See 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. 

468This 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) × (.002) (.2%) (estimated 

percentage of all issuers that default annually) × 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. 

469See Connecticut Letter at 2, GFOA Letter at 4, 

Metro Water Letter at 2, and NABL Letter at 8. 

470See NABL Letter at 8. 

471See 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’’) × 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. 

472See 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. 

473See NABL Letter at 8. 

474See Proposing Release, supra note 2, 74 FR at 

36854. 

475See 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). 

476This estimate is based on the following: 12,000 

(estimated number of issuers under amendments) × 

.31 (31%) (estimated percentage of issuers that 

would be impacted by a change to the largest 

trustee of municipal securities) = 3,720 issuers. 

100 notices.467 The Commission 

received no comments on this estimate 

and continues to believe that this 

estimate is appropriate. 

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

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. 

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

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. 

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 


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33136 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

477This 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) × 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. 

478See CHEFA Letter at 3 and NAHEFFA Letter 

at 4. 

479See Proposing Release, supra note 2, 74 FR at 

36851. 

480See supra note 375. 

481See supra note 418. 

482See supra note 420. 

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) × .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. 

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. 

487See 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. 

488See 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 × 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. 

490Annual 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. 

491 300 hours (total estimated burden for brokerdealers) + 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%. 

492See NABL Letter. 

493See NABL Letter at 12–13. 

submitted by issuers annually by 

approximately 3,720 notices.477

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. 

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

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. 

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

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 × .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. 

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

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


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494See Proposing Release, supra note 2, 74 FR at 

36858. 

495See 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. 

496See Proposing Release, supra note 2, 74 FR at 

36855. 

497 Id. 

498 Id. 

499See 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) × 1 (estimated number of additional event 

or failure to file notices filed per year per issuer) 

= $8. 

502See 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) × $400 

(hourly wage for an outside attorney) × .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) × 10,000 (number of 

current issuers) = $1,000,000. 

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 brokerdealers’ 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. 

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. 

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 thirdparty 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 thirdparty 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. 

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. 

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. 


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507See supra Section V.D.2.a. 

508See supra note 402 and accompanying text. 

509As noted above, the compliance date of the 

amendments to the Rule is December 1, 2010. 

510 1 (continuing disclosure agreement) × $400 

(hourly wage for an outside attorney) × 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) × 2,000 (number of demand securities 

issuers) = $1,200,000. 512See supra Section V.D.2.a. 

513See Proposing Release, supra note 2, 74 FR at 

36856. 

514This 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) × 

.30 (percentage of issuers that use designated 

agents) × $500 (estimated annual cost for issuer’s 

use of a designated agent) = $300,000. 

516See 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 

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

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. 

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. 

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

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. 

The cost for an issuer to have a thirdparty 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 


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that each issuer will submit one additional event 

notice as a result of the amendments. 

518The maximum cost is the cost to scan and 

convert six event or failure to file notices: 6 

(number of notices submitted annually) × $8 (cost 

to scan and convert each notice) = $48. 

519See Proposing Release, supra note 2, 74 FR at 

36856. 

520The maximum cost is the cost to scan and 

convert two annual filings: 2 (number of annual 

filings submitted annually) × $64 (cost to scan and 

convert each annual filing) = $128. 

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. 

522See Proposing Release, supra note 2, 74 FR at 

36857. 

523 Id. 

524 Id. 

525 Id. 

526 Id. 

527 Id. 

528See 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) × 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) × 6 (maximum estimated 

number of event or failure to file notices filed per 

year per issuer)] + [$50 (estimated monthly Internet 

charge) × 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%. 

529See 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) 

× 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) × 12 months = $600. 

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

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 averagesized 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

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. 

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. 

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

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 


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530See Proposing Release, supra note 2, 74 FR at 

36857. 

531 2,000 demand securities issuers × 20% = 400 

demand securities issuers. The Commission used a 

20% estimate in the Proposing Release. The 

Commission believes that this estimate is still 

appropriate. 

532 400 (Category 2 issuers) × $4,900 = $1,960,000. 

533 400 (Category 2 issuers) × $600 = $240,000. 

534 1 (continuing disclosure agreement) × $400 

(hourly wage for an outside attorney) × .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) × 12,000 

(number of issuers under the amendments) = 

$1,200,000. 

536See 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’’). 

537See 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. 

539See CRRC Letter at 5 and WCRRC Letter at 1 

(generally expressed support for comments in CRRC 

Letter). 540 Id. 541 Id. 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. 543As 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. 

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. 

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. 

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. 

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. 

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

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 


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544See http://www.emma.msrb.org for audited 

financial statements or other financial and 

operating information submitted to EMMA. 

545The 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. 

546Further, 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. 

547See 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. 

548See GFOA Letter at 5. 

549 17 CFR 240.17a–1. 

550See 1989 Adopting Release, 1994 

Amendments Adopting Release, and 2008 

Amendments Adopting Release, supra note 8. 

551See supra note 38 and accompanying text. 

552As noted in Section III.G., the compliance date 

for the amendments to the Rule is December 1, 

2010. 

and operating information of the type 

included in annual filings, a number of 

issuers and obligated persons do.544

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

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. 

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. 

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. 

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. 

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.’’ 


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553These 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. 

554These 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. 

555See 17 CFR 240.15c2–12(c). 

556See Andrew Ackerman, ‘‘Concerns Raised on 

VRDOs,’’ The Bond Buyer, June 9, 2009. 

557See 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, 

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. 

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. 

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

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 abovereferenced benefits will result primarily 

from the additional disclosure that is 

provided by issuers of demand 

securities that did not previously 

provide continuing disclosure 

documents. 

A number of commenters were 

supportive of applying the continuing 

disclosure to demand securities.557


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ICI Letter at 2, NFMA Letter at 1, RBDA Letter at 

2, and SIFMA Letter at 2. 

558See, e.g., ICI Letter at 5, SIFMA Letter at 2, and 

RBDA Letter at 2. 

559See RBDA Letter at 2. 

560See CHEFA Letter at 2. 

561See NMFA Letter at 1. 

562See NFMA Letter at 1–2, SIFMA Letter at 3, 

ICI Letter at 6–7, and Fidelity Letter at 3–4. 

563See ICI Letter at 1 and Fidelity at 2. 

564 Id. 

565 Id. 

566See supra note 553 describing the events. 

567See California Letter at 2, San Diego Letter at 

2, SIFMA Letter at 3, ICI Letter at 7–8, and Fidelity 

Letter at 3. 

568See SIFMA Letter at 3. 

569See California Letter at 2 and San Diego Letter 

at 2. 

570See ICI Letter at 7–8 and Fidelity Letter at 3. 

571 Id. 

572See NFMA Letter at 2. 

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

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

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. 

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

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 


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573 Id. 

574See SIFMA Letter at 3. 

575See supra Section III.E.1. 

576See supra Section III.E.2. 

577See supra Section III.E.3. 

578See supra Section III.E.4. 

579See ICI Letter at 8, Fidelity Letter at 2–3, 

Connecticut Letter at 2, NFMA Letter at 2, and 

SIFMA Letter at 4. 

580See ICI Letter at 8 and Fidelity Letter at 2. 

581See Fidelity Letter at 3. 

582See NFMA Letter at 2. 

583See 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 

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

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. 

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. 

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. 

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. 

Several commenters supported the 

addition of the new event items to the 

Rule.579 For example, two commenters 

believed that disclosure of trusteerelated 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

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, brokerdealers’ 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 brokerdealer 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 


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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) × $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. 

586See supra Section V.D.1.c. 

587 .5 hours (estimated annual information 

collection burden for each broker-dealer) × $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. 

588These 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. 

589The 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. 

590See supra Section V.E.2.a. 

591This 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) × $59 (hourly wage for a compliance clerk) 

× .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. 

593See 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. 

596The Commission has slightly revised these 

cost estimates upward from the estimates contained 

Continued 

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

In addition, the Commission estimates 

that a broker-dealer may have a onetime 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. 

The Commission included these 

specific cost estimates in the Proposing 

Release and received no comments on 

them.588

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. 

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

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

The Commission included these 

specific cost estimates in the Proposing 

Release and received no comments on 

them.596


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in the Proposing Release to reflect updated hourly 

rate information from SIFMA for 2009. 

597See supra Section V.C. 

598See 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. 

599 Id. 

600See Proposing Release, supra note 2, 74 FR at 

36862. 

601See supra Section V.E.2.b. 

602 Id. 

603A 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. 

604A 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 × 20% = 400 

demand securities issuers. 

607See supra Section V.E.2.b. 

608These 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. 

609See 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. 

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

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

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

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

The Commission included these 

specific cost estimates in the Proposing 

Release and received no comments on 

them.608

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


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613See 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. 

614See 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. 

615See 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. 

617See, e.g., Halgren Letter at 1. 

618See Connecticut Letter at 2. 

619See California Letter at 2 and San Diego Letter 

at 2. 

620 Id. 

621 Id. 

622See NABL Letter at 8 and Kutak Letter at 4. 

623See Connecticut Letter at 2. 

624See Metro Letter at 2, Kutak Letter at 5, and 

NABL Letter 7. 

625See Metro Letter at 2 and Kutak Letter at 5. 

626See Kutak Letter at 6. 

627See Kutak Letter at 6, NABL Letter at 7, and 

GFOA Letter at 4. 

628See Kutak Letter at 6. 

629See NABL Letter at 7. 

630See SIFMA Letter at 2–3. 

631See CRRC Letter at 3–5, NABL Letter A–9— 

A–12, and WCRRC Letter at 1. 

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. 

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

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 

bondholders624 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

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 nonprofits, 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 


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632See CRRC Letter at 3–5 and WCRRC Letter at 

1. 

633See NABL Letter at A–2, n. 1. 

634 Id. 

635See CRRC Letter at 5 and NABL Letter at A– 

2. 

636See CRRC Letter at 5. See also supra note 539 

and accompanying text. 

637See 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. 

638 Id. 

639See Proposing Release, supra note 2, 74 FR at 

36837. 

640See 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. 

642As 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. 

643See http://www.emma.msrb.org for audited 

financial statements or other financial and 

operating information submitted to EMMA. 

644The 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. 

645Further, 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. 

646See 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. 

647 2,030 hours (estimated additional annual 

number of hours worked by a compliance clerk) × 

$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 

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

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 LOCbacked demand securities to withdraw 

from the tax-exempt bond market.637

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 nonprofit 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. 

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

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

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


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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. 

648See 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. 

649See supra notes 487 through 490. 

650See MSRB Letter at 2. 

651 Id. 

652 Id. 

653 Id. 

654 15 U.S.C. 78c(f). 

655 15 U.S.C. 78w(a)(2). 

656See supra Section II. 

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

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

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. 

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 


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33150 Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 

657As 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. 

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. 

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. 

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 


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

659See supra Section III.A. 

660See NABL Letter A–9–A–12, CRRC Letter at 3– 

5, and WCRRC Letter at 1. 

661See CRRC Letter at 3–5, and WCRRC Letter at 

1. 

662 Id. 

663See CRRC Letter at 3–5, and WCRRC Letter at 

1. 664See, 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. 

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. 

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 betterinformed 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 anticompetitive 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

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. 

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 


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665See 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. 

667As 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. 

668See http://www.emma.msrb.org for audited 

financial statements or other financial and 

operating information submitted to EMMA. 

669The 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. 

670Further, 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. 

671See 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. 

672 Id. 

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. 676As noted above, the compliance date of the 

amendments to the Rule is December 1, 2010. 

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

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

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. 

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 


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677See 1994 Amendments, supra note 7, 59 FR 

at 59601 

678 Id. 

679See Proposing Release, supra note 2, 74 FR at 

36837. 

680 Id. 

681See Proposing Release, supra note 2, 74 FR at 

36840–41. 

682 Id. 

683 Id. 

684See Proposing Release, supra note 2, 74 FR at 

36839–40. 

685See Proposing Release, supra note 2, 74 FR at 

36842–46. 

686 Id. 

687 Id. 

688 Id. 

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. 

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

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 taxexempt 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

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. 

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 


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689See Proposing Release, supra note 2, 74 FR at 

36835–37. 

690 Id. 

691See Proposing Release, supra note 2, 74 FR at 

36867. 

692See 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. 

693 5 U.S.C. 601(6). 

694 17 CFR 240.0–10(c). 

695 17 CFR 240.0–10(f). 

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

697See supra Section V.C. 

698See Proposing Release, supra note 2, 74 FR at 

36866. 

699 5 U.S.C. 601(5). 

700See Securities Exchange Act Release No. 

33741 (March 9, 1994), 59 FR 12748 (March 17, 

1994). 

701Specifically, 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). 

702See 2008 Adopting Release, supra note 7, 73 

FR at 76121. 

703See Proposing Release, supra note 2, 74 FR at 

36850. 

availability of important information in 

the municipal securities market. 

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

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

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. 

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

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

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

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 brokerdealers or municipal securities 

dealers.698 The Commission did not 

receive any comments on this issue. 

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. 

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 


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704See 17 CFR 240.15c2–12(d)(2). 

705The 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). 

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 brokerdealers, 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

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 § 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. 

■ 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 

■ 1. The authority citation for part 240 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a– 

20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 

80b–11, and 7201 et seq.; and 18 U.S.C. 1350, 

unless otherwise noted. 

* * * * * 

■ 2. Section 240.15c2–12 is amended by 

the following: 

■ A. Revise the introductory text of 

paragraph (b)(5)(i)(C), and paragraphs 

(b)(5)(i)(C)(2), (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); 

■ B. Add new paragraphs 

(b)(5)(i)(C)(12), (13) and (14); 

■ C. Revise paragraph (d)(1)(ii); 

■ D. Remove paragraph (d)(1)(iii); 

■ E. Revise paragraph (d)(2)(ii)(B); and 

■ F. Add new paragraph (d)(5). 

The additions and revisions read as 

follows. 

§ 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 


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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 

■ 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 (‘‘ecertus 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 


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Federal Register / Vol. 75, No. 111 / Thursday, June 10, 2010 / Rules and Regulations 33157 

Elizabeth M. Murphy, Secretary, 

Commission, dated October 14, 2009 (‘‘ecertus 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 


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