
[Federal Register: August 27, 2010 (Volume 75, Number 166)]
[Notices]               
[Page 52793-52796]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27au10-99]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62755, File No. SR-MSRB-2010-02]

 
Self-Regulatory Organizations; Municipal Securities Rulemaking 
Board; Order Granting Approval of Proposed Rule Change, as Modified by 
Amendment No. 1 Thereto, to MSRB Rule G-34, CUSIP Numbers and New Issue 
Requirements, To Enhance the Interest Rate and Descriptive Information 
Currently Collected and Made Transparent by the MSRB on Municipal 
Auction Rate Securities and Variable Rate Demand Obligations

August 20, 2010.

I. Introduction

    On March 10, 2010, the Municipal Securities Rulemaking Board 
(``MSRB''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to enhance the interest rate and 
descriptive information currently collected and made transparent by the 
MSRB on municipal Auction Rate Securities (``ARS'') and Variable Rate 
Demand Obligations (``VRDOs''). The

[[Page 52794]]

proposed rule change was published for comment in the Federal Register 
on April 2, 2010.\3\ The Commission received six comment letters about 
the proposed rule change.\4\ On July 9, 2010, the MSRB filed with the 
Commission, pursuant to Section 19(b)(1) of the Exchange Act \5\ and 
Rule 19b-4 thereunder,\6\ Amendment No. 1 to the proposed rule 
change.\7\ The Commission received no comment letters in response to 
Amendment No. 1. This order approves the proposed rule change as 
modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 61793 (March 26, 
2010), 75 FR 16878 (``Original Notice'') (the ``original proposed 
rule change'').
    \4\ See letters from: Vladimir Drozdoff, Centerport, New York, 
dated April 4, 2010 (``Drozdoff Letter''); Joseph S. Fichera, Saber 
Partners, LLC, New York, New York (``Saber Partners''), dated April 
12, 2010 (``Saber Letter''); Heather Traeger, Associate Counsel, 
Investment Company Institute (``ICI''), dated April 23, 2010 (``ICI 
Letter''); Leslie M. Norwood, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association (``SIFMA''), dated April 23, 2010 (``SIFMA Letter''); 
Robert J. Stracks, Counsel, BMO Capital Markets GKST Inc. (``BMO 
Capital''), dated April 23, 2010 (``BMO Letter'') and Nik Mainthia, 
dated July 12, 2010 (``Mainthia Letter'').
    \5\ 15 U.S.C. 78s(b)(1).
    \6\ 17 CFR 240.19b-4.
    \7\ See Securities Exchange Act Release No. 62550 (July 22, 
2010), 75 FR 44296 (``Notice of Amendment No. 1'').
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1 to the Proposed Rule Change

    The proposed rule change would enhance the interest rate and 
descriptive information currently collected and made transparent by the 
MSRB on municipal Auction Rate Securities (``ARS'') and Variable Rate 
Demand Obligations (``VRDOs''). The proposed rule change would: (i) 
Amend MSRB Rules G-8, books and records, and G-34(c), variable rate 
security market information, to require brokers, dealers and municipal 
securities dealers (collectively ``dealers'') to (a) submit to the MSRB 
documents that define auction procedures and interest rate setting 
mechanisms for ARS and liquidity facilities for VRDOs; (b) report to 
the MSRB ARS bidding information; (c) report to the MSRB additional 
VRDO information; and (d) communicate to an ARS Program Dealer the fact 
that an order submitted for inclusion in an auction is on behalf of an 
ARS issuer or conduit borrower (collectively ``rule change proposal''); 
(ii) amend the MSRB Short-term Obligation Rate Transparency (``SHORT'') 
System Facility to collect and disseminate the documents identified in 
the rule change proposal (``SHORT System Facility amendment 
proposal''); and (iii) amend the MSRB EMMA Short-term Obligation Rate 
Transparency Service to make the documents collected in the SHORT 
System Facility amendment proposal available on the MSRB's Electronic 
Municipal Market Access (EMMA) Web site (the ``EMMA Short-term 
Obligation Rate Transparency Service amendment''). A full description 
of the proposal is contained in the Notice of Amendment No. 1.
    The MSRB has requested that the proposed rule change, which may be 
implemented in phases, be made effective on such date or dates as would 
be announced by the MSRB in notices published on the MSRB Web site, 
which dates would be no later than nine months after Commission 
approval of the proposed rule change and would be announced no later 
than sixty (60) days prior to the effective dates.

III. Summary of Comments Received and the MSRB's Response

General Comments

    The Commission received six comment letters \8\ relating to the 
Original Notice.\9\ The MSRB addressed the issues raised by the comment 
letters on the original proposed rule change in the Notice of Amendment 
No. 1. The Commission received no comment letters in response to the 
Notice of Amendment No. 1.
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    \8\ See supra note 4.
    \9\ See supra note 3.
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    While the commenters indicated general support for the MSRB's 
effort to increase transparency of ARS and VRDO, four commenters on the 
original proposed rule change expressed concerns about various aspects 
of the proposal or suggested alternatives.\10\ Two other commenters who 
have invested in ARS described problems they had experienced in that 
market.\11\ Mr. Drozdoff fully supported the proposal, noting that he 
held positions in two ARS and has been unable to obtain certain 
information about them. Mr. Drozdoff further stated that the lack of 
transparency creates the opportunity for manipulation and unfair 
dealing.
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    \10\ See Saber Letter, ICI Letter, SIFMA Letter and BMO Letter.
    \11\ See Drozdoff Letter and Mainthia Letter.
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Additional VRDO Information

    The original proposed rule change would increase the information 
that a VRDO Remarketing Agent would be required to report to the SHORT 
System. SIFMA expressed concern with the requirement in the proposed 
rule change for VRDO Remarketing Agents to report the identity of each 
tender agent and liquidity provider and maintain the accuracy of that 
information. SIFMA noted that the Remarketing Agent is not in privity 
of contract with the tender agent or the liquidity facility provider, 
that the identities of these parties may change and that the 
Remarketing Agent may not receive timely notification of such changes. 
SIFMA suggested that Remarketing Agents only be required to report such 
information on a ``best efforts'' basis.
    The MSRB stated that it does not believe that it is appropriate for 
VRDO Remarketing Agents to be required only to exercise best efforts to 
report this information. Under the terms of the original proposed rule 
change, the VRDO Remarketing Agent would be required to modify any past 
submissions to the SHORT System in the event updated information about 
the tender agents and liquidity providers becomes known. In response to 
this comment, the MSRB provided in Amendment No. 1 that the requirement 
to report these identities is based upon information known to the VRDO 
Remarketing Agent as of the time of the interest rate reset. The 
Commission believes that Amendment No. 1 adequately addresses this 
concern.
    SIFMA also expressed concern that the VRDO Remarketing Agent does 
not necessarily know the par amount of VRDOs, if any, held by a 
liquidity provider (``Bank Bonds'') at any point in time so that the 
VRDO Remarketing Agent would be able to obtain and report accurate 
information. SIFMA noted that VRDO Remarketing Agents may not know the 
precise amount of securities held as Bank Bonds as a result of revised 
amortization schedules for securities held as Bank Bonds as well as 
instances when holders tender securities directly to a tender agent. 
The MSRB noted in Amendment No. 1 that the proposal already adequately 
addresses SIFMA's concern as it only requires VRDO Remarketing Agents 
to report the par amount of Bank Bonds based upon information available 
to the VRDO Remarketing Agent as of the time of the interest rate 
reset. The Commission agrees that the requirement is reasonable because 
the reporting requirement is limited to information available to the 
VRDO Remarketing Agent.

ARS Bidding Information

    Saber Partners and SIFMA both stated that ARS bidding information 
required to be reported by ARS Program Dealers should be reported as 
individual data elements instead of as a word-searchable document. 
Saber Partners stated that greater transparency about the auctions 
would address some of the investor confidence issues created by

[[Page 52795]]

the 2008 crisis and would encourage secondary market trading. Saber 
Partners also noted a large volume of ARS still outstanding that could 
benefit from additional market transparency. The MSRB agreed that 
having ARS bidding information collected as data elements would be a 
preferred method of data collection. The MSRB noted that collection of 
data elements would facilitate data analysis and the computation of 
statistics, such as a bid-to-cover ratio, that would provide meaningful 
information about the demand for a specific ARS. Accordingly, in 
response to these comments, Amendment No. 1 requires ARS bidding 
information to be reported to the SHORT System as individual data 
elements. The Commission believes Amendment No. 1 adequately addresses 
their concerns.
    SIFMA also expressed concerns with the requirement to report orders 
submitted by an issuer or conduit borrower. SIFMA noted that some 
issuers or conduit borrowers utilize a third party, such as an 
investment adviser or registered representative, for submitting orders 
to an ARS Program Dealer. In these cases, the ARS Program Dealer may 
not know that such orders are on behalf of issuers or conduit 
borrowers. To ensure ARS Program Dealers are provided with this 
information, Amendment No. 1 includes a new requirement for any dealer 
that receives an order for inclusion in an auction for ARS from an 
issuer or conduit borrower of such ARS to disclose this fact when 
submitting the order to an ARS Program Dealer. In Amendment No. 1, the 
MSRB also amended the original proposed rule change by removing the 
requirement to identify whether orders placed by an issuer or conduit 
borrower were executed. The MSRB noted that ARS Program Dealers would 
not be able to reliably ascertain whether orders on behalf of an issuer 
or conduit borrower submitted by a third-party dealer were executed, 
particularly if the third-party dealer submits more orders than just 
those on behalf of the issuer or conduit borrower and only some of 
those orders are filled.
    SIFMA also suggested that the requirement to disclose the interest 
rate(s) and aggregate par amount(s) of orders to sell at a specific 
rate should be amended to read ``hold at a rate'' to conform to current 
practice and documentation. SIFMA noted that when the rate drops below 
that customer's ``hold at'' rate, the order is automatically converted 
into a sell order. The MSRB acknowledged in Amendment No. 1 that this 
requirement could be consolidated to simplify the rule language. The 
MSRB stated that Amendment No. 1 removes the requirement to report 
``sell at rate'' orders as the remaining ``hold at rate'' and ``sell at 
any interest rate'' categories of orders should provide for the 
reporting of all sell orders.

ARS and VRDO Documents

    The original proposed rule change would require ARS Program Dealers 
and VRDO Remarketing Agents to submit to the MSRB current and any new 
or amended versions of ARS documents defining auction procedures and 
interest rate setting mechanisms and VRDO documents consisting of 
liquidity facilities, including Letter of Credit Agreements and Stand-
by Bond Purchase Agreements.
    For existing documents, the original proposed rule change would 
require VRDO Remarketing Agents to make and document best efforts to 
obtain existing VRDO documents and specified a timeframe of ninety 
business days from the date of effectiveness of a rule change for 
dealers to submit such documents to the MSRB. For ARS documents, ARS 
Program Dealers would be required to submit existing documents to the 
MSRB no later than ninety business days from the date of effectiveness 
of a rule change. On an ongoing basis, the original proposed rule 
change included a requirement to submit new or amended versions of ARS 
and VRDO documents no later than one business day after receipt by the 
dealer.
    ICI stated that timing is vital to the value of collecting and 
disseminating this information to investors. Accordingly, ICI supported 
the MSRB's original proposed submission deadline of 30 days from the 
date of the proposed rule change instead of the proposal's 90-day 
submission deadline. The MSRB agreed that it is important to have a 
centralized source of ARS and VRDO documents as soon as practical. 
Nonetheless, the MSRB believes that ninety days is an appropriate 
timeframe for having such documents submitted to the MSRB given the 
large number of documents that would need to be submitted to the MSRB 
and the fact that, for outstanding issues, dealers may need time to 
request documents from third parties.
    ICI also stated that they strongly support the one-business-day 
submission requirement for new or amended versions of the ARS and VRDO 
documents. By contrast, SIFMA suggested that the deadline for 
submitting such new or amended documents be five business days after 
receipt. SIFMA stated that a one-business-day time frame is unduly 
burdensome for a broker dealer to submit documents to which it is not a 
party, noted the lack of a uniform manner in which dealers receive such 
documents from issuers and liquidity facility providers, indicated that 
it could take a couple of days internally at a broker dealer for these 
documents to get routed to the proper place and stated that there are 
approximately 16,500 outstanding VRDO transactions that are serviced by 
approximately 80 different Remarketing Agents. The MSRB concluded that 
a five-business-day deadline would be consistent with the timeframe for 
submitting advance refunding documents to the MSRB and would be an 
appropriate timeframe, at least initially, for such new or amended 
versions of ARS and VRDO documents to be submitted to the MSRB. 
Accordingly, in response to this comment, Amendment No. 1 provides a 
five-business-day deadline for submitting new or amended versions of 
ARS and VRDO documents to the MSRB. The Commission finds that the 90-
business-day and the five-business-day submission deadlines are 
reasonable, at least initially.
    SIFMA also requested clarification of the recordkeeping requirement 
for VRDO Remarketing Agents to document best efforts to obtain existing 
VRDO documents and asked whether such documents would be required to 
contain signatures. The MSRB, in response to this comment, amended the 
original proposed rule change in Amendment No. 1 to clarify that such 
records are only required to be kept for those documents that are 
unable to be obtained. The MSRB also noted that all documents would be 
required to be final, operative versions of such documents. The MSRB 
indicated that while this requirement does not necessarily require that 
the document be signed, the MSRB noted that signatures would provide a 
clear indication that the document reflects a final version. The 
Commission believes that Amendment No. 1 adequately clarifies this 
issue.

Other Comments

    ICI recommended that the MSRB consider expanding the proposed 
disclosures to ensure a more complete picture of the risks associated 
with ARS, VRDOs and other variable rate securities, such as ``credit 
enhancement'' data and documentation. In addition, ICI recommended that 
the MSRB create a ``miscellaneous'' or ``catch-all'' category of 
variable rate securities to provide investors with material information 
about new products. The MSRB noted a separate MSRB initiative to 
display on

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EMMA information offered by credit ratings agencies would provide 
additional access to credit enhancement features associated with 
municipal securities on a market-wide basis.\12\ The MSRB agrees that 
new products may benefit from the transparency offered for ARS and VRDO 
by the SHORT System, and plans to review in the future whether changes 
to the SHORT System and associated rules could accommodate future 
products without subsequent system and rule modifications.
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    \12\ See MSRB Notice 2010-13 (May 20, 2010).
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    With regard to all other issues raised by the commenters, the 
Commission believes that the MSRB has adequately addressed the 
commenters' concerns.

IV. Discussion and Commission Findings

    The Commission has carefully considered the proposed rule change, 
the comment letters received, and the MSRB's responses to the comment 
letters and finds that the proposed rule change is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to the MSRB \13\ and, in particular, the 
requirements of Section 15B(b)(2)(C) of the Exchange Act \14\ and the 
rules and regulations thereunder. Section 15B(b)(2)(C) of the Exchange 
Act requires, among other things, that the MSRB's rules 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 the public interest.\15\ In 
particular, the Commission believes that 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 and documents 
relating to ARS and VRDO. The proposed rule change would provide 
greater access to information about and documents relating to 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 MSRB to protect investors and the public interest.
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    \13\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78o-4(b)(2)(C).
    \15\ Id.
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V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Exchange Act and the 
rules and regulations thereunder applicable to the MSRB \16\ and, in 
particular, the requirements of Section 15B(b)(2)(C) of the Exchange 
Act \17\ and the rules and regulations thereunder. The proposal will 
become effective as requested by the MSRB.
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    \16\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \17\ 15 U.S.C. 78o-4(b)(2)(C).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\18\ that the proposed rule change (SR-MSRB-2010-02), as 
amended, be, and it hereby is, approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-21308 Filed 8-26-10; 8:45 am]
BILLING CODE 8010-01-P

