36832 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

1 17 CFR 240.15c2–12. 

2 Id. 

3See Securities Exchange Act Release No. 26985 

(June 28, 1989), 54 FR 28799 (July 10, 1989) (‘‘1989 

Adopting Release’’). 

4 In 1993, the Commission’s Division of Market 

Regulation (n/k/a the Division of Trading and 

Markets) (‘‘Division’’) conducted a comprehensive 

review of many aspects of the municipal securities 

market, including secondary market disclosure 

(‘‘1993 Staff Report’’). Findings in the 1993 Staff 

Report highlighted the need for improved 

disclosure practices in both the primary and 

secondary municipal securities markets. The 1993 

Staff Report found that investors need sufficient 

current information about issuers and significant 

obligors to better protect themselves from fraud and 

manipulation, to better evaluate offering prices, to 

decide which municipal securities to buy, and to 

decide when to sell. Moreover, the 1993 Staff 

Report found that the growing participation of 

individuals as both direct and indirect purchasers 

of municipal securities underscored the need for 

sound recommendations by brokers, dealers, and 

municipal securities dealers. See Commission, 

Division of Market Regulation, Staff Report on the 

Municipal Securities Market (September 1993) 

(available at http://www.sec.gov/info/ 

municipal.shtml). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 240 and 241 

[Release No. 34–60332; File No. S7–15–09] 

RIN 3235–AJ66 

Proposed Amendment to Municipal 

Securities Disclosure 

AGENCY: Securities and Exchange 

Commission. 

ACTION: Proposed rule and 

interpretation. 

SUMMARY: The Securities and Exchange 

Commission (‘‘Commission’’ or ‘‘SEC’’) 

is publishing for comment proposed 

amendments to Rule 15c2–12 under the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’) relating to municipal 

securities disclosure. The proposal 

would amend certain requirements 

regarding the information that a broker, 

dealer, or municipal securities dealer 

acting as an underwriter in a primary 

offering of municipal securities must 

reasonably determine that an issuer of 

municipal securities or an obligated 

person has undertaken, in a written 

agreement or contract for the benefit of 

holders of the issuer’s municipal 

securities, to provide to the Municipal 

Securities Rulemaking Board (‘‘MSRB’’). 

Specifically, the proposed amendments 

would require a broker, dealer, or 

municipal securities dealer to 

reasonably determine that the issuer or 

obligated person has agreed to provide 

notice of specified events in a timely 

manner not in excess of ten business 

days after the event’s occurrence, would 

amend the list of events for which a 

notice is to be provided, and would 

modify the events that are subject to a 

materiality determination before 

triggering a notice to the MSRB. In 

addition, the amendments would revise 

an exemption from the rule for certain 

offerings of municipal securities with 

put features. The Commission also is 

providing interpretive guidance 

intended to assist municipal securities 

issuers, brokers, dealers and municipal 

securities dealers in meeting their 

obligations under the antifraud 

provisions. 

DATES: Comments should be received on 

or before September 8, 2009. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

No. S7–15–09 on the subject line; or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File No. 

S7–15–09. This file number should be 

included on the subject line if e-mail is 

used. To help us process and review 

your comments more efficiently, please 

use only one method. The Commission 

will post all comments on the 

Commission’s Internet Web site (http:// 

www.sec.gov/rules/proposed.shtml). 

Comments are also available for public 

inspection and copying in the 

Commission’s Public Reference Room, 

100 F Street, NE., Washington, DC 

20549 on official business days between 

the hours of 10 a.m. and 3 p.m. All 

comments received will be posted 

without change; we do not edit personal 

identifying information from 

submissions. You should submit only 

information that you wish to make 

available publicly. 

FOR FURTHER INFORMATION CONTACT: 

Martha Mahan Haines, Assistant 

Director and Chief, Office of Municipal 

Securities, at (202) 551–5681; Nancy J. 

Burke-Sanow, Assistant Director, Office 

of Market Supervision, at (202) 551– 

5620; Mary N. Simpkins, Senior Special 

Counsel, Office of Municipal Securities, 

at (202) 551–5683; Cyndi N. Rodriguez, 

Special Counsel, Office of Market 

Supervision, at (202) 551–5636; Rahman 

J. Harrison, Special Counsel, Office of 

Market Supervision, at (202) 551–5663; 

David J. Michehl, Special Counsel, 

Office of Market Supervision, at (202) 

551–5627; and Steven Varholik, Special 

Counsel, Office of Market Supervision, 

at (202) 551–5615, Division of Trading 

and Markets, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–6628. 

SUPPLEMENTARY INFORMATION: The 

Commission is requesting public 

comment on a proposed amendment to 

Rule 15c2–12 under the Exchange Act.1

I. Background 

A. History of Rule 15c2–12 

The Commission has long been 

concerned with improving the quality, 

timing, and dissemination of disclosure 

in the municipal securities market. In an 

effort to improve the transparency of the 

municipal securities market, in 1989, 

the Commission adopted Rule 15c2–12 2

(‘‘Rule’’ or ‘‘Rule 15c2–12’’) and an 

accompanying interpretation modifying 

a previously published interpretation of 

the legal obligations of underwriters of 

municipal securities.3 As adopted in 

1989, Rule 15c2–12 required, and still 

requires, underwriters participating in 

primary offerings of municipal 

securities of $1,000,000 or more to 

obtain, review, and distribute to 

potential customers copies of the 

issuer’s official statement. Specifically, 

Rule 15c2–12 required, and still 

requires, an underwriter acting in a 

primary offering of municipal securities: 

(1) To obtain and review an official 

statement ‘‘deemed final’’ by an issuer 

of the securities, except for the omission 

of specified information, prior to 

making a bid, purchase, offer, or sale of 

municipal securities; (2) in noncompetitive bid offerings, to send, upon 

request, a copy of the most recent 

preliminary official statement (if one 

exists) to potential customers; (3) to 

send, upon request, a copy of the final 

official statement to potential customers 

for a specified period of time; and (4) to 

contract with the issuer to receive, 

within a specified time, sufficient 

copies of the final official statement to 

comply with the Rule’s delivery 

requirement, and the requirements of 

the rules of the MSRB. 

While the availability of primary 

offering disclosure significantly 

improved following the adoption of 

Rule 15c2–12, there was a continuing 

concern about the adequacy of 

disclosure in the secondary market.4 To 

enhance the quality, timing, and 

dissemination of disclosure in the 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36833 

5See Securities Exchange Act Release No. 34961 

(November 10, 1994), 59 FR 59590 (November 17, 

1994) (‘‘1994 Amendments Adopting Release’’). In 

light of the growing volume of municipal securities 

offerings, as well as the growing ownership of 

municipal securities by individual investors, in 

March 1994, the Commission published the 

Statement of the Commission Regarding Disclosure 

Obligations of Municipal Securities Issuers and 

Others. See Securities Exchange Act Release No. 

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

1994) (‘‘1994 Interpretive Release’’). The 

Commission intended that its statement of views 

with respect to disclosures under the federal 

securities laws in the municipal market would 

encourage and expedite the ongoing efforts by 

market participants to improve disclosure practices, 

particularly in the secondary market, and to assist 

market participants in meeting their obligations 

under the antifraud provisions. Id. 

6The term ‘‘obligated persons’’ means persons, 

including the issuer of municipal securities, 

committed by contract or other arrangement to 

support payment of all or part of the obligations on 

the municipal securities to be sold in an offering. 

See 17 CFR 240.15c2–12(f)(10). 

7See 17 CFR 240.15c2–12(b)(5)(i)(C). This 

provision now provides that the annual information 

and event notices are to be submitted to a single 

repository, the MSRB. See infra note 11 and 

accompanying text. 

8 17 CFR 240.15c2–12(b)(5)(i)(A) and (B). 

9 17 CFR 240.15c2–12(b)(5)(i)(C). Currently, the 

following events, if material, require notice: (1) 

Principal and interest payment delinquencies; (2) 

non-payment related defaults; (3) unscheduled 

draws on debt service reserves reflecting financial 

difficulties; (4) unscheduled draws on credit 

enhancements reflecting financial difficulties; (5) 

substitution of credit or liquidity providers, or their 

failure to perform; (6) adverse tax opinions or 

events affecting the tax-exempt status of the 

security; (7) modifications to rights of security 

holders; (8) bond calls; (9) defeasances; (10) release, 

substitution, or sale of property securing repayment 

of the securities; and (11) rating changes. In 

addition, Rule 15c2–12(d)(2) provides an exemption 

from the application of paragraph (b)(5) of the Rule 

with respect to certain primary offerings if, among 

other things, the issuer or obligated person has 

agreed to a limited disclosure obligation. See 17 

CFR 240.15c2–12(d)(2). As discussed in detail in 

Section II.C., below, the Commission is proposing 

to eliminate the materiality determination for 

certain of these events. 

10 17 CFR 240.15c2–12(b)(5)(i)(D). Annual filings, 

event notices, and failure to file notices are referred 

to collectively herein as ‘‘continuing disclosure 

documents.’’ 

11See Securities Exchange Act Release No. 59062 

(December 5, 2008), 73 FR 76104 (December 15, 

2008) (‘‘2008 Amendments Adopting Release’’). See 

also Securities Exchange Act Release No. 58255 

(July 30, 2008), 73 FR 46138 (August 7, 2008) 

(‘‘2008 Proposing Release’’). The 2008 Amendments 

became effective on July 1, 2009. The Commission 

proposes that the effective date of the proposed 

amendments discussed herein would be no earlier 

than three months after any final approval of the 

proposed amendments, should the Commission 

adopt these proposed rule amendments. 

12See 2008 Amendments Adopting Release, 

supra note 11, 73 FR at 76106. 

13 Id. See also Securities Exchange Act Release 

No. 59061 (December 5, 2008), 73 FR 75778 

(December 12, 2008) (order approving the MSRB’s 

proposed rule change to establish as a component 

of its central municipal securities document 

repository, the Electronic Municipal Market Access 

(‘‘EMMA’’) system, the collection and availability of 

continuing disclosure documents over the Internet 

for free). 

14 17 CFR 240.15c2–12(d)(1)(iii). 

15See, 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 

Continued 

secondary municipal securities market, 

the Commission in 1994 adopted 

amendments to Rule 15c2–12 (‘‘1994 

Amendments’’).5 Among other things, 

the 1994 Amendments placed certain 

requirements on brokers, dealers, and 

municipal securities dealers (‘‘Dealers’’ 

or, when used in connection with 

primary offerings, ‘‘Participating 

Underwriters’’). 

Specifically, Rule 15c2–12, as 

amended by the 1994 Amendments, 

prohibits Participating Underwriters 

from purchasing or selling municipal 

securities covered by the Rule in a 

primary offering, unless the 

Participating Underwriter has 

reasonably determined that an issuer of 

municipal securities or an obligated 

person 6 has undertaken in a written 

agreement or contract for the benefit of 

holders of such securities (‘‘continuing 

disclosure agreement’’) to provide 

specified annual information and event 

notices to certain information 

repositories.7 The information to be 

provided consists of: (1) Certain annual 

financial and operating information and 

audited financial statements (‘‘annual 

filings’’); 8 (2) notices of the occurrence 

of any of eleven specific events (‘‘event 

notices’’); 9 and (3) notices of the failure 

of an issuer or other obligated person to 

make a submission required by a 

continuing disclosure agreement 

(‘‘failure to file notices’’).10 The 1994 

Amendments also amended Rule 15c2– 

12 to require the Participating 

Underwriter to reasonably determine 

that an issuer of municipal securities or 

an obligated person has undertaken in 

the continuing disclosure agreement to 

provide: (1) Annual filings to each 

nationally recognized municipal 

securities information repository 

(‘‘NRMSIR’’); (2) event notices and 

failure to file notices either to each 

NRMSIR or to the MSRB; and (3) in the 

case of states that established state 

information depositories (‘‘SIDs’’), all 

continuing disclosure documents to the 

appropriate SID. Finally, the 1994 

Amendments amended Rule 15c2–12 to 

revise the definition of ‘‘final official 

statement’’ to include a description of 

the issuer’s or obligated person’s 

continuing disclosure undertakings for 

the securities being offered, and of any 

instances in the previous five years in 

which the issuer or obligated person 

failed to comply, in all material 

respects, with undertakings in previous 

continuing disclosure agreements. 

Furthermore, to promote more 

efficient, effective, and wider 

availability of municipal securities 

information to investors and market 

participants, on December 5, 2008, the 

Commission adopted amendments to 

Rule 15c2–12 (‘‘2008 Amendments’’) to 

provide for a single centralized 

repository, the MSRB, for the electronic 

collection and availability of 

information about outstanding 

municipal securities in the secondary 

market.11 In the 2008 Amendments 

Adopting Release, the Commission 

stated that the establishment of a single 

centralized repository will help provide 

ready and prompt access to continuing 

disclosure documents to investors and 

other municipal market participants and 

will help fulfill the regulatory and 

information needs of municipal market 

participants, including Dealers, 

Participating Underwriters, mutual 

funds and others.12 Specifically, the 

2008 Amendments require the 

Participating Underwriter to reasonably 

determine that the issuer or obligated 

person has undertaken in its continuing 

disclosure agreement to provide the 

continuing disclosure documents: (1) 

Solely to the MSRB; and (2) in an 

electronic format and accompanied by 

identifying information, as prescribed 

by the MSRB.13

B. Need for Further Amendments to 

Rule 15c2–12 

As discussed below, experience with 

the operation of the Rule, changes in the 

municipal market since the adoption of 

the 1994 Amendments, and recent 

market events have suggested the need 

for the Commission to reconsider 

certain aspects of the Rule, including 

the exemption for primary offerings of 

municipal securities in authorized 

denominations of $100,000 or more 

which, at the option of the holder 

thereof, may be tendered to an issuer of 

such securities or its designated agent 

for redemption or purchase at par value 

or more at least as frequently as every 

nine months until maturity, earlier 

redemption, or purchase by an issuer or 

its designated agent (‘‘demand 

securities’’).14 Furthermore, since the 

adoption of the 1994 Amendments, 

municipal securities industry 

participants have raised a number of 

areas in which the Rule’s provisions 

could be clarified or enhanced and have 

expressed a desire for additional 

information about these securities.15


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36834 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

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). 

16According to statistics assembled by the 

Securities Industry and Financial Markets 

Association (‘‘SIFMA’’), the amount of outstanding 

municipal securities grew from approximately 

$1.26 trillion in 1996 to $2.69 trillion at the end of 

2008. See SIFMA Outstanding U.S. Bond Market 

Debt (available at http://www.sifma.org/research/ 

pdf/Overall_Outstanding.pdf). 

17See SIFMA, Holders of U.S. Municipal 

Securities (available at http://www.sifma.org/ 

research/pdf/Holders_Municipal_Securities.pdf) 

(‘‘SIFMA Report’’). 

18 Id. 

19See MSRB, Real-Time Transaction Reporting, 

Statistical Patterns in the Municipal Market, 

Monthly Summaries 2008 (available at http:// 

www.msrb.org/msrb1/TRSweb/MarketStats/ 

statistical_patterns_in_the_muni.htm). 

20See Standard and Poor’s, A Complete Look at 

Monetary Defaults in the 1990s (June, 2000) 

(available at http://www.kennyweb.com/kwnext/ 

mip/paydefault.pdf) (‘‘Standard and Poor’s 

Report’’). See also Moody’s Investors Service, The 

U.S. Municipal Bond Rating Scale: Mapping to the 

Global Rating Scale And Assigning Global Scale 

Ratings to Municipal Obligations (March 2008) 

(available at http://www.moodys.com/cust/content/ 

content.ashx?source=StaticContent/Free%20pages/ 

Credit%20Policy%20Research/documents/current/ 

102249_RM.pdf) (regarding municipal defaults of 

Moody’s rated municipal securities). 

21See Standard and Poor’s Report, supra note 20. 

22See Joe Mysak, Subprime Finds New Victim as 

Muni Defaults Triple, Bloomberg News, May 30, 

2008. 

23See 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). 

24 VRDOs principally are demand securities. 

25See Two Decades of Bond Finance: 1989–2008, 

The Bond Buyer/Thomson Reuters 2009 Yearbook 

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

26 Id. 

27According to the MSRB, trading volume in 

VRDOs in 2008 was approximately $2.1 trillion. 

Total trading volume in 2008 for all municipal 

securities was approximately $5.5 trillion. See email between Martha M. Haines, Assistant Director 

and Chief, Office of Municipal Securities, Division, 

Commission, and Harold Johnson, Deputy General 

Counsel, MSRB, May 28, 2009 (confirming 2008 

trading volume in VRDOs and trading volume for 

municipal securities). 

28Auction rate securities are not demand 

securities. 

29 ‘‘Interest rate modes’’ is the term used to refer 

collectively to the various forms in which offerings 

that include variable rate demand obligations may 

typically be issued or converted. Such ‘‘multimodal’’ bonds typically include a variety of 

optional forms (modes), such as fixed interest rate, 

variable interest rates of different lengths (e.g., 

daily, weekly or monthly interest rate resets), 

auction rate, and commercial paper. 

30See, e.g., Press Release, Dormitory Authority 

State of New York, DASNY Moving Clients Out of 

Auction Rate Securities (March 26, 2008) (available 

at http://www.dasny.org/dasny/news/2008/ 

080326moving.php); Press Release, Office of Chief 

Financial Officer, District of Columbia, Over $100 

Million Saved: $10 Million This Fiscal Year by CFO 

Debt Management Strategy (May 27, 2008) 

(available at http://newsroom.dc.gov/show.aspx/ 

agency/cfo/section/2/release/13845); Henry J. 

Gomez, Bond Failures Could Mean Millions In Lost 

Interest, Cleveland Plain Dealer, March 4, 2008, at 

B3; Laura Brost, Citizens to Cut its Borrowing Cost, 

Orlando Sentinel, March 14, 2008, at C3; and Matt 

Krantz, Credit Crisis Forces Museums to be Creative; 

Skittish Bond Investors Meant Their Interest Costs 

Were Getting Out of Hand, USA TODAY, April 17, 

2008, at 4B. 31According to Thomson Reuters, VRDO 

issuances in 2008 were much higher than in 2007— 

approximately $115 billion in 2008 vs. $50 billion 

in 2007. No ARS were reported to have been issued 

during the same period in 2008. See Two Decades 

of Bond Finance: 1989–2008, The Bond Buyer/ 

Thomson Reuters 2009 Yearbook 7 (Matthew Kreps 

ed., Source Media, Inc.) (2009). 

32See infra note 45 and accompanying text. 

33See 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%.’’). 

34See supra note 15 and accompanying text. 

Since the adoption of the 1994 

Amendments, the amount of 

outstanding municipal securities has 

more than doubled—to almost $2.7 

trillion.16 Notably, despite this large 

increase in the amount of outstanding 

municipal securities, direct investment 

in municipal securities by individuals 

remained relatively steady from 1996 to 

2008, ranging from approximately 35% 

to 39% of outstanding municipal 

securities.17 At the end of 2008, 

individual investors held approximately 

36% of outstanding municipal securities 

directly and up to another 36% 

indirectly through money market funds, 

mutual funds, and closed end funds.18

There is also substantial trading volume 

in the municipal securities market. 

According to the MSRB, almost $5.5 

trillion of long and short term municipal 

securities were traded in 2008 in nearly 

11 million transactions.19 Further, the 

municipal securities market is 

extremely diverse, with approximately 

50,000 state and local issuers of these 

securities. In addition, municipal bonds 

can and do default. In fact, at least 917 

municipal bond issues went into 

monetary default during the 1990s with 

a defaulted principal amount of over 

$9.8 billion.20 Bonds for healthcare, 

multifamily housing, and industrial 

development, together with land-backed 

debt, accounted for more than 80% of 

defaulted dollar amounts.21 In 2007, a 

total of $226 million in municipal bonds 

defaulted (including both monetary and 

covenant defaults).22 In 2008, 140 

issuers defaulted on $7.6 billion in 

municipal bonds.23

At the time the Rule was adopted in 

1989, municipal securities with put or 

demand features were relatively new. 

Approximately $13 billion of variable 

rate demand obligations (‘‘VRDOs’’) 24

were issued in 1989.25 However, by 

2008, new issuances of VRDOs had 

grown to approximately $115 billion,26

with trading in VRDOs representing 

approximately 38% of trading volume of 

all municipal securities.27 Many issuers 

and other obligated persons are reported 

to have converted their municipal 

auction rate securities (‘‘ARS’’) 28 to 

securities with other interest rate modes 

(as provided in related trust 

indentures),29 such as VRDOs, or 

refunded or otherwise refinanced their 

ARS in order to reduce the unusually 

high interest rates on ARS caused by 

turmoil in the ARS market.30 This 

conversion or refinancing appears to 

have contributed to the increased 

volume of new issues of VRDOs in 

2008 31 and was accompanied by an 

increased number of investors in 

VRDOs, with some investors holding 

these securities for long periods of 

time.32 There has also been an increase 

in the trading volume of VRDOs. As the 

size and complexity of the VRDO 

market and the number of investors has 

grown, so have the risks associated with 

less complete disclosure. In addition, 

during the fall of 2008, the VRDO 

market experienced significant 

volatility.33 Moreover, there have been 

concerns expressed by representatives 

of the primary purchasers of VRDOs— 

money market funds—that suggest that 

the exemption in Rule 15c2–12 for these 

securities may no longer be justified.34

All of these developments highlight the 

need for the Commission to consider 

whether improvements should be made 

regarding the availability to investors of 

important information regarding 

demand securities. 

As a result of the changes in the 

VRDO market, the Commission believes 

that investors and other municipal 

market participants today should be 

able to obtain ongoing continuing 

disclosure information regarding 

demand securities in order to make 

more knowledgeable investment 

decisions, to effectively manage and 

monitor their investments, and thereby 

be better able to protect themselves from 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36835 

35See 17 CFR 240.15c2–12(d)(1)(iii). Specifically, 

the Commission proposes to eliminate the 

exemption for primary offerings of demand 

securities contained in paragraph (d)(1)(iii) of the 

Rule and to add new paragraph (d)(5) to the Rule. 

Paragraph (d)(5) of the Rule, as proposed, would 

exempt primary offerings of demand securities from 

all of the provisions of the Rule except those 

relating to a Participating Underwriter’s obligations 

pursuant to paragraph (b)(5) of the Rule and relating 

to recommendations by brokers, dealers, and 

municipal securities dealers pursuant to paragraph 

(c) of the Rule. As a result of these proposed 

changes, Participating Underwriters, in connection 

with a primary offering of demand securities, would 

need to reasonably determine that the issuer or 

obligated person has entered into a continuing 

disclosure agreement with respect to the 

submission of continuing disclosure documents to 

the MSRB. In addition, brokers, dealers and 

municipal securities dealers recommending the 

purchase or sale of demand securities would need 

to have procedures in place that provide reasonable 

assurance that they would receive prompt notice of 

event notices and failure to file notices. See 17 CFR 

240.15c2–12(c). 

36As discussed below in Section II.F., the 

Commission is aware that undertakings by issuers 

and obligated persons that were entered into prior 

to the effective date of any final amendments would 

be different from those entered into on or after the 

effective date of any final amendments. 

37See Rule 15c2–12(f)(7) for a definition of 

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

38 17 CFR 240.15c2–12(d)(1)(iii). 

39As noted above, Rule 15c2–12(b)(5) requires a 

Participating Underwriter, before purchasing or 

selling municipal securities in connection with an 

offering of municipal securities, to reasonably 

determine that the issuer or obligated person has 

undertaken, in a written agreement or contract, for 

the benefit of the holders of municipal securities, 

to provide annual filings, material event notices, 

and failure to file notices (i.e., continuing disclosure 

documents) to the MSRB. See 17 CFR 240.15c2– 

12(b)(5). See also supra note 11. 

40Rule 15c2–12(c) requires a broker, dealer, or 

municipal securities dealer that recommends the 

purchase or sale of a municipal security to have 

procedures in place that provide reasonable 

assurance that it will receive prompt notice of any 

material event and any failure to file annual 

financial information regarding the municipal 

security. See 17 CFR 240.15c2–12(c). 

41See supra note 25 and accompanying text. 

42See supra note 25 and accompanying text. 

43See supra note 27 and accompanying text. 

44See supra notes 30 and 31 and accompanying 

text. 

45Telephone call between Heather Traeger, 

Associate Counsel, Securities Regulation, Capital 

Markets, ICI, and Martha M. Haines, Assistant 

Director and Chief, Office of Municipal Securities, 

Division, Commission, on July 14, 2009. 

46The recent increased investment interest and 

activity in VRDOs may be attributable, in part, to 

the recent turmoil in the market for ARS, which 

began in February 2008. See MSRB Notice 2008–09 

(February 19, 2008) (‘‘Recent downgrades of 

municipal bond insurers and other short-term 

liquidity concerns have created extreme volatility 

in the market for municipal Auction Rate 

Securities. There also have been an unprecedented 

number of ‘failed auctions,’ meaning that investors 

who chose to liquidate their positions through the 

auction process were not able to do so.’’) (available 

at http://www.msrb.org/msrb1/whatsnew/2008- 

09.asp). See also Anthony P. Inverso, 2008 FirstHalf Municipal Market Review: The End of 

Securities and Bond Insurance As We Know It? 

Building Futures, New Jersey Educational Facilities 

Authority (June 2008) (stating that as downgrades 

to bond insurer ratings grew, so did the rates on 

ARS. Further stating that by the end of the first half 

of 2008, nearly half of all auction rate securities will 

have been converted or redeemed, mainly in the 

form of more predictable fixed rate debt or variable 

rate secured by a bank letter of credit.) (available 

at http://www.njefa.com/njefa/pdf/newsletter/

NJEFA%20Building%20futures%20newsletter%20

June%202008%20Vol.%207,%20No.%201.pdf); 

and Adrian D’Silva, Haley Gregg, and David 

Marshall, Explaining the Decline in the Auction 

Rate Securities Market, Chicago Fed Letter, The 

Federal Reserve Bank of Chicago (November 2008) 

(stating that the rash of failed auctions in the ARS 

markets starting in February 2008 has prompted 

issuers to consider a variety of potential solutions, 

including: Finding buyers for ARSs in the 

secondary market; converting ARSs to variable-rate 

demand notes; and replacing ARSs with short term 

debt funding.) (available at http://

www.chicagofed.org/publications/fedletter/

cflnovember2008_256.pdf). See also supra note 30. 

misrepresentations and fraudulent 

activities. Accordingly, the Commission 

proposes to modify the exemption in the 

Rule, as discussed below, for demand 

securities 35 by requiring Participating 

Underwriters to reasonably determine 

that the issuer or obligated person of 

demand securities has undertaken in a 

written agreement to provide continuing 

disclosure documents to the MSRB. 

In addition, the Commission proposes 

to require Participating Underwriters to 

reasonably determine that the issuer or 

obligated person has contractually 

agreed to provide notice of specified 

events within a certain time frame, 

amend the list of events that would 

trigger an issuer’s or other obligated 

person’s obligation under its continuing 

disclosure agreement to submit an event 

notice to the MSRB, and amend the Rule 

to modify those events that would be 

subject to a materiality determination 

before triggering a notice to the MSRB.36

As discussed below, the Commission 

believes that these proposed changes 

would, among other things, help 

Participating Underwriters satisfy their 

obligations and help improve the 

availability of timely and important 

information to investors of municipal 

securities. In addition, in line with the 

objectives behind the Commission’s 

prior revisions to Rule 15c2–12 and the 

2008 Amendments, these proposed 

amendments are designed to help deter 

fraud and manipulation in the 

municipal securities market by 

prohibiting the underwriting and 

recommendation of transactions in 

municipal securities for which adequate 

information is not available on an 

ongoing basis. 

II. Description of the Proposed 

Amendments to Rule 15c2–12 

A. Modification of the Exemption for 

Demand Securities 

Rule 15c2–12(d) provides an 

exemption for a primary offering 37 of 

municipal securities in authorized 

denominations of $100,000 or more, if 

such securities, at the option of the 

holder thereof, may be tendered to an 

issuer of such securities or its 

designated agent for redemption or 

purchase at par value or more at least 

as frequently as every nine months until 

maturity, earlier redemption, or 

purchase by an issuer or its designated 

agent.38 Demand securities qualify for 

this exemption. The Commission now 

proposes to delete the current 

exemption for demand securities in 

paragraph (d)(1)(iii) and add language in 

new paragraph (d)(5) so that paragraphs 

(b)(5) 39 and (c) 40 of the Rule also would 

apply to a primary offering of demand 

securities. 

The Commission believes that its 

experience with the operation of the 

Rule and market changes since the 

adoption of the 1994 Amendments have 

suggested a need to modify the 

exemption relating to demand securities 

as described. The effect of this proposed 

amendment would be to eliminate the 

current exemption of demand securities 

from the requirement that a 

Participating Underwriter reasonably 

determine that the issuer or obligated 

person has undertaken, in a continuing 

disclosure agreement, to provide 

continuing disclosure documents to the 

MSRB. As noted above, when this 

exemption was adopted VRDOs were 

relatively new and did not represent a 

large proportion of the market.41

However, by 2008, the amount of 

issuances of VRDOs was approximately 

$115 billion 42 and trading volume of 

VRDOs exceeded 38 percent of all 

municipal securities.43 The Commission 

observes that an unusually high volume 

of VRDOs were issued in 2008.44 The 

increase in the amount of issuances and 

trading volume of VRDOs seem to 

indicate that more investors own such 

securities. Furthermore, despite their 

periodic ability to tender VRDOs to the 

respective issuer for repurchase, some 

investors in VRDOs appear to hold these 

securities for long periods of time 45 and 

would be better able to protect 

themselves against manipulation and 

fraud if they were able more easily to 

access information about important 

events, such as those listed in 

paragraphs (b)(5) and (c) of the Rule. 

Accordingly, the increased amount of 

VRDO issuances, high VRDO trading 

volume, increased number of investors 

in VRDOs,46 and some investors’ 

tendency to hold these securities for 

long periods of time highlight the risks 

associated with less information being 

available and suggest a need to take 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36836 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

47See, e.g., comments of Leslie Richards-Yellen, 

Principal, The Vanguard Group, transcript of the 

2001 Municipal Market Roundtable—‘‘Secondary 

Market Disclosure for the 21st Century’’ (available 

at http://www.sec.gov/info/municipal/roundtables/

thirdmuniround.htm) (‘‘* * * what I hope more 

than anything is that variable rate demand 

obligations become within the Rule 15c2–12 

disclosure regime * * * put yourself in the position 

of a fund, we have on one hand Rule 15c2–12, 

which is very helpful and it sets the floor of what 

kind of information must be delivered for a 

secondary market, * * *. But on the other hand, 

mutual funds are bound by Rule 2a–7 and that says 

for short-term obligations what we must find for 

every security, and Rule 2a–7 has legal 

requirements that we must fulfill in order to buy the 

securities, and * * * to make these findings we 

have to make our own determination, we can’t rely 

on rating agencies, we do this all in house.’’). See 

also supra note 15. 

48See 1989 Adopting Release, supra note 3, 54 FR 

at 28808, n. 68. 

49See supra note 37. 

50See 1994 Amendments Adopting Release, 

supra note 5. The Commission notes that, in the 

1994 Amendments Adopting Release, it did not 

address the application of paragraph (b)(5) of the 

Rule to remarketing of VRDOs, including the 

practicality and burdens for Participating 

Underwriters to comply with this provision. The 

1994 Amendments did not reconsider any of the 

exemptions contained in the Rule. As discussed 

above, since that time, there have been significant 

developments in the market related to demand 

securities. 

51There may, however, be continuing disclosure 

agreements for VRDOs that were initially issued in 

an interest rate mode, such as a fixed rate mode, 

subject to the Rule that were subsequently 

converted to VRDOs in accordance with the 

provisions of the related indenture. 

52 17 CFR 240.15c2–12(f)(7). 

53A remarketing agent is a broker-dealer 

responsible for reselling to new investors securities 

(such as VRDOs) that have been tendered for 

purchase by their owner. The remarketing agent 

also typically is responsible for resetting the interest 

rate for a variable rate issue and also may act as 

tender agent. See MSRB, Municipal Securities 

Rulemaking Board Glossary, Second Edition 

(January 2004) (defining ‘‘remarketing agent’’) 

(available at http://www.msrb.org/msrb1/glossary). 

54See infra Section III. for a reaffirmation of the 

Commission’s interpretations regarding 

Participating Underwriters’ obligations under Rule 

15c2–12. 

55 17 CFR 240.15c2–12(f)(3). 

56See Securities Exchange Act Release No. 59061 

(December 5, 2008), 73 FR 75778 (December 12, 

2008) (File No. SR–MSRB–2008–05) (order 

measures designed to help improve the 

availability of important information to 

investors in this considerable segment 

of the municipal market. 

Representatives of money market funds 

have discussed their difficulty or, on 

some occasions, their inability to obtain 

the information that they believe is 

necessary to oversee their investments 

in demand securities.47 Modification of 

the exemption for demand securities, as 

further discussed below, would help 

improve the availability of continuing 

disclosures about these securities, not 

only to institutional investors, such as 

mutual funds, that acquire demand 

securities for their portfolios, but also to 

individual investors who own, or who 

may be interested in owning, demand 

securities, and would help them make 

better informed investment decisions, 

and thereby better protect themselves. 

Further, the Commission notes that 

the exemption for demand securities, 

which was included in the Rule when 

Rule 15c2–12 was adopted in 1989, was 

intended to respond to concerns 

expressed by commenters ‘‘that 

applying the provisions of the 

[Proposed] Rule to variable rate demand 

notes, or similar securities, might 

unnecessarily hinder the operation of 

this market, if underwriters were 

required to comply with the provisions 

of the Proposed Rule on each tender or 

reset date.’’ 48 The exemption in the 

original Rule was intended to ensure 

that the remarketings would not be 

affected by application of paragraphs (a) 

and (b)(1)–(4) of the Rule, which require 

Participating Underwriters to review an 

official statement that the issuer ‘‘deems 

final’’ before it may bid for, purchase, 

offer or sell an offering; to deliver a 

preliminary official statement or final 

official statement to any potential 

customer, upon request; and to contract 

with the issuer to receive an adequate 

number of the final official statement to 

accompany confirmation statements and 

otherwise fulfill its regulatory 

responsibilities. Although remarketings 

of VRDOs may be primary offerings,49

the Commission did not impose 

paragraphs (a) and (b)(1)–(4) of the Rule 

on Participating Underwriters of each 

remarketing—of which hundreds could 

occur on the same day—because it 

potentially would have made it 

impractical and unduly burdensome for 

Participating Underwriters to comply 

with these Rule provisions.50

Generally, there are no continuing 

disclosure agreements in place with 

respect to VRDOs, because primary 

offerings of these securities are exempt 

from the Rule.51 Under the proposed 

amendments, the Participating 

Underwriter of a primary offering of 

VRDOs would need to reasonably 

determine that the issuer or obligated 

person has entered into a continuing 

disclosure agreement with respect to the 

submission to the MSRB of continuing 

disclosure documents. The proposed 

amendment modifying the exemption 

for VRDOs would apply to any initial 

offering of VRDOs occurring on or after 

the effective date of any final 

amendments that the Commission may 

adopt. In addition, the proposed 

amendment also would apply to any 

remarketing of VRDOs that are primary 

offerings 52 occurring on or after the 

effective date of any final amendments 

that the Commission may adopt, 

including any such remarketing of 

VRDOs that initially were issued prior 

to any such effective date. 

Consequently, the initial issuance of 

VRDOs, and any remarketing that is a 

primary offering of VRDOs, following 

the effective date of any final 

amendments would require the 

Participating Underwriter to reasonably 

determine that the issuer or obligated 

person has entered into a continuing 

disclosure agreement reflecting the 

proposed new provisions of the Rule. 

The Commission, however, 

preliminarily believes that the effect of 

the application of paragraphs (b)(5) and 

(c) of the Rule to VRDOs would not be 

significantly burdensome for 

Participating Underwriters in 

connection with the initial issuance and 

remarketing of VRDOs following the 

effective date of any final amendments. 

If the amendments are adopted, any 

primary offering (including a 

remarketing) that occurs on or after the 

effective date of the Rule would require 

a Participating Underwriter or a 

Participating Underwriter serving as a 

remarketing agent 53 for a particular 

VRDO issue to make a determination 

that an issuer or obligated person has 

entered into a continuing disclosure 

agreement for that issue reflecting the 

new provisions of the Rule. The 

Participating Underwriter or the 

remarketing agent (who often served as 

the underwriter in the initial issuance of 

the VRDOs) would need to reasonably 

determine that the issuer or obligated 

person has entered into a continuing 

disclosure agreement in which it 

undertakes to provide continuing 

disclosure documents to the MSRB. 

However, once the Participating 

Underwriter has made such a 

determination for a particular VRDO 

issue, it would be aware of the existence 

of the continuing disclosure agreement 

reflecting the proposed amendment, and 

thus would easily be able to make the 

necessary determination for 

remarketings of that issue occurring 

thereafter.54 Furthermore, remarketing 

agents who did not previously 

participate in a remarketing could 

confirm that the issuer has entered into 

an undertaking in conformity with the 

proposed amendment by obtaining an 

official statement from the issuer (which 

by definition must include a description 

of the issuer’s undertakings),55 from the 

MSRB (under its program that makes 

official statements for nearly every 

offering of municipal securities 

available on the Internet from the 

MSRB’s EMMA system),56 or from a 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36837 

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). 

57See Douglas Skarr, Auction Rate Securities: A 

Primer For Finance Officers, Government Finance 

Review, August 2005. 

58See infra Section V. for a discussion of the 

collection of information burdens and costs as they 

relate to the proposed amendment regarding 

demand securities. 

59 Id. 

60 Id. 

61For example, brokers, dealers and municipal 

securities dealers with access to current information 

contained in event notices submitted to the MSRB 

would be able to use such information when 

deciding whether or not to recommend the 

purchase or sale of a particular demand security. 

62See 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). 

63See supra note 35. 

64See supra note 11 and accompanying text. 

65 17 CFR 240.15c2–12(d)(2)(ii)(B). 66See supra note 11 and accompanying text. 67See 1994 Amendments, supra note 5, 59 FR at 

59601. 68 Id. 

69See, e.g., Elizabeth Carvlin, Trustee for Vigo 

County, Ind., Agency Taps Reserve Fund for Debt 

Service, The Bond Buyer, April 2, 2004, page 3 

(reporting the filing of a material event notice 

regarding a draw on debt service reserve fund that 

occurred in February); Alison L. McConnell, Two 

More Deals Under Audit By TEB Office, The Bond 

Buyer, April 5, 2006 (event notice of tax audit filed 

nine months after audit was opened); Susanna Duff 

Barnett, IRS Answers Toxic Query; Post 1986 

Radioactive Waste Debt Not Exempt, The Bond 

Buyer, November 2, 2004 (material event notice 

filed October 29, 2004 regarding IRS technical 

advice memorandum dated August 27, 2004 that 

bonds issued to finance certain radioactive solid 

waste facilities were taxable; related preliminary 

adverse determination letter was issued in January, 

2002); and Michael Stanton, IRS: Utah Pool Bonds 

Taxable; Issuer Disputes Facts of Case, The Bond 

Buyer, December 8, 1997 (issuer’s receipt of August, 

1997 IRS technical advice memorandum 

concluding certain bonds were taxable was 

disclosed on December 5, 1997). 

variety of vendors. In addition, a 

remarketing agent could obtain a copy 

of the continuing disclosure agreement 

from the issuer or obligated person at 

the time that it enters into a contract to 

act as a remarketing agent. 

According to an industry 

commentator, some rating agencies 

recommend that variable-rate debt not 

exceed 20 percent of the total debt 

outstanding of governmental issuers.57

If governmental issuers follow this 

recommendation, it would be likely that 

state and local government issuers with 

VRDOs would have some fixed rate 

securities outstanding, at least some of 

which likely would be subject to 

continuing disclosure agreements under 

Rule 15c2–12. Because any existing 

continuing disclosure agreements for 

those other outstanding securities 

would obligate such issuers and 

obligated persons to provide annual 

filings, event notices and failure to file 

notices with respect to their outstanding 

securities, the Commission does not 

anticipate that the modification of the 

exemption for demand securities in the 

proposed amendments would increase 

significantly the obligation that they 

would incur to provide continuing 

disclosure documents to the MSRB.58

Furthermore, the Commission notes that 

some annual filings, such as audited 

financial statements, are often prepared 

by issuers and obligated persons in the 

ordinary course of their business. In 

such cases, the obligation incurred by 

an issuer or obligated person to provide 

to the MSRB information that it has 

already prepared should be small.59

Issuers and obligated persons of demand 

obligations that have not previously 

issued such securities, however, would 

be entering into a continuing disclosure 

agreement for the first time and would 

incur some costs to provide continuing 

disclosure documents electronically to 

the MSRB.60

For the reasons stated above, the 

Commission believes that application of 

paragraphs (b)(5) and (c) of the Rule 

would be appropriate in the case of 

demand securities. The Commission 

preliminarily believes that any 

additional burden on Participating 

Underwriters, issuers or obligated 

persons, the MSRB or others would be 

justified by the improved availability of 

information to investors in demand 

securities, so that investors in these 

securities could make better informed 

investment decisions and thereby better 

protect themselves from 

misrepresentations and fraudulent 

activities. Investors now would have 

better access to baseline information 

and material events regarding VRDOs. 

The availability of such information also 

would assist brokers, dealers and 

municipal securities dealers in fulfilling 

their responsibilities to their 

customers,61 such as disclosing material 

facts about transactions and securities; 

making suitable recommendations in 

transactions for municipal securities; 

and complying with other sales practice 

obligations.62

The Commission requests comment 

on whether it is appropriate to revise 

the Rule’s exemption for demand 

securities by proposing to apply 

paragraphs (b)(5) and (c) of the Rule to 

the offering of demand securities.63

Further, the Commission requests 

comment regarding investors’ and other 

municipal market participants’ need for 

continuing disclosure information 

relating to demand securities. In 

addition, the Commission requests 

comment on the extent to which the 

proposed amendment would provide 

benefits to investors and other 

municipal market participants. The 

Commission also requests comment 

regarding the effect of the proposed 

amendment on Participating 

Underwriters, issuers and obligated 

persons, and others. 

B. Time Frame for Submitting Event 

Notices Under a Continuing Disclosure 

Agreement 

The Commission proposes to modify 

paragraph (b)(5)(i)(C) of the Rule to 

require a Participating Underwriter to 

reasonably determine that the issuer or 

obligated person has agreed in its 

continuing disclosure agreement to 

submit event notices to the MSRB64 ‘‘in 

a timely manner not in excess of ten 

business days after the occurrence of the 

event,’’ instead of ‘‘in a timely manner’’ 

as the Rule currently provides. The 

Commission proposes a similar revision 

to the limited undertaking in paragraph 

(d)(2)(ii)(B) of the Rule 65 to require a 

Participating Underwriter to reasonably 

determine that the issuer or obligated 

person has agreed in its continuing 

disclosure agreement to submit event 

notices to the MSRB66 ‘‘in a timely 

manner not in excess of ten business 

days after the occurrence of the event,’’ 

instead of ‘‘in a timely manner’’ as the 

Rule currently provides. Therefore, 

under the proposed amendments, a 

Participating Underwriter would need 

to reasonably determine that the 

continuing disclosure agreement 

provides for the submission of notices to 

the MSRB within a period up to and 

including ten business days after the 

occurrence of the event. In the 1994 

Amendments, the Commission noted 

that it had not established a specific 

time frame with respect to ‘‘timely’’ 

because of the wide variety of events 

and issuer circumstances.67 The 

Commission stated that, in general, this 

determination must take into 

consideration the time needed to 

discover the occurrence of the event, 

assess its materiality, and prepare and 

disseminate the notice.68 It has been 

reported that some event notices have 

not been submitted until months after 

the events occurred.69 The Commission 

believes that these delays can, among 

other things, deny investors important 

information that they need in order to 

make informed decisions regarding 

whether to buy or sell municipal 

securities. More timely information 

would aid brokers, dealers and 

municipal securities dealers to be better 

able to satisfy their obligations to have 

a reasonable basis to recommend the 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36838 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

70See, 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 (‘‘We 

suggest * * * that the true problem is issuer 

compliance * * * filing issues are the sole cause 

of lack of transparency and disclosure availability 

in the industry. These filing issues include * * * 

late filing, * * * ’’). 

71The Commission notes that the proposed ten 

business day time frame would not apply to 

continuing disclosure agreements entered into with 

respect to primary offerings that occurred prior to 

the effective date of any final amendments that the 

Commission may adopt. 

72See supra note 9 for a description of events 

currently contained in Rule 15c2–12(b)(5)(i)(C); See 

infra Section II.E. for a description of events 

proposed to be added to the Rule. 

73 In addition, issuer or obligated person 

involvement is often required for substitution of 

credit or liquidity providers; modifications to rights 

of security holders; release, substitution, sale of 

property securing repayment of the securities; and 

optional redemptions. See Form Indenture and 

Commentary, National Association of Bond 

Lawyers, 2000. 

74For example, issuers or obligated persons 

should have direct knowledge of principal and 

interest payment delinquencies, receipt of 

preliminary or proposed determinations of 

taxability from the IRS, tender offers that they 

initiate, and bankruptcy filings. 

75The 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 or 

events affecting the tax-exempt status of the 

security. 

76Those issuers or obligated persons required by 

Section 13(a) or Section 15(d) of the Exchange Act 

to report certain events on Form 8–K (17 CFR 

249.308) would already make such information 

public in the Form 8–K. The Commission believes 

that such persons should be able to file material 

event notices, pursuant to the issuer’s or obligated 

person’s undertakings, within a short time after the 

Form 8–K filing. See 15 U.S.C. 78m and 78o(d). 

77 17 CFR 249.308. 

purchase or sale of municipal securities 

and aid investors in determining 

whether the price they pay or receive for 

their transactions is appropriate, and 

thereby better protect themselves from 

misrepresentations and other fraudulent 

activities. 

The Commission believes that longer 

delays in providing notice of the events 

set forth in paragraph (b)(5)(i)(C) of the 

Rule undermine the effectiveness of the 

Rule. Indeed, market participants have 

emphasized the importance of the 

prompt availability of such 

information.70 In addition to helping to 

reduce opportunities for fraudulent 

activities, the Commission anticipates 

that, in providing for a maximum time 

frame within which event notices 

should be disclosed under a continuing 

a disclosure agreement, the proposed 

amendment should foster the 

availability of up-to-date information 

about municipal securities, thereby 

promoting greater transparency and 

investor confidence in the municipal 

securities market as a whole. 

The Commission notes that, with 

respect to Participating Underwriters, 

the proposed amendment simply would 

require them to reasonably determine 

that issuers and obligated persons have 

contractually agreed to submit event 

notices ‘‘in a timely manner not in 

excess of ten business days after the 

occurrence of the event,’’ rather than in 

a ‘‘timely manner.’’ On the other hand, 

there would be a significant benefit to 

investors and municipal market 

participants, who would be able to 

obtain information about municipal 

securities within a specific time frame 

of an event’s occurrence. Indeed, while 

issuers and obligated persons under 

continuing disclosure agreements 

entered into prior to the effective date 

of any final amendments that the 

Commission may adopt already would 

have committed to submit event notices 

in a timely manner, the proposed 

amendment would help to make the 

timing of such submissions more certain 

in the case of issuers and obligated 

persons that enter into continuing 

disclosure agreements on or after the 

effective date of any final amendments 

that the Commission may adopt.71

The Commission believes that the 

proposed change regarding the time 

frame for submission of event notices 

would continue to provide an issuer or 

obligated person with adequate time to 

become aware of the event and, 

pursuant to its undertaking, submit 

notice of the event’s occurrence to the 

MSRB. In proposing that event filings be 

provided ‘‘in a timely manner not in 

excess of ten business days after the 

occurrence of the event,’’ the 

Commission intends to strike a balance 

between the need for such information 

to be disseminated promptly and the 

need to allow adequate time for an 

issuer or other obligated person to 

become aware of the event and to 

prepare and file such a notice. The 

Commission preliminarily believes that 

the proposed ten business day time 

frame would provide a reasonable 

amount of time for issuers to comply 

with their obligations under their 

continuing disclosure agreements, while 

also allowing event notices to be made 

available to investors, underwriters, and 

other market participants in a timely 

manner. 

By their nature, the events currently 

listed in (and proposed to be added to) 

subparagraph (b)(5)(i)(C) of the Rule are 

significant and should become known to 

the issuer or obligated person 

expeditiously.72 For example, some 

events, such as payment defaults, tender 

offers and bankruptcy filings, generally 

involve the issuer’s or obligated 

person’s participation.73 Other events, 

such as the failure of a credit or 

liquidity provider to perform, are of 

such importance that an issuer or 

obligated person likely would become 

aware of such events within the 

proposed ten business day time frame 74

or would expect an indenture trustee, 

paying agent or other transaction 

participant to bring the event to the 

issuer’s or obligated person’s attention 

within the proposed time frame for 

submission of event notices.75 Although 

a few events, such as rating changes, are 

not directly within the issuer’s control, 

the Commission expects that issuers and 

obligated persons usually would 

become aware of the events specified in 

paragraph (b)(5)(i)(C) of the Rule within 

the proposed ten business day time 

frame.76 Accordingly, the Commission 

believes that the proposed ten business 

day time frame within which issuers or 

obligated persons would submit notices 

pursuant to a continuing disclosure 

agreement would provide an adequate 

amount of time for issuers or obligated 

persons to prepare and submit event 

notices to the MSRB. While the 

proposed maximum time period for 

submitting event notices would be ten 

business days, in many instances it is 

likely that a notice could be submitted 

in fewer than ten business days. This, 

however, would depend upon the 

particular facts and circumstances of 

each event. 

The Commission requests comment 

concerning the ability of issuers and 

obligated persons to obtain information 

regarding the occurrence of events 

currently specified in, and that the 

proposed amendments would add to, 

paragraph (b)(5)(i)(C) of the Rule, in 

sufficient time to prepare and file a 

notice of such an occurrence in a timely 

manner not in excess of ten business 

days. If commenters believe that the 

time frame that would be set forth in 

continuing disclosure agreements for 

submission of event notices should be 

longer or shorter, they should provide 

suggestions for the appropriate time and 

the reasons for their views. For example, 

should the time frame be four business 

days, which is generally commensurate 

with the time period required by Form 

8–K? 77 Would a shorter period of time 

raise difficulties for smaller municipal 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36839 

78See Securities Exchange Act Release No. 33742 

(March 9, 1994), 59 FR 12759, 12761–2 (March 17, 

1994). 

79The discussion in this section pertains to 

materiality determinations for events currently 

specified in paragraph (b)(5)(i)(C) of the Rule. For 

events proposed to be added to the Rule, whether 

a materiality determination would be included is 

noted in the discussion below for each such 

proposed event. 

80See, e.g., Municipal Structured Finance Criteria 

Report: Dual-Party Pay Criteria for Long-Term 

Ratings on LOC-Supported U.S. Public Finance 

Bonds, Fitch Ratings, Public Finance, June 11, 2009 

(noting that ‘‘U.S. public finance bonds supported 

by bank letters of credit (LOC) are assigned longterm ratings one-to-two notches higher than the 

rating on the LOC provider or the underlying rating 

of the bond, whichever is higher, if [certain] 

conditions hold true[.]’’) 

81See, e.g., Alistair Varr, Moody’s Warning 

Ripples Through Municipal Bond Market, 

MarketWatch, December 17, 2007 (noting that 

‘‘when a security is cut to AA from AAA, the value 

of the bond would go down.’’) (available at http:// 

www.marketwatch.com/story/moodys-bond-insurercall-has-unprecedented-effect-on-muni-market); 

Jeffrey R. Kosnett, Why Municipal Bonds Are 

Stumbling, Kiplinger.com, December 4, 2007 

(stating that municipal bonds normally meriting a 

triple-B or single-A rating being upgraded to tripleA status as a result of having bond insurance) 

(available at http://www.kiplinger.com/columns/

balance/archive/2007/balance1204.html); ‘‘[T]he 

municipal industry chose to use bond insurance to 

enhance an issuer’s lower credit rating to that of the 

higher insurance company’s rating. The last 18 

months have exposed the risks of this choice when 

insurance company downgrades, and auction-rate 

security failures, forced numerous leveraged 

investors to unwind massive amounts of debt into 

an illiquid secondary market. The consequence was 

that issuers of new debt were forced to pay 

extremely high interest rates and investors were 

confused by volatile evaluations of their 

investments.’’ Enhancing Investor Protection and 

the Regulation of Securities Markets: Before the S. 

Continued 

issuers and obligated persons, and if so, 

why would it? Furthermore, comment is 

requested regarding the need to 

establish such a time frame for 

submissions of event notices. Should 

the trigger for the ten business day time 

frame begin when the issuer or obligated 

person knew or should have known of 

the occurrence of the event, rather than 

the actual occurrence of the event? 

Comment is also requested on whether 

an issuer’s need to monitor for events 

that would trigger an event notice 

would impose any new burdens or 

costs. Comment is requested on whether 

the proposal would help to reduce 

untimely submissions of event notices, 

or whether untimely submissions of 

event notices are caused by other 

factors. Comment is also requested on 

whether there are alternative ways to 

modify a Participating Underwriter’s 

obligations that would result in more 

prompt availability of event notices to 

investors. 

C. Materiality Determinations Regarding 

Event Notices 

In the 1994 Proposing Release, the 

Commission stated that the list of events 

in paragraph (b)(5)(i)(C) of the Rule 

consists of recognized material events 

that reflect on the creditworthiness of 

the issuer of the municipal security or 

any significant obligor, as well as on the 

terms of the securities that they issue.78

The Commission is proposing to delete 

the condition in paragraph (b)(5)(i)(C) of 

the Rule that presently provides that 

notice of all of the listed events need be 

made only ‘‘if material.’’ In connection 

with the proposed deletion of the 

materiality condition, the Commission 

has reviewed each of the Rule’s current 

specified events to determine whether 

or not a materiality determination 

should be retained for that particular 

event and preliminarily believes such a 

determination is still appropriate for 

certain listed events, as discussed 

below.79 As a result of this proposed 

change, for those events listed in 

paragraph (b)(5)(i)(C) that are not 

proposed to contain the ‘‘if material’’ 

condition, the Participating Underwriter 

must reasonably determine that the 

issuer or other obligated person has 

agreed to submit event notices to the 

MSRB whenever such an event occurs. 

The Commission now believes, based 

on its experience with the operation of 

paragraph (b)(5)(i)(C) of the Rule, that 

notice of certain events currently listed 

in paragraph (b)(5)(i)(C) need not be 

preceded by a materiality determination 

and always should be available because 

of their importance to investors and 

other market participants. These events 

include: (1) Principal and interest 

payment delinquencies with respect to 

the securities being offered; (2) 

unscheduled draws on debt service 

reserves reflecting financial difficulties; 

(3) unscheduled draws on credit 

enhancements reflecting financial 

difficulties; (4) substitution of credit or 

liquidity providers, or their failure to 

perform; (5) defeasances; and (6) rating 

changes. The availability of this 

information to investors would enable 

them to better protect themselves from 

misrepresentations and fraud. 

Furthermore, the availability of this 

information would assist brokers, 

dealers and municipal securities dealers 

to satisfy their obligation to have a 

reasonable basis on which to 

recommend municipal securities. 

The Commission believes that the 

proposal to remove the materiality 

condition for the aforementioned events 

should not alter greatly the current 

practice. Because of the significant 

nature of these events and their 

importance to investors in the 

marketplace, the Commission believes 

that issuers and obligated persons 

would already be providing notice of 

most, if not all, such events pursuant to 

existing continuing disclosure 

agreements. 

More specifically, the Commission 

believes that notice of principal and 

interest payment delinquencies should 

always be provided to aid investors in 

protecting themselves from fraud and to 

assist brokers, dealers and municipal 

securities dealers in satisfying their 

obligation to have a reasonable basis to 

recommend municipal securities. Even 

a small payment default may indicate 

that an issuer or other obligated party 

has begun to experience financial 

distress. Further, a payment default 

often adversely affects the market value 

of a municipal security. Similarly, 

unscheduled draws on debt service 

reserves reflecting financial difficulties 

and unscheduled draws on credit 

enhancements reflecting financial 

difficulties often have an adverse impact 

on the market value of a security and 

therefore should always be available to 

investors to protect against fraud and to 

other market participants to satisfy their 

securities law obligations. The 

Commission believes that investors 

should always be provided with these 

notice of events because such events 

likely indicate that the financial 

condition of a municipal securities 

issuer or obligor has deteriorated and 

therefore that there is potentially an 

increased risk of a payment default or, 

in the case of default by an issuer or 

other obligated party that results in 

payment of the securities by the 

provider of credit enhancement (such as 

a standby letter of credit), premature 

redemption. Bondholders and other 

market participants also would be 

concerned with the sufficiency of the 

amount of debt service and other 

reserves available to support an issuer 

or obligor through a period of temporary 

difficulty, along with the present 

financial condition of the provider of 

any credit enhancement. 

The identity of credit or liquidity 

providers and their ability to perform is 

important to investors. The Commission 

understands that credit ratings of 

municipal securities are typically based 

on the higher of the issuer’s (or other 

obligor’s) rating or the rating of the 

credit provider.80 With occasional 

exceptions, credit enhancement is 

obtained from a credit provider with a 

higher rating than that of the issuer or 

other obligor. When a credit enhancer 

such as a bond insurer is downgraded, 

the market value and liquidity of the 

securities that it has enhanced generally 

decline.81 Similarly, the identity and 


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36840 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

Comm. on Banking, Housing and Urban Affairs, 

111th Cong. __, March 10, 2009 (statement of 

Thomas Doe, Founder and CEO Municipal Market 

Advisors) (available at http://banking.senate.gov/

public/index.cfm?FuseAction=Hearings.

Testimony&Hearing_ID=faf91bea-ca58-4bc1-873d33739dbb4f76&Witness_ID=64207b41-3512-414b8085-ae4b71520b0a). 

82Such defeasances are known as ‘‘advance 

refundings’’ or ‘‘pre-refundings’’. See MSRB, 

Municipal Securities Rulemaking Board Glossary, 

Second Edition (January 2004) (defining ‘‘advance 

refunding’’ and ‘‘defeasance’’) (available at http:// 

www.msrb.org/msrb1/glossary). See also MSRB, 

EMMA Education Center, FAQ: ‘‘How am I affected 

if my bond is advance refunded?’’ (available at 

http://emma.msrb.org/EducationCenter/ 

FAQs.aspx?topic=AboutARD); Fitch Ratings, 

Municipal Structured Finance Criteria Report: 

Guidelines for Rating Prerefunded Municipal 

Bonds, April 2, 2009 (available at http:// 

www.fitchratings.com/corporate/reports/ 

report_frame.cfm?rpt_id=431370§or_flag=&

marketsector=3&detail=); and Moody’s Investors 

Service, Rating Methodology: Refunded Bonds, 

June, 2007 (available at: http://www.moodys.com/ 

moodys/cust/research/MDCdocs/29/ 

2006700000441141.pdf?doc_id=2006700000441141

&frameOfRef=municipal). 

83For example, a release of substitution of 

property may involve a small amount of property 

that is not particularly valuable or important to the 

business of the issuer or obligated person, and 

minor modifications to the rights of securities 

holders are often made pursuant to the provisions 

of trust indentures that allow them only if they are 

not materially adverse to the interests of 

bondholders. 

84 17 CFR 240.15c2–12(b)(5)(i)(C)(6). 

85The Commission understands that when 

determining whether interest on a bond issue is 

taxable, the IRS first issues an audit letter to the 

issuer (which may indicate whether or not IRS staff 

suspects a problem with the particular transaction). 

In the event that, as a result of the audit, IRS staff 

believes that it has found a reasonable basis to 

declare the interest on a bond issue under audit to 

be taxable, IRS staff issues a Notice of Proposed 

Issue (IRS Form 5701–TEB), which it recently began 

to use instead of a letter referred to as a 

‘‘preliminary determination of taxability.’’ If, 

following subsequent discussions with, and review 

of additional documents provided by, the entity 

under audit, IRS staff continues to believe that 

interest on the bonds should be declared taxable 

and no settlement has been reached, it issues a 

letter to the issuer referred to as a ‘‘proposed 

determination of taxability.’’ Unless appealed to the 

Office of Appeals of the IRS, a proposed 

determination of taxability becomes a final 

determination of taxability in 30 days. Final 

determinations of taxability are not appealable to 

the IRS and may not be appealed in a federal court 

by an issuer. A bondholder who has received a tax 

assessment on account of such a final determination 

may take an appeal in federal court. See Internal 

Revenue Manual (‘‘IRM’’) 4.81.14 to 4.81.1.19. See 

also IRM 4.18.5.9 (setting forth Office of TaxExempt Bonds’ current practice regarding the 

issuance of a Notice of Proposed Issue (IRS Form 

5701–TEB) in instances in which preliminary 

determinations of taxability would previously have 

been issued). 

86See 1994 Amendments, supra note 5, 59 FR at 

59600. 

ability of a liquidity provider to perform 

is typically critical to investors. 

Investors in VRDOs, for example, 

depend on liquidity providers to satisfy 

holders’ right to ‘‘put’’ their securities in 

a timely manner. As a result, the 

Commission preliminarily believes that 

notice of the substitution of credit or 

liquidity providers, or their failure to 

perform, should always be provided in 

an event notice to aid investors to 

protect against fraud and brokers, 

dealers and municipal securities dealers 

to satisfy their obligation to have a 

reasonable basis to recommend 

municipal securities. 

Further, the Commission 

preliminarily believes, for the same 

purposes, that defeasances and rating 

changes should always be available to 

investors and other market participants. 

Defeasances secured by a pool of U.S. 

Treasury securities sufficient to pay 

principal and interest commonly result 

in a bond receiving the highest rating 82

and thus can affect the security’s market 

value. Rating changes more generally 

may affect the market price of the 

security, making it important both to 

bondholders and to investors who may 

be considering the purchase of a 

particular security. 

The Commission, however, believes 

that a materiality determination should 

be retained for other events currently 

listed in paragraph (b)(5)(i)(C) because 

the occurrence of such events, in some 

circumstances, may not be of such 

importance to investors that they always 

should be disclosed. Experience with 

the operation of the Rule has not 

provided information to propose a 

change at this time, and the Commission 

continues to believe that information 

about these events may, depending on 

the facts and circumstances, not need to 

be available to investors and other 

market participants in all instances to 

accomplish the Rule’s goals.83

Therefore, the Commission proposes to 

modify the text of subparagraph 

(b)(5)(i)(C) and subparagraphs 

(b)(5)(i)(C)(2), (7), (8), and (10) of the 

Rule, with regard to the Participating 

Underwriter’s obligations, to specify 

that a determination of materiality 

would be retained for event notices 

regarding non-payment related defaults; 

modifications to rights of security 

holders; bond calls; and the release, 

substitution, or sale of property securing 

repayment of the securities. 

The Commission requests comment 

on the proposed amendment to delete 

the phrase ‘‘if material’’ in the case of 

notices for the following events: (1) 

Principal and interest payment 

delinquencies with respect to the 

securities being offered; (2) unscheduled 

draws on debt service reserves reflecting 

financial difficulties; (3) unscheduled 

draws on credit enhancements reflecting 

financial difficulties; (4) substitution of 

credit or liquidity providers, or their 

failure to perform; (5) defeasances; and 

(6) rating changes. Are these events of 

such importance to investors that their 

occurrence always should be disclosed? 

Are there situations in which notice of 

the occurrence of these events would 

not need to be available to investors to 

protect themselves from fraud and to 

brokers, dealers and municipal 

securities dealers to aid them in 

satisfying their obligations under the 

securities laws? Are there other events 

listed in the Rule as to which the 

materiality determination should be 

eliminated because their occurrence 

always should be disclosed to investors? 

Should a materiality determination be 

retained for event notices regarding nonpayment related defaults; modifications 

to rights of security holders; bond calls; 

and the release, substitution, or sale of 

property securing repayment of the 

securities? Does the proposed 

amendment to eliminate the materiality 

determination for certain events create 

or eliminate any burdens on issuers? 

D. Amendment Relating to Event 

Notices Regarding Adverse Tax Events 

Under a Continuing Disclosure 

Agreement 

The Commission proposes to modify 

paragraph (b)(5)(i)(C)(6) of the Rule, 

which presently requires Participating 

Underwriters reasonably to determine 

that the issuer or obligated person has 

entered into a continuing disclosure 

agreement to submit a notice for 

‘‘[a]dverse tax opinions or events 

affecting the tax-exempt status of the 

security,’’ if material.84 The proposed 

amendment would revise paragraph 

(b)(5)(i)(C)(6) of the Rule to provide 

specifically for the disclosure of adverse 

tax opinions, the issuance, by the 

Internal Revenue Service (‘‘IRS’’), of 

proposed or final determinations of 

taxability, Notices of Proposed Issue 

(IRS Form 5701–TEB) or other material 

notices or determinations with respect 

to the tax-exempt status of securities, or 

other events affecting the tax-exempt 

status of the security.85 As stated above, 

such disclosure would be made to the 

MSRB. 

In adopting the 1994 Amendments, 

the Commission noted that ‘‘an ‘event’ 

affecting the tax-exempt status of the 

security may include the 

commencement of litigation and other 

legal proceedings, including an audit by 

the Internal Revenue Service. * * *’’ 86

While the Commission continues to 

believe that ‘‘events affecting the taxVerDate Nov<24>2008 19:07 Jul 23, 2009 Jkt 217001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 E:\FR\FM\24JYP2.SGM 24JYP2

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87 17 CFR 240.15c2–12(b)(5)(i)(C)(6). 

88E-mail communication among Clifford Gannett, 

Director, Office of Tax-Exempt Bonds, Robert E. 

Henn, Manager, Office of Tax-Exempt Bonds Field 

Operations, Office of Tax-Exempt Bonds, IRS, and 

Martha M. Haines, Assistant Director and Chief, 

Office of Municipal Securities, Division, 

Commission, on December 9, 2008. Information in 

e-mail confirmed in telephone conversation 

between Robert E. Henn, Manager, Office of TaxExempt Bonds Field Operations, Office of TaxExempt Bonds, IRS, and Martha M. Haines, 

Assistant Director and Chief, Office of Municipal 

Securities, Division, Commission, on May 29, 2009. 

89See In the Matter of Neshannock Township 

School District, Securities Act Release No. 8411 and 

Securities Exchange Act Release No. 49600, AP 3– 

11461 (April 22, 2004) (settled action) (‘‘A 

substantial risk to the tax-exempt status of 

securities which have been sold as tax-exempt is a 

material item.’’); In the Matter of Rauscher Pierce 

Refsnes, Inc., Dain Rauscher Inc., and James R. 

Feltham, Securities Act Release No. 7844 and 

Securities Exchange Act Release No. 42644, A.P. 

File No. 3–10182 (April 6, 2000) (settled action) 

(‘‘* * * an essential feature of the 1992B 

[Certificates of Participations] was the tax-exempt 

status of the interest component to be paid to 

investors’’); and In re: County of Orange, California; 

Orange County Flood Control District and County 

of Orange, California Board of Supervisors, 

Securities Act Release No. 7260 and Securities 

Exchange Act Release No. 36760, AP 3–8937 

(January 1, 1996) (identifying tax-exempt status of 

offering of securities as a material fact). See also, 

e.g., Lori Trawinski, et al., The Bond Market 

Association, Secondary Market Effects of Municipal 

Bond Tax Audit Disclosure, at 10 (August 2002) 

(settled action) (available at http://www.gfoa.org/ 

downloads/Tax_Audit_Study_August_2002.pdf) 

(study examining the effect of IRS audit 

announcements on the secondary market for 

municipal bonds and discussing the concerns of 

investors and other municipal market participants); 

Lynn Hume, Panel: This Top 10 List Doesn’t Have 

Buy-Side Players Laughing, The Bond Buyer, May 

5, 2006, NFMA Annual Conference, Vol. 356 No. 

32375, at 7 (‘‘* * * and issuers’ failures to disclose 

Internal Revenue Service notices that bonds are 

taxable are among the ‘10 top things that drive the 

buy side crazy,’ analysts and lawyers said * * * 

during a panel session at the National Federation 

of Municipal Analysts’ 23rd annual meeting . 

* * *’’). 

90See, e.g., Lori Trawinski, et al., The Bond 

Market Association, Secondary Market Effects of 

Municipal Bond Tax Audit Disclosure, at 10 

(August 2002); Kathleen Pender, State Energy 

Bonds Could Be Hard Sell; Treasurer says most 

won’t be tax-exempt, The San Francisco Chronicle, 

February 21, 2001, at D1; and John Gin, Compare 

apples to apples when looking at bonds; Taxequivalent yield is the test, The Times-Picayune, 

September 5, 2007, Money; Money Watch, at 1; and 

SIFMA, Calculator: Tax-Free vs. Taxable Yield 

Comparison (available at http:// 

www.investinginbonds.com/ 

learnmore.asp?catid=8&subcatid=80). 

91For 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. 

92See Investment Company Institute, Frequently 

Asked Questions About Money Market Funds 

(available at http://www.ici.org/home/ 

faqs_money_funds.html#TopOfPage) (‘‘Typically, 

tax-exempt money market funds, which seek to pay 

dividends that are exempt from federal income tax 

and/or state income tax, invest in instruments 

issued by state and local governments (‘municipal 

securities’).’’). 

93See U.S. General Accounting Office, Tax Policy 

and Administration—Improvements for More 

Effective Tax-Exempt Bond Oversight, Report of the 

General Accounting Office to the Chairman, 

Subcommittee on Human Resources and 

Intergovernmental Relations, Committee on 

Government Operations, House of Representatives, 

May 10, 1993 (available at http://archive.gao.gov/ 

t2pbat5/149322.pdf) (which recommended, in part, 

that the existing bond audit program be redirected 

and that program staffing levels, locations and 

training needs be reassessed in light of the 

program’s future). 

94E-mail from Clifford Gannett, Director, Office of 

Tax-Exempt Bonds, IRS, to Martha M. Haines, 

Assistant Director and Chief, Office of Municipal 

Securities, Division, Commission, dated August 26, 

2008. Information in e-mail confirmed in telephone 

conversation between Robert E. Henn, Manager, 

Office of Tax-Exempt Bonds Field Operations, 

Office of Tax-Exempt Bonds, IRS, and Martha M. 

Haines, Assistant Director and Chief, Office of 

Municipal Securities, Division, Commission, on 

May 29, 2009. 

95E-mail communications among Clifford 

Gannett, Director, Office of Tax-Exempt Bonds, 

Robert E. Henn, Manager, Office of Tax-Exempt 

Bonds Field Operations, Office of Tax-Exempt 

Bonds, IRS, and Martha M. Haines, Assistant 

Director and Chief, Office of Municipal Securities, 

Division, Commission, dated August 26, 2008 and 

December 9, 2008. Information in e-mail confirmed 

in telephone conversation between Robert E. Henn, 

Manager, Office of Tax-Exempt Bonds Field 

Operations, Office of Tax-Exempt Bonds, IRS, and 

Martha M. Haines, Assistant Director and Chief, 

Office of Municipal Securities, Division, 

Commission, on May 29, 2009. 

96 Id. 

97According to the 2008 Work Plan for the IRS 

Office of Tax-Exempt Bonds, the bondholder 

identification process is expected to be initiated no 

later than the date a proposed adverse 

determination is issued (available at http:// 

www.irs.gov/pub/irs-tege/teb_fy08_work_plan.pdf). 

See, e.g., Susanna Duff Barnett and Lynn Hume, IRS 

to Warn Mutual Funds of Taxability Letters Being 

Sent to Over 12 Companies, The Bond Buyer, 

March 30, 2004, Washington, at 1 (‘‘More mutual 

funds can be expected to be contacted in the 

future.’’) and Susanna Duff Barnett, A Growing 

Caseload; More Challenges Face IRS Bond Office in 

’05, The Bond Buyer, December 23, 2004, 

Washington, Vol. 350 No. 32036, at 1 (‘‘One result 

Continued 

exempt status of the security’’ in 

paragraph (b)(5)(i)(C)(6) of the Rule 87

can include an audit, and thus an audit 

should be the subject of an event notice 

when it is material, the Commission 

recognizes that not all audits are 

indications of a risk to the tax-exempt 

status of interest on a municipal 

security. The IRS Office of Tax Exempt 

Bonds, through its examination 

classification process, initiates 

examinations in various market 

segments with a view toward ensuring 

broad examination coverage of the 

various tax-exempt bond segments.88

However, determinations by the IRS, 

such as proposed and final 

determinations of taxability and Notices 

of Proposed Issue (IRS Form 5701–TEB), 

indicating that the IRS believes the 

securities are or may be taxable and has 

begun a formal administrative process 

in that regard, indicate that there could 

be a significant risk to the tax-exempt 

status of a security. Accordingly, the 

Commission believes that proposed and 

final determinations of taxability and 

Notices of Proposed Issue (IRS Form 

5701–TEB) by the IRS relating to the 

taxability of a municipal security are of 

such importance that they always 

should be disclosed pursuant to a 

continuing disclosure agreement. 

Investors consider the tax-exempt 

status of a municipal security, 

specifically the issuance of such IRS 

notices, to be of great importance when 

making investment decisions.89 Because 

the interest rate on a tax-exempt 

municipal security generally is 

significantly lower than the interest rate 

on a comparable taxable security 

because of the value of the municipal 

security’s tax exemption, investors are 

sensitive to factors that could affect the 

value of the return that they would 

receive from such an investment, such 

as the tax exempt status of interest 

earned on a municipal security that they 

currently own or may purchase.90 A 

determination by the IRS that interest 

may, in fact, be taxable on a municipal 

security purchased as tax-exempt not 

only could reduce the security’s market 

value, but also could adversely affect 

each investor’s federal and, in some 

cases, state income tax liability.91 The 

tax-exempt status of a municipal 

security is also important to many 

mutual funds whose governing 

documents, with certain exceptions, 

limit their investment to tax-exempt 

municipal securities.92 Mutual funds 

may liquidate securities that become 

taxable, which could have adverse 

consequences for the fund and its 

holders. Therefore, retail and 

institutional investors alike are 

extremely interested in events that 

could adversely affect the tax-exempt 

status of the bonds that they own or may 

purchase. 

Subsequent to a 1993 Report of the 

General Accounting Office,93 the IRS 

established an Office of Tax-Exempt 

Bonds with more than 60 staff members 

devoted to audits and tax collections 

related to tax-exempt municipal 

securities.94 Staff of the Office of TaxExempt Bonds has identified numerous 

offerings in which bonds sold as taxexempt were determined to be taxable.95

As a result, the IRS has collected a 

significant amount of taxes—generally 

through settlements with issuers and 

obligated persons, but also with 

bondholders.96 Furthermore, staff of the 

IRS Office of Tax-Exempt Bonds has 

established a Bondholder Unit to 

increase the staff’s efficiency in 

identifying bondholders in the case of 

bonds determined to be taxable.97


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36842 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

that has stemmed from the lengthier audits is the 

IRS’ aggressive search for bondholder names earlier 

in an audit cycle through so-called John Doe 

summonses and other methods.’’). 

98E-mail from Robert Henn, Manager, Office of 

Tax-Exempt Bonds Field Operation, IRS, to Martha 

M. Haines, Assistant Director and Chief, Office of 

Municipal Securities, Division, Commission, dated 

July 14, 2009. 

99The IRS Office of Tax-Exempt Bonds now 

issues Notices of Proposed Issue (IRS Form 5701– 

TEB) in instances in which it previously would 

have issued preliminary determinations of 

taxability. E-mail from Clifford Gannett, Director, 

Office of Tax-Exempt Bonds, IRS, to Martha M. 

Haines, Assistant Director and Chief, Office of 

Municipal Securities, Division, Commission, dated 

August 26, 2008. Information in e-mail confirmed 

in telephone conversation between Robert E. Henn, 

Manager, Office of Tax-Exempt Bonds Field 

Operations, Office of Tax-Exempt Bonds, IRS, and 

Martha M. Haines, Assistant Director and Chief, 

Office of Municipal Securities, Division, 

Commission, on May 29, 2009. 

100See, e.g., Susanna Duff Barnett and Lynn 

Hume, IRS to Warn Mutual Funds of Taxability 

Letters Being Sent to Over 12 Companies, The Bond 

Buyer, March 30, 2004, Washington, at 1 (‘‘The 

bondholder community has been saying for years 

that they want prompt disclosure of audits and 

issuer discussions with the IRS relating to the taxexempt status of the bonds.’’—Tom Metzold, 

president and portfolio manager at Eaton Vance 

Management; ‘‘It’s vital to disclose the risk of 

taxability to the entire marketplace to protect 

potential investors.’’—Gerard J. Lian, then chairman 

of the National Federation of Municipal Analysts 

and vice president and senior analyst at Morgan 

Stanley Investment Management.); and National 

Federation of Municipal Analysts, NFMA releases 

results of member survey (November 30, 2001) 

(available at http://www.nfma.org/publications/ 

survey_results.pdf) (‘‘Over 54% of analysts 

responding to the survey felt that all IRS audits, 

whether routine, targeted or based on external 

information, should be disclosed to the market.’’). 

See also, Lori Trawinski, et al., The Bond Market 

Association, Secondary Market Effects of Municipal 

Bond Tax Audit Disclosure (August 2002) (available 

at http://www.gfoa.org/downloads/ 

Tax_Audit_Study_August_2002.pdf) (‘‘This study 

clearly demonstrates that effect for certain variablerate tax-exempt bonds, where rates paid by state 

and local bond issuers have risen significantly 

when news of the audit is made public. While 

anecdotal evidence suggests similar effects for longterm, fixed-rate bonds, empirical evidence is 

inconclusive.’’). 

101See, e.g., Susanna Duff Barnett, IRS Answers 

Toxic Query; Post 1986 Radioactive Waste Debt Not 

Exempt, The Bond Buyer, November 2, 2004 

(material event notice filed October 29, 2004 

regarding IRS technical advice memorandum dated 

August 27, 2004 that bonds issued to finance 

certain radioactive solid waste facilities were 

taxable; related preliminary adverse determination 

letter was issued in January, 2002). 

102 Generally, municipal securities are not subject 

to Commission rules governing tender offers, 

including Rule 13e–4 under the Exchange Act, 17 

CFR 240.13e–4, which sets forth disclosure, time 

periods, and other requirements governing tender 

offers by issuers. In passing the Williams Act, P.L. 

90–439, in 1968, Congress recognized that 

regulation of tender offers was necessary for the 

purposes of disclosure of material information and 

substantive protection to investors. See Rep. No. 

550, 90th Cong., 1st Sess. 3 (1967) at 1. 

IRS staff has indicated 98 that during 

the period from April 2007 through July 

2008, approximately 80% of the audits 

that received a preliminary 

determination of taxability (now IRS 

Form 5701–TEB99) and were resolved 

were settled through closing agreements 

with the IRS. During the same period, of 

those cases that received a proposed 

determination of taxability and were 

closed: approximately 25% were settled 

through a closing agreement with IRS; 

approximately 37.5% received final 

determinations that the bonds were 

taxable; and approximately 37.5% were 

appealed to the IRS Office of Appeals. 

In light of the foregoing discussion, the 

Commission believes that the risk of 

taxability following the issuance of 

proposed and final determinations of 

taxability and Notices of Proposed Issue 

(IRS Form 5701–TEB) is significant. 

Despite the possibility that these 

events could adversely affect the taxexempt status of the bonds that 

investors own or may purchase and thus 

could significantly affect the pricing of 

those municipal securities,100 it has 

been reported that notices regarding 

such tax events are not always filed.101

The Commission believes that the 

issuance of proposed and final 

determinations of taxability and Notices 

of Proposed Issue (IRS Form 5701–TEB) 

by the IRS is important information that 

should be made available to investors 

and therefore should be part of a 

Participating Underwriter’s obligation to 

determine whether such events are 

included in a continuing disclosure 

agreement. 

The Commission requests comment 

on the proposed amendment to modify 

the provision of the Rule regarding the 

submission of a notice with respect to 

adverse tax opinions to include the 

issuance by the IRS of proposed or final 

determinations of taxability, Notices of 

Proposed Issue (IRS Form 5701–TEB) or 

other material notices or determinations 

with respect to the tax-exempt status of 

the securities, or other events affecting 

the tax-exempt status of the security. 

Comment is requested on whether the 

proposed amendment would further the 

disclosure of such events and thereby 

aid investors to protect themselves from 

misrepresentations and fraud and 

brokers, dealers and municipal 

securities dealers to carry out their 

obligations. The Commission requests 

comment regarding the extent to which 

investors and other market participants 

would find it useful to be informed of 

the issuance of proposed and final 

determinations of taxability, Notices of 

Proposed Issue (IRS Form 5701–TEB) or 

other material notices or determinations 

with respect to the tax-exempt status of 

securities by the IRS. Commenters 

should advise whether the proposal 

would aid investors in their 

understanding of potential adverse tax 

consequences that may arise with 

respect to a particular municipal 

security. In addition, commenters 

should address whether such 

information is important to investors of 

various types of municipal securities, 

such as fixed and variable rate securities 

or demand securities. Should the 

continuing disclosure agreement specify 

that a copy of the determinations of 

taxability, Notices of Proposed Issue 

(IRS Form 5701–TEB) or other material 

notices issued by the IRS be provided to 

the MSRB, or would a notice of any 

such determination provide sufficient 

information to investors? What would 

be the benefit of disclosing a copy of 

any such determination? What 

drawbacks, if any, might such 

disclosure entail? Should the Rule be 

amended to require a Participating 

Underwriter to reasonably determine 

that the issuer or obligated person has 

entered into a continuing disclosure 

agreement to submit a notice of tax 

audits? If so, why? 

E. Addition of Events To Be Disclosed 

Under a Continuing Disclosure 

Agreement 

The Commission also proposes to 

amend paragraph (b)(5)(i)(C) of the Rule 

by including notice of four additional 

events the Participating Underwriter 

must reasonably determine that the 

issuer or other obligated person has 

agreed to provide in its continuing 

disclosure agreement. These would 

include: (1) Tender offers; (2) 

bankruptcy, insolvency, receivership or 

similar proceeding of the obligated 

person; (3) the consummation of a 

merger, consolidation, or acquisition 

involving an obligated person or the sale 

of all or substantially all of the assets of 

the obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material; and (4) appointment 

of a successor or additional trustee, or 

the change of name of a trustee, if 

material. 

1. Tender Offers 

The Commission proposes to add 

tender offers to the list of events in 

subparagraph (b)(5)(i)(C)(8) of the 

Rule.102 Under the proposed 

amendment, the Participating 

Underwriter must reasonably determine 

that the issuer or obligated person has 

agreed in its continuing disclosure 

agreement to provide notice of tender 


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103See supra note 11 and accompanying text. 

104See Edward N. Gadsby, et al., Regulation of 

Tender Offers, Federal Securities Exchange Act of 

1934, § 7A.03 (David Colby, et al., ed., Matthew 

Bender & Company, Inc.) (2008) (describing that 

usually a time limit is placed on a tender offer). 

105See, e.g., Caitlin Devitt, Midwest Health 

Systems Use New ARS Strategy; Two Systems See 

to Ease ARS Sting, The Bond Buyer, March 7, 2008, 

The Regions, Vol. 363 No. 32833, at 1 (describing 

an issuer’s use of a tender offer in its auction rate 

securities to provide liquidity). 

106The Commission proposes to retain in Rule 

15c2–12(b)(5)(i)(C)(8) the requirement that 

Participating Underwriters reasonably determine 

that the issuer or obligated person has agreed in a 

continuing disclosure agreement to provide to the 

MSRB notice of bond calls, if material. Thus, unlike 

with respect to tender offers, the issuer would make 

a materiality determination with respect to a notice 

regarding a bond call. The Commission believes 

that this distinction is appropriate in light of the 

various types of bond calls (e.g., sinking fund 

redemptions, extraordinary redemptions, and 

optional redemptions) that can occur. In addition, 

the specific amounts to be redeemed and dates for 

some redemptions (i.e., sinking fund redemptions) 

are generally included in official statements; 

therefore, information about such events is already 

available to investors. 

107See, e.g., MSRB Notice 2008–09 (February 19, 

2008) (reminding brokers, dealers and municipal 

securities dealers of the application of MSRB 

disclosure and suitability requirements that apply 

to all customer transactions in municipal ARS and 

stating, for example, that it may be a material fact 

for an investor that an ARS recently was subject to 

a failed auction); Press Release 2009–127, 

Commission, SEC Finalizes ARS Settlements With 

Bank of America, RBC, and Deutsche Bank (June 3, 

2009) (announcing settlement of SEC’s complaints 

alleging that Bank of America, RBC Capital Markets, 

and Deutsche Bank failed to make their customers 

aware of risks in ARS investments.). 

108See, e.g., notice dated March 28, 2008 of 

Nationwide Children’s Hospital regarding the intent 

of the hospital to bid for auction rate bonds 

(available at https://www.nationalcity.com/content/ 

private-client-group/products-services/create-growwealth/pages/documents/2008-03-28.pdf) and 

Caitlin Devitt, Midwest Health Systems Use New 

ARS Strategy; Two Systems Seek To Ease ARS 

Sting, The Bond Buyer, March 7, 2008, The Regions, 

Vol. 363 No. 32833, at 1. 

109See supra note 11 and accompanying text. 

offers to the MSRB.103 The Commission 

believes that notice of the existence of 

tender offers for municipal securities 

would help investors to be better able to 

protect themselves from 

misrepresentations and fraud, including 

deciding whether to tender their 

holdings to the issuer or its 

representative, and assist brokers, 

dealers and municipal securities dealers 

to carry out their obligations. Tender 

offers typically require an investor to 

respond within a limited time frame.104

Tender offers may provide an avenue of 

liquidity to investors, such as during 

periods of market turmoil.105 The 

Commission believes that 

communication of the existence of a 

tender offer to municipal securities 

investors is important to assist each 

investor to make an informed, timely 

decision whether or not to tender.106

Indeed, the recent events in the 

market for ARS could be seen as an 

example of the need to provide timely 

notice within ten business days of a 

tender offer. Since approximately midFebruary of 2008, the market for ARS 

has experienced severe illiquidity, with 

consequences to investors who 

purchased what they may have believed 

to be liquid, cash equivalent 

investments.107 Some issuers and 

obligated persons have offered to 

purchase some or all of their 

outstanding ARS from investors who 

desire liquidity.108 Notices about these 

tender offers may not always be widely 

disseminated. Had this information 

been available from the then-existing 

information repositories, it may have 

become more widely known to the 

market through these repositories and 

through private information vendors 

and news media who obtain information 

from the repositories. 

During a tender offer for municipal 

securities, such as ARS, some investors 

may be left in doubt whether their 

securities were the subject of the offer. 

To determine the facts about such offers, 

it often is necessary for investors to seek 

the information independently by 

contacting the issuer or other obligated 

person directly. Some investors may not 

have been able to learn of the existence 

of a tender offer for municipal securities 

that they hold, in a timely fashion and, 

in such a case, may not have been able 

to tender their securities. The 

Commission believes that the proposed 

amendment requiring Participating 

Underwriters to reasonably determine 

that such notices are provided pursuant 

to a continuing disclosure agreement 

would help ensure the consistent 

availability of this information to 

investors when they make investment 

decisions, and thereby assist them to be 

better able to protect themselves from 

misrepresentation and fraud. 

The Commission believes that the 

proposed amendment requiring 

Participating Underwriters to reasonably 

determine that issuers and other 

obligated persons have agreed in their 

continuing disclosure agreements to 

provide notice of tender offers to the 

MSRB109 would result in this 

information being more widely available 

to investors through the MSRB. In 

addition, the proposal to revise 

paragraph (b)(5)(i)(C) of the Rule to 

specify that event notices be submitted 

in a timely manner not in excess of ten 

business days after the event’s 

occurrence, as discussed above, would 

help to improve the timely availability 

of tender offer information so that 

investors would be afforded the 

opportunity to make more informed 

decisions whether to hold or tender 

their securities. The Commission 

believes that its proposal regarding 

notice of tender offer disclosures would 

enhance the ability of issuers, other 

obligated persons, or others making 

such tender offers to effectively 

communicate their offers to a wider 

constituency of bondholders and 

thereby would increase the likelihood 

that those holders would be informed of 

the offer. 

The Commission requests comment 

regarding all aspects of the proposed 

amendment of subparagraph 

(b)(5)(i)(C)(8) of the Rule to include 

tender offers. For example, would 

specifying in Rule 15c2–12 the 

submission to the MSRB of a notice of 

a tender offer assist issuers and other 

obligated persons in providing tender 

offer information to bondholders on a 

wider basis? Is there a benefit or 

drawback to adding tender offers as an 

event item in subparagraph 

(b)(5)(i)(C)(8) of the Rule? Would the 

proposal help prevent fraud? If so, 

would the proposed amendment to 

modify subparagraph (b)(5)(i)(C)(8) to 

include notice of tender offers to the 

MSRB be an appropriate avenue to 

address this objective? If a tender offer 

is open for a short period of time, is the 

proposed ‘‘ten business day’’ standard 

appropriate in the context of a tender 

offer or would another time frame be 

more appropriate? The Commission 

seeks comment regarding whether 

tender offers should be added to this 

provision of Rule 15c2–12 and requests 

suggestions concerning alternative 

methods to address the concerns stated 

above with regard to tender offers for 

municipal securities. In addition, 

comment is requested about the 

existence and prevalence of exchange 

offers for municipal securities and 

whether exchange offers also should be 

included in this provision. Further, the 

Commission requests comment 

regarding whether it should specify that 

the Participating Underwriter 

reasonably determine that the issuer or 

obligated person has agreed to provide 

particular information regarding a 

tender offer that should be included in 

such notices, such as: The offer price; 

change in offer price; withdrawal rights; 

identity of the offeror; an offeror’s 

ability to finance the offer; conditions to 

the offer; and the time frame and 

manner for tendering securities and the 

method for acceptance (e.g., whether all 

securities tendered would be accepted 

and, if not, the method for determining 

which securities would be accepted). 

Are there other items of information that 


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36844 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

110See supra note 11 and accompanying text. 

111See 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. 

112See, e.g., Letter from Karrie McMillan, General 

Counsel, ICI, to Florence E. Harmon, Secretary, 

Commission (September 22, 2008) (‘‘ICI Letter’’) 

(available at http://www.sec.gov/comments/s7-21- 

08/s72108-12.pdf) (suggesting that disclosure 

information should include information relating to 

bankruptcy and receivership); National Federation 

of Municipal Analysts, Recommended Best 

Practices in Disclosure for Land Secured Debt 

Transactions, June 2000 (available at http:// 

data.memberclicks.com/site/nfma/ 

DG.BP.landsecuredpractices.doc.pdf) 

(recommending best practice disclosures, including 

disclosures of bankruptcy). 113The Commission is aware that bonds are often 

secured by letters of credit, bond insurance, and 

other forms of credit enhancement that some have 

argued could reduce the importance of the 

creditworthiness of an issuer or obligated person. 

However, the Commission has long been of the 

view that information regarding obligated persons 

generally is material to investors in credit enhanced 

offerings. See 1989 Adopting Release, supra note 3, 

54 FR at 28812 (‘‘The presence of credit 

enhancements generally would not be a substitute 

for material disclosure concerning the primary 

obligor on municipal bonds.’’). See also Regulation 

AB, 17 CFR 229.1100 et seq. 

114See National Association of Bond Lawyers 

(NABL) Form Indenture, dated June 1, 2002 

(‘‘NABL Form Indenture’’). 

115See supra note 11 and accompanying text. 

116Although the Commission’s disclosure rules 

that are applicable to reporting companies do not 

apply to municipal securities, the Commission 

notes that reporting companies are required to make 

disclosures upon the occurrence of similar events. 

See Items 1.01 and 2.01 of Form 8–K relating to 

entry into a material definitive agreement and 

completion of the acquisition or disposition of 

assets, respectively, which require entities subject 

to Exchange Act reporting requirements to disclose 

specified information within four business days of 

the occurrence of such events. 17 CFR 249.308. Item 

1.01 of Form 8–K requires the registrant to provide 

specified items of disclosure on Form 8–K if the 

registrant has entered into a material definitive 

agreement not made in the ordinary course of 

business of the registrant, or into any amendment 

should be included in the notice to help 

accomplish the purposes of the Rule or 

would some of the items listed above be 

unnecessary in this context? If so, please 

specify which ones and explain the 

rationale as to why they should or 

should not be included. 

2. The Occurrence of Bankruptcy, 

Insolvency, Receivership or Similar 

Events Regarding an Issuer or an 

Obligated Person 

The Commission proposes to add new 

subparagraph (b)(5)(i)(C)(12) to the Rule 

to require a Participating Underwriter to 

reasonably determine that the 

continuing disclosure agreement 

requires a notice to be submitted to the 

MSRB,110 in the case of bankruptcy, 

insolvency, receivership or similar 

event of the obligated person. Rule 

15c2–12 would state in a Note following 

the events specified in subparagraph 

(b)(5)(i)(C)(12) that, for the purposes of 

the subparagraph (b)(5)(i)(C)(12), the 

event would be considered to occur 

when any of the following occur: the 

appointment of a receiver, fiscal agent 

or similar officer for an obligated person 

in a proceeding under the U.S. 

Bankruptcy Code or in any other 

proceeding under state or federal law in 

which a court or governmental authority 

has assumed jurisdiction over 

substantially all of the assets or business 

of the issuer or obligated person, or if 

such jurisdiction has been assumed by 

leaving the existing governing body and 

officials or officers in possession but 

subject to the supervision and orders of 

a court or governmental authority, or the 

entry of an order confirming a plan or 

reorganization, arrangement or 

liquidation by a court or governmental 

authority having supervision or 

jurisdiction over substantially all of the 

assets or business of the obligated 

person.111 Although issuers and other 

obligated persons of municipal 

securities rarely are involved in 

bankruptcy, insolvency, receivership or 

similar events, the Commission notes 

that the occurrence of such events, even 

if rare, can significantly impact the 

value of the municipal securities. 

Information about these events is 

important to investors and other market 

participants,112 and knowledge of the 

bankruptcy, insolvency, receivership or 

similar event involving an issuer or 

other obligated person would allow 

investors to make informed decisions 

about whether to buy, sell or hold the 

municipal security and help prevent 

fraud.113 Accordingly, the Commission 

believes that Participating Underwriters 

should be required to reasonably 

determine that such information is 

provided pursuant to a continuing 

disclosure agreement. 

Under current Rule 15c2– 

12(b)(5)(i)(C)(2), notice of a material 

‘‘non-payment related default’’ is to be 

provided to the MSRB pursuant to a 

continuing disclosure agreement. The 

Commission understands that the 

governing documents for some 

municipal securities include 

bankruptcy, insolvency, receivership or 

similar events involving an issuer or 

obligated person as a ‘‘non-payment 

related default.’’ 114 However, the 

Commission further understands that 

this may not be uniformly the case. The 

proposed amendment would help 

improve the availability of notice of 

bankruptcy, insolvency, receivership, or 

similar events to all investors. The 

proposed Note, as described above, is 

intended to clarify the scope of the 

event item contained in new 

subparagraph (b)(5)(i)(C)(12) of the Rule. 

Moreover, because of the importance of 

such events to investors and their 

possible impact on the value of the 

security, a materiality condition would 

not be added to proposed subparagraph 

(b)(5)(i)(C)(12). 

The Commission requests comment 

regarding all aspects of the proposed 

addition of the event relating to 

bankruptcy, insolvency, receivership or 

similar proceeding of the issuer or other 

obligated person in the Rule. In 

particular, the Commission requests 

comment regarding whether there are 

other similar events or proceedings 

affecting the financial condition of 

issuers or other obligated persons that 

should be included as events requiring 

notice. The Commission seeks input 

regarding whether commenters believe 

that the items contained in proposed 

subparagraph (b)(5)(i)(C)(12) of the Rule 

are already addressed by current 

subparagraph (b)(5)(i)(C)(2) of the Rule 

and thus whether it is unnecessary to 

revise the Rule in this regard. The 

Commission also seeks comment on 

whether it is appropriate to exclude a 

materiality determination from this 

proposed event item. 

3. Merger, Consolidation, Acquisition, 

and Sale of All or Substantially All 

Assets 

The Commission proposes to add 

subparagraph (b)(5)(i)(C)(13) to the Rule, 

which would require a Participating 

Underwriter reasonably to determine 

that the continuing disclosure 

agreement provides for the submission 

of notice to the MSRB115 of any of the 

following events with respect to the 

securities being offered: the 

consummation of a merger, 

consolidation, or acquisition involving 

an obligated person or the sale of all or 

substantially all of the assets of the 

obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material.116 Although mergers, 


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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. 

117But see Illinois Finance Authority, which was 

created on January 1, 2004 following the 

consolidation of seven existing state authorities. See 

Illinois Finance Authority, Illinois Finance 

Authority Bond Program Handbook, November 1, 

2004 (available at http://www.il-fa.com/policies/ 

BondHandbook11-1-04.pdf). 

118For example, according to the American 

Hospital Association, more than 680 hospital 

mergers were announced from 1998–2006. See 

American Hospital Association, TRENDWATCH 

CHARTBOOK 2008—Trends in the Overall Health 

Care Market, Chart 2.10: Announced Hospital 

Mergers and Acquisitions, 1998–2006 (available at 

http://www.aha.org/aha/trendwatch/chartbook/ 

2008/08chart2-10.pdf). 

119The materiality of the consummation of a 

merger, consolidation, or acquisition involving an 

obligated person or the sale of all or substantially 

all of the assets of the obligated person, other than 

in the ordinary course of business, the entry into 

a definitive agreement to undertake such an action 

or the termination of a definitive agreement relating 

to any such actions must be determined through a 

review of the particular facts and circumstances of 

such event. Although in a number of instances such 

events may be determined to be material, it is 

possible for such an event to be so sufficiently 

insignificant that an event notice would not be 

required. For example, a merger or acquisition of a 

small entity by one of substantial size may not be 

material to investors in bonds for which the larger 

entity is the obligated person, absent other 

circumstances. On the other hand, such a merger or 

acquisition may be material to investors in bonds 

for which the small entity is the obligated person. 

120See ICI Letter, supra note 112 (suggesting that 

disclosure information should include information 

relating to material acquisitions and dispositions). 

121See supra note 11 and accompanying text. 

122The materiality of the name change of a trustee 

must be determined through a review of the 

particular facts and circumstances of such event. 

For instance, it is possible for a name change by a 

trustee to be so minor that an event notice would 

not be required. For example, a name change such 

as ‘‘ABC National Bank and Trust Company of 

XYZ,’’ to ‘‘ABC National Bank and Trust Company’’ 

may not be material in the absence of other factors, 

such as a change of the location at which the trustee 

can be reached. 

123See NABL Form Indenture, supra note 114. 

124 Id. 

consolidations, acquisitions, and 

substantial asset sales are events 

believed to be rare among governmental 

issuers,117 they are not uncommon for 

obligated persons such as health care 

institutions, other non-profit entities, 

and for-profit businesses.118 Currently, 

Rule 15c2–12 does not require 

Participating Underwriters to reasonably 

determine that continuing disclosure 

agreements provide for notice of a 

merger, consolidation, acquisition and 

substantial asset sales involving such 

obligated persons, if material.119

Investors often are not readily able to 

obtain information about such actions 

by obligated persons. 

The Commission believes that notice 

of the consummation of a merger, 

consolidation, or acquisition involving 

an obligated person or the sale of all or 

substantially all of the assets of the 

obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material, is important 

information for investors and market 

participants.120 The foregoing events 

may signal that a significant change in 

the obligated person’s corporate 

structure could occur or has occurred. 

In the case of such event, investors may 

want to have information about the 

identity and financial stability of the 

obligated person that would be 

responsible, following such event, for 

payment of a municipal security. 

Further, municipal security holders 

generally may wish to know about the 

obligated person’s creditworthiness, 

particularly its ability to support 

payment of the security following such 

event when they assess whether to buy, 

sell or hold a municipal security. A 

notice regarding such an event, if 

material, would help further the 

availability of relevant information to 

bondholders, market professionals, and 

the public generally. Accordingly, the 

Commission believes that it is 

appropriate to include in the Rule the 

proposed event item relating to the 

consummation of a merger, 

consolidation, or acquisition involving 

an obligated person or the sale of all or 

substantially all of the assets of the 

obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions other than pursuant to its 

terms, if material. The Commission does 

not believe that all mergers are 

necessarily of sufficient importance that 

information on mergers needs to be 

made available in all instances. For 

example, a merger could involve the 

combination of a shell corporation or 

other small entity into a very large 

healthcare organization that is a conduit 

borrower. Such a merger generally 

would not have a significant impact on 

the business or financial condition of 

the larger corporation and, under all of 

the applicable facts and circumstances, 

would not be important to investors. 

The Commission requests comment 

regarding all aspects of the proposed 

addition to the Rule with respect to the 

consummation or entry into or 

termination of a definitive agreement 

involving a merger, consolidation, 

acquisition, or the sale of all or 

substantially all of the assets of the 

obligated person. The Commission 

requests comment regarding the 

frequency of such events, and whether 

this information would be meaningful to 

investors. The Commission further 

requests comment on whether a 

determination of materiality for such 

events is an appropriate condition to 

add to this proposed provision. The 

Commission also requests comments 

regarding the benefits and drawbacks of 

this proposed event item. 

4. Successor, Additional, or Change in 

Trustee 

Finally, the Commission proposes to 

add subparagraph (b)(5)(i)(C)(14) to the 

Rule to require Participating 

Underwriters to reasonably determine 

that the issuer or other obligated person 

has contractually agreed to submit 

notice to the MSRB121 when there is an 

appointment of a successor or 

additional trustee, or a change of name 

of a trustee, if material.122 The proposed 

amendment reflects the Commission’s 

belief in the importance of an investor’s 

ability to learn of a material change in 

the trustee’s identity, given the 

significant function and role of the 

trustee for the holders of the municipal 

security. The trustee makes critical 

decisions that impact investors and has 

a duty to represent the interests of 

bondholders. For example, the trustee 

often must determine whether: 

Proposed amendments to the governing 

documents of the municipal security are 

permissible without bondholder 

consent; parity obligations could be 

issued; security could be released; or an 

event of default has occurred.123 In 

addition, a trustee is responsible for 

sending payments to investors and 

computing applicable interest rates. In 

some cases, a trustee may be responsible 

for taking certain actions at the direction 

of a designated percentage of 

bondholders.124 A trustee may also be 

responsible for providing information 

requested by investors; often the trustee 

serves as the issuer’s dissemination 

agent for continuing disclosures. 

Although the identity of the trustee may 

have little or no influence on a decision 

whether to buy or sell a security under 

normal circumstances, bondholders 

would need to know the identity of a 

trustee to be able to contact the trustee 

for various reasons, particularly when 


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36846 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

an issuer or other obligated person may 

be experiencing financial difficulty. 

These factors support the need for 

investors to know the identity of the 

trustee. Yet, the Commission is unaware 

of any method by which investors, 

particularly individual investors, 

presently have a consistent means of 

obtaining up-to-date information about 

changes to the identity of the trustee. 

The proposed amendment therefore 

would require that the Participating 

Underwriter reasonably determine that 

the continuing disclosure agreement 

provide that a notice concerning a 

change in the identity of the trustee be 

submitted to the MSRB. 

The Commission requests comment 

regarding all aspects of the proposed 

addition of subparagraph (b)(5)(i)(C)(14) 

concerning the appointment of a 

successor or additional trustee or the 

change of name of a trustee. In 

particular, the Commission requests 

comment relating to the frequency of 

such an event and the importance of 

such information to investors. 

Commenters should advise whether the 

continuing disclosure agreement should 

set forth other information regarding the 

trustee that should be disclosed and 

whether a determination of materiality 

for such events is an appropriate 

condition to add to this proposed 

provision. Commenters are requested to 

provide their views on the benefits and 

drawbacks of this aspect of the proposal. 

F. Effective Date and Transition 

The proposed amendments to Rule 

15c2–12 would impact only continuing 

disclosure agreements that are entered 

into in connection with primary 

offerings occurring on or after the 

effective date of these proposed 

amendments, if they were adopted by 

the Commission. The Commission 

understands that existing undertakings 

by issuers and obligated persons that 

were entered into prior to the effective 

date of any final amendments would not 

require a broker, dealer, or municipal 

securities dealer to reasonably 

determine that the issuer or other 

obligated person had agreed to provide 

notice of specified events in a timely 

manner not in excess of ten business 

days of the event’s occurrence or 

include the additional items discussed 

above that are proposed to be added to 

paragraph (b)(5)(i)(C) of the Rule. In 

addition, such existing undertakings 

would provide for the submission of the 

events specified in paragraph (b)(5)(i)(C) 

of the Rule, ‘‘if material.’’ 

Further, the Commission is aware 

that, prior to the effective date of any 

final amendments, a broker, dealer, or 

municipal securities dealer in primary 

offerings of demand securities in 

authorized denominations of $100,000 

would not be required reasonably to 

determine that the issuer or other 

obligated person had entered into a 

continuing disclosure agreement, as 

prescribed by the Rule. The Commission 

requests comment regarding the 

potential effects and implications of 

existing continuing disclosure 

agreements having different terms (e.g., 

lacking the proposed additional events 

for which notices would be sent to the 

MSRB and the specified ten business 

day deadline for doing as discussed 

above) than continuing disclosure 

agreements entered into on or after any 

effective date of the proposed 

amendments, should the proposed 

amendments be adopted by the 

Commission. 

The Commission preliminarily 

believes that, if the proposed 

amendments to Rule 15c2–12 were 

adopted, it would be preferable to 

implement them expeditiously. If the 

Commission were to approve the 

proposed amendments, the Commission 

is preliminarily considering an effective 

date that would be no earlier than three 

months after any final adoption of the 

proposed amendments in order to 

permit sufficient time for the MSRB to 

make necessary modifications to the 

EMMA system and for Participating 

Underwriters to comply with the new 

Rule. The Commission requests 

comment on such an effective date and 

whether another effective date might be 

preferable, if the Commission were to 

adopt the proposed rule amendments. In 

particular, comment is requested 

regarding any transition issues with 

respect to the proposed amendments, 

such as whether there would be any 

conflicts with respect to terms in 

existing continuing disclosure 

agreements. 

The Commission notes that under 

paragraph (c) of the Rule, a broker, 

dealer, or municipal securities dealer 

cannot recommend the purchase or sale 

of a municipal security unless such 

broker, dealer, or municipal securities 

dealer has procedures in place that 

provide reasonable assurance that it will 

receive prompt notice of any event 

disclosed pursuant to paragraphs 

(b)(5)(i)(C) and (D) and paragraph 

(d)(2)(ii)(B) of the Rule with respect to 

the security. The Commission 

recognizes that continuing disclosure 

agreements entered into prior to the 

effective date of any final amendments 

that the Commission may adopt would 

not reflect changes made to the Rule by 

such amendments, including with 

respect to event notices. As a result, 

event items covered by a continuing 

disclosure agreement entered into prior 

to the effective date of any amendments 

that the Commission may adopt may be 

different from those event items covered 

by a continuing disclosure agreement 

entered into on or after the effective date 

of any final amendments that the 

Commission may adopt. Thus, in the 

case of municipal securities subject to a 

continuing disclosure agreement 

entered into prior to the effective date 

of any final amendments that the 

Commission may adopt, the 

recommending broker, dealer or 

municipal securities dealer would 

receive notice solely of those events 

covered by that continuing disclosure 

agreement, namely, the eleven events 

specified in the current Rule. Because, 

in that case, the continuing disclosure 

agreement would not cover any of the 

items proposed to be added to the Rule, 

it would not be necessary for the 

recommending broker, dealer, or 

municipal securities dealer to have 

procedures in place that provide 

reasonable assurance that it received 

prompt notice of events proposed to be 

added to the Rule. The Commission 

requests comment on the impact of the 

proposed amendments with respect to 

brokers, dealers, and municipal 

securities dealers that recommend the 

purchase or sale of municipal securities. 

The Commission also requests comment 

on what changes, if any, brokers, dealers 

and municipal securities dealers would 

have to make to their procedures as a 

result of any final amendments that the 

Commission may adopt relating to the 

receipt of event notices. The 

Commission also requests comment on 

whether it should amend the Rule or 

otherwise provide further guidance to 

take into account differences in event 

notices included in continuing 

disclosure agreements entered into prior 

to the effective date of any final 

amendments that the Commission may 

adopt and those event notices included 

in continuing disclosure agreements 

entered into on or after the effective date 

of any final amendments that the 

Commission may adopt. 

The Commission seeks comment on 

any other transition issues in 

connection with the proposed 

amendments to Rule 15c2–12. For 

example, in connection with the 2008 

Amendments, one commenter suggested 

that continuing disclosure agreements 

executed following the effective date of 

the 2008 Amendments should amend all 

prior continuing disclosure agreements 

of the same issuer to incorporate the 

changes to the Rule made in the 2008 

Amendments. In the event that the 

proposed amendments were to be 


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125See the comments of participants at the 2001 

SEC Municipal Market Roundtable—Secondary 

Market Disclosure for the 21st Century, (available at 

http://www.sec.gov/info/municipal/roundtables/ 

thirdmuniround.htm). See also E-mail from Peter J. 

Schmitt, CEO, DPC Data Inc., to SEC, RuleComments, dated September 19, 2008, regarding the 

2008 Proposed Amendments. 

126See e.g., 2008 Amendments Adopting Release, 

supra note 11, 73 FR at 76129. 

127See 1994 Amendments Adopting Release, 

supra note 5, 59 FR at 59594–5. 

128See Securities Exchange Act Release No. 

26100 (September 22, 1988), 53 FR at 37787–91 

(September 28, 1988) (‘‘1988 Proposing Release’’); 

the 1989 Adopting Release, supra note 3, 54 FR at 

28811–12; and the 1994 Interpretive Release, supra 

note 5, 59 FR at 12757–58 (reaffirming the 

Commission’s interpretation of the obligations of 

municipal underwriters under the antifraud 

provisions of the federal securities laws). 

129See 1989 Adopting Release, supra note 3, 54 

FR at 28811. See also 1988 Proposing Release, supra 

note 128, 53 FR at 37787. 

130 In light of the underwriter’s obligation, as 

discussed in the 1988 Proposing Release, supra note 

128, 53 FR at 37787–91, the 1989 Adopting Release, 

supra note 3, 54 FR 28811–12, and the 1994 

Interpretive Release, supra note 5, 59 FR 12757–58, 

to review the official statement and to have a 

reasonable basis for its belief in the accuracy and 

completeness of the official statement’s key 

representations, the Commission noted that 

disclaimers by underwriters of responsibility for the 

information provided by the issuer or other parties 

without further clarification regarding the 

underwriter’s belief as to accuracy, and the basis 

therefore, are misleading and should not be 

included in official statements. See 1994 

Interpretive Release, supra note 5, 59 FR 12758 

n.103. 

131See 1988 Proposing Release, supra note 128, 

53 FR at 37790. 

132Under the 2008 Amendments, the MSRB is the 

sole information repository. 

133Rule 15c2–12(f)(3), 17 CFR 15c2–12(f)(3). 

134See 1994 Amendments Adopting Release, 

supra note 5, 59 FR at 59594–5. 

135 Id. at 59595. 

136 Id. 

137See 1988 Proposing Release, supra note 128, 

53 FR at 37789 and 1989 Adopting Release, supra 

note 3, 54 FR 28811–12. 

138 Id. 

139 Id. 

adopted, would transitional issues be 

minimized by the fact that over time 

fewer bonds would be subject to 

continuing disclosure agreements 

entered into prior to the effective date? 

Would an effective date that is no earlier 

than three months after any final 

approval of the proposed amendments, 

should the Commission determine to 

adopt the proposed amendments, 

provide adequate time for issuers and 

underwriters to become informed about 

the proposed amendments and adapt to 

them? 

III. Interpretive Guidance With Respect 

to Obligations of Participating 

Underwriters 

As noted above in Section I.B., the 

Commission is aware that municipal 

securities industry participants have 

expressed concern that some municipal 

issuers and other obligated persons may 

not consistently submit continuing 

disclosure documents, particularly 

event notices and failure to file notices, 

in accordance with their undertakings 

in continuing disclosure agreements.125

Municipal security holders’ access to 

meaningful information promotes 

informed investment decision-making 

about whether to buy, sell or hold 

municipal securities 126 and thereby 

better protection against 

misrepresentations and fraudulent 

activities. Availability of that 

information also will aid brokers, 

dealers, and municipal securities 

dealers to satisfy their obligations under 

the federal securities laws to have a 

reasonable basis for recommending 

municipal securities. In the 

Commission’s view, the flow of 

municipal securities disclosure to 

investors and other market participants 

depends on issuers and obligated 

persons abiding by their undertakings in 

continuing disclosure agreements.127

Accordingly, the Commission 

emphasizes that it is important for an 

underwriter in a municipal offering to 

evaluate carefully the likelihood that the 

issuer or obligated person will comply 

on a timely basis with the undertakings 

it has made. 

In prior releases, the Commission set 

forth its interpretations of the 

obligations of municipal underwriters 

under the antifraud provisions of the 

federal securities laws.128 The 

Commission discussed the duty of 

underwriters to the investing public to 

have a reasonable basis for 

recommending any municipal securities 

and, in fulfilling that obligation, it is 

their responsibility to review the 

issuer’s or obligated person’s disclosure 

documents in a professional manner 

with respect to the accuracy and 

completeness of statements made in 

connection with the offering.129 The 

Commission today reaffirms its previous 

interpretations and provides additional 

guidance with respect to underwriters’ 

responsibilities under the antifraud 

provisions of the federal securities 

laws.130

The provisions of paragraph (b) of 

Rule 15c2–12 are intended to assist a 

municipal underwriter in meeting its 

‘‘reasonable basis’’ obligations, 

including the requirement that an 

underwriter receive and review a nearly 

complete final official statement prior to 

bidding for or purchasing securities in 

connection with the offering.131 Under 

paragraph (b)(5)(i)(C) of the Rule, the 

underwriter is obligated to reasonably 

determine that the issuer or obligated 

person has undertaken, in a written 

agreement or contract for the benefit of 

the bondholders, to provide continuing 

disclosure documents to the MSRB.132

Further, the Rule’s definition of ‘‘final 

official statement’’ provides for the 

disclosure of any instances in the 

previous five years in which any person 

identified in the continuing disclosure 

agreement has failed to comply, in all 

material respects, with any previous 

informational undertakings in the 

continuing disclosure agreement.133

When the Commission in 1994 adopted 

these provisions of the Rule, it stated its 

belief that the failure of the issuer or 

other obligated person to comply in all 

material respects with prior 

informational undertakings is 

information that is important to the 

market, and should, therefore, be 

disclosed in the final official 

statement.134 As the Commission noted 

at that time, the provision in the Rule 

regarding disclosure of a prior history of 

material non-compliance by issuers or 

other obligated persons with their 

undertakings was specifically intended 

to serve as an incentive for them to 

comply with their undertakings to 

provide secondary market disclosure.135

Moreover, such disclosure would assist 

underwriters and others in assessing the 

reliability of issuers’ or obligated 

persons’ disclosure representations.136

The Commission continues to believe in 

the importance of these Rule provisions 

and would like to remind underwriters 

of their obligations under Rule 15c2–12. 

The Commission previously has 

stated that, in its view, the 

reasonableness of a belief in the 

accuracy and completeness of the key 

representations in the final official 

statement, and the extent of a review of 

the issuer’s or other obligated person’s 

situation necessary to arrive at that 

belief, will depend upon all the 

circumstances.137 In both negotiated 

and competitively bid municipal 

offerings, the Commission expects, at a 

minimum, that underwriters will review 

the issuer’s disclosure documents in a 

professional manner for possible 

inaccuracies and omissions.138 The 

Commission previously has provided a 

non-exclusive list of factors that it 

believes generally would be relevant in 

determining the reasonableness of an 

underwriter’s basis for assessing the 

truthfulness of key representations in 

final official statements.139 These factors 

include: (1) The extent to which the 

underwriter relied upon municipal 

officials, employees, experts, and other 

persons whose duties have given them 

knowledge of particular facts; (2) the 

role of the underwriter (manager, 

syndicate member, or selected dealer); 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36848 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

140 Id. 

141See 1988 Proposing Release, supra note 128, 

53 FR at 37789. 

142See 1994 Amendments Adopting Release, 

supra note 5, 59 FR at 59595. 

143 17 CFR 240.15c2–12(f)(3). 

144The 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. 145 44 U.S.C. 3501 et seq. 

146As noted above, the Commission recently 

approved amendments to Rule 15c2–12 that, among 

other things, established the MSRB as the sole 

repository for continuing disclosure documents and 

provided that those documents are to be submitted 

to the MSRB in an electronic format. See 2008 

Amendments Adopting Release, supra note 11. 

Previously, continuing disclosure documents were 

to be submitted to the NRMSIRs and the 

appropriate SID, if any. The 2008 Amendments 

became effective on July 1, 2009. The Commission 

proposes that the effective date of the proposed 

amendments discussed herein would be no earlier 

than three months after the final approval of the 

proposed amendments, should the Commission 

adopt them. 

147 17 CFR 240.15c2–12(c). 

(3) the type of bonds being offered 

(general obligation, revenue, or private 

activity); (4) the past familiarity of the 

underwriter with the issuer; (5) the 

length of time to maturity of the bonds; 

and (6) whether the bonds are 

competitively bid or are distributed in a 

negotiated offering.140 Sole reliance on 

the representations of the issuer will not 

suffice.141

The Commission has determined 

further to expound upon its prior 

interpretations regarding municipal 

underwriter’s responsibilities. As 

articulated in a prior interpretation, the 

Commission believes that it is doubtful 

that an underwriter could form a 

reasonable basis for relying on the 

accuracy or completeness of the issuer’s 

or obligated person’s ongoing disclosure 

representations, if such issuer or 

obligated person has a history of 

persistent and material breaches or if it 

has not remedied such past failures by 

the time the offering commences.142 The 

Commission believes that, if the 

underwriter finds that the issuer or 

obligated person has on multiple 

occasions during the previous five 

years,143 failed to provide on a timely 

basis continuing disclosure documents, 

including event notices and failure to 

file notices, as required in continuing 

disclosure agreements for prior 

offerings, it would be very difficult for 

the underwriter to make a reasonable 

determination that the issuer or 

obligated person would provide such 

information under a continuing 

disclosure agreement in connection 

with a subsequent offering. In the 

Commission’s view, it is doubtful that 

an underwriter could meet the 

reasonable belief standard without the 

underwriter affirmatively inquiring as to 

that filing history.144 The underwriter’s 

reasonable belief would be based on its 

independent judgment, not solely on 

representations of the issuer or obligated 

person as to the materiality of any 

failure to comply with any prior 

undertaking. If the underwriter finds 

that the issuer or obligated person has 

failed to provide such information, the 

underwriter should take that failure into 

account in forming its reasonable belief 

in the accuracy and completeness of 

representations made by the issuer or 

obligated person. 

Comment is solicited regarding 

whether there are alternative or 

additional ways in which an 

underwriter could satisfy its obligations, 

including obligations to ascertain 

whether issuers or obligated persons are 

abiding by their municipal disclosure 

commitments. Commenters should 

address the current practices used by 

underwriters to satisfy their ‘‘reasonable 

basis’’ obligation and any aspects of 

such practices that could be addressed 

through further Commission 

interpretation or rulemaking. 

IV. Request for Comments 

The Commission seeks comment on 

all aspects of the proposed amendments 

to the Rule. In addition to the comments 

requested throughout this release, 

comment is requested on whether the 

proposed amendments would further 

the Commission’s goal of enhancing the 

availability to investors important 

information regarding municipal 

securities and their issuers in a prompt 

manner, and whether the proposed 

amendments would improve investors’ 

ability to obtain such information. 

Further, the Commission seeks 

comment regarding the impact of the 

proposed amendments on Participating 

Underwriters, issuers and obligated 

persons, institutional and individual 

investors, the MSRB, information 

vendors, and others that may be affected 

by the proposed amendments. 

In addition, the Commission requests 

comment on whether there are 

additional events for which notices 

should be provided, and alternative 

approaches or modifications to the 

Commission’s proposed approach to 

improving the public’s ability to obtain 

important information about municipal 

securities that the Commission should 

consider. Commenters are requested to 

indicate their views and to provide any 

other suggestions that they may have. 

V. Paperwork Reduction Act 

Certain provisions of the proposed 

amendments to the Rule contain 

‘‘collection of information 

requirements’’ within the meaning of 

the Paperwork Reduction Act of 1995 

(‘‘PRA’’).145 In accordance with 44 

U.S.C. 3507 and 5 CFR 1320.11, the 

Commission has submitted revisions to 

the currently approved collection of 

information titled ‘‘Municipal Securities 

Disclosure’’ (17 CFR 240.15c2–12) 

(OMB Control No. 3235–0372) to OMB. 

An agency may not conduct or sponsor, 

and a person is not required to respond 

to, a collection of information unless it 

displays a currently valid control 

number. 

A. Summary of Collection of 

Information 

Under paragraph (b) of Rule 15c2–12, 

a Participating Underwriter currently is 

required: (1) To obtain and review an 

official statement ‘‘deemed final’’ by an 

issuer of the securities, except for the 

omission of specified information, prior 

to making a bid, purchase, offer, or sale 

of municipal securities; (2) in 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.146 Under paragraph (c) of the 

Rule, a broker-dealer that recommends 

the purchase or sale of a municipal 

security must have procedures in place 

that provide reasonable assurance that it 

will receive prompt notice of any event 

specified in paragraph (b)(5)(i)(C) of the 

Rule and any failure to file annual 

financial information regarding the 

security.147

Under paragraph (d)(1)(iii) of the 

Rule, a primary offering of municipal 

securities in authorized denominations 

of $100,000 or more is exempt from the 

Rule, if the securities, at the option of 

the holder thereof, may be tendered to 


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148 17 CFR 240.15c2–12(d)(1)(iii). 

149 17 CFR 240.15c2–12(b)(5)(i)(C). 

150See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

an issuer of such securities or its 

designated agent for redemption or 

purchase at par value or more at least 

as frequently as every nine months until 

maturity, earlier redemption, or 

purchase by an issuer or its designated 

agent.148 These securities are referred to 

as demand securities or variable rate 

demand obligations (‘‘VRDOs’’). The 

Commission proposes to modify the 

exemption for demand securities by 

adding proposed paragraph (d)(5) to the 

Rule, which would apply current 

paragraphs (b)(5) and (c) of the Rule to 

a primary offering of demand securities 

in authorized denominations of 

$100,000 or more. 

Under the current Rule, a 

Participating Underwriter must 

reasonably determine that the issuer or 

obligated person has undertaken in a 

continuing disclosure agreement to 

provide an event notice to the MSRB 

when any of the following events with 

respect to the securities being offered in 

an offering occurs, if material: (1) 

Principal and interest payment 

delinquencies; (2) non-payment related 

defaults; (3) unscheduled draws on debt 

service reserves reflecting financial 

difficulties; (4) unscheduled draws on 

credit enhancements reflecting financial 

difficulties; (5) substitution of credit or 

liquidity providers, or their failure to 

perform; (6) adverse opinions or events 

affecting the tax-exempt status of the 

security; (7) modifications to rights of 

security holders; (8) bond calls; (9) 

defeasances; (10) release, substitution, 

or sale of property securing repayment 

of securities; and (11) rating changes.149

Under the proposed amendments, 

Participating Underwriters would be 

required to reasonably determine that 

the issuer or obligated person has 

undertaken in a continuing disclosure 

agreement to provide event notices to 

the MSRB, in an electronic format as 

prescribed by the MSRB, in a timely 

manner not in excess of ten business 

days, rather than only in ‘‘a timely 

manner.’’ In addition, the Commission 

proposes to add the following event 

items to paragraph (b)(5)(i)(C) of the 

Rule: (1) the issuance by the IRS of 

proposed or final determinations of 

taxability, Notices of Proposed Issue 

(IRS form 5701–TEB) or other material 

notices or determinations with respect 

to the tax-exempt status of the 

securities; (2) tender offers; (3) 

bankruptcy, insolvency, receivership or 

similar event of the issuer or obligated 

person; (4) the consummation of a 

merger, consolidation, or acquisition 

involving an obligated person or the sale 

of all or substantially all of the assets of 

the obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material; and (5) appointment 

of a successor or additional trustee, or 

the change of name of a trustee, if 

material. Further, the Commission 

proposes to delete the generally 

applicable ‘‘if material’’ condition from 

paragraph (b)(5)(i)(C) of the Rule and 

instead indicate in specific event items 

listed in that paragraph whether notice 

of such event must be made only to the 

extent that such event is material. In 

this regard, Participating Underwriters 

would need to reasonably determine 

that notice of the following events 

would be made in all circumstances: (1) 

Principal and interest payment 

delinquencies with respect to the 

securities being offered; (2) unscheduled 

draws on debt service reserves reflecting 

financial difficulties; (3) unscheduled 

draws on credit enhancements reflecting 

financial difficulties; (4) substitution of 

credit or liquidity providers, or their 

failure to perform; (5) defeasances; and 

(6) rating changes. 

B. Proposed Use of Information 

By specifying the time period for 

submission of event notices, expanding 

the Rule’s current categories of events, 

and modifying an exemption in the 

current Rule used for demand securities, 

the proposed amendments are intended 

to promptly make available to brokerdealers, institutional and retail 

investors, and others important 

information about significant events 

relating to municipal securities and 

their issuers. The proposed amendments 

would help enable investors and other 

municipal securities market participants 

to be better informed about important 

events that occur with respect to 

municipal securities and their issuers, 

including with respect to demand 

securities, and thus would allow 

investors to better protect themselves 

against fraud. In addition, the proposed 

amendments would provide brokers, 

dealers, and municipal securities 

dealers with access to important 

information about municipal securities 

that they can use to carry out their 

obligations under the securities laws. 

This information could be used by 

individual and institutional investors; 

underwriters of municipal securities; 

other market participants, including 

broker-dealers and municipal securities 

dealers; analysts; municipal securities 

issuers; the MSRB; vendors of 

information regarding municipal 

securities; Commission’s staff; and the 

public generally. 

C. Respondents 

In December 2008, OMB approved a 

revision to the collection of information 

associated with the Rule in accordance 

with 2008 Amendments to the Rule. The 

current paperwork collection associated 

with Rule 15c2–12 applies to brokerdealers, issuers of municipal securities, 

and the MSRB. The paperwork 

collection associated with today’s 

proposed amendments applies to the 

same respondents. 

The proposal would require that a 

Participating Underwriter in a primary 

offering of municipal securities 

reasonably determine that the issuer or 

an obligated person has undertaken in a 

continuing disclosure agreement to 

submit event notices in a timely manner 

not in excess of ten business days of 

their occurrence to the MSRB, as well as 

to submit such notices for proposed 

additional disclosure items. The 

proposal also would revise the Rule 

with respect to whether or not a 

materiality condition would apply to 

each of the Rule’s specified events 

prompting submission of notices to the 

MSRB. In addition, the proposed 

amendments would revise the Rule with 

respect to its treatment of demand 

securities. The Commission gathered 

updated information regarding the 

paperwork burden associated with Rule 

15c2–12 in connection with the 

Commission’s adoption of the 2008 

Amendments and is using these 

estimates in preparing the paperwork 

collection associated with its current 

proposal. In the 2008 Amendments 

Adopting Release, the Commission 

estimated that the number of 

respondents impacted by the paperwork 

collection associated with the Rule 

consists of 250 broker-dealers and 

10,000 issuers.150 The Commission’s 

staff expects that the proposed 

amendments would not change the 

number of broker-dealer respondents 

described in the 2008 Amendments 

Adopting Release. The Commission’s 

staff expects that the proposed 

amendments would increase the 

number of issuer respondents in 

comparison to the Rule’s paperwork 

current collection, as set forth in the 

2008 Amendments Adopting Release. 

This is because the proposed 

amendments would expand the types of 

securities covered under subparagraphs 

(b)(5) and (c) of the Rule, thus 

increasing the number of issuers having 

a paperwork burden. Specifically, the 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36850 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

151 In 2008, there were approximately 2,000 

offerings of demand securities. See Two Decades of 

Bond Finance: 1989–2008, The Bond Buyer/ 

Thomson Reuters 2009 Yearbook 7 (Matthew Kreps 

ed., SourceMedia, Inc.) (2009). To provide estimates 

that would not be under-inclusive, the 

Commission’s staff has elected to assume that all 

2,000 offerings of demand securities were issued by 

separate issuers and that each of those issuers 

currently is not a party to a continuing disclosure 

agreement that provides for the submission of 

continuing disclosure documents to the MSRB. 

Thus, the Commission’s staff estimates that 

approximately 2,000 additional issuers would be 

affected by the proposed amendments to the Rule. 

These 2,000 additional issuers represent a 20% 

increase in the total number of issuers affected by 

the Rule. 10,000 (number of issuers under current 

Rule)/2,000 (number of additional issuers under 

proposed amendments to the Rule) × 100 = 20%. 

152See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

153 Id. 

154See supra note 151. 

155 250 hours (total annual burden for all brokerdealers under the current Rule) × .20 (20% increase 

in total hourly burden) = 50 hours. This estimated 

increase in the annual burden for broker-dealers 

also accounts for their review of continuing 

disclosure agreements in connection with 

remarketings of VRDOs that are primary offerings. 

156See Section V.D.2., infra. 

157 (250 hours (total estimated annual hourly 

burden for all broker-dealers under the current 

Rule) + 50 hours (total estimated additional annual 

hourly burden for all broker-dealers under the 

proposed amendments to the Rule) = 300 hours. 

158The Commission notes that while the 

proposed amendments to the Rule do not change 

this obligation, broker-dealers would need to 

reasonably determine that the written agreement or 

contract entered into by an issuer or obligated 

person contains the proposed change to the timing 

for filing event notices. 

159See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

Commission’s staff estimates that the 

proposed revision of the Rule’s 

exemption for demand securities would 

increase the number of issuers with a 

paperwork burden by 2,000 issuers, for 

a total of 12,000 issuer respondents.151

The Commission’s 2008 Amendments 

Adopting Release included a paperwork 

collection burden for the MSRB and, for 

purposes of the proposed amendments, 

the Commission’s staff expects that the 

MSRB also would be a respondent. 

D. Total Annual Reporting and 

Recordkeeping Burden 

In the 2008 Amendments Adopting 

Release, the Commission included 

estimates for the hourly burdens that the 

Rule imposes upon broker-dealers, 

issuers of municipal securities, and the 

MSRB. The Commission’s staff has 

relied on these estimates to prepare the 

analysis discussed below for each of the 

aforementioned entities. 

The Commission’s staff estimates the 

aggregate information collection burden 

for the amended Rule would consist of 

the following: 

1. Broker-Dealers 

The Commission’s staff estimates that 

approximately 250 broker-dealers 

potentially could serve as Participating 

Underwriters in an offering of 

municipal securities.152 Therefore, the 

Commission’s staff estimates that, under 

the proposed amendments, the 

maximum number of broker-dealer 

respondents would be 250. 

a. Proposed Amendment To Modify the 

Exemption for Demand Securities 

Under the current Rule, the 

Commission has estimated that the total 

annual burden on all 250 broker-dealers 

is 250 hours (1 hour annually per 

broker-dealer).153 The Commission 

believes that the proposed amendment 

to modify the exemption from the Rule 

for a primary offering of demand 

securities in authorized denominations 

of $100,000 or more, would increase the 

number of issuers with municipal 

securities offerings that are subject to 

the Rule annually by 20%, based on the 

Commission’s staff estimate of the ratio 

of demand securities outstanding in 

relation to the municipal security 

market generally.154 The Commission’s 

staff estimates that this 20% increase in 

the number of issuers with offerings 

subject to the Rule also would increase 

the estimated average annual burden for 

each broker-dealer by 20%, or .20 hours 

(12 minutes = 60 minutes × .20 (20%)) 

and the total estimated annual 

paperwork burden for all broker-dealers 

by 20%, or 50 hours.155 This increased 

burden represents the estimated 

additional time broker-dealers would 

need annually to review the continuing 

disclosure agreements associated with 

the additional municipal securities 

offerings that would be subject to the 

amended Rule. As discussed in more 

detail below,156 the Commission notes 

that the continuing disclosure 

agreements that are reviewed by brokerdealers as part of their obligation under 

the Rule are form agreements. The 

proposed changes to the Rule would 

result in minor changes to certain 

provisions of these continuing 

disclosure agreements. However, 

because these continuing disclosure 

agreements are form agreements, the 

Commission does not believe that there 

would be a substantial increase in the 

annual hourly burden for broker-dealers 

under the proposed amendments to the 

Rule. Accordingly, the Commission’s 

staff estimates that 250 broker-dealers 

would incur an estimated average 

burden of 300 hours per year to comply 

with the Rule, as proposed to be 

amended.157

b. Proposed Amendments to Events To 

Be Disclosed Under a Continuing 

Disclosure Agreement 

The proposed amendments to 

paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) 

of the Rule would not alter a brokerdealer’s obligation to reasonably 

determine that the issuer or obligated 

person has undertaken, in a written 

agreement or contract, for the benefit of 

holders of such municipal securities, to 

provide annual filings, event notices, 

and failure to file notices to the MSRB. 

As described above, the proposed 

amendments to paragraph (b)(5)(i)(C) of 

the Rule would add four new event 

disclosure items to the Rule, as well as 

amend an existing event disclosure item 

currently contained in the Rule, and 

would modify the events that are subject 

to a materiality determination before 

triggering a notice to the MSRB. In 

addition, the proposed amendments to 

paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) 

of the Rule would change the timing for 

filing event notices from ‘‘in a timely 

manner’’ to ‘‘in a timely manner not to 

exceed ten business days.’’ The 

Commission believes that these 

amendments would not change the 

obligation of broker-dealers under the 

Rule to reasonably determine that the 

issuer or obligated person has 

undertaken, in a written agreement or 

contract, for the benefit of holders of 

such municipal securities, to provide 

annual filings, event notices, and failure 

to file notices to the MSRB.158

Accordingly, the Commission does not 

believe that the proposed amendments 

relating to the timing and scope of event 

notices would affect the annual 

paperwork burden for broker-dealers. 

c. One-Time Paperwork Burden 

The Commission’s staff estimates that 

a broker-dealer would incur a one-time 

paperwork burden to have its internal 

compliance attorney prepare and issue a 

notice advising its employees about the 

proposed revisions to Rule 15c2–12, if 

they are adopted by the Commission. In 

the 2008 Amendments Adopting 

Release, the Commission estimated that 

it would take a broker-dealer’s internal 

compliance attorney approximately 30 

minutes to prepare and issue a notice 

describing the broker-dealer’s 

obligations in light of the 2008 

Amendments to the Rule.159 The 

Commission’s staff believes that this 30 

minute estimate to prepare a notice 

would also apply to a broker-dealer’s 

internal compliance attorney to prepare 

such a notice for these current 

amendments to the Rule. The 

Commission’s staff believes that the task 

of preparing and issuing a notice 


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160 (250 (broker-dealers impacted by the proposed 

amendments to the Rule) × 1.20 hours) + (250 

(broker-dealers impacted by the proposed 

amendments to the Rule) × .5 hour (estimate for 

one-time burden to issue notice regarding brokerdealer’s obligations under the proposed 

amendments to the Rule)) = 425 hours. 

161 250 (broker-dealers impacted by the proposed 

amendments to the Rule) × 1.20 hours = 300 hours. 

162See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

163See supra note 151. 

164 10,000 (number of issuers under current Rule) 

1.20 (20% increase) = 12,000. To provide estimates 

that would not be under-inclusive, the 

Commission’s staff has elected to use an estimate 

that assumes that all issuers of demand securities 

currently are not a party to a continuing disclosure 

agreement that provides for the submission of 

continuing disclosure documents to the MSRB. 

165See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

166The Commission’s staff believes that this 

estimated 20% increase in the number of each type 

of continuing disclosure document filed by issuers 

is appropriate since it maintains the same ratio 

between the number of issuers and the number of 

each type of document submitted by these issuers 

as set forth in the 2008 Amendments Adopting 

Release. 

167See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

168 Id. 

169 15,000 (annual filings under 2008 

Amendments Adopting Release) × 1.20 (20% 

increase in filings under proposed amendments) = 

18,000 annual filings. 

170See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

171 18,000 (estimated number of annual filings 

under proposed amendments) × .75 hours (45 

minutes) (estimated time to prepare and submit 

annual filings under the 2008 Amendments 

Adopting Release) = 13,500 hours. To provide an 

estimate for the paperwork burden that would not 

be under-inclusive, the Commission’s staff elected 

to use the higher end of the estimate for the total 

number of annual filings estimated to be submitted 

each year. 

172See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

173 60,000 (number of event notices under 2008 

Amendments Adopting Release) × 1.20 (20% 

increase in filings under proposed amendments) = 

72,000 event notices. The Commission’s staff’s 

estimates of the additional event notices associated 

with the proposed amendments relating to the 

materiality condition and additional event 

disclosure items contained in paragraph (b)(5)(1)(C) 

of the Rule are discussed in Sections V.D.2.a.iii. 

through vii. infra. As discussed below, the total 

number of event notices estimated to be submitted 

to the MSRB in connection with the proposed 

amendments is 78,757 notices. 

174See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

advising the broker-dealer’s employees 

about the proposed amendments, if they 

are adopted, is consistent with the type 

of compliance work that a broker-dealer 

typically handles internally. 

Accordingly, the Commission’s staff 

estimates that 250 broker-dealers would 

each incur a one-time, first-year burden 

of 30 minutes to prepare and issue a 

notice to its employees regarding the 

broker dealer’s obligations under the 

proposed amendments. 

d. Total Annual Burden for BrokerDealers 

Under the proposed amendments, the 

total burden on broker-dealers would be 

425 hours for the first year 160 and 300 

hours for each subsequent year.161

2. Issuers 

Issuers’ undertakings regarding the 

submission of annual filings, event 

notices, and failure to file notices that 

are set forth in continuing disclosure 

agreements contemplated by the 

existing Rule, as well as the proposed 

amendments to the Rule, impose a 

paperwork burden on issuers of 

municipal securities. 

a. Proposed Amendment To Modify the 

Exemption for Demand Securities 

The Commission’s staff believes that 

the proposed amendment to delete 

paragraph (d)(1)(iii) from the Rule, 

which contains an exemption from the 

Rule for a primary offering of demand 

securities in authorized denominations 

of $100,000 or more, and add new 

paragraph (d)(5) to the Rule to apply 

paragraphs (b)(5) and (c) of the Rule to 

a primary offering of demand securities 

in authorized denominations of 

$100,000 or more, would increase the 

number of issuers with a paperwork 

burden under the Rule. In the 2008 

Amendments Adopting Release, the 

Commission estimated that the Rule 

affected approximately 10,000 

issuers.162 Using the estimate of 10,000 

issuers from the 2008 Amendments 

Adopting Release, the Commission’s 

staff estimates that, under the proposed 

amendments, the number of issuers 

with a paperwork burden would 

increase by approximately 20%163 to 

12,000 issuers.164 These additional 

issuers would increase the aggregate 

number of annual filings, event notices 

and failure to file notices submitted 

each year. In the 2008 Amendments 

Adopting Release, the Commission 

estimated the hourly burdens for an 

issuer to prepare and submit an annual 

filing (45 minutes), an event notice (45 

minutes) and a failure to file notice (30 

minutes).165 The proposed modification 

to the Rule’s exemption for demand 

securities would not alter these hourly 

burdens. Thus, the Commission’s staff 

estimates that the aggregate number of 

annual filings, event notices and failure 

to file notices submitted by issuers also 

would increase by 20% from the 

estimates contained in the 2008 

Amendments Adopting Release.166

(i) Annual Filings 

In the 2008 Amendments Adopting 

Release, the Commission estimated that 

Rule 15c2–12 imposed a total 

paperwork burden of 11,250 hours on 

10,000 issuers to prepare and submit 

annual filings in any given year.167 In 

determining the paperwork burden for 

issuers under the 2008 Amendments 

Adopting Release, the Commission 

estimated that issuers would prepare 

and submit a total of approximately 

15,000 annual filings yearly.168 Under 

the proposed amendment to modify the 

current exemption for demand 

securities contained in the Rule, the 

Commission’s staff estimates that 12,000 

municipal issuers with continuing 

disclosure agreements would prepare 

and submit approximately 18,000 

annual filings yearly.169

In the 2008 Amendments Adopting 

Release, the Commission estimated that 

the process for an issuer to prepare and 

submit annual filings to the MSRB in an 

electronic format would require 

approximately 45 minutes.170 The 

proposed amendments to the Rule 

would not change the way annual 

filings are prepared and submitted. The 

Commission’s staff estimates that, under 

the proposed amendments, an issuer 

would still require approximately 45 

minutes to prepare and submit annual 

filings to the MSRB in an electronic 

format. Therefore, under the proposed 

amendments, the total burden on issuers 

of municipal securities to prepare and 

submit 18,000 annual filings to the 

MSRB in an electronic format is 

estimated to be 13,500 hours.171

(ii) Event Notices 

In determining the paperwork burden 

for issuers under the 2008 Amendments 

Adopting Release, the Commission 

estimated that issuers would prepare 

and submit a total of approximately 

60,000 event notices yearly.172 Under 

the proposed amendments to modify the 

exemption for demand securities 

contained in the Rule, the Commission’s 

staff estimates that the 12,000 municipal 

issuers with continuing disclosure 

agreements would prepare and submit 

approximately 72,000 event notices 

yearly.173

In the 2008 Amendments Adopting 

Release, the Commission estimated that 

the process for an issuer to prepare and 

submit event notices to the MSRB in an 

electronic format would require 

approximately 45 minutes.174 Since the 

proposed amendments to the Rule 

would not change the way event notices 

are prepared and submitted, the 

Commission’s staff estimates that, under 

today’s proposed amendments, an issuer 

still would require approximately 45 

minutes to prepare and submit an event 


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36852 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

175 72,000 (estimated number of material event 

notices under proposed amendments) × .75 hours 

(45 minutes) (estimated time to prepare and submit 

material event notices under the 2008 Amendments 

Adopting Release) = 54,000 hours. 

176See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

177 Id. 

178 2,000 (failure to file notices) × 1.20 (20% 

increase in filings) = 2,400 failure to file notices. 

179See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

180 2,400 (estimated number of failure to file 

notices under proposed amendments) × .5 hours (30 

minutes) (estimated time to prepare and submit 

failure to file notices under the 2008 Amendments 

Adopting Release) = 1,200 hours. 

181See supra note 173. 

182 Id. 

183See supra note 174 and accompanying text. 

184The discussion in this section pertains to 

materiality determinations for events currently 

specified in paragraph (b)(5)(i)(C) of the Rule. For 

events proposed to be added to the Rule, whether 

a materiality determination is specified is included 

in the discussion below for each such proposed 

event. 

185See supra Section II.C. for a discussion of the 

Commission’s rationale regarding why the 

Commission proposes not to retain a materiality 

condition for these events. 

notice. Therefore, under today’s 

proposed amendments relating to 

demand securities, the total burden on 

issuers of municipal securities to 

prepare and submit 72,000 event notices 

to the MSRB is estimated to be 54,000 

hours.175

(iii) Failure To File Notices 

In the 2008 Amendments Adopting 

Release, the Commission estimated that 

Rule 15c2–12 currently imposes a total 

paperwork burden of 1,000 hours on 

10,000 issuers to submit failure to file 

notices in any given year.176 In 

determining the paperwork burden for 

issuers under the 2008 Amendments 

Adopting Release, the Commission 

estimated that 10,000 issuers would 

prepare and submit a total of 

approximately 2,000 failure to file 

notices yearly.177 Under the proposed 

amendment to modify the exemption for 

demand securities contained in the 

Rule, the Commission’s staff estimates 

that the 12,000 municipal issuers with 

continuing disclosure agreements would 

prepare and submit approximately 2,400 

failure to file notices yearly.178

In the 2008 Amendments Adopting 

Release, the Commission estimated that 

the process for an issuer to submit 

failure to file notices would require 

approximately 30 minutes.179 Since the 

proposed amendments to the Rule 

would not change the way failure to file 

notices are prepared and submitted, the 

Commission’s staff estimates that, under 

today’s proposed amendments, an issuer 

would require approximately 30 

minutes to prepare and submit a failure 

to file notice. Therefore, under the 

proposed amendments, the total burden 

on issuers of municipal securities to 

prepare and submit 2,400 failure to file 

notices to the MSRB is estimated to be 

1,200 hours.180

b. Proposed Amendments to Event 

Notice Provisions of the Rule 

The Commission proposes to modify 

paragraph (b)(5)(i)(C) of the Rule, which 

presently requires Participating 

Underwriters to reasonably determine 

that an issuer or obligated person has 

entered into a continuing disclosure 

agreement that, among other things, 

contemplates the submission of an event 

notice to the MSRB in an electronic 

format upon the occurrence of any 

events set forth in the Rule, if such 

event is material. The current Rule 

contains eleven such events. The 

proposed amendments to this paragraph 

of the Rule would add four new event 

disclosure items and revise an existing 

event disclosure item. In addition, the 

proposed amendments to paragraphs 

(b)(5)(i)(C) and (d)(2)(ii)(B) would revise 

the Rule to state that event notices 

should be submitted in a timely manner 

‘‘not to exceed ten business days after 

the occurrence of the event,’’ rather than 

simply in a timely manner, as set forth 

in the current Rule, and would apply to 

some (but not all) events the materiality 

condition that applies to the current 

eleven events. In the 2008 Amendments 

Adopting Release, the Commission 

estimated that 60,000 event notices 

would be prepared and submitted 

annually. As described above, the 

Commission’s staff estimates that the 

proposed amendments to modify the 

Rule’s exemption for demand securities 

would increase the number of event 

notices to be prepared and submitted to 

72,000 annually.181 The Commission’s 

staff believes that these proposed 

amendments to paragraphs (b)(5)(i)(C) 

and (d)(2)(ii)(B) of the Rule would 

further increase the current annual 

paperwork burden for issuers because 

they would result in an increase in the 

number of event notices to be prepared 

and submitted.182

(i) Time Frame for Submitting Event 

Notices Under a Continuing Disclosure 

Agreement 

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

(d)(2)(ii)(B) of the Rule state that notice 

of an event should be provided in ‘‘a 

timely manner.’’ The proposed 

amendment would revise these 

provisions to state that such notice 

should be provided ‘‘in a timely manner 

not in excess of ten business days after 

the occurrence of the event.’’ As noted 

above, the Commission’s staff estimates 

that an issuer can prepare and submit an 

event notice in 45 minutes, which is the 

hourly burden noted in the 2008 

Amendments Adopting Release.183 The 

proposed revision to the Rule regarding 

the time period for submission of event 

notices would not change this estimated 

burden of 45 minutes, which is the 

amount of time under the Rule’s current 

paperwork collection to prepare and 

submit event notices. Rather, the change 

in burden hours results from the fact 

that more event notices are expected to 

be filed under the proposed 

amendments. The Commission’s staff 

believes that the proposed change to 

‘‘not in excess of ten business days after 

the occurrence of the event’’ to submit 

a event notice would not affect the 

length of time it takes an issuer to 

prepare and submit the notice and thus 

would not have any impact on the 

current paperwork burden with respect 

to the length of time it would take an 

issuer to prepare and submit an event 

notice. 

(ii) Modification With Regard to Those 

Events for Which a Materiality 

Determination Is Necessary 

As discussed earlier, the Commission 

believes that it is appropriate to delete 

the condition in paragraph (b)(5)(i)(C) of 

the Rule that presently provides that 

notice of all of the listed events need be 

made only ‘‘if material.’’ In connection 

with the proposed deletion of the 

materiality condition, the Commission 

has reviewed each of the Rule’s current 

specified events to determine whether a 

materiality determination should be 

retained for that particular event and 

preliminarily believes such a 

determination is still appropriate for 

certain listed events.184 As a result of 

this proposed change, for those events 

listed in paragraph (b)(5)(i)(C) that are 

not proposed to contain the ‘‘if 

material’’ condition, the Participating 

Underwriter must reasonably determine 

that the issuer or other obligated person 

has agreed to submit event notices to the 

MSRB whenever such an event occurs. 

These events include: (1) Principal and 

interest payment delinquencies with 

respect to the securities being offered; 

(2) unscheduled draws on debt service 

reserves reflecting financial difficulties; 

(3) unscheduled draws on credit 

enhancements reflecting financial 

difficulties; (4) substitution of credit or 

liquidity providers, or their failure to 

perform; (5) defeasances; and (6) rating 

changes.185 The Commission, however, 

believes that for other events currently 

listed in paragraph (b)(5)(i) a materiality 

determination should be retained. 


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186Telephone conversation between Ernesto A. 

Lanza, General Counsel, MSRB, and Martha M. 

Haines, Assistant Director and Chief, Office of 

Municipal Securities, Division, Commission, June 

12, 2009. The MSRB staff believes that the potential 

increase could be much smaller; however, the 

Commission’s staff is using the estimate of 1,000 

event notices to provide a conservative estimate. 

187See supra Section II.C. 

188 During conversations with the Commission’s 

staff in December 2008, the staff of the IRS 

indicated that during a 12-month period it issues 

approximately 130 notices of determinations of 

taxability. To provide an estimate that is not underinclusive, the Commission’s staff has estimated that 

event notices are not currently submitted for any of 

these IRS notices. Accordingly, the Commission’s 

staff estimates that approximately 130 additional 

event notices would be submitted under the 

proposed amendments to subparagraph 

(b)(5)(i)(C)(6) of the Rule. 

189Based on industry sources that included 

lawyers, trade associations and vendors of 

municipal disclosure information, the 

Commission’s staff has estimated that there are 

typically no more than 100 tender offers annually 

in the municipal securities market. The 

Commission’s staff believes that the actual number 

of tender offers annually is significantly less than 

100. However, to provide an estimate for the 

paperwork burden that would not be underinclusive, the Commission’s staff has elected to use 

the higher end of the estimate with respect to the 

number of municipal tender offers that occur each 

year. 

190The Commission’s staff based this estimate on 

the following: (i) 917 (number of issuances of 

municipal securities that defaulted during the 

1990’s based on statistics contained in Standard 

and Poor’s ‘‘A Complete Look at Monetary Defaults 

in the 1990s’’ (June, 2000))/10 (number of years in 

a decade) = 91.7 (estimated number of issuances 

defaulting per year) (rounded to 92); (ii) 92 

(estimated number of issuances defaulting per 

year)/50,000 (estimated total number of municipal 

issuers) = .002 (.2%) (estimated percentage of all 

issuers that default annually); and (iii) 12,000 

(estimated number of issuers under proposed 

amendments to the Rule) × (.002) (.2%) (estimated 

percentage of all issuers that default annually) × 1 

(estimated number of material event notices that an 

issuer would file) = 24 notices. The Commission’s 

staff notes that not all issuers that default 

eventually enter bankruptcy. However, to provide 

an estimate for the paperwork burden that would 

not be under-inclusive, the Commission staff has 

elected to use the number of defaults as a basis for 

this estimate. 

191The Commission’s staff based this estimate on 

the following: (i) 2,201 (total number of merger 

transactions reported under the Hart-Scott-Rodino 

Act in 2007 contained in the Hart-Scott-Rodino 

Annual Report Fiscal Year 2007 (November 2008) 

available at http://www.ftc.gov/os/2008/11/ 

hsrreportfy2007.pdf (‘‘HSR Report’’) × 81% 

(percentage of mergers in industries in which 

municipal securities may exist) = 1782.81 notices 

(rounded to 1783). The Commission staff estimated 

the percentage of mergers in the municipal industry 

based on data contained in the HSR Report. The 

Continued 

In a telephone conversation between 

the Commission’s staff and MSRB staff 

on June 12, 2009, Commission staff was 

advised that the increase in the number 

of event notices in connection with the 

proposal to modify the materiality 

condition would result in an increase of 

no more than 1,000 event notices, taking 

into account the increase in event 

notices that would result from the 

proposed amendment relating to 

demand securities.186 Therefore, the 

Commission’s staff estimates that this 

proposed change to the materiality 

condition would increase the total 

number of event notices to be submitted 

annually by issuers by 1,000 notices. 

(iii) Amendment to the Submission of 

Event Notices Regarding Adverse Tax 

Events Under a Continuing Disclosure 

Agreement 

Subparagraph (b)(5)(i)(C)(6) of the 

Rule refers to an event notice in the case 

of adverse tax events. Under the 

proposed amendments, subparagraph 

(b)(5)(i)(C)(6) of the Rule would be 

amended to include ‘‘the issuance by 

the Internal Revenue Service of 

proposed or final determinations of 

taxability, Notices of Proposed Issue 

(IRS form 5701–TEB) or other material 

notices or determinations with respect 

to the tax-exempt status of the 

securities.’’ This proposed amendment 

would address the circumstances in 

which issuers would submit an event 

notice to the MSRB with respect to IRS 

determinations of taxability or other 

material notices or determinations with 

respect to the tax status of a municipal 

security. As discussed above,187 the 

Commission believes that the proposed 

amendment to subparagraph 

(b)(5)(i)(C)(6) of the Rule would clarify 

that IRS determinations of taxability or 

other material notices or determinations 

with respect to the tax status of a 

municipal security are events that 

currently should be disclosed under a 

continuing disclosure agreement. The 

Commission’s staff estimates that the 

proposed amendments to paragraph 

(b)(5)(i)(C)(6) of the Rule would increase 

the total number of event notices to be 

submitted by issuers annually by 

approximately 130 notices.188

(iv) Tender Offers 

Subparagraph (b)(5)(i)(C)(8) of the 

Rule refers to notice of an event in the 

case of bond calls. Under the proposed 

amendments, subparagraph 

(b)(5)(i)(C)(8) of the Rule would be 

amended to include tender offers. The 

inclusion of tender offers in this 

subparagraph of the Rule would expand 

the circumstances in which issuers 

would submit an event notice to the 

MSRB. The Commission’s staff 

estimates that proposed amendments to 

subparagraph (b)(5)(i)(C)(8) of the Rule 

would increase the total number of 

event notices to be submitted by issuers 

annually by approximately 100 

notices.189

(v) The Occurrence of Bankruptcy, 

Insolvency, Receivership or Similar 

Event Regarding an Issuer or an 

Obligated Person 

Under the proposed amendments, 

subparagraph (b)(5)(i)(C)(12) would be 

added to the Rule and would contain a 

new disclosure event in the case of 

bankruptcy, insolvency, receivership or 

similar event of the issuer or obligated 

person. The proposed addition to the 

Rule of bankruptcy, insolvency, 

receivership or similar event of the 

issuer or obligated person would 

expand the circumstances in which 

issuers would submit an event notice. 

Based on a review of industry sources 

by the Commission’s staff, the 

Commission’s staff estimates that the 

proposed amendment to add the new 

bankruptcy, insolvency, receivership or 

similar event of the issuer or obligated 

person in subparagraph (b)(5)(i)(C)(8) of 

the Rule would increase the total 

number of event notices submitted by 

issuers annually by approximately 24 

notices.190

(vi) Merger, Consolidation, Acquisition, 

and Sale of All or Substantially All 

Assets 

Under the proposed amendments, 

subparagraph (b)(5)(i)(C)(13) would be 

added to the Rule and would contain a 

new disclosure event in the case of a 

merger, consolidation, acquisition 

involving an obligated person or sale of 

all or substantially all of the assets of 

the obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material. The proposed 

addition to the Rule of the merger, 

consolidation, acquisition, or sale of all 

or substantially all of the assets to the 

Rule would expand the circumstances 

in which issuers would submit an event 

notice. The Commission’s staff believes 

that the proposed amendment to add the 

new event of merger, consolidation, 

acquisition, or sale of all or substantially 

all of the assets in subparagraph 

(b)(5)(i)(C)(13) of the Rule would 

increase the total number of event 

notices submitted by issuers annually. 

Based on a review of industry sources, 

the Commission’s staff estimates that 

the proposed amendment to add the 

new bankruptcy, insolvency, 

receivership or similar event of the 

issuer or obligated person in 

subparagraph (b)(5)(i)(C)(8) of the Rule 

would increase the total number of 

event notices submitted by issuers 

annually by approximately 1,783 

notices.191


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HSR Report contained data regarding the percentage 

of merger transactions reported from nine industry 

segments. Of these nine segments, the only segment 

that does not issue municipal securities is the 

banking and insurance industry segment which 

accounted for 19% of reported merger transactions. 

The Commission notes that each of the mergers 

reported under the other industry segments may not 

involve entities that have issued municipal 

securities. However, to provide an estimate that is 

not under-inclusive, the Commission’s staff has 

estimated that all of the reported mergers in the 

remaining industry segments would involve entities 

that have issued municipal securities. 

192See 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). 

193The Commission’s staff based this estimate on 

the following: 12,000 (estimated number of issuers 

under proposed amendments) × .31 (31%) 

(estimated percentage of issuers that would be 

impacted by a change to the largest trustee of 

municipal securities) = 3,720 issuers. 

194The Commission’s staff based this estimate on 

the following: 3,720 (estimated number of issuers 

that would be impacted by a change to the largest 

trustee of municipal securities) × 1 (estimated 

number of event notices that an issuer would file) 

= 3,720 notices. The Commission staff believes that 

the actual number of changes involving the trustee 

that occur annually is significantly less than 3,720. 

However, to provide an estimate for the paperwork 

burden that would not be under-inclusive, the 

Commission’s staff has elected to use an estimate 

that takes into account a change involving the 

largest trustee. 

195See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

196 1000 (estimated number of additional notices 

submitted under change to events materiality 

condition) + 130 (estimated number of adverse tax 

event notices under proposed amendments) + 100 

(estimated number of tender offers event notices 

under proposed amendments) + 24 (estimated 

number of bankruptcy/insolvency event notices 

under proposed amendments) + 1,783 (estimated 

number of merger or acquisition event notices 

under proposed amendments) + 3,720 (estimated 

number of appointment/change of trustee event 

notices under proposed amendments) = 6,757 (total 

number of additional event notices that would be 

prepared under the proposed amendments to the 

event notice provisions of the Rule). 

197 72,000 (number of event notices under 

proposed amendments modifying the exemption for 

demand securities exemption) + 6,757 (total 

number of additional event notices that would be 

prepared under the proposed amendments to the 

event notice provisions of the Rule) = 78,757 event 

notices. 

198 6,757 (total number of additional event notices 

that would be prepared under the proposed 

amendments to the event notice provisions of the 

Rule) × .75 hours (45 minutes) (estimated time to 

prepare an event notice under 2008 Amendments 

Adopting Release) = 5,067.75 hours (rounded to 

5,068 hours). 

199 13,500 hours (estimated burden for issuers to 

submit annual filings) + 59,068 hours (estimated 

burden for issuers to submit event notices) + 1,200 

hours (estimated burden for issuers to submit 

failure to file notices) = 73,768 hours. 

200See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

201See supra note 151. 

202 6,757 (estimated additional event notices 

under the proposed event notice amendments)/ 

77,000 (estimated number of continuing disclosure 

documents submitted under current Rule (60,000 

(event notices) + 15,000 (annual filings) + 2,000 

(failure to file notices) = 77,000)) = .087 × 100 = 

approximately 9%. 

203Annual burden for MSRB: 7000 hours (annual 

burden under 2008 Amendments Adopting Release) 

+ 2,030 hours (additional hourly burden under 

proposed amendments) = 9,030 hours. 

204 300 hours (total estimated burden for brokerdealers) + 73,768 hours (total estimated burden for 

issuers) + 9,030 hours (total estimated burden for 

MSRB) = 83,098 hours. The initial first-year burden 

would be 83,223 hours: 425 hours (total estimated 

burden for broker-dealers in the first year) + 73,768 

(vii) Successor or Additional Trustee, or 

Change in Trustee Name 

Under the proposed amendments, 

paragraph (b)(5)(i)(C)(14) would be 

added to the Rule and would contain a 

new disclosure event related to the 

appointment of a successor or 

additional trustee or the change of name 

of a trustee, if material. The proposed 

addition to the Rule of the event relating 

to trustee changes would expand the 

circumstances in which issuers would 

submit an event notice to the MSRB. 

The Commission’s staff believes that a 

change affecting the largest trustee of 

municipal securities would provide a 

reasonable estimate of the number of 

additional event notices that would be 

submitted annually under this proposed 

amendment to the Rule. The largest 

trustee covered approximately 31% of 

the municipal issuances in 2008.192 The 

Commission’s staff believes that this 

percentage represents a reasonable 

estimate of the percentage of issuers 

covered by the largest trustee. Thus, the 

Commission’s staff estimates that a 

change to the largest trustee would 

cover approximately 31% of issuers, or 

3,720 issuers, which would serve as a 

conservative proxy for the number of 

event notices to be submitted regarding 

a change in trustee.193 Therefore the 

Commission’s staff estimates that the 

proposed amendment to add the new 

disclosure event contained in paragraph 

(b)(5)(i)(C)(14) of the Rule would 

increase the total number of event 

notices submitted by issuers annually 

by approximately 3,720 notices.194

c. Total Burden on Issuers for Proposed 

Amendments to Event Notices 

In the 2008 Amendments Adopting 

Release, the Commission estimated that 

the process for an issuer to prepare and 

submit event notices to the MSRB in an 

electronic format would require 

approximately 45 minutes.195 As 

discussed above, under the proposed 

amendment to modify the Rule’s 

exemption for demand securities, the 

total number of issuers affected by the 

Rule would increase to 12,000, the total 

number of event notices submitted by 

issuers would increase to 72,000, and 

the annual paper work burden for 

issuers to submit event notices would 

increase to 54,000 hours. Under the 

proposed amendments to paragraph 

(b)(5)(i)(C) of the Rule, the 

Commission’s staff estimates that the 

12,000 municipal issuers with 

continuing disclosure agreements would 

prepare an additional 6,757 event 

notices annually,196 raising the total 

number of event notices prepared by 

issuers annually to approximately 

78,757.197 This increase in the number 

of event notices would result in an 

increase of 5,068 hours in the annual 

paperwork burden for issuers to submit 

event notices.198 This increase would 

result in an annual paperwork burden 

for issuers to submit event notices of 

approximately 59,068 hours (54,000 

hours + 5,068 hours). 

d. Total Burden for Issuers 

Accordingly, under the proposed 

amendments, the total burden on issuers 

to submit annual filings, event notices 

and failure to file notices would be 

73,768 hours.199

3. MSRB 

In the 2008 Amendments Adopting 

Release, the Commission estimated that 

the MSRB incurred an annual burden of 

approximately 7,000 hours to collect, 

index, store, retrieve, and make 

available the pertinent documents under 

the Rule.200 As discussed above, the 

Commission’s staff anticipates that the 

proposed amendments to modify the 

Rule’s exemption for demand securities 

would increase filings submitted by 

approximately 20% annually.201 In 

addition, the Commission’s staff 

estimates that the proposed 

amendments to the event notice 

provisions of the Rule would increase 

filings submitted by approximately an 

additional 9% annually. 202

Accordingly, the Commission’s staff 

estimates that the total burden on the 

MSRB of collecting, indexing, storing, 

retrieving and disseminating 

information requested by the public also 

would increase by approximately 29% 

or 2,030 hours (7,000 hours x .29). Thus, 

the Commission’s staff estimates that 

the total burden on the MSRB to collect, 

store, retrieve, and make available the 

disclosure documents covered by the 

proposed amendments to the Rule 

would be 9,030 hours annually.203

4. Annual Aggregate Burden for 

Proposed Amendments 

The Commission’s staff estimates that 

the ongoing annual aggregate 

information collection burden for the 

proposed amendments to the Rule 

would be 83,098 hours.204


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hours (total estimated burden for issuers) + 9,030 

hours (total estimated burden for MSRB) = 83,223 

hours. 

205Telephone 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. 

206See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

207 Id. 

208 Id. 

209 6,757 (estimated additional event notices 

submitted under proposed amendments to event 

notices)/12,000 (estimated number of issuers under 

proposed amendments) = .563 notices per issuer 

(rounded up to 1) (estimated number of additional 

event notices submitted annually per issuer). To 

provide an estimate that would not be underinclusive, the Commission’s staff has elected to use 

an estimate that expects each issuer would submit 

one additional event notice as a result of the 

proposed amendments. 

210 $8 (cost to have third party convert an event 

notice or failure to file notice into an electronic 

format) × 1 (maximum estimated number of 

additional event or failure to file notices filed per 

year per issuer)] = $8. 

211 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 proposed amendments to the Rule) = $100. The 

$400 per hour estimate for an outside attorney’s 

work is based on the Commission’s staff review of 

industry sources. 

212 $100 (estimated cost to revise a continuing 

disclosure agreement I accordance with the 

proposed amendments to the Rule) × 10,000 

(number of current issuers) = $1,000,000. 

E. Total Annual Cost Burden 

1. Broker-Dealers and the MSRB 

The Commission does not expect 

broker-dealers to incur any additional 

external costs associated with the 

proposed amendments to the Rule since 

the proposed amendments do not 

change the obligation of broker-dealers 

under the Rule to reasonably determine 

that the issuer or obligated person has 

undertaken, in a written agreement or 

contract, for the benefit of holders of 

such municipal securities, to provide 

annual filings, event notices, and failure 

to file notices to the MSRB. 

The Commission believes that the 

MSRB may incur costs to modify the 

indexing system in its EMMA system to 

accommodate the proposed changes to 

the Rule that would add additional 

material disclosure events. Based on 

information provided to the 

Commission’s staff by MSRB staff in a 

telephone conversation on November 7, 

2008, the MSRB staff estimated that the 

MSRB’s costs to update its EMMA 

system to accommodate the proposed 

changes to the material disclosure 

events of the Rule would be no more 

than approximately $10,000.205

2. Issuers 

(a) Current Issuers 

The Commission expects that some 

issuers that currently submit continuing 

disclosure documents to the MSRB in 

an electronic format (referred to herein 

as ‘‘current issuers’’) could be subject to 

some additional costs associated with 

the proposed amendments to the Rule. 

For current issuers that convert their 

annual filings, event notices and/or 

failure to file notices into the MSRB’s 

prescribed electronic format through a 

third party there would be costs 

associated with any additional 

submissions of event notices and failure 

to file notices. 

The cost for an issuer to have a thirdparty vendor convert paper continuing 

disclosure documents into the MSRB’s 

prescribed electronic format could vary 

depending on what resources are 

required to transfer the documents into 

the appropriate electronic format. One 

example of such a transfer would be the 

scanning of paper-based continuing 

disclosure documents into an electronic 

format. In the 2008 Amendments 

Adopting Release, the Commission 

estimated that the cost for an issuer to 

have a third-party vendor scan 

documents would be $6 for the first 

page and $2 for each page thereafter.206

In the 2008 Amendments Adopting 

Release, the Commission also estimated 

that event notices and failure to file 

notices consist of one to two pages.207

Accordingly, the approximate cost for 

an issuer to use a third party vendor to 

scan an event notice or failure to file 

notice would be $8 per notice. The 

Commission believes these estimates are 

still accurate. In the 2008 Amendments 

Adopting Release, the Commission 

estimated that the high end of the 

estimate for the number of event notices 

submitted by an issuer annually is 

three.208 Under the proposed 

amendments to the Rule, some current 

issuers would need to prepare 

additional event notices for submission 

to the MSRB. Some current issuers 

could need to submit these additional 

event notices to a third party to convert 

into an electronic format for submission 

to the MSRB. Under the proposed 

amendments to the Rule, the 

Commission’s staff estimates that a 

conservative estimate of the number of 

additional event notices that an issuer 

would need to submit annually under 

the proposed amendments would be 

one, increasing the total estimate to 

four.209 Each of these issuers would 

incur an annual cost of $8 to convert the 

additional event notice into an 

electronic format for submission to the 

MSRB.210 The Commission believes that 

current issuers that already have the 

technology resources to convert 

continuing disclosure documents into 

an electronic format for submission to 

the MSRB would not incur any 

additional external costs associated with 

the proposed amendments to the Rule. 

There may be some costs incurred by 

issuers to revise their current template 

for continuing disclosure agreements to 

reflect the proposed amendments to the 

Rule, if they are adopted. The 

Commission understands that models 

currently exist for continuing disclosure 

agreements that are relied upon by legal 

counsel to issuers and, accordingly, 

these documents are likely to be 

updated by outside attorneys to reflect 

the proposed amendments, if the 

Commission should adopt them. Based 

on a review of industry sources, the 

Commission believes that continuing 

disclosure agreements are form 

agreements. Based on a review of 

industry sources, the Commission’s staff 

estimates that it would take an outside 

attorney approximately 15 minutes to 

revise the template for continuing 

disclosure agreements for a current 

issuer, if the proposed amendments are 

adopted. Thus, the Commission’s staff 

estimates that the approximate cost of 

revising a continuing disclosure 

agreement to reflect the proposed 

amendments for each current issuer 

would be approximately $100,211 for a 

one-time total cost of $1,000,000 212 for 

all current issuers, if an outside counsel 

were used to revise the continuing 

disclosure agreement. 

(b) VRDO Issuers 

As discussed above, the Commission’s 

staff estimates that the proposal relating 

to demand securities would increase the 

number of issuers affected by the Rule 

by approximately 20% or 2,000 issuers 

(referred to herein as ‘‘VRDO issuers’’). 

VRDO issuers may have some external 

costs associated with the preparation 

and submission of annual filings, event 

notices and failure to file notices. Under 

the Rule, Participating Underwriters are 

required to reasonably determine that an 

issuer has entered into a continuing 

disclosure agreement to provide 

continuing disclosure documents to the 

MSRB in an electronic format as 

prescribed by the MSRB. Under the 

proposed amendments to the Rule, 

Participating Underwriters of VRDO 

issuers would need to reasonably 

determine that these VRDO issuers have 

entered into continuing disclosure 

agreements. The Commission 

understands that models currently exist 

for continuing disclosure agreements 

that are relied upon by legal counsel to 

issuers and, accordingly, these 

documents are likely to be updated by 


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36856 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

213 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 the Commission’s 

staff review of industry sources. 

214 $600 (cost for continuing disclosure 

agreement) × 2,000 (number of VRDO issuers) = 

$1,200,000. 

215See supra Section V.D. 

216See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

217This estimated range of the annual fee for the 

services of a designated agent is based on the 

Commission’s staff review of industry sources in 

December 2008. 

218 2,000 (number of VRDO issuers) × .30 

(percentage of issuers that use designated agents) × 

$500 (estimated annual cost for issuer’s use of a 

designated agent) = $300,000. In order to provide 

a total cost estimate that is not under-inclusive the 

Commission’s staff elected to use the higher end of 

the estimated range of annual fees for designated 

agent’s services. 

219See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

220 6,757 (estimated additional event notices 

submitted under proposed amendments)/12,000 

(estimated number of issuers under proposed 

amendments) = .563 notices per issuer (rounded up 

to 1) (estimated number of additional event notices 

submitted annually per issuer). To provide an 

estimate that would not be under-inclusive, the 

Commission’s staff has elected to use an estimate 

that expects each issuer would submit one 

additional material event notice as a result of the 

proposed amendments. 

221The maximum cost is the cost to scan and 

convert four material event or failure to file notices: 

4 (number of notices submitted annually) × $8.00 

(cost to scan and convert each notice) = $32. 

222See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

223The maximum cost is the cost to scan and 

convert two annual filings: 2 (number of annual 

filings submitted annually) × $64.00 (cost to scan 

and convert each annual filing) = $128. 

224 Generally, the technology resources necessary 

to transfer a paper document into an electronic 

format are a computer, scanner and possibly 

software to convert the scanned document into the 

appropriate electronic document format. Most 

scanners include a software package that is capable 

of converting scanned images into multiple 

electronic document formats. An issuer would only 

outside attorneys to reflect the proposed 

amendments, if the Commission should 

adopt them. Based on a review of 

industry sources, the Commission 

believes that continuing disclosure 

agreements are form agreements. Also, 

based on a review of industry sources, 

the Commission’s staff estimates that it 

would take an outside attorney 

approximately 1.5 hours to draft a 

continuing disclosure agreement. Thus, 

the Commission’s staff estimates that 

the approximate cost of preparing a 

continuing disclosure agreement for 

each VRDO issuer would be 

approximately $600,213 for a one-time 

total cost of $1,200,000 214 for all VRDO 

issuers, if an outside counsel were to 

prepare the entire agreement. 

The Commission believes that VRDO 

issuers generally would not incur any 

other external costs associated with the 

preparation of annual filings, event 

notices (including those notices for the 

new event disclosure items included in 

the proposed amendments) and failure 

to file notices. The Commission believes 

that VRDO issuers would prepare the 

information contained in these 

continuing disclosure documents 

internally and that these internal costs 

have been accounted for in the hourly 

burden section above.215

The Commission believes that the 

only external costs VRDO issuers could 

incur in connection with the submission 

of continuing disclosure documents to 

the MSRB would be the costs associated 

with converting them into an electronic 

format. The Commission believes that 

many issuers of municipal securities 

currently have the computer equipment 

and software necessary to convert paper 

copies of continuing disclosure 

documents to electronic copies and to 

electronically transmit the documents to 

the MSRB. VRDO issuers that presently 

do not have the ability to prepare their 

annual filings, event notices and/or 

failure to file notices in an electronic 

format could incur some costs to obtain 

electronic copies of such documents if 

they are prepared by a third party (e.g., 

accountant or attorney) or, alternatively, 

to have a paper copy converted into an 

electronic format. These costs would 

vary depending on how the VRDO 

issuer elected to convert its continuing 

disclosure documents into an electronic 

format. An issuer could elect to have a 

third-party vendor transfer its paper 

continuing disclosure documents into 

the appropriate electronic format. An 

issuer also could decide to undertake 

the work internally, and its costs would 

vary depending on the issuer’s current 

technology resources. An issuer also 

could elect to use a designated agent to 

submit its continuing disclosure 

documents to the MSRB. In the 2008 

Amendments Adopting Release, the 

Commission estimated that 30% of 

issuers would elect to use designated 

agents to submit continuing disclosure 

documents to the MSRB.216 Generally, 

when issuers utilize the services of a 

designated agent, they enter into a 

contract with the agent for a package of 

services, including the submission of 

continuing disclosure documents, for a 

single fee. Based on a review of industry 

sources, the Commission’s staff 

estimates this fee to range from $100 to 

$500 per year depending on which 

designated agent an issuer uses.217

Accordingly, the Commission’s staff 

estimates that the high end of the total 

annual cost that could be incurred by 

VRDO issuers that use the services of a 

designated agent would be 

approximately $300,000.218

The cost for an issuer to have a thirdparty vendor transfer its paper 

continuing disclosure documents into 

an appropriate electronic format could 

vary depending on what resources are 

required to transfer the documents into 

the appropriate electronic format. One 

example of such a transfer would be the 

scanning of paper-based continuing 

disclosure documents into an electronic 

format. In the 2008 Amendments 

Adopting Release, the Commission 

estimated that the approximate cost for 

an issuer to use a third party vendor to 

scan an event notice or failure to file 

notice would be $8 per notice, and that 

the maximum number of event notices 

or failure to file notices that an issuer 

would submit annually is three.219 The 

Commission still believes these 

estimates are accurate. Under the 

proposed amendments to the Rule, the 

Commission’s staff estimates that the 

maximum number of event notices and 

failure to file notices submitted by 

issuers would increase to four.220

Accordingly, the Commission’s staff 

estimates that the maximum external 

costs for a VRDO issuer who elects to 

have a third-party scan continuing event 

notices or failure to file notices into an 

electronic format under the proposed 

amendments would be $32.221 In the 

2008 Amendments Adopting Release, 

the Commission estimated that the 

approximate cost for an issuer to use a 

third party vendor to scan an averagesized annual financial statement would 

be $64 per annual statement, and that 

the maximum number of annual filings 

submitted per year is two.222 The 

Commission believes that these 

estimates are still accurate. The 

proposed amendments to the Rule 

would increase the number of issuers 

submitting annual filings each year. 

However, the proposed amendments to 

the Rule would not increase the number 

of annual filings each issuer submits 

yearly. Thus, the Commission expects 

that the number of annual filings 

submitted yearly, per issuer, under the 

proposed amendments to the Rule 

would remain the same. Accordingly, 

the Commission’s staff estimates that 

the maximum external costs for a VRDO 

issuer who elects to have a third-party 

scan annual filings into an electronic 

format under the proposed amendments 

would be $128.223

Alternatively, a VRDO issuer that 

currently does not have the appropriate 

technology to convert paper continuing 

disclosure documents into an electronic 

format could elect to purchase the 

resources to do so.224 In the 2008 


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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. 

225See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

226 Id. 

227 Id. 

228 Id. 

229 Id. 

230 Id. 

231The total maximum external cost for a 

Category 1 VRDO issuer would be calculated as 

follows: [$64 (cost to have third party convert 

annual filing into an electronic format) × 2 

(maximum estimated number of annual filings filed 

per year per issuer)] + [$8 (cost to have third party 

convert material event notice or failure to file notice 

into an electronic format) × 4 (maximum estimated 

number of event or failure to file notices filed per 

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

charge) × 12 months] = $760. The Commission’s 

staff estimates that an issuer would file one to six 

continuing disclosure documents per year. These 

documents generally would consist of no more than 

two annual filings and four event or failure to file 

notices. The Commission’s staff estimates the 

maximum number of documents filed annually per 

issuer as follows: 5 documents (consisting of 2 

annual filings and 3 event or failure to file notices 

based on the Commission’s estimate from the 2008 

Amendment Adopting Release) + 1 document 

(consisting of the additional event notice that 

would be filed under the proposed amendments to 

the Rule). 

232The total maximum external cost for a 

Category 2 VRDO issuer would be calculated as 

follows: [$4300 (maximum estimated one-time cost 

to acquire technology to convert continuing 

disclosure documents into an electronic format)] + 

[$50 (estimated monthly Internet charge) × 12 

months] = $4900. After the initial year, issuers who 

acquire the technology to convert continuing 

disclosure documents into an electronic format 

internally would only have the cost of obtaining 

Internet access. $50 (estimated monthly Internet 

charge) × 12 months = $600. 

233See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

234 2,000 VRDO issuers × 20% = 400 VRDO 

issuers. The Commission used a 20% estimate in 

the 2008 Amendment Adopting Release. See 2008 

Amendments Adopting Release, supra note 11, 73 

FR 76104. The Commission believes that this 

estimate is still appropriate. 

235 400 (Category 2 issuers) × $4,900 = $1,960,000. 

236 400 (Category 2 issuers) × $600 = $240,000. 

237 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 the 

Commission’s staff review of industry sources. 

238 $100 (estimated cost to have outside counsel 

add a change of name notice provision to a trust 

indenture) × 12,000 (number of issuers under the 

proposed amendments) = $1,200,000. 

239 17 CFR 240.17a–1. 

Amendments Adopting Release, the 

Commission estimated that an issuer’s 

initial cost to acquire these technology 

resources could range from $750 to 

$4,300.225 Some VRDO issuers may 

have the necessary hardware to transmit 

documents electronically to the MSRB, 

but may need to upgrade or obtain the 

software necessary to submit documents 

to the MSRB in the electronic format 

that it prescribes. In the 2008 

Amendments Adopting Release, the 

Commission estimated that an issuer’s 

cost to update or acquire this software 

could range from $50 to $300.226 The 

Commission believes these estimates are 

still accurate. 

In addition, VRDO issuers without 

direct Internet access could incur some 

costs to obtain such access to submit the 

documents. In the 2008 Amendments 

Adopting Release, the Commission 

noted that Internet access is now 

broadly available to and utilized by 

businesses, governments, organizations 

and the public, and the Commission 

expects that most issuers of municipal 

securities currently have Internet 

access.227 In the event that a VRDO 

issuer does not have Internet access, it 

could incur costs in obtaining such 

access, which the Commission estimates 

to be approximately $50 per month, 

based on its limited inquiries to Internet 

service providers.228 Otherwise, there 

are multiple free or low cost locations 

that an issuer could utilize, such as 

various commercial sites, which could 

help an issuer to avoid the costs of 

maintaining continuous Internet access 

solely to comply with the proposed 

amendments to the Rule.229

Accordingly, the Commission 

estimates that the costs to some of the 

VRDO issuers to acquire technology 

necessary to convert continuing 

disclosure documents into an electronic 

format to submit to the MSRB could 

include: (i) An approximate cost of $8 

per notice to use a third party vendor to 

scan an event notice or failure to file 

notice, and an approximate cost of $64 

to use a third party vendor to scan an 

average-sized annual financial 

statement, (ii) an approximate cost 

ranging from $750 and $4,300 to acquire 

technology resources to convert 

continuing disclosure documents into 

an electronic format, (iii) $50 to $300 

solely to upgrade or acquire the software 

to submit documents in an electronic 

format; and (iv) approximately $50 per 

month to acquire Internet access. The 

Commission included these estimates in 

the 2008 Amendments Adopting 

Release and the Commission believes 

that they are still accurate.230

For a VRDO issuer that does not have 

Internet access and elects to have a third 

party convert continuing disclosure 

documents into an electronic format 

(‘‘Category 1’’), the total maximum 

external cost such issuer would incur 

would be $760 per year.231 For an issuer 

that does not have Internet access and 

elects to acquire the technological 

resources to convert continuing 

disclosure documents into an electronic 

format internally (‘‘Category 2’’), the 

total maximum external cost such 

VRDO issuer would incur would be 

$4,900 for the first year and $600 per 

year thereafter.232 To be conservative for 

purposes of the PRA, the Commission 

estimates that any VRDO issuers that 

incur costs associated with converting 

continuing disclosure documents into 

an electronic format would choose the 

Category 2 option.233 The Commission’s 

staff estimates that approximately no 

more than 400 VRDO issuers would 

incur costs associated with acquiring 

technology resources to convert 

continuing disclosure documents into 

an electronic format.234 Additionally, 

the Commission’s staff estimates that 

the estimated maximum annual costs for 

those VRDO issuers that need to acquire 

technology resources to submit 

documents to the MSRB would be 

approximately $1,960,000 235 for the 

first year after the adoption of the 

proposed amendments and 

approximately $240,000 236 for each 

year thereafter. 

(c) Current and VRDO Issuers 

Lastly, some current and VRDO 

issuers may incur a one-time external 

cost associated with the proposed 

amendment to change the timing 

requirement for submitting event 

notices in the Rule from ‘‘in a timely 

manner’’ to ‘‘in a timely manner not to 

exceed ten business days after the 

occurrence of the event.’’ In particular, 

some current and VRDO issuers may 

incur a one-time external cost associated 

with monitoring for a change in the 

name of the issuer’s trustee. One way an 

issuer may monitor a change in the 

name of its trustee cost would be to 

have outside counsel add a notice 

provision to the issuer’s trust indenture 

requiring the trustee to provide the 

issuer with notice of any change in the 

trustee’s name. Based on a review of 

industry sources, the Commission’s staff 

estimates that it would take an outside 

attorney approximately 15 minutes to 

draft and add a notice provision for a 

change in name of the trustee to an 

indenture agreement. Thus, the 

Commission’s staff estimates that the 

approximate cost of adding this notice 

provision to an issuer’s trust indenture 

for each issuer would be approximately 

$100,237 for a one-time annual cost of 

$1,200,000 238 for all issuers. 

F. Retention Period of Recordkeeping 

Requirements 

As an SRO subject to Rule 17a–1 

under the Exchange Act,239 the MSRB is 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36858 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

required to retain records of the 

collection of information for a period of 

not less than five years, the first two 

years in an easily accessible place. The 

proposed amendments to the Rule 

would contain no recordkeeping 

requirements for any other persons. 

G. Collection of Information Is 

Mandatory 

Any collection of information 

pursuant to the proposed amendments 

to the Rule would be a mandatory 

collection of information. 

H. Responses to Collection of 

Information Will Not Be Kept 

Confidential 

The collection of information 

pursuant to the proposed amendments 

to the Rule would not be confidential 

and would be publicly available. The 

collection of information that would be 

provided pursuant to the continuing 

disclosure documents under the 

proposed amendments would be 

accessible through the MSRB’s EMMA 

system and would be publicly available 

via the Internet. 

I. Request for Comments 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the Commission solicits comments 

regarding: (1) Whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the agency, including 

whether the information will have 

practical utility; (2) the accuracy of the 

Commission’s estimate of the burden of 

the revised collections of information; 

(3) whether there are ways to enhance 

the quality, utility, and clarity of the 

information to be collected; and (4) 

whether there are ways to minimize the 

burden of the collection of information 

on those who are to respond, including 

through the use of automated collection 

techniques or other forms of information 

technology. 

The Commission has submitted to 

OMB for approval the proposed 

revisions to the current collection of 

information titled ‘‘Municipal Securities 

Disclosure.’’ Persons submitting 

comments on the collection of 

information requirements should direct 

them to the Office of Management and 

Budget, Attention: Desk Officer for the 

Securities and Exchange Commission, 

Office of Information and Regulatory 

Affairs, Washington, DC 20503, and 

should also send a copy of their 

comments to Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–0609, with 

reference to File No. S7–15–09, and to 

the Securities and Exchange 

Commission, Public Reference Room, 

100 F Street, NE., Washington, DC 

20549. As OMB is required to make a 

decision concerning the collection of 

information between 30 and 60 days 

after publication, a comment to OMB is 

best assured of having its full effect if 

OMB receives it within 30 days of 

publication. Requests for materials 

submitted to OMB by the Commission 

with regard to this collection of 

information should be in writing, 

should refer to File No. S7–15–09, and 

be submitted to the Securities and 

Exchange Commission, Public Reference 

Room, 100 F Street, NE., Washington, 

DC 20549. 

VI. Costs and Benefits of Proposed 

Amendment to Rule 15c2–12 

The Commission is proposing 

amendments to Rule 15c2–12 that 

would amend certain requirements 

regarding the information that a broker, 

dealer, or municipal securities dealer 

acting as an underwriter in a primary 

offering of municipal securities must 

reasonably determine that an issuer of 

municipal securities or an obligated 

person has undertaken, in a written 

agreement or contract for the benefit of 

holders of the issuer’s municipal 

securities, to provide to the MSRB. 

Specifically, the proposed amendments 

would require a broker, dealer, or 

municipal securities dealer to 

reasonably determine that the issuer or 

obligated person has agreed to provide 

notice of specified events in a timely 

manner not in excess of ten business 

days after the event’s occurrence, would 

amend the list of events for which a 

notice must be provided, and would 

modify the events that are subject to a 

materiality determination before 

triggering a notice to the MSRB. In 

addition, the amendments would revise 

an exemption from the rule for certain 

offerings of municipal securities with 

put features. These proposed 

amendments are intended to help 

improve the availability of timely and 

important information to investors and 

other market participants regarding 

municipal securities, including demand 

securities, so that investors could make 

more knowledgeable investment 

decisions, effectively manage and 

monitor their investments, and help 

protect themselves against fraud, and so 

brokers, dealers, and municipal 

securities dealers could satisfy their 

obligation to have a reasonable basis on 

which to recommend a municipal 

security. 

The Commission is sensitive to the 

costs and benefits of the proposed rule 

amendments and requests comment on 

the costs and benefits of the proposed 

amendments to Rule 15c2–12 discussed 

above. The Commission encourages 

commenters to identify, discuss, 

analyze, and supply relevant data 

regarding any such costs or benefits. 

A. Benefits 

The proposed amendments would 

modify paragraphs (b)(5)(i)(C) and 

(d)(2)(ii)(B) of the Rule to provide that 

a Participating Underwriter must 

reasonably determine that the issuer or 

obligated person has undertaken in a 

continuing disclosure agreement to 

provide event notices to the MSRB in a 

timely manner not to exceed ten 

business days after the occurrence of the 

event. The current provisions of the 

Rule state that a Participating 

Underwriter must reasonably determine 

that the continuing disclosure 

agreement provides that event notices 

are to be provided ‘‘in a timely manner’’ 

to the MSRB in an electronic format. As 

discussed above, the Commission 

preliminarily believes that more timely 

availability of such significant 

information would assist investors in 

making better informed investment 

decisions and should help reduce 

instances of fraud. The Commission also 

anticipates that, in providing for a 

maximum time frame within which 

event notices should be disclosed under 

a continuing disclosure agreement, the 

proposed amendment should foster the 

availability of up-to-date information 

about municipal securities, thereby 

further promoting greater transparency 

and investor confidence in the 

municipal securities market as a whole, 

and assisting investors to better protect 

themselves against fraud. Moreover, 

brokers, dealers and municipal 

securities dealers should be able to more 

readily carry out their responsibilities 

under the securities laws. The 

Commission believes that the proposed 

change regarding the maximum time 

frame for submission of event notices 

should continue to provide an issuer 

with adequate time to become aware of 

the event and, pursuant to its 

undertaking, submit notice of the 

event’s occurrence to the MSRB. In 

proposing that event notices be 

provided ‘‘in a timely manner not in 

excess of ten business days after the 

occurrence of the event,’’ the 

Commission intends to strike a balance 

between the need for such information 

to be disseminated promptly and the 

need to allow adequate time for an 

issuer to become aware of the event and 

to prepare and file such a notice. The 

Commission preliminarily believes that 

the proposed time frame of ten business 

days after the occurrence of the event 

would provide a reasonable amount of 

time for issuers to comply with their 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36859 

240See supra Section II.C. 

241These events are: (1) Principal and interest 

payment delinquencies with respect to the 

securities being offered; (2) unscheduled draws on 

debt service reserves reflecting financial difficulties; 

(3) unscheduled draws on credit enhancements 

reflecting financial difficulties; (4) substitution of 

credit or liquidity providers, or their failure to 

perform; (5) defeasances; and (6) rating changes. 

242See supra Section II.E.1. 

243See supra Section II.E.2. 

244See supra Section II.E.3. 

245See supra Section II.E.4. 

obligations under their continuing 

disclosure agreements, while also 

allowing event notices to be made 

available to investors in a more timely 

manner. The Commission notes that 

issuers would not be precluded from 

submitting subsequent notices as 

additional information relating to the 

event becomes available. 

The proposed amendments would 

modify subparagraph (b)(5)(i)(C)(6) of 

the Rule to require a Participating 

Underwriter to reasonably determine 

that the issuer or obligated person has 

undertaken in a continuing disclosure 

agreement to provide notice to the 

MSRB of the issuance of proposed and 

final determinations of taxability, 

Notices of Proposed Issue (IRS form 

5701–TEB), or other material notices or 

determinations with respect to the taxexempt status of securities by the 

Internal Revenue Service, as well as 

adverse tax opinions and other events 

affecting the tax-exempt status of such 

securities. As discussed earlier, the 

Commission believes that the taxexempt status of municipal securities is 

of significant importance to investors 

and other participants in the municipal 

securities market.240 The Commission 

believes that this tax-exempt status has 

a significant impact on the value of 

municipal securities, as well as on the 

potential tax liability a municipal 

security holder may incur if such status 

were to change. Accordingly, the 

Commission believes that this 

amendment to subparagraph 

(b)(5)(i)(C)(6) of the Rule would clarify 

a Participating Underwriter’s obligation 

to determine that the issuer has 

undertaken in its continuing disclosure 

agreements to provide notice of these 

events that could affect the tax-exempt 

status of its municipal securities. 

The Commission is proposing to 

delete the condition in paragraph 

(b)(5)(i)(C) of the Rule that presently 

provides that notice of all of the listed 

events need be made only ‘‘if material.’’ 

The Commission has reviewed each of 

the Rule’s current disclosure event 

items and determined six instances in 

which no materiality evaluation should 

be necessary.241 Issuers would not need 

to undertake the determination of 

materiality for these six events, which 

should help speed the disclosure of 

these events to investors and the public 

and eliminate the costs presently 

required of an issuer to make such a 

determination. 

The proposed amendments would 

add tender offers to subparagraph 

(b)(5)(i)(C)(8) of the Rule, which 

currently covers bond calls.242 The 

Commission believes that the need to 

reach all investors with important 

information regarding a tender offer, 

which necessitates that an investor 

decide whether or not to tender within 

the prescribed time period, makes its 

proposed addition to the Rule 

appropriate. As a result, the proposal 

would help improve the ability of 

issuers and other obligated persons to 

communicate tender offers to 

bondholders effectively and of 

bondholders to respond within the 

tender offer period. In addition, the 

proposed amendment to subparagraph 

(b)(5)(i)(C)(8) of the Rule could help 

eliminate the possibility of any investor 

confusion regarding whether a certain 

municipal security is the subject of a 

tender offer. In all these ways, the 

availability of this information would 

help investors protect themselves from 

misrepresentation and fraud, and would 

also aid brokers, dealers and municipal 

securities dealers to satisfy their 

obligation to have a reasonable basis to 

recommend a municipal security. 

The proposed addition of 

subparagraph (b)(5)(i)(C)(12) to the Rule 

would require the Participating 

Underwriter to reasonably determine 

that the issuer or obligated person has 

undertaken in a continuing disclosure 

agreement to provide notice to the 

MSRB, upon its bankruptcy, insolvency, 

receivership or similar event.243 The 

Commission notes that, while 

bankruptcy, insolvency, receivership or 

similar event of the issuer or obligated 

person are uncommon in the municipal 

market, these events can have a 

significant impact on the price of the 

municipal issuer’s securities. The 

Commission believes that the potential 

severity of the consequences to 

investors from bankruptcy, insolvency, 

receivership or similar event of the 

issuer or obligated person, and the 

corresponding benefit of the availability 

of that information to help prevent 

fraud, supports its proposal that the 

Participating Underwriter should be 

required to reasonably determine that 

the issuer or obligated person has 

undertaken in its continuing disclosure 

agreement to provide notice to the 

MSRB if such an event should occur. 

In addition, the proposed 

amendments would add subparagraph 

(b)(5)(i)(C)(13) to the Rule, which would 

require the Participating Underwriter to 

reasonably determine that the issuer or 

obligated person has undertaken in a 

continuing disclosure agreement to 

provide notice to the MSRB, if material, 

of the consummation of a merger, 

consolidation, or acquisition involving 

an obligated person or the sale of all or 

substantially all of the assets of the 

obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms.244 As with bankruptcy, 

insolvency, receivership or similar 

event of the issuer or obligated person, 

there can be a potential impact on the 

price of a municipal security as a result 

of the consummation of a material 

merger, consolidation, or acquisition 

involving an obligated person or the sale 

of all or substantially all of the assets of 

the obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms. In such a circumstance, the 

Commission believes that the proposed 

amendment would help to ensure that 

investors and other market participants 

could obtain knowledge of the identity 

of the entity that would have 

responsibility for municipal security 

repayment obligations after the 

transaction is consummated. In 

addition, investors and other market 

participants would have the opportunity 

to review the creditworthiness and other 

aspects of the acquiring entity that 

would support repayment of the 

security following the transaction. Thus, 

the proposed amendment would help to 

prevent fraud. 

Proposed subparagraph (b)(5)(i)(C)(14) 

to the Rule would add the appointment 

of a successor or additional trustee or 

the change of name of a trustee to the 

list of events contained in the Rule, if 

material. As discussed earlier, the 

Commission believes that the trustee of 

a municipal security performs important 

functions for investors in that 

security.245 The Commission notes that 

the proposed amendment would benefit 

investors by helping to ensure that the 

continuing disclosure agreement would 

provide that investors be made aware of 

the identity of and contact information 

for the most current trustee for a 

municipal security and that any changes 

to the trustee’s identity would be made 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36860 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

246See supra Section II.A. 

247 Id. 

248See 17 CFR 240.15c2–12(c). 

249See supra Section V.D.1.a. 

250 Id. 

251 1.20 hours (estimated annual information 

collection burden for each broker-dealer) × $270 

(hourly cost for a broker-dealer’s internal 

compliance attorney) = $324. The hourly rate for 

the compliance attorney is from SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2008, modified by the 

Commission’s staff to account for an 1800-hour 

work-year and multiplied by 5.35 to account for 

bonuses, firm size, employee benefits and overhead. 

Cost increase for Broker-Dealers under the proposed 

amendments to the Rule: $324 (annual cost under 

amended rule) ¥ $270 (annual cost under current 

Rule) = $54. This estimated cost for broker-dealers 

also accounts for their review of continuing 

disclosure agreements in connection with 

remarketings of VRDOs that are primary offerings. 

known to investors in a timely manner, 

not in excess of ten business days of the 

event’s occurrence. 

Further, the Commission proposes to 

modify the exemption in the Rule for 

demand securities. As discussed above, 

when the Commission adopted this 

exemption, demand obligations made 

up a relatively small portion of the 

municipal market.246 Recently, 

issuances of demand securities have 

increased.247 The Commission believes 

that it is important that there be greater 

information regarding these securities 

available to investors, market 

professionals, and the public generally. 

Accordingly, the Commission believes 

that modifying the Rule’s exemption for 

demand securities would be beneficial 

to investors and the prevention of fraud. 

The modification of the Rule’s 

exemption for demand securities would 

provide investors with notice of the 

events set forth in the Rule regarding 

demand securities that may not have 

been available previously. In addition, 

this proposal would restrict a broker, 

dealer or municipal securities dealer 

from making recommendations 

regarding such securities unless it has 

procedures in place that provide 

reasonable assurance that it would 

receive prompt notice of the events set 

forth in the Rule,248 which should 

benefit investors because the broker, 

dealer or municipal securities dealer 

should have available to it continuing 

disclosure information regarding the 

demand obligation it recommends. 

The Commission believes that the 

proposed amendments would benefit 

individual and institutional investors 

who would be able to obtain greater 

information about municipal securities 

that they could use to make informed 

investment decisions. Moreover, this 

information would aid investors by 

helping them to determine that they are 

not the subject of fraudulent or 

manipulative acts or practices with 

respect to municipal security 

transactions. In addition, the 

Commission believes that the proposed 

amendments could assist broker-dealers 

and others, such as mutual funds, with 

their compliance with regulatory 

requirements because they would have 

access to greater information about 

municipal securities. Moreover, 

municipal securities vendors could 

benefit from the proposed amendments 

because additional information about 

municipal securities and their issuers 

would be made available, which they 

then could use in developing or 

enhancing value-added products to offer 

to interested parties. 

In the Commission’s view, the 

proposed amendments would have a 

positive impact on the municipal 

securities market and participants in 

that market sector. It is possible that, 

with more information available to 

market professionals, individual 

investors, and others regarding 

municipal securities, including VRDOs, 

there could be greater competition in 

the marketplace with respect to the offer 

and sale of municipal securities, to the 

benefit of these individuals and entities. 

Greater information enhances the ability 

of market professionals, investors and 

others to make investment-related 

decisions about particular municipal 

securities, which in turn can promote 

competition in the marketplace. 

Moreover, individual and institutional 

investors might take into account the 

fact that more information would be 

available about municipal securities, 

including VRDOs, when they decide 

whether to purchase municipal 

securities. 

The Commission seeks comment on 

the anticipated benefits of the proposed 

amendments. 

B. Costs 

1. Broker-Dealers 

The proposed amendments to 

paragraph (b)(5)(i)(C) of the Rule would 

add events that would require 

Participating Underwriters to reasonably 

determine that issuers or obligated 

persons agreed to provide notice of and 

would specify the maximum time 

period in which such notices would 

need to be submitted to the MSRB. The 

Commission does not believe that the 

proposed amendments to paragraph 

(b)(5)(i)(C) of the Rule would cause 

broker-dealers to incur any additional 

recurring external or internal costs in 

connection with their implementation, 

if the proposals are adopted, because 

they would not significantly alter the 

existing Rule’s requirements for brokerdealers. Under the Rule, broker-dealers 

already must reasonably determine that 

issuers or obligated persons have 

undertaken to provide notice of 

specified events in their continuing 

disclosure agreements and the addition 

of a few more events that would require 

notice to the MSRB and the addition of 

a provision regarding the timeliness of 

such notices should not significantly 

increase broker-dealers’ obligations and 

thus their costs. As noted above, 

continuing disclosure documents 

generally are form documents. The 

broker-dealer must reasonably 

determine that provisions relating to the 

issuer’s or obligated person’s 

undertaking to provide notice of those 

events that are specified in the current 

Rule, as well as those events that are 

proposed to be added to the Rule, are 

contained in the continuing disclosure 

agreement. 

The proposed amendments also 

would modify the Rule’s exemption for 

demand securities. The Commission 

preliminarily believes that these 

proposed amendments would not result 

in any external recurring costs for 

broker-dealers but could result in their 

incurring a small increase in internal 

recurring costs because these proposals 

would increase the number of 

municipal securities offerings subject to 

paragraphs (b)(5) and (c) of the Rule. 

The proposed deletion of paragraph 

(d)(1)(iii) of the Rule and the addition of 

new paragraph (d)(5) to the Rule, would 

modify an exemption from the Rule for 

primary offerings of demand securities. 

As noted above, the Commission’s staff 

estimates that the modification of this 

exemption from the Rule would 

increase the number of issuers with 

municipal securities offerings subject to 

the Rule by 20%.249 The Commission’s 

staff estimates that the annual 

information collection burden for each 

broker-dealer under this proposed 

amendment to the Rule would be 1.20 

hours (1 hour and 12 minutes).250

Accordingly, the Commission’s staff 

estimates that it would cost each brokerdealer $324 annually to comply with the 

Rule, which represents a cost increase of 

$54 annually over each broker-dealer’s 

current annual cost to comply with the 

Rule.251

In addition, the Commission’s staff 

estimates that a broker-dealer could 

have a one-time internal cost associated 

with having an in-house compliance 

attorney prepare and issue a 

memorandum advising the brokerdealer’s employees about the proposed 

revisions to Rule 15c2–12. The 

Commission’s staff estimates it would 

take internal counsel approximately 30 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36861 

252See supra Section V.D.1.c. 

253 .5 hours (estimated annual information 

collection burden for each broker-dealer) × $270 

(hourly cost for a broker-dealer’s internal 

compliance attorney) = $135. The hourly rate for 

the compliance attorney is from SIFMA’s 

Management & Professional Earnings in the 

Securities Industry 2008, modified by the 

Commission’s staff to account for an 1,800-hour 

work-year and multiplied by 5.35 to account for 

bonuses, firm size, employee benefits and overhead. 

254See supra Section V.D.2.b.i. See infra Section 

V.I.B.2.b. for a discussion of the costs associated 

with an increase in the number of issuers as a result 

of the proposed amendment modifying the 

exemption for demand securities. 

255As to two of the proposed new events, the 

amendments would include a materiality 

determination. Such a materiality determination 

could result in costs to investors, market 

professionals and others to the extent the issuer or 

obligated person determined that the event was not 

material and thus did not submit a notice to the 

MSRB. If investors, market professionals and others 

would have considered the information important 

and had access to it, they might have made a 

different investment decision. 

256See supra Section V.E.2.a. 

257 Id. 

258 Id. 

259 Id. The Commission’s staff estimates that there 

is an approximate cost of $100 associated with 

revising each continuing disclosure agreement by 

the current issuer’s outside counsel. Thus, the total 

cost for revising continuing disclosure agreements 

for all current issuers by the current issuers’ outside 

counsel would be approximately $1,000,000. 

260 Id. 

261This estimate includes additional event 

notices that may be submitted as a result of the 

proposed modification of the materiality condition 

in paragraph (b)(5)(i)(C) of the Rule. 

262 1 (maximum estimated number of additional 

material event notices submitted per year per 

issuer) × $63 (hourly wage for a compliance clerk) 

× .75 hours (45 minutes) (estimated time for 

compliance clerk to prepare and submit a material 

event notice) = $47.25 (rounded to $47). The $63 

per hour estimate for a compliance clerk is from 

SIFMA’s Office Salaries in the Securities Industry 

2008, modified by the Commission’s staff to 

account for an 1800-hour work-year and multiplied 

by 2.93 to account for bonuses, firm size, employee 

benefits and overhead. In order to provide an 

estimate of total costs for issuers that would not be 

under-inclusive, the Commission’s staff elected to 

use the higher end of the estimate of annual 

submissions of continuing disclosure documents. 

See supra note 220. 

minutes to prepare this 

memorandum,252 for a cost of 

approximately $135.253 The 

Commission further believes that the 

ongoing obligations of broker-dealers 

under the Rule would be handled 

internally because compliance with 

these obligations is consistent with the 

type of work that a broker-dealer 

typically handles internally. 

The Commission seeks comment on 

any other potential costs that may result 

from the proposal amendments, 

including whether there would be any 

change to the cost of underwriting 

variable rate demand obligations or 

other types of municipal securities for 

which greater information would be 

available as a result of the Commission’s 

proposals and, if so, whether there 

would be any effect on a broker-dealer’s 

business and revenues. The Commission 

seeks comment on whether the 

proposed amendments would adversely 

affect the ability of broker-dealers to 

serve as Participating Underwriters in 

municipal securities offerings, 

particularly in the case of offerings of 

variable rate demand obligations. While 

the Commission does not anticipate that 

there would be any adverse 

consequences to a broker-dealer’s 

business, activities or financial 

condition as a result of the proposed 

amendments, it seeks commenters’ 

views regarding the possibility of any 

such impact. The Commission requests 

comment on any direct or indirect costs 

broker-dealers could incur as a result of 

the proposed amendments and asks 

commenters to quantify those costs, 

where possible. 

2. Issuers 

(a) Current Issuers 

The Commission expects that some 

current issuers could be subject to some 

internal and external costs associated 

with the proposed amendments to the 

Rule. As noted above, the proposed 

revisions to the Rule regarding the time 

period for submission of event notices 

and regarding the materiality condition 

for such notices would not change the 

substance of an event notice, the 

method for filing an event notice, or the 

location to which an event notices 

would be submitted.254 Accordingly, the 

Commission preliminarily does not 

believe that issuers would incur any 

costs associated with the proposed 

change to the timing provision of the 

Rule, except to the extent that some 

issuers may need to submit notices more 

speedily than they do currently and may 

need to be cognizant of events not 

within their direct control, such as a 

rating change, that would prompt 

submission of an event notice. The 

Commission preliminarily believes that 

the costs for current issuers would 

result from the proposed amendments to 

the Rule associated with the proposed 

new and modified event notice 

provisions and the elimination of the 

materiality determination for certain 

event notices in the current Rule.255

Current issuers would incur internal 

costs associated with the preparation of 

the additional event notices that may 

result from these proposed changes to 

the event notice provisions of the Rule. 

Current issuers also would incur costs if 

they issue demand obligations, as 

discussed below. 

For current issuers that convert their 

annual filings, event notices and/or 

failure to file notices into the MSRB’s 

prescribed electronic format through a 

third party there would be additional 

costs associated with any additional 

submissions of event notices and failure 

to file notices. As noted above, the 

Commission estimates that each current 

issuer would submit one additional 

event notice annually as a result of the 

proposed amendments.256 If the current 

issuer uses a third-party vendor to scan 

the additional event notice into an 

electronic format for submission to the 

MSRB, the Commission estimates that 

such issuer would have an additional 

annual cost of $8 per notice.257 For 

current issuers that convert their annual 

filings, event notices and/or failure to 

file notices into the MSRB’s prescribed 

electronic format internally there would 

be no additional external costs 

associated with the conversion of the 

event notice into the MSRB’s prescribed 

electronic format. 

As discussed above,258 some current 

issuers may incur a one-time cost of 

$100 associated with the need to revise 

the template for continuing disclosure 

agreements, if the proposed 

amendments are adopted.259

The Commission also believes that 

current issuers could incur some 

internal labor costs associated with the 

preparation and submission of the 

additional event notice. As discussed 

above,260 the Commission’s staff 

estimates that a current issuer would 

submit a maximum of one additional 

event notice annually.261 Thus, the 

Commission staff estimates that the 

maximum annual labor cost to prepare 

and submit the additional event notice 

is approximately $47 per current 

issuer.262

The Commission seeks comment on 

any other costs that the proposed 

addition of several new event items, the 

proposed maximum time frame to 

submit event notices, and the revisions 

with respect to the materiality condition 

would have on issuers. While the 

Commission preliminarily does not 

believe that these proposals would have 

a significant cost impact on issuers, it 

seeks commenters’ views on any direct 

or indirect cost consequences as a result 

of the proposals. For example, would 

the proposed amendments in any way 

make it more likely or less likely for 

issuers to obtain needed financing or to 

obtain a broker-dealer to conduct a 

primary offering on their behalf? Would 

there be any costs incurred by investors, 

market professionals or others as a 

result of the proposed amendments? Are 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36862 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

263See supra Section V.D.2.a. 

264See supra Section V.E.2.b. The Commission’s 

staff has estimated that there is an approximate cost 

of $600 associated with drafting each continuing 

disclosure agreement by the VRDO issuer’s outside 

counsel. Thus, the total cost for preparing 

continuing disclosure documents for all VRDO 

issuers by the VRDO issuers’ outside counsel would 

be approximately $1,200,000. 

265 Id. 

266See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

267See supra Section V.E.2.b. 

268 Id. 

269See supra note 231. 

270See supra Section V.E.2.b. 

271 2000 VRDO issuers × 20% = 400 VRDO 

issuers. See 2008 Amendments Adopting Release, 

supra note 11, 73 FR 76104. 

272See supra Section V.E.2.b. 

273See supra note 237. 

274See supra note 238. 

there other internal or external costs not 

identified by the Commission that could 

result from the proposed amendments? 

The Commission requests comment on 

any direct or indirect costs issuers could 

incur as a result of the proposed 

amendments and asks commenters to 

quantify those costs, where possible. 

(b) VRDO Issuers 

As discussed above, the Commission 

estimates that the proposed 

modification of the Rule’s exemption for 

demand securities would increase the 

number of issuers affected by the Rule 

by approximately 20% or 2,000 

issuers.263 These VRDO issuers may 

have some costs associated with the 

preparation and submission of 

continuing disclosure documents. As 

discussed above, the Commission 

believes that each VRDO issuer may 

have a one-time external cost of $600 

associated with entering into a 

continuing disclosure agreements.264

The Commission believes that the only 

other external costs for VRDO issuers 

would be the costs associated with 

converting continuing disclosure 

documents into an electronic format to 

submit to the MSRB. As noted earlier, 

the Commission believes that many 

issuers of municipal securities currently 

have the computer equipment and 

software necessary to convert paper 

copies of continuing disclosure 

documents to electronic copies and to 

electronically transmit the documents to 

the MSRB.265 VRDO issuers that 

presently do not have the ability to 

prepare their annual filings, event 

notices and/or failure to file notices in 

an electronic format could incur some 

costs to obtain electronic copies of such 

documents if they are prepared by a 

third party (e.g., accountant or attorney) 

or, alternatively, to have a paper copy 

converted into an electronic format. 

These costs would vary depending on 

how the VRDO issuer elected to convert 

its continuing disclosure documents 

into an electronic format. An issuer 

could elect to have a third-party vendor 

transfer its paper continuing disclosure 

documents into the appropriate 

electronic format. An issuer also could 

decide to undertake the work internally, 

and its costs would vary depending on 

the issuer’s current technology 

resources. An issuer also could use the 

services of a designated agent to submit 

its continuing disclosure documents to 

the MSRB. In the 2008 Amendments 

Adopting Release, the Commission 

noted that approximately 30% of 

municipal issuers rely on the services of 

a designated agent to submit continuing 

disclosure documents for them.266

Generally, when issuers utilize the 

services of a designated agent, they 

enter into a contract with the agent for 

a package of services, including the 

submission of continuing disclosure 

documents, for a single fee. As noted 

above, the Commission’s staff estimates 

that the annual fees for designated 

agents range from $100 to $500 per 

issuer, for a total maximum annual cost 

of $300,000 for all VRDO issuers.267

As noted above, the Commission 

estimates that the costs to some of the 

VRDO issuers may incur costs 

associated with converting continuing 

disclosure documents into an electronic 

format to submit to the MSRB. These 

costs could include: (i) An approximate 

cost of $8 per notice to use a third party 

vendor to scan a event notice or failure 

to file notice, and an approximate cost 

of $64 to use a third party vendor to 

scan an average-sized annual financial 

statement, (ii) an approximate cost 

ranging from $750 and $4,300 to acquire 

technology resources to convert 

continuing disclosure documents into 

an electronic format, (iii) $50 to $300 

solely to upgrade or acquire the software 

to submit documents in an electronic 

format; and (iv) approximately $50 per 

month to acquire Internet access.268

For a VRDO issuer that does not have 

Internet access and elects to have a third 

party convert continuing disclosure 

documents into an electronic format 

(‘‘Category 1’’), the total maximum 

external cost such issuer would incur 

would be $760 per year.269 For an issuer 

that does not have Internet access and 

elects to acquire the technological 

resources to convert continuing 

disclosure documents into an electronic 

format internally (‘‘Category 2’’), the 

total maximum external cost such 

VRDO issuer would incur would be 

$4,900 for the first year and $600 per 

year thereafter. As noted above, in order 

to provide a conservative cost estimate, 

the Commission has estimated that any 

VRDO issuer that incurs costs associated 

with converting continuing disclosure 

documents into the MSRB’s prescribed 

electronic format would choose the 

more expensive Category 2 approach.270

The Commission’s staff estimates that 

approximately 400 VRDO issuers would 

incur costs associated with acquiring 

technology resources to convert 

continuing disclosure documents into 

an electronic format.271 Additionally, 

the Commission’s staff estimates that 

the maximum annual costs for those 

VRDO issuers that need to acquire 

technology resources to submit 

documents to the MSRB would be 

approximately $1,960,000 for the first 

year after the adoption of the proposed 

amendments and approximately 

$240,000 for each year thereafter.272

Although the Commission 

preliminarily does not believe that there 

are any additional costs to issuers or 

obligated persons of VRDOs as a result 

of the proposed amendments, it requests 

comment regarding any possible direct 

or indirect costs that such issuers could 

incur, such as any potential impact on 

underwriting fees, interest costs, or 

other costs generally. Would the 

proposed amendments adversely affect 

the business, activities or financial 

condition of VRDO issuers or obligated 

persons, their ability to engage brokerdealers to underwrite or to act as 

remarketing agents of VRDOs, or to 

engage financial advisors? 

(c) Current and VRDO Issuers 

Lastly, as discussed above, some 

current and VRDO issuers may incur a 

one-time external cost associated with 

the proposed amendment to change the 

timing requirement for submitting event 

notices in the Rule from ‘‘in a timely 

manner’’ to ‘‘in a timely manner not to 

exceed ten business days after the 

occurrence of the event.’’ In particular, 

some current and VRDO issuers may 

incur a one-time external cost associated 

with monitoring for a change in the 

name of the issuer’s trustee. One way an 

issuer may monitor a change in the 

name of its trustee cost would be to 

have outside counsel add a notice 

provision to the issuer’s trust indenture 

requiring the trustee to provide the 

issuer with notice of any change in the 

trustee’s name. The Commission’s staff 

estimates that the approximate cost of 

adding this notice provision to an 

issuer’s trust indenture for each issuer 

would be approximately $100,273 for a 

one-time annual cost of $1,200,000274

for all issuers. 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36863 

275 2,030 hours (estimated additional annual 

number of hours worked by a compliance clerk) × 

$63 (hourly wage for a compliance clerk) = 

$127,890 (annual salary for compliance clerk). The 

$63 per hour estimate for a compliance clerk is from 

SIFMA’s Office Salaries in the Securities Industry 

2008, modified by the Commission’s staff to 

account for an 1800-hour work-year and multiplied 

by 2.93 to account for bonuses, firm size, employee 

benefits and overhead. The estimate for additional 

annual hours worked by a compliance clerk is the 

estimated additional hourly burden the MSRB 

would incur on an annual basis under the proposed 

amendments to the Rule. See Section V.D. 

276Telephone 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. 

277See supra notes 261 and 262. 

278 15 U.S.C. 78c(f). 

279 15 U.S.C. 78w(a)(2). 

280The Commission proposes a similar revision 

to the limited undertaking in paragraph (d)(2)(ii)(B) 

of the Rule to require a Participating Underwriter 

to reasonably determine that the issuer or obligated 

person has agreed in its continuing disclosure 

agreement to submit event notices to the MSRB ‘‘in 

a timely manner not in excess of ten business days 

after the occurrence of the event,’’ instead of ‘‘in a 

timely manner’’ as the Rule currently provides. 

The Commission requests comment 

on any direct or indirect costs issuers or 

obligated persons could incur as a result 

of the proposed amendments and asks 

commenters to quantify those costs, 

where possible. 

3. MSRB 

Since the number of continuing 

disclosure documents submitted would 

increase as a result of the proposed 

amendments, the MSRB could incur 

costs associated with the proposed 

amendments. The Commission’s staff 

estimates that these costs for the MSRB 

may include: (i) the cost to hire 

additional clerical personnel at an 

estimated annual cost of $127,890 to 

process the additional submissions 

associated with the proposed 

amendments to the Rule 275 and (ii) the 

cost to update its EMMA system to 

accommodate indexing information in 

connection with the proposed changes 

to the material disclosure events of the 

Rule. Based on information provided to 

Commission staff by MSRB staff in a 

telephone conversation on November 7, 

2008, the MSRB staff estimated that the 

MSRB’s costs to update its EMMA 

system to accommodate the proposed 

changes to the material disclosure 

events of the Rule would be 

approximately $10,000.276 Therefore, in 

connection with the proposed 

amendments the MSRB would incur a 

one-time cost of approximately $10,000 

as well as a recurring annual cost of 

approximately $127,890.277

Given that the MSRB has provided a 

preliminary estimate of the costs that it 

would incur in connection with the 

proposed amendments, the Commission 

does not believe that there are any other 

direct or indirect additional costs that 

the MSRB may incur as a result of the 

proposals. The Commission seeks 

comment on all direct and indirect costs 

that its proposals would impose on the 

MSRB and requests that those costs be 

quantified, where possible. 

C. Request for Comment on Costs and 

Benefits 

The Commission preliminarily 

believes that any additional burden or 

costs on broker-dealers, issuers, and the 

MSRB as a result of the proposed 

amendments would be justified by the 

improved availability of information to 

broker-dealers, mutual funds that hold 

municipal securities, analysts and other 

market professionals, institutional and 

retail investors, vendors of municipal 

securities information, and the public 

generally, all of which contribute to 

investors’ ability to make more 

knowledgeable investment decisions, 

effectively manage and monitor their 

investments, and protect themselves 

from misrepresentation and fraud. This 

availability also would contribute to 

brokers, dealers and municipal 

securities dealers’ reasonable basis to 

recommend the purchase or sale of 

municipal securities. To assist the 

Commission in evaluating the costs and 

benefits that could result from the 

proposed amendments to the Rule, the 

Commission requests comments on the 

potential costs and benefits identified in 

this proposal, as well as any other costs 

or benefits that could result from the 

proposed amendments to the Rule. In 

particular, comments are requested on 

whether there are costs or benefits to 

any entity not identified above. 

Commenters should provide analysis 

and data to support their views on the 

costs and benefits. In particular, the 

Commission requests comment on the 

costs and benefits of the proposed 

amendments on broker-dealers, issuers, 

the MSRB, other municipal securities 

information vendors, as well as any 

costs on others, including market 

participants and investors. 

VII. Consideration of Burden and 

Promotion of Efficiency, Competition, 

and Capital Formation 

Section 3(f) of the Exchange Act 278

requires the Commission, whenever it 

engages in rulemaking and is required to 

consider or determine whether an action 

is necessary or appropriate in the public 

interest, to consider whether the action 

would promote efficiency, competition, 

and capital formation. In addition, 

Section 23(a)(2) of the Exchange Act 279

requires the Commission, when 

adopting rules under the Exchange Act, 

to consider the impact such rules would 

have on competition. Section 23(a)(2) of 

the Exchange Act also prohibits the 

Commission from adopting any rule that 

would impose a burden on competition 

not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act. 

The proposed amendments to the 

Rule would revise paragraph (b)(5) of 

Rule 15c2–12 to require Participating 

Underwriters to reasonably determine 

that the issuer or obligated person has 

agreed at the time of a primary offering: 

(i) To provide notice of the events listed 

in paragraph (b)(5)(i)(C) of the Rule in 

a timely manner, but not later than ten 

business days after the occurrence of the 

event; 280 and (ii) to expand the list of 

events in paragraph (b)(5)(i)(C) of the 

Rule to include the following: the 

issuance by the Internal Revenue 

Service of proposed or final 

determinations of taxability, Notices of 

Proposed Issue (IRS form 5701–TEB) or 

other material notices or determinations 

with respect to the tax-exempt status of 

the securities; a tender offer; 

bankruptcy, insolvency, receivership or 

similar event of the issuer or obligated 

person; and the consummation of a 

merger, consolidation, or acquisition 

involving an obligated person or the sale 

of all or substantially all of the assets of 

the obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material. The proposed 

amendments would delete the 

materiality condition for some, but not 

all, of the events currently listed in 

paragraph (b)(5)(i)(C) of the Rule. In 

addition, the proposed amendments 

would narrow the exemption currently 

contained in paragraph (d)(1)(iii) of the 

Rule for demand securities, by deleting 

paragraph (d)(1)(iii), and adding 

paragraph (d)(5) to the Rule to make the 

event disclosure provisions contained in 

section (b)(5)(i)(C) of the Rule applicable 

to this category of municipal securities. 

As discussed below, the Commission 

preliminarily believes that the proposed 

amendments to the Rule should help 

make the municipal disclosure process 

more efficient because of the proposed 

new events to be added to paragraph 

(b)(5)(i)(C) of the Rule; the proposal that 

submissions of event notices to the 

MSRB must be made in a timely manner 

not in excess of ten business days of the 

event’s occurrence; and the proposed 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36864 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

281See supra Sections V. and VI. 

282Public Law No. 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

283 5 U.S.C. 603(a). 

284 17 CFR 240.15c2–12. 

285 15 U.S.C. 78a et seq. 

modification of the exemption for 

demand securities through the 

elimination of paragraph (d)(1)(iii) of 

the Rule, and the addition of paragraph 

(d)(5) to the Rule. Currently, the Rule 

does not contain a specific time frame 

within which a continuing disclosure 

agreement must specify that event 

notices will be provided to the MSRB. 

Thus, the Commission believes the 

proposed change should help 

individuals or entities interested in 

obtaining information about events 

relating to municipal issuers to obtain 

this information from the MSRB within 

a specific time frame of the event’s 

occurrence. In addition, certain events 

regarding municipal securities that may 

be important to investors, such as 

certain tender offers or the 

consummation of a merger, 

consolidation, or acquisition involving 

an obligated person or the sale of all or 

substantially all of the assets of the 

obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material, are not currently 

included in the Rule. Further, certain 

events listed in paragraph (b)(5)(i)(C) of 

the rule would need to be disclosed, 

without the issuer having to make a 

materiality determination. Moreover, 

the Rule currently contains an 

exemption for demand securities, which 

means that broker-dealers are not 

required to reasonably determine that 

the issuer or obligated person has 

undertaken to provide the information 

set forth in paragraph (b)(5) of the Rule. 

As a consequence of the proposed 

amendments, greater information about 

municipal securities and their issuers 

should be more readily accessible on a 

more-timely basis to broker-dealers, 

mutual funds, analysts and other market 

professionals, institutional and retail 

investors, and the public generally. 

Thus, these individuals and entities 

should be able to obtain greater 

information about municipal securities 

within a specific ten business day time 

frame, which could aid them in making 

better informed and more efficient 

investment decisions and should help 

reduce instances of fraud. 

The Commission preliminarily 

believes that this proposal could 

promote competition in the purchase 

and sale of municipal securities because 

the greater availability and timeliness of 

information as a result of the proposed 

amendments could instill greater 

investor confidence in the municipal 

securities market. As a result, more 

investors could be attracted to this 

market sector and broker-dealers and 

municipal issuers could compete for 

their business. The proposed 

amendments also could encourage 

improvement in the completeness and 

timeliness of issuer disclosures and 

could foster additional interest in 

municipal securities by retail and 

institutional customers. In addition, the 

greater availability of information about 

municipal securities would be 

beneficial to vendors of municipal 

securities information as they develop 

their value-added products. Thus, the 

proposed amendments could promote 

competition among those vendors of 

municipal securities information that 

could utilize the information provided 

to the MSRB pursuant to continuing 

disclosure agreements and would 

compete with each other in creating and 

offering for sale value-added products 

relating to municipal securities. As 

discussed above,281 the proposed 

amendments to the Rule could result in 

some additional cost and hourly 

burdens for broker-dealers, issuers and 

the MSRB. However, the Commission 

preliminarily believes that these 

increased burdens are justified by the 

positive competitive impact of the 

proposed amendments to the Rule. 

Accordingly, the Commission 

preliminarily does not believe that the 

proposed amendments would result in 

any burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act. 

The proposed amendments to the 

Rule would provide investors and other 

municipal market participants with 

notice of additional events, to be 

provided in a timely manner not in 

excess of ten business days of the 

event’s occurrence, which could have 

an impact on the value of the applicable 

municipal security. In addition, the 

proposed amendments would help to 

provide investors and other municipal 

market participants with access to 

important information about demand 

securities that previously were not 

subject to the Rule’s disclosure 

provisions. The Commission believes 

that these proposals should help 

improve investors’ ability to make 

informed investment decisions, which, 

in turn, should help promote capital 

formation generally. The proposed 

amendments could have a positive 

effect on capital formation because the 

greater availability of information about 

municipal securities could provide 

institutional and retail investors with 

more complete information regarding 

these securities. As a result, investors 

could be more comfortable that they 

would have better access to important 

information about a particular 

municipal security when deciding 

whether to purchase that security. 

Based on the analysis above, the 

Commission preliminarily believes that 

the proposed amendments to the Rule 

would not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Exchange Act. The 

Commission requests comment on all 

aspects of this analysis and, in 

particular, on whether the proposed 

amendments to the Rule would place a 

burden on competition, as well as the 

effect of the proposed amendments on 

efficiency, competition, and capital 

formation. The Commission specifically 

seeks comment on whether the 

proposed amendments would place a 

burden on competition or have an effect 

on efficiency, competition, and capital 

formation with respect to issuers or 

obligated persons, the MSRB, brokerdealers, other market participants, 

investors, or others. 

VIII. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 282 the Commission 

must advise the OMB as to whether the 

proposed regulation constitutes a 

‘‘major’’ rule. Under SBREFA, a rule is 

considered ‘‘major’’ where, if adopted, it 

results or is likely to result in: (1) An 

annual effect on the economy of $100 

million or more (either in the form of an 

increase or a decrease); (2) a major 

increase in costs or prices for consumers 

or individual industries; or (3) 

significant adverse effect on 

competition, investment or innovation. 

The Commission requests comment 

on the potential impact of the proposed 

rule amendments on the economy on an 

annual basis. Commenters are requested 

to provide empirical data and other 

factual support for their view to the 

extent possible. 

IX. Regulatory Flexibility Analysis 

This Initial Regulatory Flexibility 

Analysis (‘‘IRFA’’) has been prepared in 

accordance with the provisions of the 

Regulatory Flexibility Act (‘‘RFA’’).283 It 

relates to proposed amendments to Rule 

15c2–12,284 under the Securities 

Exchange Act of 1934, as amended.285

The proposed amendments would 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36865 

286See Securities Exchange Act Release No. 

34961 (November 10, 1994), 59 FR 59590, 59601 

(November 17, 1994) (‘‘1994 Amendments’’). 

287 Id. 

288See supra Section II.B. 

289 Id. 

290See supra Section II.D. 

291 Id. 

292 Id. 

293 Id. 

294See supra Section II.E.1. 

295See supra Section II.E.2. 

amend certain requirements regarding 

the information that a broker, dealer, or 

municipal securities dealer acting as an 

underwriter in a primary offering of 

municipal securities must reasonably 

determine that an issuer of municipal 

securities or an obligated person has 

undertaken, in a written agreement or 

contract for the beneficial holders of the 

issuer’s municipal securities, to provide, 

and revise an exemption from the rule. 

Specifically, the amendments would 

require a broker, dealer, or municipal 

securities dealer (or ‘‘Participating 

Underwriter,’’ when used in connection 

with primary offerings), to reasonably 

determine that an issuer or obligated 

person has agreed to provide notice of 

specified events in a timely manner not 

in excess of ten business days of the 

occurrence of the event and amend the 

list of events for which notices would be 

provided. In addition, the proposal 

would modify the condition that event 

notices be submitted to the Municipal 

Securities Rulemaking Board, ‘‘if 

material,’’ for some, but not all, of the 

Rule’s specified events. Further, the 

amendments would modify an 

exemption from the rule for certain 

offerings of municipal securities with 

put features, by making the offering of 

such securities subject to continuing 

disclosure obligations set forth in the 

Rule. 

A. Reasons for the Proposed Action 

The main purpose of the proposal is 

to improve the availability of significant 

and timely information to the municipal 

securities markets and to help deter 

fraud and manipulation in the 

municipal securities market by 

prohibiting the underwriting and 

subsequent recommendation of 

transactions in municipal securities for 

which adequate information is not 

available on an ongoing basis. 

The Commission proposes to modify 

paragraphs (b)(5)(i)(C ) and (d)(2)(ii)(B ) 

of Rule 15c2–12 to require a 

Participating Underwriter to reasonably 

determine that the issuer or obligated 

person has agreed in its continuing 

disclosure agreement to provide event 

notices to the MSRB in an electronic 

format as prescribed by the MSRB, in a 

timely manner not in excess of ten 

business days after the occurrence of 

any such event, instead of ‘‘in a timely 

manner’’ as the Rule currently provides. 

In 1994, the Commission adopted 

amendments to Rule 15c2–12 and noted 

that it had not established a specific 

time frame with respect to ‘‘timely’’ 

because of the wide variety of events 

and issuer circumstances.286 However, 

the Commission stated that, in general, 

this determination must take into 

consideration the time needed to 

discover the occurrence of the event, 

assess its materiality, and prepare and 

disseminate the notice.287 It has been 

reported that there have been some 

instances in which event notices were 

not submitted until months after the 

events occurred.288 The Commission 

believes that delays deny investors 

important information that they need in 

order to make informed decisions 

regarding whether to buy, sell, or hold 

their municipal securities and to aid 

them in determining whether the price 

that they pay or receive for their 

transactions is appropriate.289

The Commission preliminarily 

believes that codifying in the Rule a 

specific time within which event 

notices would be provided, in 

accordance with the continuing 

disclosure agreement, to the MSRB 

should result in these notices being 

made available more promptly than at 

present. Accordingly, the proposed 

amendments would require a broker, 

dealer, or municipal securities dealer 

(i.e., a Participating Underwriter) to 

reasonably determine that an issuer or 

obligated person has agreed, in a 

continuing disclosure agreement, to 

provide notice of specified events in a 

timely manner not in excess of ten 

business days after the event’s 

occurrence. The Commission believes 

this change would help promote more 

timely disclosure of this important 

information to municipal security 

investors. 

The Commission proposes to modify 

paragraph (b)(5)(i)(C)(6) of the Rule, 

which presently requires Participating 

Underwriters reasonably to determine 

that the issuer or obligated person has 

entered into a continuing disclosure 

agreement to submit a notice for 

‘‘[a]dverse tax opinions or events 

affecting the tax-exempt status of the 

security.’’ The proposal would revise 

paragraph (b)(5)(i)(C)(6) of the Rule also 

to provide for the disclosure of the 

issuance of material ‘‘proposed or final 

determinations of taxability, Notices of 

Proposed Issue (IRS form 5701–TEB) or 

other material notices or determinations 

with respect to the tax-exempt status of 

securities’’ by the IRS to the MSRB 

under a continuing disclosure 

agreement. A determination by the IRS 

that interest on a municipal security 

may, in fact, be taxable not only could 

reduce the security’s market value, but 

also could adversely affect each 

investor’s federal and, in some cases, 

state income tax liability.290 The 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.291 Therefore, retail and 

institutional investors alike are 

extremely interested in events that 

could adversely affect the tax-exempt 

status of the municipal securities that 

they own or may wish to purchase.292

The Commission is proposing that no 

determination of materiality would be 

necessary for the following six existing 

events: (1) Principal and interest 

payment delinquencies with respect to 

the securities being offered; (2) 

unscheduled draws on debt service 

reserves reflecting financial difficulties; 

(3) unscheduled draws on credit 

enhancements reflecting financial 

difficulties; (4) substitution of credit or 

liquidity providers, or their failure to 

perform; (5) defeasances; and (6) rating 

changes.293 The Commission 

preliminarily believes that these events 

are of such a high level of importance 

to investors that notice of their 

occurrence should always be included 

in a continuing disclosure agreement. 

Furthermore, the Commission 

preliminarily believes that eliminating 

the necessity to make a materiality 

decision upon the occurrence of these 

events would simplify issuer 

compliance with the terms of 

continuing disclosure agreements to 

which they are a party and would help 

to make such filings available more 

quickly. 

The proposal also would add the 

following events, for which disclosure 

notices would be provided pursuant to 

a continuing disclosure agreement: (i) 

Tender offers (paragraph (b)(5)(i)(C)(8) 

of the Rule); 294 (ii) bankruptcy, 

insolvency, receivership or similar 

event of the issuer or obligated person 

(paragraph (b)(5)(i)(C)(12) of the 

Rule); 295 (iii) the consummation of a 

merger, consolidation, or acquisition 

involving an obligated person or the sale 

of all or substantially all of the assets of 

the obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 


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36866 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

296See supra Section II.E.3. 

297See supra Section II.E.4. 

298See supra Section II.A. 

299 Id. 

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

301 17 CFR 240.0–10(c). 

302 17 CFR 240.0–10(f). 

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

304 5 U.S.C. 601(5). 

305See Securities Exchange Act Release No. 

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

1994). 

306Specifically, Rule 15c2–12(d)(2) provides an 

exemption from the application of paragraph (b)(5) 

(Rule’s provisions regarding continuing disclosure 

agreements) of the Rule with respect to primary 

offerings if, among other things, the issuer or 

obligated person has agreed to a limited disclosure 

obligation, including sending certain material event 

notices to the MSRB. See 17 CFR 240.15c2–12(d)(2). 

307See supra Section V.E.2. 

308 Id. 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material (paragraph 

(b)(5)(i)(C)(13) of the Rule); 296 and (iv) 

appointment of a successor or 

additional trustee, or the change of 

name of a trustee (paragraph 

(b)(5)(i)(C)(14) of the Rule), if 

material.297 The Commission believes 

that there is a need to make available to 

all investors such important information 

affecting their decisions and the value of 

their securities. The Commission 

believes that the proposed addition of 

these four events disclosure items 

would substantially improve the 

availability of important information in 

the municipal securities market. 

Finally, the proposal would modify 

the Rule’s exemption for demand 

securities by eliminating paragraph 

(d)(1)(iii) to Rule 15c2–12, and adding 

new paragraph (d)(5) to the Rule. The 

Commission’s experience with the 

operation of the Rule and changes in the 

municipal securities market over the 

last fourteen years suggests a need to 

increase the availability of information 

to investors regarding demand 

securities.298 Furthermore, the recent 

period of turmoil in the markets for 

municipal auction rate securities and 

variable rate demand obligations 

(‘‘VRDOs’’) and the comments of 

numerous primary purchasers of 

demand securities also suggest that a 

full exemption for demand securities is 

no longer appropriate and that the 

exemption should be modified to 

provide that paragraphs (b)(5) and (c) of 

the Rule relating to the disclosure of 

continuing disclosure documents and 

recommendations by broker-dealers also 

would apply to the offerings of demand 

securities.299

B. Objectives 

The purpose of the proposal is to 

achieve more efficient, effective, and 

wider availability of municipal 

securities information to broker-dealers, 

mutual funds, analysts and other market 

professionals, institutional and retail 

investors, and the public generally, and 

to help prevent fraudulent, deceptive, or 

manipulative acts or practices in the 

municipal securities market. 

C. Legal Basis 

Pursuant to the Exchange Act, and 

particularly Sections 2, 3(b), 10, 15(c), 

15B, 17 and 23(a)(1) thereof, 15 U.S.C. 

78b, 78c(b), 78j, 78o(c), 78o–4, 78q and 

78w(a)(1), the Commission is proposing 

amendments to § 240.15c2–12 of Title 

17 of the Code of Federal Regulations. 

D. Small Entities Subject to the Rule 

The proposal would apply to any 

broker, dealer, or municipal securities 

dealer that acts as an underwriter in a 

primary offering of municipal securities 

with an aggregate principal amount of 

$1,000,000 or more and issuers of such 

securities. 

The RFA defines ‘‘small entity’’ to 

mean ‘‘small business,’’ ‘‘small 

organization,’’ or ‘‘small government 

jurisdiction.’’ 300 The Commission’s 

rules define ‘‘small business’’ and 

‘‘small organization’’ for purposes of the 

RFA for each of the types of entities 

regulated by the Commission. 

A broker-dealer is a small business if 

its total capital (net worth plus 

subordinated liabilities) on the last day 

of its most recent fiscal year was 

$500,000 or less, and is not affiliated 

with any entity that is not a ‘‘small 

business.’’ 301

A municipal securities dealer that is 

a bank (including a separately 

identifiable department or division of a 

bank) is a small business if it has total 

assets of less than $10 million at all 

times during the preceding fiscal year; 

had an average monthly volume of 

municipal securities transactions in the 

preceding fiscal year of less than 

$100,000; and is not affiliated with any 

entity that is not a ‘‘small business.’’ 302

For purposes of Commission 

rulemaking, an issuer or person, other 

than an investment company, is a 

‘‘small business’’ or ‘‘small 

organization’’ if its ‘‘total assets on the 

last day of its most recent fiscal year 

were $5 million or less.’’ 303

Based on information obtained by the 

Commission’s staff in connection with 

the 2008 Adopted Amendments, the 

Commission estimates that 250 brokerdealers, including municipal securities 

dealers, would be Participating 

Underwriters within the meaning of 

Rule 15c2–12. Based on a recent review 

of industry sources, the Commission 

does not believe that any Participating 

Underwriters would be small brokerdealers or municipal securities dealers. 

A ‘‘small governmental jurisdiction’’ 

is defined by the RFA to include 

‘‘governments of cities, counties, towns, 

townships, villages, school districts, or 

special districts, with a population of 

less than fifty thousand.’’ 304 Currently, 

there are more than 50,000 state and 

local issuers of municipal securities 305

that would be subject to the proposal. 

The Commission estimates that 

approximately 40,000 state and local 

issuers would be ‘‘small’’ entities for 

purposes of the RFA. However, the 

Commission believes that most issuers 

of municipal securities would qualify 

for the limited exemption in paragraph 

(d)(2) of the Rule.306 The Commission 

has estimated that currently 10,000 

issuers have entered into continuing 

disclosure agreements that provide for 

their submitting continuing disclosure 

documents to the MSRB and that, under 

the proposed amendment to narrow the 

Rule’s exemption for demand securities, 

the number of affected issuers would 

increase to 12,000 issuers. It is possible 

that some of these issuers may be small 

issuers. 

The proposed amendments would 

apply to all small entities that are 

currently subject to Rule 15c2–12. 

Because small entities already may 

submit event notices for the current 

disclosure items, these entities are able 

to prepare event notices that are 

proposed to be incorporated into the 

Rule. The Commission expects that 

providing the additional event 

disclosure items would increase costs 

incurred by small entities, to the extent 

that their primary offerings of municipal 

securities are covered by the Rule, 

because they potentially would have to 

provide a greater number of event 

notices than they do currently. 

However, the Commission notes this 

increased cost would be approximately 

$8 per entity annually. The 

Commission’s staff has estimated that 

for purposes of the Paperwork 

Reduction Act each issuer, including 

small entities, would be subject to an 

annual reporting burden of 

approximately 4.5 hours and an 

estimated annual cost ranging from $600 

to $760.307 In addition, some issuers 

could have one-time costs ranging from 

$50 to $4,300.308

E. Reporting, Recordkeeping and Other 

Compliance Requirements 

Rule 15c2–12 currently sets forth 

eleven disclosure items that the 


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Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 36867 

309Rule 15c2–12(b)(5) requires a Participating 

Underwriter, before purchasing or selling municipal 

securities in connection with an offering of 

municipal securities, to reasonably determine that 

the issuer or obligated person has undertaken, in a 

written agreement or contract, for the benefit of the 

holders of the municipal securities, to provide 

annual filings, material event notices, and failure to 

file notices (i.e., continuing disclosure documents) 

to the MSRB. See 17 CFR 240.15c2–12(b)(5). 

310Rule 15c2–12(c) requires a broker, dealer, or 

municipal securities dealer that recommends the 

purchase or sale of a municipal security to have 

procedures in place that provide reasonable 

assurance that it will receive prompt notice of any 

material event and any failure to file annual 

financial information regarding the municipal 

security. See 17 CFR 240.15c2–12(c). 

311Specifically, Rule 15c2–12(d)(2) provides an 

exemption from the application of paragraph (b)(5) 

(Rule’s provisions regarding continuing disclosure 

agreements) of the Rule with respect to primary 

offerings if, among other things, the issuer or 

obligated person has agreed to a limited disclosure 

obligation, including sending certain material event 

notices to the MSRB. See 17 CFR 240.15c2–12(d)(2). 

Participating Underwriter must 

reasonably determine would be 

provided, in accordance with the 

continuing disclosure agreement, to the 

MSRB. The proposed amendments to 

Rule 15c2–12 would amend an existing 

event disclosure item and add four new 

event disclosure items. The proposed 

amendments would clarify the current 

disclosure item regarding adverse tax 

opinions, add tender offers to the 

current disclosure item regarding bond 

calls contained in paragraph (b)(5)(C)(8), 

and add three new disclosure items: 

bankruptcy, insolvency, receivership or 

similar event of the issuer or obligated 

person; merger, consolidation, or 

acquisition involving an obligated 

person or the sale of all or substantially 

all of the assets of the obligated person, 

other than in the ordinary course of 

business, the entry into a definitive 

agreement to undertake such an action 

or the termination of a definitive 

agreement relating to any such actions, 

other than pursuant to its terms, if 

material; and the appointment of a 

successor or additional trustee or the 

change of name of a trustee, if material. 

In addition, the proposal would modify 

the condition that event notices be 

submitted to the MSRB, ‘‘if material,’’ 

for some, but not all, of the Rule’s 

specified events. The proposal also 

would delete the current exemption for 

demand securities in paragraph 

(d)(1)(iii) and add language in new 

paragraph (d)(5) so that paragraphs 

(b)(5) 309 and (c) 310 of the Rule also 

would apply to a primary offering of 

demand securities. Lastly, the proposed 

amendments would modify paragraphs 

(b)(5)(i)(C) and (d)(2)(ii)(B) of the Rule to 

require a Participating Underwriter to 

reasonably determine that the issuer or 

obligated person has agreed in its 

continuing disclosure agreement to 

submit event notices to the MSRB, ‘‘in 

a timely manner not in excess of ten 

business days after the occurrence of the 

event,’’ instead of ‘‘in a timely manner’’ 

as the Rule currently provides. 

F. Duplicative, Overlapping, or 

Conflicting Federal Rules 

The Commission believes that there 

are no rules that duplicate, overlap, or 

conflict with the proposed amendments 

to Rule 15c2–12. 

G. Significant Alternatives 

The RFA directs the Commission to 

consider significant alternatives that 

would accomplish the stated objective, 

while minimizing any significant 

adverse impact on small entities. In 

connection with the proposed revisions 

to the Rule, the Commission considered 

the following alternatives: 

(1) Establishing differing compliance 

or reporting requirements or timetables 

which take into account the resources 

available to smaller entities; 

(2) Exempting smaller entities from 

coverage of the disclosure requirements, 

or any part thereof; 

(3) The clarification, consolidation, or 

simplification of disclosure for small 

entities; and 

(4) Use of performance standards 

rather than design standards. 

The Commission believes that 

separate compliance or reporting 

requirements or timetables for smaller 

entities that would differ from the 

proposed requirements, or exempting 

broker-dealers from the obligations in 

paragraph (b)(5) and (c) of the Rule with 

respect to small issuers, would not 

achieve the Commission’s objectives. At 

the outset, the Commission notes that 

most small issuers of municipal 

securities are eligible for the limited 

exemption currently contained in 

paragraph (d)(2) of the Rule. The 

exemption in Rule 15c2–12(d)(2) 

provides that paragraph (b)(5) of the 

Rule, which relates to the submission of 

continuing disclosure agreements, does 

not apply to a primary offering if the 

conditions contained therein are met.311

This limited exemption from the Rule is 

intended to assist small governmental 

jurisdictions that issue municipal 

securities. In the case of primary 

offerings by small governmental 

jurisdictions that are not covered by the 

exemption, the Commission notes that 

the proposal balances the informational 

needs of investors and others with 

regard to municipal securities issued by 

small governmental jurisdictions with 

the effects of the proposed rule change. 

The adoption of separate rules for 

broker-dealers with respect to 

continuing disclosure agreements 

entered into by smaller entities would 

not be consistent with the Commission’s 

intent to improve the greater availability 

and timeliness of disclosures in the 

municipal securities market. 

Furthermore, the municipal securities 

market could be disadvantaged by 

disparate disclosures by small and large 

entities pursuant to their continuing 

disclosure agreements. Broker-dealers 

and other market participants would be 

better able to satisfy their legal 

obligations under the federal securities 

laws to have a reasonable basis on 

which to recommend municipal 

securities. In addition, the proposal 

would impose performance standards 

rather than design standards. 

H. Request for Comments 

The Commission encourages written 

comments on matters discussed in the 

IRFA. In particular, the Commission 

requests comments on: (a) The number 

of small entities that would be affected 

by the proposed amendments; (b) the 

nature of any impact the proposed 

amendments would have on small 

entities and empirical data supporting 

the extent of the impact; (c) how to 

quantify the number of small entities 

that would be affected by and/or how to 

quantify the impact of the proposed 

amendments; and (d) potential costs to 

small entities, if any, including costs 

associated with providing event notices. 

Such comments will be considered in 

the preparation of the Final Regulatory 

Flexibility Analysis, if the proposed rule 

is adopted, and will be placed in the 

same public file as comments on the 

proposed rule itself. Persons wishing to 

submit written comments should refer 

to the instructions for submitting 

comments in the front of this release. 

X. Statutory Authority 

Pursuant to the Exchange Act, and 

particularly Sections 2, 3(b), 10, 15(c), 

15B, 17 and 23(a)(1) thereof, 15 U.S.C. 

78b, 78c(b), 78j, 78o(c), 78o–4, 78q and 

78w(a)(1), the Commission is proposing 

amendments to § 240.15c2–12 of Title 

17 of the Code of Federal Regulations in 

the manner set forth below. 

Text of Proposed Rule Amendments 

List of Subjects in 17 CFR Part 240 

Brokers, Reporting and recordkeeping 

requirements, Securities. 

For the reasons set out in the 

preamble, Title 17, Chapter II, of the 

Code of Federal Regulations is proposed 

to be amended as follows. 


srobinson on DSKHWCL6B1PROD with PROPOSALS2
36868 Federal Register / Vol. 74, No. 141 / Friday, July 24, 2009 / Proposed Rules 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

1. The authority citation for part 240 

continues to read in part as follows: 

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

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

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

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

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

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

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

unless otherwise noted. 

* * * * * 

2. Section 240.15c2–12 is amended by 

the following: 

A. Revise the introductory text of 

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

(b)(5)(i)(C)(2), (6), (7), (8), (10), and (11); 

B. Add new paragraphs 

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

C. Revise paragraph (d)(1)(ii); 

D. Remove paragraph (d)(1)(iii); and 

E. Revise the paragraph (d)(2)(ii)(B); 

and 

F. Add new paragraph (d)(5). 

The additions and revisions read as 

follows. 

§ 240.15c2–12 Municipal securities 

disclosure. 

* * * * * 

(b) * * * 

(5)(i) * * * 

(C) In a timely manner not in excess 

of ten business days after the occurrence 

of the event, notice of any of the 

following events with respect to the 

securities being offered in the Offering: 

* * * * * 

(2) Non-payment related defaults, if 

material; 

* * * * * 

(6) Adverse tax opinions, the issuance 

by the Internal Revenue Service of 

proposed or final determinations of 

taxability, Notices of Proposed Issue 

(IRS Form 5701–TEB) or other material 

notices or determinations with respect 

to the tax-exempt status of the 

securities, or other events affecting the 

tax-exempt status of the security; 

(7) Modifications to rights of security 

holders, if material; 

(8) Bond calls, if material, and tender 

offers; 

* * * * * 

(10) Release, substitution, or sale of 

property securing repayment of the 

securities, if material; 

(11) Rating changes; 

(12) Bankruptcy, insolvency, 

receivership or similar event of the 

obligated person; 

Note to paragraph (b)(5)(i)(C)(12): For the 

purposes of the event identified in paragraph 

(b)(5)(i)(C)(12), the event is considered to 

occur when any of the following occur: the 

appointment of a receiver, fiscal agent or 

similar officer for an obligated person in a 

proceeding under the U.S. Bankruptcy Code 

or in any other proceeding under state or 

federal law in which a court or governmental 

authority has assumed jurisdiction over 

substantially all of the assets or business of 

the obligated person, or if such jurisdiction 

has been assumed by leaving the existing 

governing body and officials or officers in 

possession but subject to the supervision and 

orders of a court or governmental authority, 

or the entry of an order confirming a plan or 

reorganization, arrangement or liquidation by 

a court or governmental authority having 

supervision or jurisdiction over substantially 

all of the assets or business of the obligated 

person; 

(13) The consummation of a merger, 

consolidation, or acquisition involving 

an obligated person or the sale of all or 

substantially all of the assets of the 

obligated person, other than in the 

ordinary course of business, the entry 

into a definitive agreement to undertake 

such an action or the termination of a 

definitive agreement relating to any 

such actions, other than pursuant to its 

terms, if material; 

(14) Appointment of a successor or 

additional trustee or the change of name 

of a trustee, if material; and 

* * * * * 

(d) * * * 

(1) * * * 

(ii) Have a maturity of nine months or 

less. 

* * * * * 

(2) * * * 

(ii) * * * 

* * * * * 

(B) In a timely manner not in excess 

of ten business days after the occurrence 

of the event, notice of events specified 

in paragraph (b)(5)(i)(C) of this section 

with respect to the securities that are the 

subject of the Offering; and 

* * * * * 

(5) With the exception of paragraphs 

(b)(5) and (c) of this section, this section 

shall not apply to a primary offering of 

municipal securities in authorized 

denominations of $100,000 or more if 

such securities may, at the option of the 

holder thereof, be tendered to an issuer 

of such securities or its designated agent 

for redemption or purchase at par value 

or more at least as frequently as every 

nine months until maturity, earlier 

redemption, or purchase by an issuer or 

its designated agent. 

* * * * * 

PART 241—INTERPRETATIVE 

RELEASES RELATING TO THE 

SECURITIES EXCHANGE ACT OF 1934 

AND GENERAL RULES AND 

REGULATIONS THEREUNDER 

* * * * * 

3. Part 241 is amended by adding 

Release No. 34–XXXXX and the release 

date of X to the list of interpretative 

releases. 

Dated: July 17, 2009. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–17466 Filed 7–23–09; 8:45 am] 

BILLING CODE 8010–01–P 


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