In recent years, the Securities Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB) have taken numerous actions to address the perceived lack of transparency in the municipal markets, such as:
- creating a centralized information repository known as EMMA (Electronic Municipal Market Access System), and
- amending the SEC’s Rule 15c2-12 to, among other items: (i) expand the required disclosure of certain “listed events” and (ii) eliminate the prior exemption of variable rate demand obligations (VRDOs) from the reporting requirements of Rule 15c2-12).
Through these actions and others, the MSRB and the SEC have taken steps toward their stated goal of improving the quality and availability of municipal issuer information to investors.
In connection with these efforts, the MSRB also proposed a rule change that will require brokers, dealers, municipal securities dealers and remarketing agents to use to their best efforts to obtain and submit certain information and documentation regarding auction rates securities (ARS) and VRDOs to the MSRB’s SHORT system (Short-Term Obligation Rate Transparency Service), making it publicly available through EMMA. This amendment to the MSRB’s Rule G-34(c) becomes effective on May 16, 2011.
Under the amended MRSB Rule G-34(c), remarketing agents will be required to submit certain information regarding VRDOs they are remarketing, and will also be required to use their best efforts to obtain current versions of the documents detailing the provisions of any liquidity support for such VRDOs (including any amendments to those documents), including Standby Bond Purchase Agreements, Letter of Credit Agreements and any other document that establishes an obligation to provide liquidity, including self-liquidity.
The MSRB has advised that all documents defining critical aspects of VRDO liquidity provisions and interest rate setting mechanisms should be available through EMMA, noting that such critical aspects “include, but are not limited to:
- “termination provisions” detailing circumstances when the obligation for a liquidity provider to provide liquidity is no longer applicable,
- the “notification period” that details the length of time that may lapse between a holder of a VRDO tendering a position in the security and a liquidity provider purchasing the tendered security, and
- the “term-out period” showing, if any, the time period that principal held with the liquidity provider (as a “bank bond”) would be amortized.”
For existing ARS and VRDOs, dealers are required to submit these documents on or before September 22, 2011 (or document why there were unable to do so after using their best efforts to gather such information). Borrowers should discuss the impact of this rule change with the remarketing agents for their existing VRDOs, and should consider what information may need to be redacted from these documents prior to their submission (the MSRB had indicated that a limited amount of redaction is permissible to preserve confidential information).
For new VRDO transactions, borrowers should expect their remarketing agents to impose additional requirements and request borrowers to take steps ensure that any liquidity documents and any other related documents (including the Indenture) that contain key information and defined terms are submitted in final form in a timely manner and in a format acceptable to the MSRB (which, for new transactions, must be portable document format (“pdf”) word-searchable files).
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