Document ID: SEC-2008-1614-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Municipal Securities Rulemaking Board
Posted Date: 2008-11-28T05:00Z

[Federal Register: November 28, 2008 (Volume 73, Number 230)]
[Notices]               
[Page 72540-72546]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28no08-129]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58998; File No. SR-MSRB-2008-07]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Notice of Filing of Proposed Rule Change to MSRB Rule G-34, 
CUSIP Numbers and New Issue Requirements, To Establish a Transparency 
System for Municipal Auction Rate Securities and Municipal Variable 
Rate Demand Obligations

November 21, 2008.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 18, 2008, the Municipal Securities Rulemaking Board 
(``MSRB'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been substantially 
prepared by the MSRB. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The MSRB is filing with the Commission a proposed rule change to 
establish a transparency system for municipal Auction Rate Securities 
(``ARS'') and municipal Variable Rate Demand Obligations (``VRDO''). 
The proposed rule change would: (i) Implement an electronic system that 
would collect and disseminate ARS and VRDO information (the ``Short-
term Obligation Rate Transparency System Proposal''); (ii) provide free 
public access to information disseminated from the Short-term 
Obligation Rate Transparency (``SHORT'') System through the MSRB's 
Electronic Municipal Market Access (EMMA) system (the ``EMMA short-term 
obligation rate transparency service''); and (iii) amend Rule G-34, on 
CUSIP numbers and new issue requirements, to require brokers, dealers 
and municipal securities dealers (collectively ``dealers'') to report, 
or ensure the reporting of, interest rate and descriptive information 
to the SHORT System about ARS and VRDO following an ARS auction or VRDO 
interest rate reset (the ``rule change proposal'').
    The text of the proposed rule change is available on the MSRB's Web 
site (http://www.msrb.org), at the MSRB's principal office, and at the 
Commission's Public Reference Room. If approved, the rule text for the 
Short-term Obligation Rate Transparency System, as well as for the EMMA 
variable rate transparency service, would be available on the MSRB Web 
site at http://www.msrb.org/msrb1/rulesandforms under the heading 
Information Facilities.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the MSRB included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The MSRB has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

[[Page 72541]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change would increase the amount of information 
available to market participants for municipal ARS and VRDO by: (i) 
Implementing the Short-term Obligation Rate Transparency System 
(``SHORT'' System) to collect and disseminate information about 
securities bearing interest at short-term rates; (ii) providing free 
public access to information disseminated from the SHORT System through 
EMMA; and (iii) amending Rule G-34 to require dealers to report, or 
ensure the reporting of, interest rate and descriptive information to 
the SHORT System about ARS and VRDO following an ARS auction or VRDO 
interest rate reset.

Background

    In recent years, there has been a growing market in municipal 
securities with long-term maturity dates and short-term (nine months or 
under) interest rate reset periods. ARS and VRDO comprise most of the 
securities in this sector. ARS and VRDO are similar in that they both 
are long-term securities with short-term interest rates. In both types 
of securities, interest rates are reset periodically through programs 
operated by dealers on behalf of the issuers of the securities.
VRDO Remarketing Process
    VRDO are distinguished by the existence of a ``put'' or ``tender'' 
feature that allows holders to tender their securities back to an 
issuer-appointed representative, at par, on a periodic basis. VRDO 
normally operate with a letter of credit or stand-by bond purchase 
agreement designed to ensure liquidity. Interest rates typically are 
reset by a dealer serving as the ``Remarketing Agent'' for the issue at 
a rate that allows the securities to be sold at par.
ARS Auction Process
    ARS are distinguished by the auction process that is used to reset 
interest rates. ARS are not characterized by, and generally do not 
have, put features or liquidity facilities. Although the auction 
process is designed to allow holders normally to sell their positions 
at par value during any auction, it is possible for auctions to fail, 
in which case holders are not able to liquidate their positions at par.
    The auction methodology used in ARS is a type similar to a ``Dutch 
auction.'' An auction program employs one or more dealers (``ARS 
Program Dealers'') \3\ that solicit orders from investors who wish to 
own the securities over the next interest rate reset period. Typical 
interest rate reset periods are 7, 28, and 35 days. The programs 
require one ``ARS Auction Agent''--typically a bank--that receives 
orders from the ARS Program Dealer(s) and conducts auctions in 
accordance with the method described in program documents. The ARS 
Auction Agent provides the results of the auction to the ARS Program 
Dealer(s), which then inform their bidders of the auction results and 
the securities, if any, that have been allocated to them as a result of 
the auction.
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    \3\ The ARS Program Dealer(s) is so designated through an 
agreement with an Auction Agent and the issuer of or other obligated 
person with respect to the Auction Rate Security.
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    The auction method specified in program documents for ARS takes 
into consideration the total quantity of orders received in each order 
category specified in ARS documents. Typical order categories include:
     Existing holders that want to hold at any rate decided by 
the auction;
     Potential investors bidding to purchase a specified amount 
of securities by stating minimum acceptable interest rates;
     Existing holders that want to hold, but only if the 
auction produces a rate equal to or greater than one that the existing 
holder specifies; and
     Existing holders that want to sell a specified amount.
    Using order information that must be submitted by an ARS Program 
Dealer(s) before the auction deadline, the ARS Auction Agent employs an 
algorithm to determine the lowest interest rate at which all of the 
securities that have been offered for sale by current holders of the 
securities will clear the market (the ``clearing rate''). The clearing 
rate then becomes the interest rate for all of the securities in the 
issue for the next interest rate reset period.
    ARS also have provisions that address situations that may occur if 
no clearing rate can be determined through the normal auction process. 
For example, if all existing holders want to hold at any rate, then an 
``all hold rate'' is used. The all hold rate is usually a multiple of a 
market index and is designed to be lower than the rate that normally 
would be expected as a clearing rate. Conversely, auctions also can 
``fail'' if the auction agent does not receive enough bids to cover the 
aggregate amount of securities that need to be sold, or if the clearing 
rate is above a ``maximum rate'' set in the program documents. In a 
failed auction, all existing holders hold their securities and the rate 
for the next interest rate reset period is set to the ``maximum rate.'' 
Like the all hold rate, the maximum rate may be a multiple of a 
specified index. However, it is normally designed to be a rate higher 
than the rate that would normally be expected in a successful auction.
Existing Price Transparency Issues
    As ``short-term'' securities under Rule G-14 on transaction 
reporting, both ARS and VRDO are subject to slightly different 
reporting requirements than other securities. In 2003, the MSRB 
proposed rules for a Real-Time Transaction Reporting System (RTRS), 
including a requirement to report trades no later than fifteen minutes 
after the time of trade execution, and, for customer transactions, a 
requirement that the trade report include both a dollar price and 
yield.\4\ In response, the MSRB received comments from dealers that, 
because of the special trade processing methodologies for short-term 
variable rate securities, it would be difficult or impossible to meet 
these requirements for such securities. Based on these concerns, the 
MSRB included special provisions that provide dealers with an end-of-
day exception from the fifteen-minute reporting deadline and allows 
dealers to report customer transactions in variable rate securities 
without yield.
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    \4\ Inter-dealer trade reports, in general, are not required to 
include yield.
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    Since transactions in short-term variable rate securities normally 
are executed at a dollar price of par and the current interest rate for 
such variable securities are not included in the data sources used by 
RTRS and the municipal securities industry in general, the lack of 
yield means that RTRS does not currently provide a means by which to 
determine the return on an investment in these securities. The MSRB was 
aware of this in 2003 when it decided to provide the special variable 
rate securities provisions, noting:

    The MSRB does not currently plan to require reports of yields or 
reset rates on variable rate and auction rate products, but 
continues to be interested in price transparency in this area. 
Accordingly, the MSRB will explore other ways to provide 
transparency for short-term rates that are being set * * * in 
variable rate and auction products.\5\
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    \5\ See Real-Time Transaction Reporting: Revised Schedule and 
Operational Plan, MSRB Notice 2003-44 (December 11, 2003).

[[Page 72542]]

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    The MSRB has continued to consider the availability of this 
information through existing data sources and is not aware of any ready 
source of interest rate reset information available to retail investors 
or, in some cases, to market participants in general about ARS and 
VRDO.
Recent Market for ARS and VRDO
    Since early 2008, downgrades of municipal bond insurers and other 
short-term liquidity concerns have created extreme volatility in the 
market for ARS. This has resulted in an unprecedented number of 
``failed auctions,'' meaning that investors who chose to liquidate 
positions through the auction process were not able to do so. As a 
result of the volatility in the market for ARS, there has been 
increased interest in the market for VRDO by both issuers and 
investors. At the same time, the extreme turmoil in the financial 
markets has resulted in considerable pressures on the supply of 
liquidity facilities for the VRDO market and, consequently, much higher 
levels of rate volatility. Given these developments in the market for 
VRDO, the MSRB has concerns about the lack of information available to 
market participants on VRDO similar to those concerns with respect to 
ARS.
Description of the Short System
    To increase the information available about ARS and VRDO, the 
proposed rule change would implement the Short-term Obligation Rate 
Transparency System for the collection and dissemination of information 
about ARS and VRDO. The SHORT System will receive submissions of 
information about ARS and VRDO under the proposed amendments to Rule G-
34. Information submitted to the SHORT System will be processed upon 
receipt and disseminated in real-time.
Submissions to the SHORT System
    Information to be Submitted. The basic items of information 
proposed to be submitted to the SHORT System are the same as those 
required to be submitted to the MSRB under the proposed amendments to 
Rule G-34. The complete list of data elements that would be required on 
a submission to the SHORT System will be made available in input 
specifications and system procedures made available on http://
www.msrb.org.
    Submitters. Submissions to the SHORT System may be made solely by 
authorized submitters using password-protected accounts in MSRB 
Gateway.\6\ Submissions may be made by the following classes of 
submitters:
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    \6\ MSRB Gateway is designed to be a single, secure access point 
for all MSRB applications. Submitters of information to the SHORT 
System would be required to obtain an account in MSRB Gateway in 
order to submit information to the SHORT System. Through MSRB 
Gateway, submitters also have the ability to designate third-party 
agents to submit information to the SHORT System on the submitter's 
behalf. See MSRB Gateway Roll Out and Training, MSRB Notice 2008-43 
(October 15, 2008).
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     ARS Program Dealer;
     VRDO Remarketing Agent;
     ARS Auction Agent; and
     Designated Agent, which may submit any information 
otherwise permitted to be submitted by another class of submitter which 
has designated such agent, as provided below.
    Dealers may designate agents to submit information on their behalf, 
and may revoke the designation of any such agents, through MSRB 
Gateway. Such Designated Agents must register to obtain password-
protected accounts through MSRB Gateway in order to make submissions on 
behalf of the designating dealers. All actions taken by a Designated 
Agent on behalf of a dealer that has designated such agent shall be the 
responsibility of the dealer.
    The MSRB anticipates that a majority of ARS information will be 
submitted by ARS Auction Agents. ARS Auction Agents would be allowed to 
submit information about an auction to the SHORT System without prior 
designation by an ARS Program Dealer. In the event that an ARS Auction 
Agent submits information about an auction to the SHORT System, an ARS 
Program Dealer would not also be required to submit information 
provided that the ARS Program Dealer has been correctly identified on 
the submission by the ARS Auction Agent. In the event that an ARS 
Auction Agent fails to submit information about an ARS auction, the ARS 
Program Dealer is required to submit the required information about the 
auction to the SHORT System.\7\
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    \7\ In the event that an ARS Auction Agent fails to submit 
information about an ARS auction and multiple ARS Program Dealers 
are required to submit information, each ARS Program Dealer would be 
responsible for ensuring that the required information is provided 
in a timely manner.
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    Timing of Submissions. Submitters shall make submissions to the 
SHORT System within the timeframes set forth in MSRB rules. Submissions 
of information to the SHORT System may be made throughout any RTRS 
Business Day, as defined in Rule G-14 RTRS Procedures section (d)(ii), 
from at least the hours of 6 a.m. to 9 p.m. Eastern Time subject to the 
right of the MSRB to make such processes unavailable at times as needed 
to ensure the integrity of the SHORT System and any related systems. 
The MSRB shall provide advance notice of any planned periods of 
unavailability and shall endeavor to provide information to submitters 
as to the status of the submission interface during unanticipated 
periods of unavailability, to the extent technically feasible.
    Method of Submission. Information may be submitted to the SHORT 
System through a secure, password-protected, web-based electronic 
submitter interface or through a secure, authenticated computer-to-
computer data connection, at the election of the submitter. When making 
submissions using the web-based interface, related information is 
entered manually into an on-line form. Computer-to-computer submissions 
utilize XML files. Appropriate schemas and procedures for web-based and 
computer-to-computer submissions will be included in input 
specifications and system procedures made available on http://
www.msrb.org.

SHORT System Processing

    The SHORT System would perform various data checks to ensure that 
information submitted is in the correct format. In addition, data 
checks would be performed to monitor dealer compliance with MSRB Rule 
G-34(c) as well as to identify information submitted in correct formats 
that may contain errors due to information not falling within 
reasonable ranges of expected values for a given item of information. 
The MSRB expects to institute the following processes, which are 
subject to modification, addition and deletion as appropriate.
    Measurement of Timely Submission. The time of receipt of a 
submission will be recorded by the SHORT System and compared with the 
submitting deadline (e.g., 6:30 p.m. Eastern Time on the day an 
interest reset occurs for a VRDO). Submissions not received by the 
appropriate deadline will be considered late.
    Format Edits. Each submission will be reviewed to verify that its 
format is correct. This involves checking various required data 
elements to ensure that they are present in the correct form (e.g., 
dates are in date format) and with the correct number of digits or 
characters. Submissions that fail these edits will not be processed 
further. Input from web-based screens will be checked before 
information is transferred from the submitters personal computer to the 
SHORT System.
    Submitter Validation. The SHORT System will accept information only 
from parties known to the MSRB. In addition, information submitted by a

[[Page 72543]]

Designated Agent on behalf of a dealer or ARS Auction Agent will only 
be accepted if such dealer or ARS Auction Agent for whom the Designated 
Agent is submitting information has previously been so designated by 
the dealer or ARS Auction Agent.
    Content Edits. The values in submissions of data to the SHORT 
System will be checked to determine that they are within reasonable 
limits, in order to detect input errors. Any errors or possible errors 
found will be noted and an error message describing the deficiency will 
be returned to the submitter.
    Feedback. All submissions processed by the SHORT System will 
generate an acknowledgement or error message. In addition, all dealers 
that have information submitted on their behalf by either an ARS 
Auction Agent or a Designated Agent will be able to monitor such 
information submissions in real-time, once such submissions have been 
successfully processed by the SHORT System.
SHORT System Data Dissemination
    Information submitted to the SHORT System that passes the format 
edits described above will be processed and disseminated on a real-time 
basis. Any changes to submissions also will be processed and updated 
information will be disseminated in real-time. Such information will be 
disseminated through the EMMA portal. The MSRB also anticipates 
providing a subscription service for the information provided through 
the SHORT System pursuant to a future filing with the Commission.
Description of the Rule Change Proposal
    The proposed rule change would amend Rule G-34, on CUSIP numbers 
and new issue requirements, to require that information about ARS and 
VRDO is submitted to the SHORT System following an ARS auction or VRDO 
interest rate reset. The MSRB proposes a January 30, 2009 effective 
date for the proposed rule change.
Amendments to Rule G-34 Relating to ARS
    The proposed rule change would require an ARS Program Dealer to 
report (either directly or through a Designated Agent), or ensure that 
an ARS Auction Agent reports, the information below to the SHORT System 
by no later than 6:30 p.m. Eastern Time on the day that an auction 
occurs.\8\ The information required to be provided to the MSRB about an 
ARS includes:
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    \8\ The 6:30 p.m. Eastern Time deadline only applies on those 
ARS auctions and VRDO interest rate resets that occur on an RTRS 
Business Day, as defined in Rule G-14(d)(ii). Information about ARS 
auctions and VRDO interest rate resets that occur on non-RTRS 
Business Days would be required to be submitted to the SHORT System 
by no later than 6:30 p.m. Eastern Time on the next RTRS Business 
Day. The MSRB plans to review the appropriateness of the 6:30 PM 
Eastern Time deadline once experience with the SHORT System and 
associated MSRB rules has been obtained with a view toward advancing 
the timing of the requirement to submit information to the SHORT 
System.
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     CUSIP number;
     Interest rate for the next reset period;
     Identity of Program Dealer(s);
     Number of days of the reset period;
     Minimum denomination;
     Date and time of the auction;
     Date and time of posting of auction results by an Auction 
Agent;
     Indication of whether the clearing rate is a ``maximum 
rate,'' an ``all hold rate,'' or ``set by auction;''
     Minimum and maximum rates, if any, applicable at the time 
of the auction or, if not calculable as of the time of auction, 
indication that such rate or rates are not calculable;\9\ and
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    \9\ If a minimum or maximum rate is unable to be determined on 
the day that an ARS auction or VRDO interest rate reset occurs, for 
example because the maximum rate for an ARS is determined through a 
clawback provision, the submitter would be required to report that 
the maximum rate is not calculable. This exception does not apply to 
maximum rates that are linked to an index or bank lending rate, such 
as LIBOR. Such maximum rates would be required to be computed and 
provided to the MSRB.
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     Par amount auctioned, not including hold orders effective 
at any rate.
Amendments to Rule G-34 Relating to VRDO
    The proposed rule change would require a dealer that acts as a 
Remarketing Agent for a VRDO to report (either directly or through a 
Designated Agent) to the SHORT System the following items of 
information about a VRDO by no later than 6:30 p.m. Eastern Time on the 
day that an interest rate reset occurs: \10\
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    \10\ See supra note 8.
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     CUSIP number;
     Interest rate for the next reset period;
     Identity of Remarketing Agent;
     Date of interest rate reset;
     Length of the interest rate reset period;
     Length of Notification Period;
     Indicate of whether interest rate is ``set by formula,'' 
``set by Remarketing Agent'' or a maximum rate;
     Minimum and maximum rates, if any, applicable at the time 
of the interest rate reset or, if not calculable as of the time of the 
interest rate reset, indication that such rate or rates are not 
calculable; \11\
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    \11\ See supra note 9.
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     Minimum denomination;
     Type of liquidity facility(ies);\12\ and
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    \12\ An indication of whether each applicable liquidity facility 
is a letter of credit or standby bond purchase agreement would be 
required to be submitted to the SHORT System.
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     Expiration date of each liquidity facility.
Description of the Emma Short-Term Obligation Rate Transparency Service
    The EMMA short-term obligation rate transparency service would make 
the information disseminated from the SHORT System publicly available, 
at no charge, on the MSRB's EMMA portal. The EMMA short-term obligation 
rate transparency service would provide free public access to the 
information about ARS and VRDO that would be provided to the MSRB under 
the amendments to Rule G-34.
    As proposed, EMMA would provide on-line search functions to enable 
users to readily access information about ARS and VRDO based on a broad 
range of search parameters. The MSRB would not be responsible for the 
content of the information submitted by submitters to the SHORT System 
displayed on the EMMA portal.
2. Statutory Basis
    The MSRB believes that the proposed rule change is consistent with 
Section 15B(b)(2)(C) of the Act,\13\ which provides that the MSRB's 
rules shall:
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    \13\ 15 U.S.C. 78o-4(b)(2)(C).

    Be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect 
to, and facilitating transactions in municipal securities, to remove 
impediments to and perfect the mechanism of a free and open market 
in municipal securities, and, in general, to protect investors and 
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the public interest.

    The MSRB believes that the proposed rule change is consistent with 
the Act. The proposed rule change would serve as an additional 
mechanism by which the MSRB works toward removing impediments to and 
helping to perfect the mechanisms of a free and open market in 
municipal securities by providing a centralized venue for free public 
access to information about ARS and VRDO. The proposed rule change 
would provide greater access to information about ARS and VRDO to all 
participants in the municipal securities market on an equal basis 
thereby removing potential barriers to obtaining such information. 
These factors serve to promote the statutory mandate of the

[[Page 72544]]

MSRB to protect investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The MSRB does not believe that the proposed rule change would 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act, since it would apply equally to 
dealers in municipal securities.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    On March 17, 2008, the MSRB requested comment on a proposed plan 
for increasing the information available for ARS (``March ARS Notice'') 
\14\ and on May 23, 2008, the MSRB requested comment on a proposed plan 
for increasing the information available for VRDO (``May VRDO 
Notice'').\15\ These notices, the comments received, and the MSRB's 
responses are discussed below.
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    \14\ See MSRB Notice 2008-15 (March 17, 2008).
    \15\ See MSRB Notice 2008-24 (May 23, 2008).
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March ARS Notice

    The March ARS Notice proposed a plan to create a centralized system 
for the collection and dissemination of critical market information 
about ARS. The proposed plan would require ARS Program Dealers to 
report the following information to a central system operated by the 
MSRB on the day that an auction occurs:
ARS Interest Rate and Descriptive Information
     CUSIP number;
     Name of Program Dealer(s);
     Number of days of the reset period;
     Minimum denomination;
     Date and time of the auction;
     Interest rate for the next reset period;
     Indication of whether the clearing rate is a ``maximum 
rate,'' an ``all hold rate,'' or ``set by auction'';
     Dollar amount of securities auctioned
ARS Bidding Information
     Number of bidders;
     Par amount of securities for sale in the auction;
     Number and aggregate dollar amount of bids made;
     Number of bidders other than the Program Dealer(s), issuer 
or conduit borrower;
     Number, interest rate(s) and amount of bids by a Program 
Dealer for its own account;
     Number, interest rate(s) and amount of bids by issuer or 
conduit borrower;
     Par amount of securities allocated to bids at clearing 
rate;
     High bid;
     Low bid;
     Median bid.
    In addition to the information listed above, the March ARS Notice 
also proposed collecting documents concerning ARS that are not 
currently required to be filed with the MSRB under Rule G-36, on 
delivery of official statements, advance refunding documents and Forms 
G-36(OS) and G-36(ARD).

May VRDO Notice

    The May VRDO Notice proposed a plan to collect and disseminate 
critical market information about VRDO using the same system proposed 
in the March ARS Notice. Under the plan proposed in the May VRDO 
Notice, dealers that act as Remarketing Agents would be required to 
report the following information about a VRDO by the end of the day on 
which an interest rate reset occurs:
VRDO Interest Rate and Descriptive Information
     CUSIP number;
     Name of Remarketing Agent;
     Date of interest rate reset;
     Interest rate for the next reset period;
     Length of the interest rate reset period;
     Length of Notification Period;
     Whether interest rate is ``set by formula'' or ``set by 
Remarketing Agent'';
     Minimum and maximum rates, if any;
     Minimum denomination;
     Type of liquidity facility(ies);
     Expiration date of each liquidity facility.
    In addition to the specific items of information listed above, the 
May VRDO Notice also proposed collecting documents concerning VRDOs 
that are not currently required to be filed with the MSRB under Rule G-
36, such as the letter of credit or standby bond purchase agreement.

Discussion of Comments

    The MSRB received comments on the March ARS Notice from seven 
commentators \16\ and on the May VRDO Notice from nine 
commentators.\17\After reviewing these comments, the MSRB approved a 
phased-in approach to collecting the information and documents 
identified in the March ARS Notice and May VRDO Notice. This first 
phase of this approach includes the collection of ARS and VRDO interest 
rate and descriptive information, listed above. The principal comments 
concerning the collection of ARS and VRDO interest rate and descriptive 
information are discussed below.\18\
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    \16\ See letters from Paula Stuart, Chief Executive Officer, 
Digital Assurance Certification, LLC (``DAC'') to Justin Pica, dated 
April 21, 2008; Jack B. McPherson to Mr. Pica, dated March 27, 2008; 
Mikag@cox.net to Mr. Pica, e-mail dated April 23, 2008; Michael 
Decker and Mike Nicholas, Co-Chief Executive Officers, Regional Bond 
Dealers Association (``RBDA'') to Mr. Pica, dated April 21, 2008; 
Joseph S. Fichera, Senior Managing Director and CEO, Saber Partners, 
LLC (``Saber Partners'') to Mr. Pica, dated July 9, 2008; Leslie M. 
Norwood, Managing Director and Associate General Counsel, Securities 
Industry and Financial Markets Association (``SIFMA'') to Mr. Pica, 
dated April 21, 2008; and, Jeff Yankauer to Mr. Pica, e-mail dated 
April 17, 2008.
    \17\ See letters from Ms. Stuart, DAC, to Mr. Pica, dated July 
1, 2008; Daniel Thieke, Vice President, Depository Trust and 
Clearing Corporation (``DTCC'') to Mr. Pica, dated June 26, 2008; 
Christine Walsh, Managing Director, Merrill Lynch to Mr. Pica, dated 
June 26, 2008; S. Lauren Heyne, Chief Compliance Officer, RW Smith 
and Associates, Inc. (``RW Smith'') to Mr. Pica, dated June 30, 
2008; Mr. Fichera, Saber Partners, to Mr. Pica, dated July 9, 2008; 
Ms. Norwood, SIFMA, to Mr. Pica, dated June 30, 2008; Dara L. Smith, 
Managing Director, SunTrust Robinson Humphrey (``SunTrust'') to Mr. 
Pica, dated June 27, 2008; Joseph A. Whitehead, Thornton Farish Inc. 
(``Thornton Farish'') to Mr. Pica, dated June 30, 2008; and, Belle 
Walker, Senior Vice President, W.R. Taylor and Company, LLC (``W.R. 
Taylor'') to Mr. Pica, dated August 7, 2008.
    \18\ Future phases may include the collection and dissemination 
of the other information and documents identified in the March ARS 
Notice and May VRDO Notice. Comments relating to the collection and 
dissemination of such information and documents will be discussed in 
connection with the future filings of relevant proposed rule changes 
with the SEC.
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Support for MSRB Plan to Increase Information Available for ARS and 
VRDO
    In response to the March ARS Notice, commentators generally stated 
support for the creation of a system to increase the information 
available on ARS. SIFMA ``fully supports the development by the MSRB of 
a system to display auction information on a Web site.'' RBDA stated 
that ``the MSRB's proposal...represents a reasonable response to the 
problem of a lack of transparency regarding the conduct of auctions in 
the [municipal ARS] market.'' However, RBDA stated that ``since the 
downturn in [ARS], the market for [ARS] has shrunk significantly'' and 
that ``if the [ARS] continues to shrink, ... [RBDA] believe[s] the 
MSRB's and dealers'' resources would be more productively directed to 
other initiatives.'' The MSRB agrees with RBDA's view that the amount 
of information that could be

[[Page 72545]]

collected in any new information system must be balanced with the cost 
of system development and in review of comments on the March ARS 
Notice, the question of increased transparency for VRDO surfaced. 
Accordingly, the MSRB published the May VRDO Notice.
    In response to the May VRDO Notice, commentators also stated 
support for increasing the information available about VRDO using the 
same system proposed in the March ARS Notice. SIFMA ``fully supports 
the development by the MSRB of a system to display remarketing 
information on a Web site.'' RW Smith ``believes the most effective way 
to ensure efficient, liquid markets is through timely distribution of 
security data, market pricing and transaction information.'' Thornton 
Farish stated ``the transparency and communication of appropriate 
information for [VRDO] should be a priority of [the] MSRB.'' One 
commentator, W.R. Taylor, opposed the proposed requirement for VRDO 
Remarketing Agents to report information to an MSRB system following a 
VRDO interest rate reset.
Information Proposed To Be Collected and Disseminated
    In response to the ARS interest rate and descriptive information 
proposed to be collected in the March ARS Notice, Mr. Yankauer stated 
that he is ``in agreement that all of the proposed items * * * should 
be disclosed.'' \19\ Mr. Yankauer suggested that the MSRB collect 
information on how ARS maximum rates are computed. While the MSRB 
agrees that such information would be of value, the MSRB has instead 
included in the ARS interest rate and descriptive information required 
to be submitted to the MSRB the current computation of the maximum 
rate, when such value is able to be computed. SIFMA stated that it 
agrees with the items proposed for collection, but recommended a 
phased-in approach that initially only includes the collection of ARS 
interest rate and descriptive information. SIFMA states that this would 
allow the system to be brought up as quickly as possible.
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    \19\ Mr. Yankauer further suggested that the MSRB collect 
information about whether an auction for a specific security has 
ever failed and the date of the most recent failure. While the MSRB 
believes that such information would be useful to market 
participants, the MSRB decided to not require Program Dealers to 
provide historical information about an ARS. The MSRB notes that on 
a prospective basis, such information would be available to market 
participants.
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    In response to the May VRDO Notice, SunTrust stated that the items 
of information proposed to be collected and disseminated about VRDOs 
are appropriate and that there are no additional items of information 
that should be added to the list of information. SIFMA ``considers the 
* * * information proposed to be collected and disseminated to be 
appropriate.'' \20\
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    \20\ Thornton Farish suggests that Remarketing Agents that 
market VRDOs solely to institutional investors should be exempt from 
a proposed rule to report information about the VRDO. However, the 
MSRB believes it is important that the information available on 
VRDOs be comprehensive.
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Information Collection Methodology
    DTCC, in commenting on the May VRDO Notice, proposed that its New 
Issue Information Dissemination System (NIIDS) could be used as a 
mechanism for reporting information about VRDOs to the MSRB. DTCC 
stated that since NIIDS ``contains many of the sought-after data 
elements for [VRDOs], there would be a limited amount of system 
modifications needed to support this initiative.'' While NIIDS is 
designed to receive and disseminate many of the items of information 
listed in the May VRDO Notice, the MSRB notes that modifications to 
NIIDS would be needed to receive the ARS interest rate and descriptive 
information. Further, NIIDS is only currently designed to receive and 
disseminate information about new issues of municipal securities.
    The MSRB believes that the amount of changes to NIIDS to support 
the collection and dissemination of ARS information and to receive 
information from dealers on an ongoing basis would not be 
insignificant. Since underwriters of new issues of VRDOs would be 
required to input many of the items of information to NIIDS in 
connection with filing an application for depository eligibility, the 
MSRB will work with DTCC to see if such data could, in the future, 
serve as a ``template'' for Remarketing Agents to minimize the amount 
of information that would need to be provided to the MSRB in connection 
with a VRDO interest rate reset under the proposed rule change.
    RW Smith and SunTrust stated that Remarketing Agents typically 
communicate information about VRDOs to information vendors and SunTrust 
suggested that if a Remarketing Agent can designate an information 
vendor for purposes of submitting information to the MSRB, ``then the 
impact to the remarketing agent will be minimal.'' The MSRB notes that 
dealers would be able to designate agents, including information 
vendors, for purposes of submitting information to the MSRB on a 
dealer's behalf.
Allocations of Responsibilities Among ARS Program Dealers
    Some ARS programs employ multiple Program Dealers. SIFMA noted that 
unlike in an underwriting of municipal securities where a lead 
underwriter executes a bond purchase agreement on behalf of all 
underwriters, ``there is generally no `lead' Program Dealer 
specifically designated as such in programs involving multiple Program 
Dealers.'' SIFMA recommended that when more than one Program Dealer 
exists in an auction program, the Program Dealers should designate one 
Program Dealer ``to act as `manager' for all Program Dealers for 
purposes of compliance with the proposed rule.''
    The MSRB anticipates that ARS Auction Agents would submit 
information on behalf of all Program Dealers for those securities that 
have multiple Program Dealers. The MSRB acknowledges that having 
multiple submission of identical information by separate dealers would 
not be efficient and could result in data discrepancies. In the event 
that an Auction Agent does not submit information on behalf of ARS 
Program Dealers, dealers would be able to designate agents for purposes 
of reporting information to the MSRB and in this case, Program Dealers 
would be able to designate a ``lead'' Program Dealer to report 
information to the MSRB or a third party, such as a vendor, to report 
information on behalf of all Program Dealers connected with an ARS.\21\
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    \21\ See supra note 7.
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Deadline for Submission of Information
    Both the March ARS Notice and May VRDO Notice proposed requiring 
ARS Program Dealers and VRDO Remarketing Agents to submit interest rate 
information on the day that an ARS auction or a VRDO rate reset occurs. 
Several commentators suggested an end-of-day submission deadline and 
SIFMA recommended that the deadline should be the same as the deadline 
under MSRB Rule G-14, on transaction reporting, for reporting 
transactions in short-term securities to the MSRB Real-Time Transaction 
Reporting System. The MSRB agrees with these commentators that an 
``end-of-day'' deadline for reporting information to the MSRB should 
coincide with the end-of-day in MSRB rules on transaction reporting and 
has included a 6:30 p.m. Eastern Time deadline for submitting ARS and 
VRDO information to the MSRB in the proposed rule change.

[[Page 72546]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-MSRB-2008-07 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-MSRB-2008-07. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission 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/
sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for 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. Copies of such filing also will be available for 
inspection and copying at the principal office of the MSRB. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-MSRB-2008-07 and should be 
submitted on or before December 19, 2008.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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 Florence E. Harmon,
 Acting Secretary.
[FR Doc. E8-28242 Filed 11-26-08; 8:45 am]

BILLING CODE 8011-01-P