In the News: Recent Developments

July 15, 2009

Municipal Services Rulelmaking Board (“MSRB”) Files Disclosure Proposals

By Andrew Ackerman

Files Two Proposals to SEC; Releases Guidance

WASHINGTON – The Municipal Securities Rulemaking Board yesterday filed with the Securities and Exchange Commission two rulemaking proposals designed to improve primary and continuing muni disclosure information in conjunction with the SEC’s meeting today to consider draft changes to update its Rule 15c2-12.

One proposal would require underwriters to disclose to the MSRB’s EMMA system whether and when an issuer is obligated to provide secondary market disclosure information as well as who will be providing that information for the issuer.

The other proposal will allow issuers to voluntarily submit to EMMA preliminary official statements, notices of sales, and other pre-sale information. In addition, the notice will offer to give issuers special notice on EMMA if they provide links to their investor relations’ Web sites, receive the Government Finance Officers Association’s Certificate of Excellence, provide continuing disclosure information within 120 days after the close of their fiscal years, and comply with Governmental Accounting Standards Board standards.

The MSRB also issued interpretive guidance warning dealers about their disclosure and other duties to retail investors, including the need to provide material information about credit-enhanced munis as well as information about bank-provided liquidity facilities for variable-rate demand obligations.

At the same time, the board released, and asked for public comments on, draft rule changes that would require dealers to provide much more information to the board about auction-rate securities and VRDOs, as well as program documents for both types of short-term securities.

The MSRB is seeking comments by Sept. 1 on the draft rule changes to its Rule G-34 on new-issue requirements for variable-rate securities. If implemented, the additional information would constitute the second and final phase of the board’s Short-term Obligation Rate Transparency, or SHORT, system.

The board launched the initial phases of SHORT for basic ARS reset information on Jan. 30 and for basic remarketing information of VRDOs on April 1. Originally, SHORT was envisioned as a three-phase system, but the MSRB combined the second and third phases, though they leave the door open for additional improvements in the future.

Though the ARS market collapsed last year, there were still $78 billion outstanding in March, according to the board, which also estimates that there are $400 billion of VRDOs outstanding.

For ARS, the draft amendments would seek bidding information to augment the interest rate and descriptive information currently provided, in the hopes of showing how the interest rate was determined for a successful auction, according to the MSRB notice.

The board said the ARS bidding information also would allow it and market participants to compute ARS auction statistics similar to those that are available for Treasury auctions, including a “bid-to-cover ratio” that would serve as an indication of liquidity of ARS in a specific auction.

The idea was first publicly suggested in a letter to the board last summer by Joseph Fichera of Saber Partners LLC, a Wall Street-based financial advisory firm.

For VRDOs, the draft amendments would require that dealers provide the board with the identity and contact information of the tender agent, which is sometimes the trustee. The move is designed to better facilitate the tender of VRDOs by investors, who may not know who to contact.

In addition, the draft amendments would require that the identity of all liquidity providers be reported along with information that would allow market participants to determine whether a VRDO remarketing agent or liquidity provider holds a position in the VRDO at the time of the interest rate reset.

Meanwhile, MSRB executive director Lynnette Hotchkiss said the interpretive guidance is not in reaction to any particular issue in the market. It seeks to remind dealers of their responsibilities in terms of fair dealing, fair pricing and suitability for credit enhanced debt or munis with liquidity facilities sold to individual investors.

“This is just a general reminder” to dealers, she said.

The guidance notes that dealers are required to disclose the credit rating of the issuer or lack thereof, the underlying credit rating if one exists, the identity of any credit enhancer or liquidity provider, and the credit rating of the credit provider and liquidity provider, including potential rating actions.

Among several warnings, the board says that dealers must disclose details about the remarketing agent of VRDOs, including whether they may occasionally purchase tendered bonds into their own inventory, making it unnecessary to draw on the liquidity facility for unremarketed bonds, even if it is under no legal obligation to do so.

The guidance also reminds dealers that the increased use of retail order periods designed to improve pricing of a new issue does not create a “safe harbor” for dealers to engage in unfair pricing.

“Large differences between institutional and individual prices that exceed the price-yield variance that normally applies to transactions of different sizes in the primary market provide evidence that the duty of fair pricing to individual clients may not have been met,” the board warned.

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