Request for Comment on Additional Increases in Transparency of Municipal Auction Rate Securities and Variable Rate Demand Obligations

The Municipal Securities Rulemaking Board (the “MSRB”) is requesting comment on draft amendments to Rule G-34(c), on variable rate security market information, that 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”).  To provide a greater level of transparency about the municipal short-term market, the draft amendments would add documents to the information currently collected and publicly disseminated that define auction procedures and interest rate setting mechanisms for ARS and liquidity facilities for VRDOs, as well as ARS bidding information and additional VRDO information.

BACKGROUND

Since January 30, 2009 for ARS and April 1, 2009 for VRDOs, Rule G-34(c) has required brokers, dealers and municipal securities dealers (collectively, “dealers”) that act as Program Dealers[1] for ARS or Remarketing Agents for VRDOs to report (either directly or through an agent) certain information following an ARS auction or VRDO interest rate reset to the MSRB Short-term Obligation Rate Transparency (“SHORT”) System.[2]  Information generally is required to be reported to the SHORT System by no later than 6:30 P.M. Eastern Time on the day that an ARS auction or VRDO interest rate reset occurs and all collected information is made available to market participants for free in real-time on the MSRB’s Electronic Municipal Market Access (“EMMA”) web site.[3]  The specific items of interest rate and descriptive information about ARS and VRDOs currently required to be reported to the SHORT System are listed below.

The following is a list of the information currently required to be reported to the SHORT System by an ARS Program Dealer following an ARS auction:

• 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 interest rate represents a “maximum rate,” an “all hold rate,” or a rate that was “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;[4] and
• Par amount auctioned, not including hold orders effective at any rate.

The following is a list of the information currently required to be reported to the SHORT System by a VRDO Remarketing Agent following a VRDO interest rate reset:

• 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;
• Indication 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;[5]
• Minimum denomination;
• Type of liquidity facility(ies);[6] and
• Expiration date of each liquidity facility. 

DESCRIPTION OF DRAFT AMENDMENTS

The draft amendments to Rule G-34(c) would enhance the interest rate and descriptive information currently made available to market participants about ARS and VRDOs.  Collection and dissemination of the information identified in the draft amendments would be accomplished using existing MSRB systems.  Documents would be submitted directly to EMMA using the EMMA Dataport and information items would be reported to the SHORT System.  All collected documents and information would be made available in real-time on EMMA.[7]  The documents and information about ARS and VRDOs that would be required to be provided to the MSRB are described below.  

ARS and VRDO Documents

The draft amendments would require ARS Program Dealers and VRDO Remarketing Agents to submit certain ARS and VRDO documents to the MSRB to ensure that market participants have centralized access to critical documents about ARS programs and VRDO issues.  For existing ARS and VRDOs, dealers would be required to provide the current versions of documents to the MSRB within thirty days after the effective date of the draft amendments.  On an ongoing basis, dealers would be required to provide any new or amended versions of these documents within one business day of receipt.  The specific documents that would be required to be provided to the MSRB include:

• ARS documents defining current auction procedures and interest rate setting mechanisms; and
• VRDO liquidity facility documents, including current Letters of Credit and Stand-by Bond Purchase Agreements.  

ARS Bidding Information

The draft amendments would require each ARS Program Dealer to report to the SHORT System “ARS bidding information” that would include information about all orders placed by an ARS Program Dealer with an ARS Auction Agent for inclusion in an auction.  This information would augment the interest rate and descriptive information currently provided to market participants by also providing information that would show, for example, how the interest rate was determined for a successful auction.  In addition, ARS bidding information would allow market participants and the MSRB to compute statistics about an auction similar to those available for U.S. Treasury auctions including a “bid-to-cover ratio” that would serve as an indication of liquidity of an ARS in a specific auction.  The specific items of ARS bidding information an ARS Program Dealer would be required to report to the SHORT System are listed below and all items would be required to be reported in conjunction with the ARS interest rate and descriptive information currently required to be reported under Rule G-34(c).

• Interest rate(s) and aggregate par amount(s) of orders to sell at a specific interest rate and aggregate par amount of such orders that were executed;
• Aggregate par amount of orders to sell at any interest rate and aggregate par amount of such orders that were executed;
• Interest rate(s) and aggregate par amount(s) of orders to hold at a specific interest rate and aggregate par amount of such orders that were successfully held;
• Interest rate(s) and aggregate par amount(s) of orders to buy and aggregate par amount of such orders that were executed;
• Number of unique bidders submitting orders to buy, other than the Program Dealer bidding for its own account;
• Interest rate(s), aggregate par amount(s), and type of order – either buy, sell or hold – by a Program Dealer for its own account and aggregate par amounts of such orders, by type, that were executed; and
• Interest rate(s), aggregate par amount(s), and type of order – either buy, sell or hold – by an issuer or conduit borrower for such Auction Rate Security and aggregate par amounts of such orders, by type, that were executed.

Additional VRDO Information

Since the April 1, 2009 effective date of Rule G-34(c) for VRDOs, the MSRB has received suggestions for additional items of information that would add value to the VRDO interest rate and descriptive information currently collected and made transparent.  The draft amendments would require that the identity of and contact information for the agent of the issuer of the VRDOs to whom a holder may tender their security (“Tender Agent”) be reported in order to facilitate the tender of VRDOs by investors.  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.  The specific items of additional VRDO information a VRDO Remarketing Agent would be required to report to the SHORT System are listed below and all items would be required to be reported in conjunction with the VRDO interest rate and descriptive information currently required to be reported under Rule G-34(c).

• Effective date that the interest rate reset is applicable;
• Identity of and contact information for the Tender Agent;
• Identity of the liquidity provider(s) including a indication of those VRDOs for which an issuer provides “self liquidity” and the identity of the party providing such self-liquidity;[8]
• Par amount of the VRDO, if any, held by the VRDO Remarketing Agent, a liquidity provider (“Bank Bond”) for the VRDO, and a party other than the Remarketing Agent or as a Bank Bond; and
• Interest rate paid to a liquidity provider that holds Bank Bonds.

REQUEST FOR COMMENT

Comment is requested on all aspects of the draft amendments.  Consideration of the following questions may be helpful in providing comments:

• Are there additional documents concerning ARS or VRDOs that should be filed with the MSRB and made publicly available?  The MSRB proposes a thirty-day time period from the date of SEC approval for ARS Program Dealers and VRDO Remarketing Agents to provide documents for existing ARS and VRDOs to the MSRB.  Would dealers anticipate difficulty in being able to collect, if not already held by a dealer, as well as submit to the MSRB the documents identified in the draft amendments in a thirty-day time period?

• Are there cases in which dealers do not have ready access to the documents described in the draft amendments for existing ARS and VRDOs?  If so, how is the dealer able to professionally exercise the duties of an ARS Program Dealer or VRDO Remarketing Agent if it does not have access to such documents?  Would dealers be able to provide a summary of the material terms of any such documents not available for submission to the MSRB?

• Are the items of information proposed to be collected and disseminated about ARS and VRDOs appropriate?  Are there additional items of information that should be added to these lists of information?  Do ARS Program Dealers or VRDO Remarketing Agents anticipate difficulty in being able to collect and report the information in the draft amendments to the MSRB? 

• One of the items of information about VRDOs proposed to be collected would be contact information for the Tender Agent and the draft amendments include the telephone number as a means of contacting a Tender Agent.  Would this be the appropriate means of contacting a Tender Agent or is there another means of contact (for example, a uniform resource locator (URL) link to an internet-based resource) that should be provided in lieu of or in addition to the telephone number for the Tender Agent that would assist holders of VRDOs in directly contacting a Tender Agent?

• The MSRB would appreciate comments on the current and future state of the ARS market.  With the current and future state of the ARS market in mind, comments would be welcomed on what the level of effort would be for dealers to comply with the requirement to report ARS bidding information to the SHORT System.  Would this level of effort be reduced if ARS bidding information was provided to the MSRB in the form of a document instead of as individual items of data?   

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Comments should be submitted no later than September 1, 2009, and may be directed to Justin R. Pica, Director, Uniform Practice Policy.  Written comments will be available for public inspection upon request and also will be posted on the MSRB web site.[9]

July 13, 2009

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TEXT OF DRAFT AMENDMENTS[10]

Rule G-8:  Books and Records to be Made by Brokers, Dealers and Municipal Securities Dealers

(a) Description of Books and Records Required to be Made.  Except as otherwise specifically indicated in this rule, every broker, dealer and municipal securities dealer shall make and keep current the following books and records, to the extent applicable to the business of such broker, dealer or municipal securities dealer:

(i) through (xxi) No change.

(xxii) Records Concerning Compliance with Rule G-34(c). 

(A) A broker, dealer or municipal securities dealer that acts as a Program Dealer, as defined in Rule G-34(c)(i)(A)(1), for an Auction Rate Security shall maintain:

(1) through (2) No change.

(3) all information and documents required to be submitted to the Board by the broker, dealer or municipal securities dealer under Rule G-34(c)(i).

(B) A broker, dealer or municipal securities dealer that acts as a Remarketing Agent, as defined in Rule G-34(c)(ii), for a Variable Rate Demand Obligation shall maintain:

(1) No change.

(2) all information and documents required to be submitted to the Board by the broker, dealer or municipal securities dealer under Rule G-34(c)(ii).

(xxiii) Records Concerning Compliance with Rule G-34(a)(ii)(C).  A broker, dealer or municipal securities dealer that acts as an underwriter in a primary offering of municipal securities subject to Rule G-34(a)(ii)(C)(1) shall maintain:

(A) through (C) No change.

(b) through (g) No change.

Rule G-34: CUSIP Numbers, New Issue, and Market Information Requirements

(a) - (b) No change.

(c) Variable Rate Security Market Information.  The Board operates a facility for the collection and public dissemination of [information] data about securities bearing interest at short-term rates (the Short-term Obligation Rate Transparency System, or SHORT System) as well as a facility for the collection and dissemination of documents (the Electronic Municipal Market Access system, or EMMA). 

(i) Auction Rate Securities. Auction Rate Securities are municipal securities in which the interest rate resets on a periodic basis under an auction process conducted by an agent responsible for conducting the auction process on behalf of the issuer or other obligated person with respect to such Auction Rate Securities (“Auction Agent”) that receives orders from brokers, dealers and municipal securities dealers.

(A) Auction Rate Securities Data.

[(A)](1) Each broker, dealer or municipal securities dealer that submits an order directly to an Auction Agent for its own account or on behalf of another account to buy, hold or sell an Auction Rate Security through the auction process (“Program Dealer”) shall report, or ensure the reporting of, the following information about the Auction Rate Security and concerning the results of the auction to the Board:

[(1)](a) CUSIP number;

[(2)](b) Interest rate produced by the auction process and designation of whether the interest rate is a maximum rate, all hold rate, or rate set by auction;

[(3)](c) Identity of all Program Dealers that submitted orders, including but not limited to hold orders;

[(4)](d) Date and time of the auction;

[(6)](e) Length of time, in days, that the interest rate produced by the auction process is applicable;

[(7)](f) Minimum denomination;

[(9)](g) 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.

[(5)](h) Date and time the interest rate determined as a result of the auction process was communicated to Program Dealers;

[(8)](i) Interest rate(s) and aggregate [P] par amount(s) [auctioned] of orders to sell at a specific interest rate and aggregate par amount of such orders that were executed; [, not including hold orders effective at any rate; and]

(j) Aggregate par amount of orders to sell at any interest rate and aggregate par amount of such orders that were executed;

(k) Interest rate(s) and aggregate par amount(s) of orders to hold at a specific interest rate and aggregate par amount of such orders that were successfully held;

(l) Interest rate(s) and aggregate par amount(s) of orders to buy and aggregate par amount of such orders that were executed;

(m) Number of unique bidders other than the Program Dealer bidding for its own account;

(n) Interest rate(s), aggregate par amount(s), and type of order – either buy, sell or hold – for a Program Dealer for its own account and aggregate par amounts of such orders, by type, that were executed; and

(o) Interest rate(s), aggregate par amount(s), and type of order – either buy, sell or hold – for an issuer or conduit borrower for such Auction Rate Security and aggregate par amounts of such orders, by type, that were executed.

[(B)](2) Information identified in subparagraph (c)(i)(A) shall be provided to the Board by no later than 6:30 P.M. Eastern Time on the date on which an auction occurs if such date is an RTRS Business Day as defined in Rule G-14 RTRS Procedures section (d)(ii).  In the event that any item of information identified in subparagraph (c)(i)(A)(1) is not available by the deadline in this subparagraph (c)(i)[(B)](A)(2), such item shall be provided to the Board as soon as it is available.  In the event that an auction occurs on a non-RTRS Business Day, the information identified in subparagraph (c)(i)(A)(1) shall be reported by no later than 6:30 P.M. Eastern Time on the next RTRS Business Day.

[(C)](3) A Program Dealer may designate an agent to report the information identified in subparagraph (c)(i)(A)(1) to the Board, provided that an Auction Agent may submit information on behalf of all Program Dealers involved in an auction absent such designation by the Program Dealer.  The failure of a designated agent to comply with any requirement of this paragraph (c)(i) shall be considered a failure by such Program Dealer to so comply; provided that if an Auction Agent has, within the time periods required under subparagraph (c)(i)[(B)](A)(2), reported the information required under subparagraph (c)(i)(A)(1), the Program Dealer may rely on the accuracy of such information if the Program Dealer makes a good faith and reasonable effort to cause the Auction Agent to correct any inaccuracies known to the Program Dealer.

(4) For Auction Rate Securities in which there are multiple Program Dealers, each Program Dealer must only report for items (i) through (o) in subparagraph (c)(i)(A)(1) information reflective of the Program Dealer’s involvement in the auction unless designated by another Program Dealer pursuant to subparagraph (c)(i)(A)(3).

[(D)](5) Information reported to the Board pursuant to this section (c)(i) shall be submitted in the manner described in the written procedures for SHORT System users and changes to submitted information must be made as soon as possible.

(B) Auction Rate Securities Documents.

(1) Each broker, dealer and municipal securities dealer shall submit to EMMA current documents, including amendments thereto, defining auction procedures and interest rate setting mechanisms associated with an outstanding Auction Rate Security for which the broker, dealer or municipal securities dealer acts as a Program Dealer as defined in subparagraph (c)(i)(A)(1) by no later than one business day after they are made available to the Program Dealer; provided that any documents or amendments thereto in effect as of [insert date of SEC approval] submitted by no later than [insert date thirty business days from date of SEC approval] shall be deemed to be submitted on a timely basis.

(2) All submissions of documents required under this rule shall be made by electronic submissions to EMMA in such format and manner, and including such items of information provided at such times, as specified herein, and in the EMMA Dataport Manual defined in Rule G-32.

(ii) Variable Rate Demand Obligations.  Variable Rate Demand Obligations are securities in which the interest rate resets on a periodic basis with a frequency of up to and including every nine months, an investor has the option to put the issue back to the trustee, tender agent or other agent of the issuer or obligated person at any time, typically with specified advance notice (“Notification Period”), and a broker, dealer or municipal security dealer acts as a remarketing agent (“Remarketing Agent”) responsible for reselling to new investors securities that have been tendered for purchase by a holder.

(A) Variable Rate Demand Obligations Data.

(1) Each Remarketing Agent for a Variable Rate Demand Obligation shall report the following information to the Board about the Variable Rate Demand Obligation [and] applicable at the time of and concerning the results of an interest rate reset [to the Board]:

[(1)](a) CUSIP number;

[(2)](b) Interest rate and designation of whether the interest rate is a maximum rate, set by formula or set by the remarketing agent;

[(3)](c) Identity of the Remarketing Agent;

[(4)](d) Date and time of the interest rate reset;

[(5)](e) Effective date and [L] length of time, in days, that the interest rate is applicable;

[(6)](f) Minimum denomination;

[(7)](g) Length of Notification Period;

[(8)](h) Minimum and maximum rates, if any, applicable at time of the interest rate reset or, if not calculable as of the time of interest rate reset, indication that such rate or rates are not calculable; [and]

[(9)](i) Identity of liquidity provider, [T] type and expiration date of each liquidity facility applicable to the Variable Rate Demand Obligation;[.]

[(10)](j) Identity of and contact information for the agent of the issuer to whom bondholders may tender their security (“Tender Agent”);

[(11)](k) Par amount, if any, of the Variable Rate Demand Obligation held by the Remarketing Agent;

[(12)](l) Par amount, if any, of the Variable Rate Demand Obligation held by a liquidity facility applicable to the Variable Rate Demand Obligation (“Bank Bond”) and interest rate paid to the liquidity facility; and

[(13)](m) Par amount, if any, of the Variable Rate Demand Obligation held by a party other than the Remarketing Agent or as a Bank Bond.

[(B)](2) Information identified in subparagraph (c)(ii)(A)(1) shall be provided to the Board by no later than 6:30 P.M. Eastern Time on the date on which an interest rate reset occurs if such date is an RTRS Business Day as defined in Rule G-14 RTRS Procedures section (d)(ii).  In the event that any item of information identified in subparagraph (c)(ii)(A)(1) is not available by the deadline in this subparagraph (c)(ii)[(B)](A)(2), such item shall be provided to the Board as soon as it is available.  In the event that an interest rate reset occurs on a non-RTRS Business Day, the information identified in subparagraph (c)(ii)(A)(1) shall be reported by no later than 6:30 P.M. Eastern Time on the next RTRS Business Day.

[(C)](3) A Remarketing Agent may designate an agent to report the information identified in subparagraph (c)(ii)(A)(1) to the Board.  The failure of a designated agent to comply with any requirement of this paragraph (c)(ii) shall be considered a failure by such Remarketing Agent to so comply.

[(D)](4) Information reported to the Board pursuant to this section (c)(ii) shall be submitted in the manner described in the written procedures for SHORT System users and changes to submitted information must be made as soon as possible.

(B) Variable Rate Demand Obligations Documents.

(1) Each broker, dealer or municipal securities dealer shall submit to EMMA, as applicable, the current versions of the following documents, including amendments thereto, detailing provisions of liquidity facilities associated with the Variable Rate Demand Obligation for which the broker, dealer or municipal securities dealer acts as a Remarketing Agent as defined in subparagraph (c)(ii) by no later than one business day after they are made available to the Remarketing Agent; provided that any documents or amendments thereto in effect as of [insert date of SEC approval] submitted by no later than [insert date thirty business days from date of SEC approval] shall be deemed to be submitted on a timely basis:

(a) Stand-By Bond Purchase Agreement;

(b) Letter of Credit; and

(c) Any other document detailing the provisions of a liquidity facility.

(2) All submissions of documents required under this rule shall be made by electronic submissions to EMMA in such format and manner, and including such items of information provided at such times, as specified herein, and in the EMMA Dataport Manual defined in Rule G-32.

[(c)](d) No change.

[(d)](e) No change.

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