[Federal Register: July 24, 2009 (Volume 74, Number 141)]
[Proposed Rules]
[Page 36831-36868]
[DOCID:fr24jy09-17]

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Part II

Securities and Exchange Commission

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17 CFR Parts 240 and 241

Proposed Amendment to Municipal Securities Disclosure; Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 241

[Release No. 34-60332; File No. S7-15-09]
RIN 3235-AJ66

Proposed Amendment to Municipal Securities Disclosure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule and interpretation.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is publishing for comment proposed amendments to Rule 15c2-12
under the Securities Exchange Act of 1934 (``Exchange Act'') relating
to municipal securities disclosure. The proposal would amend certain
requirements regarding the information that a broker, dealer, or
municipal securities dealer acting as an underwriter in a primary
offering of municipal securities must reasonably determine that an
issuer of municipal securities or an obligated person has undertaken,
in a written agreement or contract for the benefit of holders of the
issuer's municipal securities, to provide to the Municipal Securities
Rulemaking Board (``MSRB''). Specifically, the proposed amendments
would require a broker, dealer, or municipal securities dealer to
reasonably determine that the issuer or obligated person has agreed to
provide notice of specified events in a timely manner not in excess of
ten business days after the event's occurrence, would amend the list of
events for which a notice is to be provided, and would modify the
events that are subject to a materiality determination before
triggering a notice to the MSRB. In addition, the amendments would
revise an exemption from the rule for certain offerings of municipal
securities with put features. The Commission also is providing
interpretive guidance intended to assist municipal securities issuers,
brokers, dealers and municipal securities dealers in meeting their
obligations under the antifraud provisions.

DATES: Comments should be received on or before September 8, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File No. S7-15-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File No. S7-15-09. This file number
should be included on the subject line if e-mail is used. To help us
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/proposed.shtml). Comments
are also available for public 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.
All comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Martha Mahan Haines, Assistant
Director and Chief, Office of Municipal Securities, at<PHONE_NUMBER>;
Nancy J. Burke-Sanow, Assistant Director, Office of Market Supervision,
at<PHONE_NUMBER>; Mary N. Simpkins, Senior Special Counsel, Office of
Municipal Securities, at<PHONE_NUMBER>; Cyndi N. Rodriguez, Special
Counsel, Office of Market Supervision, at<PHONE_NUMBER>; Rahman J.
Harrison, Special Counsel, Office of Market Supervision, at (202) 551-
5663; David J. Michehl, Special Counsel, Office of Market Supervision,
at<PHONE_NUMBER>; and Steven Varholik, Special Counsel, Office of
Market Supervision, at<PHONE_NUMBER>, Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-6628.

SUPPLEMENTARY INFORMATION: The Commission is requesting public comment
on a proposed amendment to Rule 15c2-12 under the Exchange Act.\1\
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    \1\ 17 CFR 240.15c2-12.
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I. Background

A. History of Rule 15c2-12

    The Commission has long been concerned with improving the quality,
timing, and dissemination of disclosure in the municipal securities
market. In an effort to improve the transparency of the municipal
securities market, in 1989, the Commission adopted Rule 15c2-12 \2\
(``Rule'' or ``Rule 15c2-12'') and an accompanying interpretation
modifying a previously published interpretation of the legal
obligations of underwriters of municipal securities.\3\ As adopted in
1989, Rule 15c2-12 required, and still requires, underwriters
participating in primary offerings of municipal securities of
$1,000,000 or more to obtain, review, and distribute to potential
customers copies of the issuer's official statement. Specifically, Rule
15c2-12 required, and still requires, an underwriter acting in a
primary offering of municipal securities: (1) To obtain and review an
official statement ``deemed final'' by an issuer of the securities,
except for the omission of specified information, prior to making a
bid, purchase, offer, or sale of municipal securities; (2) in non-
competitive bid offerings, to send, upon request, a copy of the most
recent preliminary official statement (if one exists) to potential
customers; (3) to send, upon request, a copy of the final official
statement to potential customers for a specified period of time; and
(4) to contract with the issuer to receive, within a specified time,
sufficient copies of the final official statement to comply with the
Rule's delivery requirement, and the requirements of the rules of the
MSRB.
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    \2\ Id.
    \3\ See Securities Exchange Act Release No. 26985 (June 28,
1989), 54 FR 28799 (July 10, 1989) (``1989 Adopting Release'').
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    While the availability of primary offering disclosure significantly
improved following the adoption of Rule 15c2-12, there was a continuing
concern about the adequacy of disclosure in the secondary market.\4\ To
enhance the quality, timing, and dissemination of disclosure in the

secondary municipal securities market, the Commission in 1994 adopted
amendments to Rule 15c2-12 (``1994 Amendments'').\5\ Among other
things, the 1994 Amendments placed certain requirements on brokers,
dealers, and municipal securities dealers (``Dealers'' or, when used in
connection with primary offerings, ``Participating Underwriters'').
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    \4\ In 1993, the Commission's Division of Market Regulation (n/
k/a the Division of Trading and Markets) (``Division'') conducted a
comprehensive review of many aspects of the municipal securities
market, including secondary market disclosure (``1993 Staff
Report''). Findings in the 1993 Staff Report highlighted the need
for improved disclosure practices in both the primary and secondary
municipal securities markets. The 1993 Staff Report found that
investors need sufficient current information about issuers and
significant obligors to better protect themselves from fraud and
manipulation, to better evaluate offering prices, to decide which
municipal securities to buy, and to decide when to sell. Moreover,
the 1993 Staff Report found that the growing participation of
individuals as both direct and indirect purchasers of municipal
securities underscored the need for sound recommendations by
brokers, dealers, and municipal securities dealers. See Commission,
Division of Market Regulation, Staff Report on the Municipal
Securities Market (September 1993) (available at http://www.sec.gov/
info/municipal.shtml).
    \5\ See Securities Exchange Act Release No. 34961 (November 10,
1994), 59 FR 59590 (November 17, 1994) (``1994 Amendments Adopting
Release''). In light of the growing volume of municipal securities
offerings, as well as the growing ownership of municipal securities
by individual investors, in March 1994, the Commission published the
Statement of the Commission Regarding Disclosure Obligations of
Municipal Securities Issuers and Others. See Securities Exchange Act
Release No. 33741 (March 9, 1994), 59 FR 12748 (March 17, 1994)
(``1994 Interpretive Release''). The Commission intended that its
statement of views with respect to disclosures under the federal
securities laws in the municipal market would encourage and expedite
the ongoing efforts by market participants to improve disclosure
practices, particularly in the secondary market, and to assist
market participants in meeting their obligations under the antifraud
provisions. Id.
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    Specifically, Rule 15c2-12, as amended by the 1994 Amendments,
prohibits Participating Underwriters from purchasing or selling
municipal securities covered by the Rule in a primary offering, unless
the Participating Underwriter has reasonably determined that an issuer
of municipal securities or an obligated person \6\ has undertaken in a
written agreement or contract for the benefit of holders of such
securities (``continuing disclosure agreement'') to provide specified
annual information and event notices to certain information
repositories.\7\ The information to be provided consists of: (1)
Certain annual financial and operating information and audited
financial statements (``annual filings''); \8\ (2) notices of the
occurrence of any of eleven specific events (``event notices''); \9\
and (3) notices of the failure of an issuer or other obligated person
to make a submission required by a continuing disclosure agreement
(``failure to file notices'').\10\ The 1994 Amendments also amended
Rule 15c2-12 to require the Participating Underwriter to reasonably
determine that an issuer of municipal securities or an obligated person
has undertaken in the continuing disclosure agreement to provide: (1)
Annual filings to each nationally recognized municipal securities
information repository (``NRMSIR''); (2) event notices and failure to
file notices either to each NRMSIR or to the MSRB; and (3) in the case
of states that established state information depositories (``SIDs''),
all continuing disclosure documents to the appropriate SID. Finally,
the 1994 Amendments amended Rule 15c2-12 to revise the definition of
``final official statement'' to include a description of the issuer's
or obligated person's continuing disclosure undertakings for the
securities being offered, and of any instances in the previous five
years in which the issuer or obligated person failed to comply, in all
material respects, with undertakings in previous continuing disclosure
agreements.
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    \6\ The term ``obligated persons'' means persons, including the
issuer of municipal securities, committed by contract or other
arrangement to support payment of all or part of the obligations on
the municipal securities to be sold in an offering. See 17 CFR
240.15c2-12(f)(10).
    \7\ See 17 CFR 240.15c2-12(b)(5)(i)(C). This provision now
provides that the annual information and event notices are to be
submitted to a single repository, the MSRB. See infra note 11 and
accompanying text.
    \8\ 17 CFR 240.15c2-12(b)(5)(i)(A) and (B).
    \9\ 17 CFR 240.15c2-12(b)(5)(i)(C). Currently, the following
events, if material, require notice: (1) Principal and interest
payment delinquencies; (2) non-payment related defaults; (3)
unscheduled draws on debt service reserves reflecting financial
difficulties; (4) unscheduled draws on credit enhancements
reflecting financial difficulties; (5) substitution of credit or
liquidity providers, or their failure to perform; (6) adverse tax
opinions or events affecting the tax-exempt status of the security;
(7) modifications to rights of security holders; (8) bond calls; (9)
defeasances; (10) release, substitution, or sale of property
securing repayment of the securities; and (11) rating changes. In
addition, Rule 15c2-12(d)(2) provides an exemption from the
application of paragraph (b)(5) of the Rule with respect to certain
primary offerings if, among other things, the issuer or obligated
person has agreed to a limited disclosure obligation. See 17 CFR
240.15c2-12(d)(2). As discussed in detail in Section II.C., below,
the Commission is proposing to eliminate the materiality
determination for certain of these events.
    \10\ 17 CFR 240.15c2-12(b)(5)(i)(D). Annual filings, event
notices, and failure to file notices are referred to collectively
herein as ``continuing disclosure documents.''
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    Furthermore, to promote more efficient, effective, and wider
availability of municipal securities information to investors and
market participants, on December 5, 2008, the Commission adopted
amendments to Rule 15c2-12 (``2008 Amendments'') to provide for a
single centralized repository, the MSRB, for the electronic collection
and availability of information about outstanding municipal securities
in the secondary market.\11\ In the 2008 Amendments Adopting Release,
the Commission stated that the establishment of a single centralized
repository will help provide ready and prompt access to continuing
disclosure documents to investors and other municipal market
participants and will help fulfill the regulatory and information needs
of municipal market participants, including Dealers, Participating
Underwriters, mutual funds and others.\12\ Specifically, the 2008
Amendments require the Participating Underwriter to reasonably
determine that the issuer or obligated person has undertaken in its
continuing disclosure agreement to provide the continuing disclosure
documents: (1) Solely to the MSRB; and (2) in an electronic format and
accompanied by identifying information, as prescribed by the MSRB.\13\
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    \11\ See Securities Exchange Act Release No. 59062 (December 5,
2008), 73 FR 76104 (December 15, 2008) (``2008 Amendments Adopting
Release''). See also Securities Exchange Act Release No. 58255 (July
30, 2008), 73 FR 46138 (August 7, 2008) (``2008 Proposing
Release''). The 2008 Amendments became effective on July 1, 2009.
The Commission proposes that the effective date of the proposed
amendments discussed herein would be no earlier than three months
after any final approval of the proposed amendments, should the
Commission adopt these proposed rule amendments.
    \12\ See 2008 Amendments Adopting Release, supra note 11, 73 FR
at 76106.
    \13\ Id. See also Securities Exchange Act Release No. 59061
(December 5, 2008), 73 FR 75778 (December 12, 2008) (order approving
the MSRB's proposed rule change to establish as a component of its
central municipal securities document repository, the Electronic
Municipal Market Access (``EMMA'') system, the collection and
availability of continuing disclosure documents over the Internet
for free).
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B. Need for Further Amendments to Rule 15c2-12

    As discussed below, experience with the operation of the Rule,
changes in the municipal market since the adoption of the 1994
Amendments, and recent market events have suggested the need for the
Commission to reconsider certain aspects of the Rule, including the
exemption for primary offerings of municipal securities in authorized
denominations of $100,000 or more which, at the option of the holder
thereof, may be tendered to an issuer of such securities or its
designated agent for redemption or purchase at par value or more at
least as frequently as every nine months until maturity, earlier
redemption, or purchase by an issuer or its designated agent (``demand
securities'').\14\ Furthermore, since the adoption of the 1994
Amendments, municipal securities industry participants have raised a
number of areas in which the Rule's provisions could be clarified or
enhanced and have expressed a desire for additional information about
these securities.\15\
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    \14\ 17 CFR 240.15c2-12(d)(1)(iii).
    \15\ See, e.g., Letter from Karrie McMillan, General Counsel,
Investment Company Institute (``ICI''), to Florence E. Harmon,
Secretary, Commission (July 25, 2008) (available at http://
www.sec.gov/comments/s7-13-08/s71308-44.pdf); comments of
participants in the 2001 SEC Municipal Market Roundtable--
``Secondary Market Disclosure for the 21st Century,'' (available at
http://www.sec.gov/info/municipal/roundtables/thirdmuniround.htm)
(Leslie Richards-Yellen, Principal, The Vanguard Group: ``* * * what
I'd like to see change the most is the inclusion of securities that
have been carved out of Rule 15c2-12. I would like securities such
as money market securities to be within the ambit of Rule 15c2-12.
In addition, I'd like to see the eleven material events be expanded.
The first eleven were very helpful. The ICI drafted a letter and
we've added another twelve for the industry to think about and
cogitate on * * *,'' and Dianne McNabb, Managing Director, A.G.
Edwards & Sons, Inc: ``I think that in summary, we could use more
specificity as far as what needs to be disclosed, the timeliness of
that disclosure, such as the financial statements, more events, I
think that we would agree that there are more events * * *''); and
National Federation of Municipal Analysts, Recommended Best
Practices in Disclosure for Variable Rate and Short-Term Securities,
February, 2003 (recommendations for continuing disclosures of
specified information) (available at http://www.nfma.org/
publications/short_term_030207.pdf).

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    Since the adoption of the 1994 Amendments, the amount of
outstanding municipal securities has more than doubled--to almost $2.7
trillion.\16\ Notably, despite this large increase in the amount of
outstanding municipal securities, direct investment in municipal
securities by individuals remained relatively steady from 1996 to 2008,
ranging from approximately 35% to 39% of outstanding municipal
securities.\17\ At the end of 2008, individual investors held
approximately 36% of outstanding municipal securities directly and up
to another 36% indirectly through money market funds, mutual funds, and
closed end funds.\18\ There is also substantial trading volume in the
municipal securities market. According to the MSRB, almost $5.5
trillion of long and short term municipal securities were traded in
2008 in nearly 11 million transactions.\19\ Further, the municipal
securities market is extremely diverse, with approximately 50,000 state
and local issuers of these securities. In addition, municipal bonds can
and do default. In fact, at least 917 municipal bond issues went into
monetary default during the 1990s with a defaulted principal amount of
over $9.8 billion.\20\ Bonds for healthcare, multifamily housing, and
industrial development, together with land-backed debt, accounted for
more than 80% of defaulted dollar amounts.\21\ In 2007, a total of $226
million in municipal bonds defaulted (including both monetary and
covenant defaults).\22\ In 2008, 140 issuers defaulted on $7.6 billion
in municipal bonds.\23\
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    \16\ According to statistics assembled by the Securities
Industry and Financial Markets Association (``SIFMA''), the amount
of outstanding municipal securities grew from approximately $1.26
trillion in 1996 to $2.69 trillion at the end of 2008. See SIFMA
Outstanding U.S. Bond Market Debt (available at http://
www.sifma.org/research/pdf/Overall_Outstanding.pdf).
    \17\ See SIFMA, Holders of U.S. Municipal Securities (available
at http://www.sifma.org/research/pdf/Holders_Municipal_
Securities.pdf) (``SIFMA Report'').
    \18\ Id.
    \19\ See MSRB, Real-Time Transaction Reporting, Statistical
Patterns in the Municipal Market, Monthly Summaries 2008 (available
at http://www.msrb.org/msrb1/TRSweb/MarketStats/statistical_
patterns_in_the_muni.htm).
    \20\ See Standard and Poor's, A Complete Look at Monetary
Defaults in the 1990s (June, 2000) (available at http://
www.kennyweb.com/kwnext/mip/paydefault.pdf) (``Standard and Poor's
Report''). See also Moody's Investors Service, The U.S. Municipal
Bond Rating Scale: Mapping to the Global Rating Scale And Assigning
Global Scale Ratings to Municipal Obligations (March 2008)
(available at http://www.moodys.com/cust/content/
content.ashx?source=StaticContent/Free%20pages/
Credit%20Policy%20Research/documents/current/102249_RM.pdf)
(regarding municipal defaults of Moody's rated municipal
securities).
    \21\ See Standard and Poor's Report, supra note 20.
    \22\ See Joe Mysak, Subprime Finds New Victim as Muni Defaults
Triple, Bloomberg News, May 30, 2008.
    \23\ See Joe Mysak, Municipal Defaults Don't Reflect Tough
Times: Chart of Day, Bloomberg News, May 28, 2009 (also noting that
since 1999, issuers have defaulted on $24.13 billion in municipal
bonds).
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    At the time the Rule was adopted in 1989, municipal securities with
put or demand features were relatively new. Approximately $13 billion
of variable rate demand obligations (``VRDOs'') \24\ were issued in
1989.\25\ However, by 2008, new issuances of VRDOs had grown to
approximately $115 billion,\26\ with trading in VRDOs representing
approximately 38% of trading volume of all municipal securities.\27\
Many issuers and other obligated persons are reported to have converted
their municipal auction rate securities (``ARS'') \28\ to securities
with other interest rate modes (as provided in related trust
indentures),\29\ such as VRDOs, or refunded or otherwise refinanced
their ARS in order to reduce the unusually high interest rates on ARS
caused by turmoil in the ARS market.\30\ This conversion or refinancing
appears to have contributed to the increased volume of new issues of
VRDOs in 2008 \31\ and was accompanied by an increased number of
investors in VRDOs, with some investors holding these securities for
long periods of time.\32\ There has also been an increase in the
trading volume of VRDOs. As the size and complexity of the VRDO market
and the number of investors has grown, so have the risks associated
with less complete disclosure. In addition, during the fall of 2008,
the VRDO market experienced significant volatility.\33\ Moreover, there
have been concerns expressed by representatives of the primary
purchasers of VRDOs--money market funds--that suggest that the
exemption in Rule 15c2-12 for these securities may no longer be
justified.\34\ All of these developments highlight the need for the
Commission to consider whether improvements should be made regarding
the availability to investors of important information regarding demand
securities.
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    \24\ VRDOs principally are demand securities.
    \25\ See Two Decades of Bond Finance: 1989-2008, The Bond Buyer/
Thomson Reuters 2009 Yearbook 4 (Matthew Kreps ed., Source Media,
Inc.) (2009).
    \26\ Id.
    \27\ According to the MSRB, trading volume in VRDOs in 2008 was
approximately $2.1 trillion. Total trading volume in 2008 for all
municipal securities was approximately $5.5 trillion. See e-mail
between Martha M. Haines, Assistant Director and Chief, Office of
Municipal Securities, Division, Commission, and Harold Johnson,
Deputy General Counsel, MSRB, May 28, 2009 (confirming 2008 trading
volume in VRDOs and trading volume for municipal securities).
    \28\ Auction rate securities are not demand securities.
    \29\ ``Interest rate modes'' is the term used to refer
collectively to the various forms in which offerings that include
variable rate demand obligations may typically be issued or
converted. Such ``multi-modal'' bonds typically include a variety of
optional forms (modes), such as fixed interest rate, variable
interest rates of different lengths (e.g., daily, weekly or monthly
interest rate resets), auction rate, and commercial paper.
    \30\ See, e.g., Press Release, Dormitory Authority State of New
York, DASNY Moving Clients Out of Auction Rate Securities (March 26,
2008) (available at http://www.dasny.org/dasny/news/2008/
080326moving.php); Press Release, Office of Chief Financial Officer,
District of Columbia, Over $100 Million Saved: $10 Million This
Fiscal Year by CFO Debt Management Strategy (May 27, 2008)
(available at http://newsroom.dc.gov/show.aspx/agency/cfo/section/2/
release/13845); Henry J. Gomez, Bond Failures Could Mean Millions In
Lost Interest, Cleveland Plain Dealer, March 4, 2008, at B3; Laura
Brost, Citizens to Cut its Borrowing Cost, Orlando Sentinel, March
14, 2008, at C3; and Matt Krantz, Credit Crisis Forces Museums to be
Creative; Skittish Bond Investors Meant Their Interest Costs Were
Getting Out of Hand, USA TODAY, April 17, 2008, at 4B.
    \31\ According to Thomson Reuters, VRDO issuances in 2008 were
much higher than in 2007--approximately $115 billion in 2008 vs. $50
billion in 2007. No ARS were reported to have been issued during the
same period in 2008. See Two Decades of Bond Finance: 1989-2008, The
Bond Buyer/Thomson Reuters 2009 Yearbook 7 (Matthew Kreps ed.,
Source Media, Inc.) (2009).
    \32\ See infra note 45 and accompanying text.
    \33\ See Diya Gullapalli, Crisis On Wall Street: Muni Money-Fund
Yields Surge--Departing Investors Send 7-Day Returns Over 5%, Wall
Street Journal, September 27, 2008; Andrew Ackerman, Short-Term
Market Dries Up: Illiquidity Leads to Lack of Bank LOCs, The Bond
Buyer, October 7, 2008. (``The reluctance of financial firms to
carry VRDOs is evident in the spike in the weekly [SIFMA] municipal
swap index, which is based on VRDO yields and spiked from 1.79% on
Sept. 10 to 7.96% during the last week of the month. It has since
declined somewhat to 5.74%.'').
    \34\ See supra note 15 and accompanying text.
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    As a result of the changes in the VRDO market, the Commission
believes that investors and other municipal market participants today
should be able to obtain ongoing continuing disclosure information
regarding demand securities in order to make more knowledgeable
investment decisions, to effectively manage and monitor their
investments, and thereby be better able to protect themselves from

misrepresentations and fraudulent activities. Accordingly, the
Commission proposes to modify the exemption in the Rule, as discussed
below, for demand securities \35\ by requiring Participating
Underwriters to reasonably determine that the issuer or obligated
person of demand securities has undertaken in a written agreement to
provide continuing disclosure documents to the MSRB.
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    \35\ See 17 CFR 240.15c2-12(d)(1)(iii). Specifically, the
Commission proposes to eliminate the exemption for primary offerings
of demand securities contained in paragraph (d)(1)(iii) of the Rule
and to add new paragraph (d)(5) to the Rule. Paragraph (d)(5) of the
Rule, as proposed, would exempt primary offerings of demand
securities from all of the provisions of the Rule except those
relating to a Participating Underwriter's obligations pursuant to
paragraph (b)(5) of the Rule and relating to recommendations by
brokers, dealers, and municipal securities dealers pursuant to
paragraph (c) of the Rule. As a result of these proposed changes,
Participating Underwriters, in connection with a primary offering of
demand securities, would need to reasonably determine that the
issuer or obligated person has entered into a continuing disclosure
agreement with respect to the submission of continuing disclosure
documents to the MSRB. In addition, brokers, dealers and municipal
securities dealers recommending the purchase or sale of demand
securities would need to have procedures in place that provide
reasonable assurance that they would receive prompt notice of event
notices and failure to file notices. See 17 CFR 240.15c2-12(c).
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    In addition, the Commission proposes to require Participating
Underwriters to reasonably determine that the issuer or obligated
person has contractually agreed to provide notice of specified events
within a certain time frame, amend the list of events that would
trigger an issuer's or other obligated person's obligation under its
continuing disclosure agreement to submit an event notice to the MSRB,
and amend the Rule to modify those events that would be subject to a
materiality determination before triggering a notice to the MSRB.\36\
As discussed below, the Commission believes that these proposed changes
would, among other things, help Participating Underwriters satisfy
their obligations and help improve the availability of timely and
important information to investors of municipal securities. In
addition, in line with the objectives behind the Commission's prior
revisions to Rule 15c2-12 and the 2008 Amendments, these proposed
amendments are designed to help deter fraud and manipulation in the
municipal securities market by prohibiting the underwriting and
recommendation of transactions in municipal securities for which
adequate information is not available on an ongoing basis.
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    \36\ As discussed below in Section II.F., the Commission is
aware that undertakings by issuers and obligated persons that were
entered into prior to the effective date of any final amendments
would be different from those entered into on or after the effective
date of any final amendments.
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II. Description of the Proposed Amendments to Rule 15c2-12

A. Modification of the Exemption for Demand Securities

    Rule 15c2-12(d) provides an exemption for a primary offering \37\
of municipal securities in authorized denominations of $100,000 or
more, if such securities, at the option of the holder thereof, may be
tendered to an issuer of such securities or its designated agent for
redemption or purchase at par value or more at least as frequently as
every nine months until maturity, earlier redemption, or purchase by an
issuer or its designated agent.\38\ Demand securities qualify for this
exemption. The Commission now proposes to delete the current exemption
for demand securities in paragraph (d)(1)(iii) and add language in new
paragraph (d)(5) so that paragraphs (b)(5) \39\ and (c) \40\ of the
Rule also would apply to a primary offering of demand securities.
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    \37\ See Rule 15c2-12(f)(7) for a definition of primary
offering. 17 CFR 240.15c2-12(f)(7).
    \38\ 17 CFR 240.15c2-12(d)(1)(iii).
    \39\ As noted above, Rule 15c2-12(b)(5) requires a Participating
Underwriter, before purchasing or selling municipal securities in
connection with an offering of municipal securities, to reasonably
determine that the issuer or obligated person has undertaken, in a
written agreement or contract, for the benefit of the holders of
municipal securities, to provide annual filings, material event
notices, and failure to file notices (i.e., continuing disclosure
documents) to the MSRB. See 17 CFR 240.15c2-12(b)(5). See also supra
note 11.
    \40\ Rule 15c2-12(c) requires a broker, dealer, or municipal
securities dealer that recommends the purchase or sale of a
municipal security to have procedures in place that provide
reasonable assurance that it will receive prompt notice of any
material event and any failure to file annual financial information
regarding the municipal security. See 17 CFR 240.15c2-12(c).
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    The Commission believes that its experience with the operation of
the Rule and market changes since the adoption of the 1994 Amendments
have suggested a need to modify the exemption relating to demand
securities as described. The effect of this proposed amendment would be
to eliminate the current exemption of demand securities from the
requirement that a Participating Underwriter reasonably determine that
the issuer or obligated person has undertaken, in a continuing
disclosure agreement, to provide continuing disclosure documents to the
MSRB. As noted above, when this exemption was adopted VRDOs were
relatively new and did not represent a large proportion of the
market.\41\ However, by 2008, the amount of issuances of VRDOs was
approximately $115 billion \42\ and trading volume of VRDOs exceeded 38
percent of all municipal securities.\43\ The Commission observes that
an unusually high volume of VRDOs were issued in 2008.\44\ The increase
in the amount of issuances and trading volume of VRDOs seem to indicate
that more investors own such securities. Furthermore, despite their
periodic ability to tender VRDOs to the respective issuer for
repurchase, some investors in VRDOs appear to hold these securities for
long periods of time \45\ and would be better able to protect
themselves against manipulation and fraud if they were able more easily
to access information about important events, such as those listed in
paragraphs (b)(5) and (c) of the Rule.
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    \41\ See supra note 25 and accompanying text.
    \42\ See supra note 25 and accompanying text.
    \43\ See supra note 27 and accompanying text.
    \44\ See supra notes 30 and 31 and accompanying text.
    \45\ Telephone call between Heather Traeger, Associate Counsel,
Securities Regulation, Capital Markets, ICI, and Martha M. Haines,
Assistant Director and Chief, Office of Municipal Securities,
Division, Commission, on July 14, 2009.
---------------------------------------------------------------------------

    Accordingly, the increased amount of VRDO issuances, high VRDO
trading volume, increased number of investors in VRDOs,\46\ and some
investors' tendency to hold these securities for long periods of time
highlight the risks associated with less information being available
and suggest a need to take

measures designed to help improve the availability of important
information to investors in this considerable segment of the municipal
market. Representatives of money market funds have discussed their
difficulty or, on some occasions, their inability to obtain the
information that they believe is necessary to oversee their investments
in demand securities.\47\ Modification of the exemption for demand
securities, as further discussed below, would help improve the
availability of continuing disclosures about these securities, not only
to institutional investors, such as mutual funds, that acquire demand
securities for their portfolios, but also to individual investors who
own, or who may be interested in owning, demand securities, and would
help them make better informed investment decisions, and thereby better
protect themselves.
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    \46\ The recent increased investment interest and activity in
VRDOs may be attributable, in part, to the recent turmoil in the
market for ARS, which began in February 2008. See MSRB Notice 2008-
09 (February 19, 2008) (``Recent downgrades of municipal bond
insurers and other short-term liquidity concerns have created
extreme volatility in the market for municipal Auction Rate
Securities. There also have been an unprecedented number of `failed
auctions,' meaning that investors who chose to liquidate their
positions through the auction process were not able to do so.'')
(available at http://www.msrb.org/msrb1/whatsnew/2008-09.asp). See
also Anthony P. Inverso, 2008 First-Half Municipal Market Review:
The End of Securities and Bond Insurance As We Know It? Building
Futures, New Jersey Educational Facilities Authority (June 2008)
(stating that as downgrades to bond insurer ratings grew, so did the
rates on ARS. Further stating that by the end of the first half of
2008, nearly half of all auction rate securities will have been
converted or redeemed, mainly in the form of more predictable fixed
rate debt or variable rate secured by a bank letter of credit.)
(available at http://www.njefa.com/njefa/pdf/newsletter/
NJEFA%20Building%20futures%20newsletter%20June%202008%20Vol.%207,%20N
o.%201.pdf); and Adrian D'Silva, Haley Gregg, and David Marshall,
Explaining the Decline in the Auction Rate Securities Market,
Chicago Fed Letter, The Federal Reserve Bank of Chicago (November
2008) (stating that the rash of failed auctions in the ARS markets
starting in February 2008 has prompted issuers to consider a variety
of potential solutions, including: Finding buyers for ARSs in the
secondary market; converting ARSs to variable-rate demand notes; and
replacing ARSs with short term debt funding.) (available at http://
www.chicagofed.org/publications/fedletter/cflnovember2008_256.pdf).
See also supra note 30.
    \47\ See, e.g., comments of Leslie Richards-Yellen, Principal,
The Vanguard Group, transcript of the 2001 Municipal Market
Roundtable--``Secondary Market Disclosure for the 21st Century''
(available at http://www.sec.gov/info/municipal/roundtables/
thirdmuniround.htm) (``* * * what I hope more than anything is that
variable rate demand obligations become within the Rule 15c2-12
disclosure regime * * * put yourself in the position of a fund, we
have on one hand Rule 15c2-12, which is very helpful and it sets the
floor of what kind of information must be delivered for a secondary
market, * * *. But on the other hand, mutual funds are bound by Rule
2a-7 and that says for short-term obligations what we must find for
every security, and Rule 2a-7 has legal requirements that we must
fulfill in order to buy the securities, and * * * to make these
findings we have to make our own determination, we can't rely on
rating agencies, we do this all in house.''). See also supra note
15.
---------------------------------------------------------------------------

    Further, the Commission notes that the exemption for demand
securities, which was included in the Rule when Rule 15c2-12 was
adopted in 1989, was intended to respond to concerns expressed by
commenters ``that applying the provisions of the [Proposed] Rule to
variable rate demand notes, or similar securities, might unnecessarily
hinder the operation of this market, if underwriters were required to
comply with the provisions of the Proposed Rule on each tender or reset
date.'' \48\ The exemption in the original Rule was intended to ensure
that the remarketings would not be affected by application of
paragraphs (a) and (b)(1)-(4) of the Rule, which require Participating
Underwriters to review an official statement that the issuer ``deems
final'' before it may bid for, purchase, offer or sell an offering; to
deliver a preliminary official statement or final official statement to
any potential customer, upon request; and to contract with the issuer
to receive an adequate number of the final official statement to
accompany confirmation statements and otherwise fulfill its regulatory
responsibilities. Although remarketings of VRDOs may be primary
offerings,\49\ the Commission did not impose paragraphs (a) and (b)(1)-
(4) of the Rule on Participating Underwriters of each remarketing--of
which hundreds could occur on the same day--because it potentially
would have made it impractical and unduly burdensome for Participating
Underwriters to comply with these Rule provisions.\50\
---------------------------------------------------------------------------

    \48\ See 1989 Adopting Release, supra note 3, 54 FR at 28808, n.
68.
    \49\ See supra note 37.
    \50\ See 1994 Amendments Adopting Release, supra note 5. The
Commission notes that, in the 1994 Amendments Adopting Release, it
did not address the application of paragraph (b)(5) of the Rule to
remarketing of VRDOs, including the practicality and burdens for
Participating Underwriters to comply with this provision. The 1994
Amendments did not reconsider any of the exemptions contained in the
Rule. As discussed above, since that time, there have been
significant developments in the market related to demand securities.
---------------------------------------------------------------------------

    Generally, there are no continuing disclosure agreements in place
with respect to VRDOs, because primary offerings of these securities
are exempt from the Rule.\51\ Under the proposed amendments, the
Participating Underwriter of a primary offering of VRDOs would need to
reasonably determine that the issuer or obligated person has entered
into a continuing disclosure agreement with respect to the submission
to the MSRB of continuing disclosure documents. The proposed amendment
modifying the exemption for VRDOs would apply to any initial offering
of VRDOs occurring on or after the effective date of any final
amendments that the Commission may adopt. In addition, the proposed
amendment also would apply to any remarketing of VRDOs that are primary
offerings \52\ occurring on or after the effective date of any final
amendments that the Commission may adopt, including any such
remarketing of VRDOs that initially were issued prior to any such
effective date. Consequently, the initial issuance of VRDOs, and any
remarketing that is a primary offering of VRDOs, following the
effective date of any final amendments would require the Participating
Underwriter to reasonably determine that the issuer or obligated person
has entered into a continuing disclosure agreement reflecting the
proposed new provisions of the Rule.
---------------------------------------------------------------------------

    \51\ There may, however, be continuing disclosure agreements for
VRDOs that were initially issued in an interest rate mode, such as a
fixed rate mode, subject to the Rule that were subsequently
converted to VRDOs in accordance with the provisions of the related
indenture.
    \52\ 17 CFR 240.15c2-12(f)(7).
---------------------------------------------------------------------------

    The Commission, however, preliminarily believes that the effect of
the application of paragraphs (b)(5) and (c) of the Rule to VRDOs would
not be significantly burdensome for Participating Underwriters in
connection with the initial issuance and remarketing of VRDOs following
the effective date of any final amendments. If the amendments are
adopted, any primary offering (including a remarketing) that occurs on
or after the effective date of the Rule would require a Participating
Underwriter or a Participating Underwriter serving as a remarketing
agent \53\ for a particular VRDO issue to make a determination that an
issuer or obligated person has entered into a continuing disclosure
agreement for that issue reflecting the new provisions of the Rule. The
Participating Underwriter or the remarketing agent (who often served as
the underwriter in the initial issuance of the VRDOs) would need to
reasonably determine that the issuer or obligated person has entered
into a continuing disclosure agreement in which it undertakes to
provide continuing disclosure documents to the MSRB. However, once the
Participating Underwriter has made such a determination for a
particular VRDO issue, it would be aware of the existence of the
continuing disclosure agreement reflecting the proposed amendment, and
thus would easily be able to make the necessary determination for
remarketings of that issue occurring thereafter.\54\ Furthermore,
remarketing agents who did not previously participate in a remarketing
could confirm that the issuer has entered into an undertaking in
conformity with the proposed amendment by obtaining an official
statement from the issuer (which by definition must include a
description of the issuer's undertakings),\55\ from the MSRB (under its
program that makes official statements for nearly every offering of
municipal securities available on the Internet from the MSRB's EMMA
system),\56\ or from a

variety of vendors. In addition, a remarketing agent could obtain a
copy of the continuing disclosure agreement from the issuer or
obligated person at the time that it enters into a contract to act as a
remarketing agent.
---------------------------------------------------------------------------

    \53\ A remarketing agent is a broker-dealer responsible for
reselling to new investors securities (such as VRDOs) that have been
tendered for purchase by their owner. The remarketing agent also
typically is responsible for resetting the interest rate for a
variable rate issue and also may act as tender agent. See MSRB,
Municipal Securities Rulemaking Board Glossary, Second Edition
(January 2004) (defining ``remarketing agent'') (available at http:/
/www.msrb.org/msrb1/glossary).
    \54\ See infra Section III. for a reaffirmation of the
Commission's interpretations regarding Participating Underwriters'
obligations under Rule 15c2-12.
    \55\ 17 CFR 240.15c2-12(f)(3).
    \56\ See Securities Exchange Act Release No. 59061 (December 5,
2008), 73 FR 75778 (December 12, 2008) (File No. SR-MSRB-2008-05)
(order approving the MSRB's proposed rule change to make permanent a
pilot program for an Internet-based public access portal for the
consolidated availability of primary offering information about
municipal securities).
---------------------------------------------------------------------------

    According to an industry commentator, some rating agencies
recommend that variable-rate debt not exceed 20 percent of the total
debt outstanding of governmental issuers.\57\ If governmental issuers
follow this recommendation, it would be likely that state and local
government issuers with VRDOs would have some fixed rate securities
outstanding, at least some of which likely would be subject to
continuing disclosure agreements under Rule 15c2-12. Because any
existing continuing disclosure agreements for those other outstanding
securities would obligate such issuers and obligated persons to provide
annual filings, event notices and failure to file notices with respect
to their outstanding securities, the Commission does not anticipate
that the modification of the exemption for demand securities in the
proposed amendments would increase significantly the obligation that
they would incur to provide continuing disclosure documents to the
MSRB.\58\ Furthermore, the Commission notes that some annual filings,
such as audited financial statements, are often prepared by issuers and
obligated persons in the ordinary course of their business. In such
cases, the obligation incurred by an issuer or obligated person to
provide to the MSRB information that it has already prepared should be
small.\59\ Issuers and obligated persons of demand obligations that
have not previously issued such securities, however, would be entering
into a continuing disclosure agreement for the first time and would
incur some costs to provide continuing disclosure documents
electronically to the MSRB.\60\
---------------------------------------------------------------------------

    \57\ See Douglas Skarr, Auction Rate Securities: A Primer For
Finance Officers, Government Finance Review, August 2005.
    \58\ See infra Section V. for a discussion of the collection of
information burdens and costs as they relate to the proposed
amendment regarding demand securities.
    \59\ Id.
    \60\ Id.
---------------------------------------------------------------------------

    For the reasons stated above, the Commission believes that
application of paragraphs (b)(5) and (c) of the Rule would be
appropriate in the case of demand securities. The Commission
preliminarily believes that any additional burden on Participating
Underwriters, issuers or obligated persons, the MSRB or others would be
justified by the improved availability of information to investors in
demand securities, so that investors in these securities could make
better informed investment decisions and thereby better protect
themselves from misrepresentations and fraudulent activities. Investors
now would have better access to baseline information and material
events regarding VRDOs. The availability of such information also would
assist brokers, dealers and municipal securities dealers in fulfilling
their responsibilities to their customers,\61\ such as disclosing
material facts about transactions and securities; making suitable
recommendations in transactions for municipal securities; and complying
with other sales practice obligations.\62\
---------------------------------------------------------------------------

    \61\ For example, brokers, dealers and municipal securities
dealers with access to current information contained in event
notices submitted to the MSRB would be able to use such information
when deciding whether or not to recommend the purchase or sale of a
particular demand security.
    \62\ See MSRB, Reminder of Customer Protection Obligations in
Connection with Sales of Municipal Securities, Interpretative Notice
of Rule G-17, dated May 30, 2007 (available at http://www.msrb.org/
msrb1/rules/notg17.htm).
---------------------------------------------------------------------------

    The Commission requests comment on whether it is appropriate to
revise the Rule's exemption for demand securities by proposing to apply
paragraphs (b)(5) and (c) of the Rule to the offering of demand
securities.\63\ Further, the Commission requests comment regarding
investors' and other municipal market participants' need for continuing
disclosure information relating to demand securities. In addition, the
Commission requests comment on the extent to which the proposed
amendment would provide benefits to investors and other municipal
market participants. The Commission also requests comment regarding the
effect of the proposed amendment on Participating Underwriters, issuers
and obligated persons, and others.
---------------------------------------------------------------------------

    \63\ See supra note 35.
---------------------------------------------------------------------------

B. Time Frame for Submitting Event Notices Under a Continuing
Disclosure Agreement

    The Commission proposes to modify paragraph (b)(5)(i)(C) of the
Rule to require a Participating Underwriter to reasonably determine
that the issuer or obligated person has agreed in its continuing
disclosure agreement to submit event notices to the MSRB \64\ ``in a
timely manner not in excess of ten business days after the occurrence
of the event,'' instead of ``in a timely manner'' as the Rule currently
provides. The Commission proposes a similar revision to the limited
undertaking in paragraph (d)(2)(ii)(B) of the Rule \65\ to require a
Participating Underwriter to reasonably determine that the issuer or
obligated person has agreed in its continuing disclosure agreement to
submit event notices to the MSRB \66\ ``in a timely manner not in
excess of ten business days after the occurrence of the event,''
instead of ``in a timely manner'' as the Rule currently provides.
Therefore, under the proposed amendments, a Participating Underwriter
would need to reasonably determine that the continuing disclosure
agreement provides for the submission of notices to the MSRB within a
period up to and including ten business days after the occurrence of
the event. In the 1994 Amendments, the Commission noted that it had not
established a specific time frame with respect to ``timely'' because of
the wide variety of events and issuer circumstances.\67\ The Commission
stated that, in general, this determination must take into
consideration the time needed to discover the occurrence of the event,
assess its materiality, and prepare and disseminate the notice.\68\ It
has been reported that some event notices have not been submitted until
months after the events occurred.\69\ The Commission believes that
these delays can, among other things, deny investors important
information that they need in order to make informed decisions
regarding whether to buy or sell municipal securities. More timely
information would aid brokers, dealers and municipal securities dealers
to be better able to satisfy their obligations to have a reasonable
basis to recommend the

purchase or sale of municipal securities and aid investors in
determining whether the price they pay or receive for their
transactions is appropriate, and thereby better protect themselves from
misrepresentations and other fraudulent activities.
---------------------------------------------------------------------------

    \64\ See supra note 11 and accompanying text.
    \65\ 17 CFR 240.15c2-12(d)(2)(ii)(B).
    \66\ See supra note 11 and accompanying text.
    \67\ See 1994 Amendments, supra note 5, 59 FR at 59601.
    \68\ Id.
    \69\ See, e.g., Elizabeth Carvlin, Trustee for Vigo County,
Ind., Agency Taps Reserve Fund for Debt Service, The Bond Buyer,
April 2, 2004, page 3 (reporting the filing of a material event
notice regarding a draw on debt service reserve fund that occurred
in February); Alison L. McConnell, Two More Deals Under Audit By TEB
Office, The Bond Buyer, April 5, 2006 (event notice of tax audit
filed nine months after audit was opened); Susanna Duff Barnett, IRS
Answers Toxic Query; Post 1986 Radioactive Waste Debt Not Exempt,
The Bond Buyer, November 2, 2004 (material event notice filed
October 29, 2004 regarding IRS technical advice memorandum dated
August 27, 2004 that bonds issued to finance certain radioactive
solid waste facilities were taxable; related preliminary adverse
determination letter was issued in January, 2002); and Michael
Stanton, IRS: Utah Pool Bonds Taxable; Issuer Disputes Facts of
Case, The Bond Buyer, December 8, 1997 (issuer's receipt of August,
1997 IRS technical advice memorandum concluding certain bonds were
taxable was disclosed on December 5, 1997).
---------------------------------------------------------------------------

    The Commission believes that longer delays in providing notice of
the events set forth in paragraph (b)(5)(i)(C) of the Rule undermine
the effectiveness of the Rule. Indeed, market participants have
emphasized the importance of the prompt availability of such
information.\70\ In addition to helping to reduce opportunities for
fraudulent activities, the Commission anticipates that, in providing
for a maximum time frame within which event notices should be disclosed
under a continuing a disclosure agreement, the proposed amendment
should foster the availability of up-to-date information about
municipal securities, thereby promoting greater transparency and
investor confidence in the municipal securities market as a whole.
---------------------------------------------------------------------------

    \70\ See, e.g., National Federation of Municipal Analysts,
Recommended Best Practices in Disclosure for General Obligation and
Tax-Supported Debt (December 2001) (``Any material event notices,
including those required under SEC Rule 15c2-12, should be released
as soon as practicable after the information becomes available.'')
(available at http://www.nfma.org/disclosure.php); Peter J. Schmitt,
Letter to the Editor, To the Editor: MuniFilings.com: The Once and
Future Edgar?, The Bond Buyer, October 9, 2007, Commentary, Vol. 362
No. 32732, at 36 (``We suggest * * * that the true problem is issuer
compliance * * * filing issues are the sole cause of lack of
transparency and disclosure availability in the industry. These
filing issues include * * * late filing, * * * '').
---------------------------------------------------------------------------

    The Commission notes that, with respect to Participating
Underwriters, the proposed amendment simply would require them to
reasonably determine that issuers and obligated persons have
contractually agreed to submit event notices ``in a timely manner not
in excess of ten business days after the occurrence of the event,''
rather than in a ``timely manner.'' On the other hand, there would be a
significant benefit to investors and municipal market participants, who
would be able to obtain information about municipal securities within a
specific time frame of an event's occurrence. Indeed, while issuers and
obligated persons under continuing disclosure agreements entered into
prior to the effective date of any final amendments that the Commission
may adopt already would have committed to submit event notices in a
timely manner, the proposed amendment would help to make the timing of
such submissions more certain in the case of issuers and obligated
persons that enter into continuing disclosure agreements on or after
the effective date of any final amendments that the Commission may
adopt.\71\
---------------------------------------------------------------------------

    \71\ The Commission notes that the proposed ten business day
time frame would not apply to continuing disclosure agreements
entered into with respect to primary offerings that occurred prior
to the effective date of any final amendments that the Commission
may adopt.
---------------------------------------------------------------------------

    The Commission believes that the proposed change regarding the time
frame for submission of event notices would continue to provide an
issuer or obligated person with adequate time to become aware of the
event and, pursuant to its undertaking, submit notice of the event's
occurrence to the MSRB. In proposing that event filings be provided
``in a timely manner not in excess of ten business days after the
occurrence of the event,'' the Commission intends to strike a balance
between the need for such information to be disseminated promptly and
the need to allow adequate time for an issuer or other obligated person
to become aware of the event and to prepare and file such a notice. The
Commission preliminarily believes that the proposed ten business day
time frame would provide a reasonable amount of time for issuers to
comply with their obligations under their continuing disclosure
agreements, while also allowing event notices to be made available to
investors, underwriters, and other market participants in a timely
manner.
    By their nature, the events currently listed in (and proposed to be
added to) subparagraph (b)(5)(i)(C) of the Rule are significant and
should become known to the issuer or obligated person
expeditiously.\72\ For example, some events, such as payment defaults,
tender offers and bankruptcy filings, generally involve the issuer's or
obligated person's participation.\73\ Other events, such as the failure
of a credit or liquidity provider to perform, are of such importance
that an issuer or obligated person likely would become aware of such
events within the proposed ten business day time frame \74\ or would
expect an indenture trustee, paying agent or other transaction
participant to bring the event to the issuer's or obligated person's
attention within the proposed time frame for submission of event
notices.\75\ Although a few events, such as rating changes, are not
directly within the issuer's control, the Commission expects that
issuers and obligated persons usually would become aware of the events
specified in paragraph (b)(5)(i)(C) of the Rule within the proposed ten
business day time frame.\76\ Accordingly, the Commission believes that
the proposed ten business day time frame within which issuers or
obligated persons would submit notices pursuant to a continuing
disclosure agreement would provide an adequate amount of time for
issuers or obligated persons to prepare and submit event notices to the
MSRB. While the proposed maximum time period for submitting event
notices would be ten business days, in many instances it is likely that
a notice could be submitted in fewer than ten business days. This,
however, would depend upon the particular facts and circumstances of
each event.
---------------------------------------------------------------------------

    \72\ See supra note 9 for a description of events currently
contained in Rule 15c2-12(b)(5)(i)(C); See infra Section II.E. for a
description of events proposed to be added to the Rule.
    \73\ In addition, issuer or obligated person involvement is
often required for substitution of credit or liquidity providers;
modifications to rights of security holders; release, substitution,
sale of property securing repayment of the securities; and optional
redemptions. See Form Indenture and Commentary, National Association
of Bond Lawyers, 2000.
    \74\ For example, issuers or obligated persons should have
direct knowledge of principal and interest payment delinquencies,
receipt of preliminary or proposed determinations of taxability from
the IRS, tender offers that they initiate, and bankruptcy filings.
    \75\ The Commission believes that indenture trustees generally
would be aware of principal and interest payment delinquencies;
material non-payment related defaults, unscheduled draws on credit
enhancements reflecting financial difficulties; the failure of
credit or liquidity providers to perform; and adverse tax opinions
or events affecting the tax-exempt status of the security.
    \76\ Those issuers or obligated persons required by Section
13(a) or Section 15(d) of the Exchange Act to report certain events
on Form 8-K (17 CFR 249.308) would already make such information
public in the Form 8-K. The Commission believes that such persons
should be able to file material event notices, pursuant to the
issuer's or obligated person's undertakings, within a short time
after the Form 8-K filing. See 15 U.S.C. 78m and 78o(d).
---------------------------------------------------------------------------

    The Commission requests comment concerning the ability of issuers
and obligated persons to obtain information regarding the occurrence of
events currently specified in, and that the proposed amendments would
add to, paragraph (b)(5)(i)(C) of the Rule, in sufficient time to
prepare and file a notice of such an occurrence in a timely manner not
in excess of ten business days. If commenters believe that the time
frame that would be set forth in continuing disclosure agreements for
submission of event notices should be longer or shorter, they should
provide suggestions for the appropriate time and the reasons for their
views. For example, should the time frame be four business days, which
is generally commensurate with the time period required by Form 8-K?
\77\ Would a shorter period of time raise difficulties for smaller
municipal

issuers and obligated persons, and if so, why would it? Furthermore,
comment is requested regarding the need to establish such a time frame
for submissions of event notices. Should the trigger for the ten
business day time frame begin when the issuer or obligated person knew
or should have known of the occurrence of the event, rather than the
actual occurrence of the event? Comment is also requested on whether an
issuer's need to monitor for events that would trigger an event notice
would impose any new burdens or costs. Comment is requested on whether
the proposal would help to reduce untimely submissions of event
notices, or whether untimely submissions of event notices are caused by
other factors. Comment is also requested on whether there are
alternative ways to modify a Participating Underwriter's obligations
that would result in more prompt availability of event notices to
investors.
---------------------------------------------------------------------------

    \77\ 17 CFR 249.308.
---------------------------------------------------------------------------

C. Materiality Determinations Regarding Event Notices

    In the 1994 Proposing Release, the Commission stated that the list
of events in paragraph (b)(5)(i)(C) of the Rule consists of recognized
material events that reflect on the creditworthiness of the issuer of
the municipal security or any significant obligor, as well as on the
terms of the securities that they issue.\78\ The Commission is
proposing to delete the condition in paragraph (b)(5)(i)(C) of the Rule
that presently provides that notice of all of the listed events need be
made only ``if material.'' In connection with the proposed deletion of
the materiality condition, the Commission has reviewed each of the
Rule's current specified events to determine whether or not a
materiality determination should be retained for that particular event
and preliminarily believes such a determination is still appropriate
for certain listed events, as discussed below.\79\ As a result of this
proposed change, for those events listed in paragraph (b)(5)(i)(C) that
are not proposed to contain the ``if material'' condition, the
Participating Underwriter must reasonably determine that the issuer or
other obligated person has agreed to submit event notices to the MSRB
whenever such an event occurs.
---------------------------------------------------------------------------

    \78\ See Securities Exchange Act Release No. 33742 (March 9,
1994), 59 FR 12759, 12761-2 (March 17, 1994).
    \79\ The discussion in this section pertains to materiality
determinations for events currently specified in paragraph
(b)(5)(i)(C) of the Rule. For events proposed to be added to the
Rule, whether a materiality determination would be included is noted
in the discussion below for each such proposed event.
---------------------------------------------------------------------------

    The Commission now believes, based on its experience with the
operation of paragraph (b)(5)(i)(C) of the Rule, that notice of certain
events currently listed in paragraph (b)(5)(i)(C) need not be preceded
by a materiality determination and always should be available because
of their importance to investors and other market participants. These
events include: (1) Principal and interest payment delinquencies with
respect to the securities being offered; (2) unscheduled draws on debt
service reserves reflecting financial difficulties; (3) unscheduled
draws on credit enhancements reflecting financial difficulties; (4)
substitution of credit or liquidity providers, or their failure to
perform; (5) defeasances; and (6) rating changes. The availability of
this information to investors would enable them to better protect
themselves from misrepresentations and fraud. Furthermore, the
availability of this information would assist brokers, dealers and
municipal securities dealers to satisfy their obligation to have a
reasonable basis on which to recommend municipal securities.
    The Commission believes that the proposal to remove the materiality
condition for the aforementioned events should not alter greatly the
current practice. Because of the significant nature of these events and
their importance to investors in the marketplace, the Commission
believes that issuers and obligated persons would already be providing
notice of most, if not all, such events pursuant to existing continuing
disclosure agreements.
    More specifically, the Commission believes that notice of principal
and interest payment delinquencies should always be provided to aid
investors in protecting themselves from fraud and to assist brokers,
dealers and municipal securities dealers in satisfying their obligation
to have a reasonable basis to recommend municipal securities. Even a
small payment default may indicate that an issuer or other obligated
party has begun to experience financial distress. Further, a payment
default often adversely affects the market value of a municipal
security. Similarly, unscheduled draws on debt service reserves
reflecting financial difficulties and unscheduled draws on credit
enhancements reflecting financial difficulties often have an adverse
impact on the market value of a security and therefore should always be
available to investors to protect against fraud and to other market
participants to satisfy their securities law obligations. The
Commission believes that investors should always be provided with these
notice of events because such events likely indicate that the financial
condition of a municipal securities issuer or obligor has deteriorated
and therefore that there is potentially an increased risk of a payment
default or, in the case of default by an issuer or other obligated
party that results in payment of the securities by the provider of
credit enhancement (such as a standby letter of credit), premature
redemption. Bondholders and other market participants also would be
concerned with the sufficiency of the amount of debt service and other
reserves available to support an issuer or obligor through a period of
temporary difficulty, along with the present financial condition of the
provider of any credit enhancement.
    The identity of credit or liquidity providers and their ability to
perform is important to investors. The Commission understands that
credit ratings of municipal securities are typically based on the
higher of the issuer's (or other obligor's) rating or the rating of the
credit provider.\80\ With occasional exceptions, credit enhancement is
obtained from a credit provider with a higher rating than that of the
issuer or other obligor. When a credit enhancer such as a bond insurer
is downgraded, the market value and liquidity of the securities that it
has enhanced generally decline.\81\ Similarly, the identity and

ability of a liquidity provider to perform is typically critical to
investors. Investors in VRDOs, for example, depend on liquidity
providers to satisfy holders' right to ``put'' their securities in a
timely manner. As a result, the Commission preliminarily believes that
notice of the substitution of credit or liquidity providers, or their
failure to perform, should always be provided in an event notice to aid
investors to protect against fraud and brokers, dealers and municipal
securities dealers to satisfy their obligation to have a reasonable
basis to recommend municipal securities.
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    \80\ See, e.g., Municipal Structured Finance Criteria Report:
Dual-Party Pay Criteria for Long-Term Ratings on LOC-Supported U.S.
Public Finance Bonds, Fitch Ratings, Public Finance, June 11, 2009
(noting that ``U.S. public finance bonds supported by bank letters
of credit (LOC) are assigned long-term ratings one-to-two notches
higher than the rating on the LOC provider or the underlying rating
of the bond, whichever is higher, if [certain] conditions hold
true[.]'')
    \81\ See, e.g., Alistair Varr, Moody's Warning Ripples Through
Municipal Bond Market, MarketWatch, December 17, 2007 (noting that
``when a security is cut to AA from AAA, the value of the bond would
go down.'') (available at http:// www.marketwatch.com/story/moodys-
bond-insurer-call-has-unprecedented-effect-on-muni-market); Jeffrey
R. Kosnett, Why Municipal Bonds Are Stumbling, Kiplinger.com,
December 4, 2007 (stating that municipal bonds normally meriting a
triple-B or single-A rating being upgraded to triple-A status as a
result of having bond insurance) (available at http://
www.kiplinger.com/columns/balance/archive/2007/balance1204.html);
``[T]he municipal industry chose to use bond insurance to enhance an
issuer's lower credit rating to that of the higher insurance
company's rating. The last 18 months have exposed the risks of this
choice when insurance company downgrades, and auction-rate security
failures, forced numerous leveraged investors to unwind massive
amounts of debt into an illiquid secondary market. The consequence
was that issuers of new debt were forced to pay extremely high
interest rates and investors were confused by volatile evaluations
of their investments.'' Enhancing Investor Protection and the
Regulation of Securities Markets: Before the S. Comm. on Banking,
Housing and Urban Affairs, 111th Cong. ----, March 10, 2009
(statement of Thomas Doe, Founder and CEO Municipal Market Advisors)
(available at http://banking.senate.gov/public/
index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=faf91bea-ca58-
4bc1-873d-33739dbb4f76&Witness_ID=64207b41-3512-414b-8085-
ae4b71520b0a).
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    Further, the Commission preliminarily believes, for the same
purposes, that defeasances and rating changes should always be
available to investors and other market participants. Defeasances
secured by a pool of U.S. Treasury securities sufficient to pay
principal and interest commonly result in a bond receiving the highest
rating \82\ and thus can affect the security's market value. Rating
changes more generally may affect the market price of the security,
making it important both to bondholders and to investors who may be
considering the purchase of a particular security.
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    \82\ Such defeasances are known as ``advance refundings'' or
``pre-refundings''. See MSRB, Municipal Securities Rulemaking Board
Glossary, Second Edition (January 2004) (defining ``advance
refunding'' and ``defeasance'') (available at http://www.msrb.org/
msrb1/glossary). See also MSRB, EMMA Education Center, FAQ: ``How am
I affected if my bond is advance refunded?'' (available at http://
emma.msrb.org/EducationCenter/FAQs.aspx?topic=AboutARD); Fitch
Ratings, Municipal Structured Finance Criteria Report: Guidelines
for Rating Prerefunded Municipal Bonds, April 2, 2009 (available at
http://www.fitchratings.com/corporate/reports/report_
frame.cfm?rpt_id=431370§or_flag=&marketsector=3&detail=); and
Moody's Investors Service, Rating Methodology: Refunded Bonds, June,
2007 (available at: http://www.moodys.com/moodys/cust/research/
MDCdocs/29/2006700000441141.pdf?doc_
id=2006700000441141&frameOfRef=municipal).
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    The Commission, however, believes that a materiality determination
should be retained for other events currently listed in paragraph
(b)(5)(i)(C) because the occurrence of such events, in some
circumstances, may not be of such importance to investors that they
always should be disclosed. Experience with the operation of the Rule
has not provided information to propose a change at this time, and the
Commission continues to believe that information about these events
may, depending on the facts and circumstances, not need to be available
to investors and other market participants in all instances to
accomplish the Rule's goals.\83\ Therefore, the Commission proposes to
modify the text of subparagraph (b)(5)(i)(C) and subparagraphs
(b)(5)(i)(C)(2), (7), (8), and (10) of the Rule, with regard to the
Participating Underwriter's obligations, to specify that a
determination of materiality would be retained for event notices
regarding non-payment related defaults; modifications to rights of
security holders; bond calls; and the release, substitution, or sale of
property securing repayment of the securities.
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    \83\ For example, a release of substitution of property may
involve a small amount of property that is not particularly valuable
or important to the business of the issuer or obligated person, and
minor modifications to the rights of securities holders are often
made pursuant to the provisions of trust indentures that allow them
only if they are not materially adverse to the interests of
bondholders.
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    The Commission requests comment on the proposed amendment to delete
the phrase ``if material'' in the case of notices for the following
events: (1) Principal and interest payment delinquencies with respect
to the securities being offered; (2) unscheduled draws on debt service
reserves reflecting financial difficulties; (3) unscheduled draws on
credit enhancements reflecting financial difficulties; (4) substitution
of credit or liquidity providers, or their failure to perform; (5)
defeasances; and (6) rating changes. Are these events of such
importance to investors that their occurrence always should be
disclosed? Are there situations in which notice of the occurrence of
these events would not need to be available to investors to protect
themselves from fraud and to brokers, dealers and municipal securities
dealers to aid them in satisfying their obligations under the
securities laws? Are there other events listed in the Rule as to which
the materiality determination should be eliminated because their
occurrence always should be disclosed to investors? Should a
materiality determination be retained for event notices regarding non-
payment related defaults; modifications to rights of security holders;
bond calls; and the release, substitution, or sale of property securing
repayment of the securities? Does the proposed amendment to eliminate
the materiality determination for certain events create or eliminate
any burdens on issuers?

D. Amendment Relating to Event Notices Regarding Adverse Tax Events
Under a Continuing Disclosure Agreement

    The Commission proposes to modify paragraph (b)(5)(i)(C)(6) of the
Rule, which presently requires Participating Underwriters reasonably to
determine that the issuer or obligated person has entered into a
continuing disclosure agreement to submit a notice for ``[a]dverse tax
opinions or events affecting the tax-exempt status of the security,''
if material.\84\ The proposed amendment would revise paragraph
(b)(5)(i)(C)(6) of the Rule to provide specifically for the disclosure
of adverse tax opinions, the issuance, by the Internal Revenue Service
(``IRS''), of proposed or final determinations of taxability, Notices
of Proposed Issue (IRS Form 5701-TEB) or other material notices or
determinations with respect to the tax-exempt status of securities, or
other events affecting the tax-exempt status of the security.\85\ As
stated above, such disclosure would be made to the MSRB.
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    \84\ 17 CFR 240.15c2-12(b)(5)(i)(C)(6).
    \85\ The Commission understands that when determining whether
interest on a bond issue is taxable, the IRS first issues an audit
letter to the issuer (which may indicate whether or not IRS staff
suspects a problem with the particular transaction). In the event
that, as a result of the audit, IRS staff believes that it has found
a reasonable basis to declare the interest on a bond issue under
audit to be taxable, IRS staff issues a Notice of Proposed Issue
(IRS Form 5701-TEB), which it recently began to use instead of a
letter referred to as a ``preliminary determination of taxability.''
If, following subsequent discussions with, and review of additional
documents provided by, the entity under audit, IRS staff continues
to believe that interest on the bonds should be declared taxable and
no settlement has been reached, it issues a letter to the issuer
referred to as a ``proposed determination of taxability.'' Unless
appealed to the Office of Appeals of the IRS, a proposed
determination of taxability becomes a final determination of
taxability in 30 days. Final determinations of taxability are not
appealable to the IRS and may not be appealed in a federal court by
an issuer. A bondholder who has received a tax assessment on account
of such a final determination may take an appeal in federal court.
See Internal Revenue Manual (``IRM'') 4.81.14 to <IP_ADDRESS>. See also
IRM <IP_ADDRESS> (setting forth Office of Tax-Exempt Bonds' current
practice regarding the issuance of a Notice of Proposed Issue (IRS
Form 5701-TEB) in instances in which preliminary determinations of
taxability would previously have been issued).
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    In adopting the 1994 Amendments, the Commission noted that ``an
`event' affecting the tax-exempt status of the security may include the
commencement of litigation and other legal proceedings, including an
audit by the Internal Revenue Service. * * *'' \86\ While the
Commission continues to believe that ``events affecting the tax-

exempt status of the security'' in paragraph (b)(5)(i)(C)(6) of the
Rule \87\ can include an audit, and thus an audit should be the subject
of an event notice when it is material, the Commission recognizes that
not all audits are indications of a risk to the tax-exempt status of
interest on a municipal security. The IRS Office of Tax Exempt Bonds,
through its examination classification process, initiates examinations
in various market segments with a view toward ensuring broad
examination coverage of the various tax-exempt bond segments.\88\
However, determinations by the IRS, such as proposed and final
determinations of taxability and Notices of Proposed Issue (IRS Form
5701-TEB), indicating that the IRS believes the securities are or may
be taxable and has begun a formal administrative process in that
regard, indicate that there could be a significant risk to the tax-
exempt status of a security. Accordingly, the Commission believes that
proposed and final determinations of taxability and Notices of Proposed
Issue (IRS Form 5701-TEB) by the IRS relating to the taxability of a
municipal security are of such importance that they always should be
disclosed pursuant to a continuing disclosure agreement.
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    \86\ See 1994 Amendments, supra note 5, 59 FR at 59600.
    \87\ 17 CFR 240.15c2-12(b)(5)(i)(C)(6).
    \88\ E-mail communication among Clifford Gannett, Director,
Office of Tax-Exempt Bonds, Robert E. Henn, Manager, Office of Tax-
Exempt Bonds Field Operations, Office of Tax-Exempt Bonds, IRS, and
Martha M. Haines, Assistant Director and Chief, Office of Municipal
Securities, Division, Commission, on December 9, 2008. Information
in e-mail confirmed in telephone conversation between Robert E.
Henn, Manager, Office of Tax-Exempt Bonds Field Operations, Office
of Tax-Exempt Bonds, IRS, and Martha M. Haines, Assistant Director
and Chief, Office of Municipal Securities, Division, Commission, on
May 29, 2009.
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    Investors consider the tax-exempt status of a municipal security,
specifically the issuance of such IRS notices, to be of great
importance when making investment decisions.\89\ Because the interest
rate on a tax-exempt municipal security generally is significantly
lower than the interest rate on a comparable taxable security because
of the value of the municipal security's tax exemption, investors are
sensitive to factors that could affect the value of the return that
they would receive from such an investment, such as the tax exempt
status of interest earned on a municipal security that they currently
own or may purchase.\90\ A determination by the IRS that interest may,
in fact, be taxable on a municipal security purchased as tax-exempt not
only could reduce the security's market value, but also could adversely
affect each investor's federal and, in some cases, state income tax
liability.\91\ The tax-exempt status of a municipal security is also
important to many mutual funds whose governing documents, with certain
exceptions, limit their investment to tax-exempt municipal
securities.\92\ Mutual funds may liquidate securities that become
taxable, which could have adverse consequences for the fund and its
holders. Therefore, retail and institutional investors alike are
extremely interested in events that could adversely affect the tax-
exempt status of the bonds that they own or may purchase.
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    \89\ See In the Matter of Neshannock Township School District,
Securities Act Release No. 8411 and Securities Exchange Act Release
No. 49600, AP 3-11461 (April 22, 2004) (settled action) (``A
substantial risk to the tax-exempt status of securities which have
been sold as tax-exempt is a material item.''); In the Matter of
Rauscher Pierce Refsnes, Inc., Dain Rauscher Inc., and James R.
Feltham, Securities Act Release No. 7844 and Securities Exchange Act
Release No. 42644, A.P. File No. 3-10182 (April 6, 2000) (settled
action) (``* * * an essential feature of the 1992B [Certificates of
Participations] was the tax-exempt status of the interest component
to be paid to investors''); and In re: County of Orange, California;
Orange County Flood Control District and County of Orange,
California Board of Supervisors, Securities Act Release No. 7260 and
Securities Exchange Act Release No. 36760, AP 3-8937 (January 1,
1996) (identifying tax-exempt status of offering of securities as a
material fact). See also, e.g., Lori Trawinski, et al., The Bond
Market Association, Secondary Market Effects of Municipal Bond Tax
Audit Disclosure, at 10 (August 2002) (settled action) (available at
http://www.gfoa.org/downloads/Tax_Audit_Study_August_2002.pdf)
(study examining the effect of IRS audit announcements on the
secondary market for municipal bonds and discussing the concerns of
investors and other municipal market participants); Lynn Hume,
Panel: This Top 10 List Doesn't Have Buy-Side Players Laughing, The
Bond Buyer, May 5, 2006, NFMA Annual Conference, Vol. 356 No. 32375,
at 7 (``* * * and issuers' failures to disclose Internal Revenue
Service notices that bonds are taxable are among the `10 top things
that drive the buy side crazy,' analysts and lawyers said * * *
during a panel session at the National Federation of Municipal
Analysts' 23rd annual meeting . * * *'').
    \90\ See, e.g., Lori Trawinski, et al., The Bond Market
Association, Secondary Market Effects of Municipal Bond Tax Audit
Disclosure, at 10 (August 2002); Kathleen Pender, State Energy Bonds
Could Be Hard Sell; Treasurer says most won't be tax-exempt, The San
Francisco Chronicle, February 21, 2001, at D1; and John Gin, Compare
apples to apples when looking at bonds; Tax-equivalent yield is the
test, The Times-Picayune, September 5, 2007, Money; Money Watch, at
1; and SIFMA, Calculator: Tax-Free vs. Taxable Yield Comparison
(available at http://www.investinginbonds.com/
learnmore.asp?catid=8&subcatid=80).
    \91\ For example, investors in such a circumstance may have to
include interest on such a security as income when computing their
federal income taxes for current and future tax years and may have
to pay additional taxes for prior tax years.
    \92\ See Investment Company Institute, Frequently Asked
Questions About Money Market Funds (available at http://www.ici.org/
home/faqs_money_funds.html#TopOfPage) (``Typically, tax-exempt
money market funds, which seek to pay dividends that are exempt from
federal income tax and/or state income tax, invest in instruments
issued by state and local governments (`municipal securities').'').
---------------------------------------------------------------------------

    Subsequent to a 1993 Report of the General Accounting Office,\93\
the IRS established an Office of Tax-Exempt Bonds with more than 60
staff members devoted to audits and tax collections related to tax-
exempt municipal securities.\94\ Staff of the Office of Tax-Exempt
Bonds has identified numerous offerings in which bonds sold as tax-
exempt were determined to be taxable.\95\ As a result, the IRS has
collected a significant amount of taxes--generally through settlements
with issuers and obligated persons, but also with bondholders.\96\
Furthermore, staff of the IRS Office of Tax-Exempt Bonds has
established a Bondholder Unit to increase the staff's efficiency in
identifying bondholders in the case of bonds determined to be
taxable.\97\
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    \93\ See U.S. General Accounting Office, Tax Policy and
Administration--Improvements for More Effective Tax-Exempt Bond
Oversight, Report of the General Accounting Office to the Chairman,
Subcommittee on Human Resources and Intergovernmental Relations,
Committee on Government Operations, House of Representatives, May
10, 1993 (available at http://archive.gao.gov/t2pbat5/149322.pdf)
(which recommended, in part, that the existing bond audit program be
redirected and that program staffing levels, locations and training
needs be reassessed in light of the program's future).
    \94\ E-mail from Clifford Gannett, Director, Office of Tax-
Exempt Bonds, IRS, to Martha M. Haines, Assistant Director and
Chief, Office of Municipal Securities, Division, Commission, dated
August 26, 2008. Information in e-mail confirmed in telephone
conversation between Robert E. Henn, Manager, Office of Tax-Exempt
Bonds Field Operations, Office of Tax-Exempt Bonds, IRS, and Martha
M. Haines, Assistant Director and Chief, Office of Municipal
Securities, Division, Commission, on May 29, 2009.
    \95\ E-mail communications among Clifford Gannett, Director,
Office of Tax-Exempt Bonds, Robert E. Henn, Manager, Office of Tax-
Exempt Bonds Field Operations, Office of Tax-Exempt Bonds, IRS, and
Martha M. Haines, Assistant Director and Chief, Office of Municipal
Securities, Division, Commission, dated August 26, 2008 and December
9, 2008. Information in e-mail confirmed in telephone conversation
between Robert E. Henn, Manager, Office of Tax-Exempt Bonds Field
Operations, Office of Tax-Exempt Bonds, IRS, and Martha M. Haines,
Assistant Director and Chief, Office of Municipal Securities,
Division, Commission, on May 29, 2009.
    \96\ Id.
    \97\ According to the 2008 Work Plan for the IRS Office of Tax-
Exempt Bonds, the bondholder identification process is expected to
be initiated no later than the date a proposed adverse determination
is issued (available at http://www.irs.gov/pub/irs-tege/teb_fy08_
work_plan.pdf). See, e.g., Susanna Duff Barnett and Lynn Hume, IRS
to Warn Mutual Funds of Taxability Letters Being Sent to Over 12
Companies, The Bond Buyer, March 30, 2004, Washington, at 1 (``More
mutual funds can be expected to be contacted in the future.'') and
Susanna Duff Barnett, A Growing Caseload; More Challenges Face IRS
Bond Office in '05, The Bond Buyer, December 23, 2004, Washington,
Vol. 350 No. 32036, at 1 (``One result that has stemmed from the
lengthier audits is the IRS' aggressive search for bondholder names
earlier in an audit cycle through so-called John Doe summonses and
other methods.'').

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    IRS staff has indicated \98\ that during the period from April 2007
through July 2008, approximately 80% of the audits that received a
preliminary determination of taxability (now IRS Form 5701-TEB \99\)
and were resolved were settled through closing agreements with the IRS.
During the same period, of those cases that received a proposed
determination of taxability and were closed: approximately 25% were
settled through a closing agreement with IRS; approximately 37.5%
received final determinations that the bonds were taxable; and
approximately 37.5% were appealed to the IRS Office of Appeals. In
light of the foregoing discussion, the Commission believes that the
risk of taxability following the issuance of proposed and final
determinations of taxability and Notices of Proposed Issue (IRS Form
5701-TEB) is significant.
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    \98\ E-mail from Robert Henn, Manager, Office of Tax-Exempt
Bonds Field Operation, IRS, to Martha M. Haines, Assistant Director
and Chief, Office of Municipal Securities, Division, Commission,
dated July 14, 2009.
    \99\ The IRS Office of Tax-Exempt Bonds now issues Notices of
Proposed Issue (IRS Form 5701-TEB) in instances in which it
previously would have issued preliminary determinations of
taxability. E-mail from Clifford Gannett, Director, Office of Tax-
Exempt Bonds, IRS, to Martha M. Haines, Assistant Director and
Chief, Office of Municipal Securities, Division, Commission, dated
August 26, 2008. Information in e-mail confirmed in telephone
conversation between Robert E. Henn, Manager, Office of Tax-Exempt
Bonds Field Operations, Office of Tax-Exempt Bonds, IRS, and Martha
M. Haines, Assistant Director and Chief, Office of Municipal
Securities, Division, Commission, on May 29, 2009.
---------------------------------------------------------------------------

    Despite the possibility that these events could adversely affect
the tax-exempt status of the bonds that investors own or may purchase
and thus could significantly affect the pricing of those municipal
securities,\100\ it has been reported that notices regarding such tax
events are not always filed.\101\ The Commission believes that the
issuance of proposed and final determinations of taxability and Notices
of Proposed Issue (IRS Form 5701-TEB) by the IRS is important
information that should be made available to investors and therefore
should be part of a Participating Underwriter's obligation to determine
whether such events are included in a continuing disclosure agreement.
---------------------------------------------------------------------------

    \100\ See, e.g., Susanna Duff Barnett and Lynn Hume, IRS to Warn
Mutual Funds of Taxability Letters Being Sent to Over 12 Companies,
The Bond Buyer, March 30, 2004, Washington, at 1 (``The bondholder
community has been saying for years that they want prompt disclosure
of audits and issuer discussions with the IRS relating to the tax-
exempt status of the bonds.''--Tom Metzold, president and portfolio
manager at Eaton Vance Management; ``It's vital to disclose the risk
of taxability to the entire marketplace to protect potential
investors.''--Gerard J. Lian, then chairman of the National
Federation of Municipal Analysts and vice president and senior
analyst at Morgan Stanley Investment Management.); and National
Federation of Municipal Analysts, NFMA releases results of member
survey (November 30, 2001) (available at http://www.nfma.org/
publications/survey_results.pdf) (``Over 54% of analysts responding
to the survey felt that all IRS audits, whether routine, targeted or
based on external information, should be disclosed to the
market.''). See also, Lori Trawinski, et al., The Bond Market
Association, Secondary Market Effects of Municipal Bond Tax Audit
Disclosure (August 2002) (available at http://www.gfoa.org/
downloads/Tax_Audit_Study_August_2002.pdf) (``This study clearly
demonstrates that effect for certain variable-rate tax-exempt bonds,
where rates paid by state and local bond issuers have risen
significantly when news of the audit is made public. While anecdotal
evidence suggests similar effects for long-term, fixed-rate bonds,
empirical evidence is inconclusive.'').
    \101\ See, e.g., Susanna Duff Barnett, IRS Answers Toxic Query;
Post 1986 Radioactive Waste Debt Not Exempt, The Bond Buyer,
November 2, 2004 (material event notice filed October 29, 2004
regarding IRS technical advice memorandum dated August 27, 2004 that
bonds issued to finance certain radioactive solid waste facilities
were taxable; related preliminary adverse determination letter was
issued in January, 2002).
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendment to modify
the provision of the Rule regarding the submission of a notice with
respect to adverse tax opinions to include the issuance by the IRS of
proposed or final determinations of taxability, Notices of Proposed
Issue (IRS Form 5701-TEB) or other material notices or determinations
with respect to the tax-exempt status of the securities, or other
events affecting the tax-exempt status of the security. Comment is
requested on whether the proposed amendment would further the
disclosure of such events and thereby aid investors to protect
themselves from misrepresentations and fraud and brokers, dealers and
municipal securities dealers to carry out their obligations. The
Commission requests comment regarding the extent to which investors and
other market participants would find it useful to be informed of the
issuance of proposed and final determinations of taxability, Notices of
Proposed Issue (IRS Form 5701-TEB) or other material notices or
determinations with respect to the tax-exempt status of securities by
the IRS. Commenters should advise whether the proposal would aid
investors in their understanding of potential adverse tax consequences
that may arise with respect to a particular municipal security. In
addition, commenters should address whether such information is
important to investors of various types of municipal securities, such
as fixed and variable rate securities or demand securities. Should the
continuing disclosure agreement specify that a copy of the
determinations of taxability, Notices of Proposed Issue (IRS Form 5701-
TEB) or other material notices issued by the IRS be provided to the
MSRB, or would a notice of any such determination provide sufficient
information to investors? What would be the benefit of disclosing a
copy of any such determination? What drawbacks, if any, might such
disclosure entail? Should the Rule be amended to require a
Participating Underwriter to reasonably determine that the issuer or
obligated person has entered into a continuing disclosure agreement to
submit a notice of tax audits? If so, why?

E. Addition of Events To Be Disclosed Under a Continuing Disclosure
Agreement

    The Commission also proposes to amend paragraph (b)(5)(i)(C) of the
Rule by including notice of four additional events the Participating
Underwriter must reasonably determine that the issuer or other
obligated person has agreed to provide in its continuing disclosure
agreement. These would include: (1) Tender offers; (2) bankruptcy,
insolvency, receivership or similar proceeding of the obligated person;
(3) the consummation of a merger, consolidation, or acquisition
involving an obligated person or the sale of all or substantially all
of the assets of the obligated person, other than in the ordinary
course of business, the entry into a definitive agreement to undertake
such an action or the termination of a definitive agreement relating to
any such actions, other than pursuant to its terms, if material; and
(4) appointment of a successor or additional trustee, or the change of
name of a trustee, if material.
1. Tender Offers
    The Commission proposes to add tender offers to the list of events
in subparagraph (b)(5)(i)(C)(8) of the Rule.\102\ Under the proposed
amendment, the Participating Underwriter must reasonably determine that
the issuer or obligated person has agreed in its continuing disclosure
agreement to provide notice of tender

offers to the MSRB.\103\ The Commission believes that notice of the
existence of tender offers for municipal securities would help
investors to be better able to protect themselves from
misrepresentations and fraud, including deciding whether to tender
their holdings to the issuer or its representative, and assist brokers,
dealers and municipal securities dealers to carry out their
obligations. Tender offers typically require an investor to respond
within a limited time frame.\104\ Tender offers may provide an avenue
of liquidity to investors, such as during periods of market
turmoil.\105\ The Commission believes that communication of the
existence of a tender offer to municipal securities investors is
important to assist each investor to make an informed, timely decision
whether or not to tender.\106\
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    \102\ Generally, municipal securities are not subject to
Commission rules governing tender offers, including Rule 13e-4 under
the Exchange Act, 17 CFR 240.13e-4, which sets forth disclosure,
time periods, and other requirements governing tender offers by
issuers. In passing the Williams Act, P.L. 90-439, in 1968, Congress
recognized that regulation of tender offers was necessary for the
purposes of disclosure of material information and substantive
protection to investors. See Rep. No. 550, 90th Cong., 1st Sess. 3
(1967) at 1.
    \103\ See supra note 11 and accompanying text.
    \104\ See Edward N. Gadsby, et al., Regulation of Tender Offers,
Federal Securities Exchange Act of 1934, Sec.  7A.03 (David Colby,
et al., ed., Matthew Bender & Company, Inc.) (2008) (describing that
usually a time limit is placed on a tender offer).
    \105\ See, e.g., Caitlin Devitt, Midwest Health Systems Use New
ARS Strategy; Two Systems See to Ease ARS Sting, The Bond Buyer,
March 7, 2008, The Regions, Vol. 363 No. 32833, at 1 (describing an
issuer's use of a tender offer in its auction rate securities to
provide liquidity).
    \106\ The Commission proposes to retain in Rule 15c2-
12(b)(5)(i)(C)(8) the requirement that Participating Underwriters
reasonably determine that the issuer or obligated person has agreed
in a continuing disclosure agreement to provide to the MSRB notice
of bond calls, if material. Thus, unlike with respect to tender
offers, the issuer would make a materiality determination with
respect to a notice regarding a bond call. The Commission believes
that this distinction is appropriate in light of the various types
of bond calls (e.g., sinking fund redemptions, extraordinary
redemptions, and optional redemptions) that can occur. In addition,
the specific amounts to be redeemed and dates for some redemptions
(i.e., sinking fund redemptions) are generally included in official
statements; therefore, information about such events is already
available to investors.
---------------------------------------------------------------------------

    Indeed, the recent events in the market for ARS could be seen as an
example of the need to provide timely notice within ten business days
of a tender offer. Since approximately mid-February of 2008, the market
for ARS has experienced severe illiquidity, with consequences to
investors who purchased what they may have believed to be liquid, cash
equivalent investments.\107\ Some issuers and obligated persons have
offered to purchase some or all of their outstanding ARS from investors
who desire liquidity.\108\ Notices about these tender offers may not
always be widely disseminated. Had this information been available from
the then-existing information repositories, it may have become more
widely known to the market through these repositories and through
private information vendors and news media who obtain information from
the repositories.
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    \107\ See, e.g., MSRB Notice 2008-09 (February 19, 2008)
(reminding brokers, dealers and municipal securities dealers of the
application of MSRB disclosure and suitability requirements that
apply to all customer transactions in municipal ARS and stating, for
example, that it may be a material fact for an investor that an ARS
recently was subject to a failed auction); Press Release 2009-127,
Commission, SEC Finalizes ARS Settlements With Bank of America, RBC,
and Deutsche Bank (June 3, 2009) (announcing settlement of SEC's
complaints alleging that Bank of America, RBC Capital Markets, and
Deutsche Bank failed to make their customers aware of risks in ARS
investments.).
    \108\ See, e.g., notice dated March 28, 2008 of Nationwide
Children's Hospital regarding the intent of the hospital to bid for
auction rate bonds (available at https://www.nationalcity.com/
content/private-client-group/products-services/create-grow-wealth/
pages/documents/2008-03-28.pdf) and Caitlin Devitt, Midwest Health
Systems Use New ARS Strategy; Two Systems Seek To Ease ARS Sting,
The Bond Buyer, March 7, 2008, The Regions, Vol. 363 No. 32833, at
1.
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    During a tender offer for municipal securities, such as ARS, some
investors may be left in doubt whether their securities were the
subject of the offer. To determine the facts about such offers, it
often is necessary for investors to seek the information independently
by contacting the issuer or other obligated person directly. Some
investors may not have been able to learn of the existence of a tender
offer for municipal securities that they hold, in a timely fashion and,
in such a case, may not have been able to tender their securities. The
Commission believes that the proposed amendment requiring Participating
Underwriters to reasonably determine that such notices are provided
pursuant to a continuing disclosure agreement would help ensure the
consistent availability of this information to investors when they make
investment decisions, and thereby assist them to be better able to
protect themselves from misrepresentation and fraud.
    The Commission believes that the proposed amendment requiring
Participating Underwriters to reasonably determine that issuers and
other obligated persons have agreed in their continuing disclosure
agreements to provide notice of tender offers to the MSRB \109\ would
result in this information being more widely available to investors
through the MSRB. In addition, the proposal to revise paragraph
(b)(5)(i)(C) of the Rule to specify that event notices be submitted in
a timely manner not in excess of ten business days after the event's
occurrence, as discussed above, would help to improve the timely
availability of tender offer information so that investors would be
afforded the opportunity to make more informed decisions whether to
hold or tender their securities. The Commission believes that its
proposal regarding notice of tender offer disclosures would enhance the
ability of issuers, other obligated persons, or others making such
tender offers to effectively communicate their offers to a wider
constituency of bondholders and thereby would increase the likelihood
that those holders would be informed of the offer.
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    \109\ See supra note 11 and accompanying text.
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    The Commission requests comment regarding all aspects of the
proposed amendment of subparagraph (b)(5)(i)(C)(8) of the Rule to
include tender offers. For example, would specifying in Rule 15c2-12
the submission to the MSRB of a notice of a tender offer assist issuers
and other obligated persons in providing tender offer information to
bondholders on a wider basis? Is there a benefit or drawback to adding
tender offers as an event item in subparagraph (b)(5)(i)(C)(8) of the
Rule? Would the proposal help prevent fraud? If so, would the proposed
amendment to modify subparagraph (b)(5)(i)(C)(8) to include notice of
tender offers to the MSRB be an appropriate avenue to address this
objective? If a tender offer is open for a short period of time, is the
proposed ``ten business day'' standard appropriate in the context of a
tender offer or would another time frame be more appropriate? The
Commission seeks comment regarding whether tender offers should be
added to this provision of Rule 15c2-12 and requests suggestions
concerning alternative methods to address the concerns stated above
with regard to tender offers for municipal securities. In addition,
comment is requested about the existence and prevalence of exchange
offers for municipal securities and whether exchange offers also should
be included in this provision. Further, the Commission requests comment
regarding whether it should specify that the Participating Underwriter
reasonably determine that the issuer or obligated person has agreed to
provide particular information regarding a tender offer that should be
included in such notices, such as: The offer price; change in offer
price; withdrawal rights; identity of the offeror; an offeror's ability
to finance the offer; conditions to the offer; and the time frame and
manner for tendering securities and the method for acceptance (e.g.,
whether all securities tendered would be accepted and, if not, the
method for determining which securities would be accepted). Are there
other items of information that

should be included in the notice to help accomplish the purposes of the
Rule or would some of the items listed above be unnecessary in this
context? If so, please specify which ones and explain the rationale as
to why they should or should not be included.
2. The Occurrence of Bankruptcy, Insolvency, Receivership or Similar
Events Regarding an Issuer or an Obligated Person
    The Commission proposes to add new subparagraph (b)(5)(i)(C)(12) to
the Rule to require a Participating Underwriter to reasonably determine
that the continuing disclosure agreement requires a notice to be
submitted to the MSRB,\110\ in the case of bankruptcy, insolvency,
receivership or similar event of the obligated person. Rule 15c2-12
would state in a Note following the events specified in subparagraph
(b)(5)(i)(C)(12) that, for the purposes of the subparagraph
(b)(5)(i)(C)(12), the event would be considered to occur when any of
the following occur: the appointment of a receiver, fiscal agent or
similar officer for an obligated person in a proceeding under the U.S.
Bankruptcy Code or in any other proceeding under state or federal law
in which a court or governmental authority has assumed jurisdiction
over substantially all of the assets or business of the issuer or
obligated person, or if such jurisdiction has been assumed by leaving
the existing governing body and officials or officers in possession but
subject to the supervision and orders of a court or governmental
authority, or the entry of an order confirming a plan or
reorganization, arrangement or liquidation by a court or governmental
authority having supervision or jurisdiction over substantially all of
the assets or business of the obligated person.\111\ Although issuers
and other obligated persons of municipal securities rarely are involved
in bankruptcy, insolvency, receivership or similar events, the
Commission notes that the occurrence of such events, even if rare, can
significantly impact the value of the municipal securities. Information
about these events is important to investors and other market
participants,\112\ and knowledge of the bankruptcy, insolvency,
receivership or similar event involving an issuer or other obligated
person would allow investors to make informed decisions about whether
to buy, sell or hold the municipal security and help prevent
fraud.\113\ Accordingly, the Commission believes that Participating
Underwriters should be required to reasonably determine that such
information is provided pursuant to a continuing disclosure agreement.
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    \110\ See supra note 11 and accompanying text.
    \111\ See Form 8-K, Item 1.03 for provisions relating to
bankruptcy or receivership that are applicable to entities subject
to Exchange Act reporting requirements. 17 CFR 249.308. Item 1.03 of
Form 8-K requires the registrant to provide specified items of
disclosure on Form 8-K if a receiver, fiscal agent or similar
officer has been appointed for a registrant or its parent, in a
proceeding under the U.S. Bankruptcy Code or in any other proceeding
under state and federal law in which a court or governmental
authority has assumed jurisdiction over substantially all of the
assets or business of the registrant or its parent, or if such
jurisdiction has been assumed by leaving the existing directors and
officers in possession but subject to the supervision and orders of
a court or governmental authority. The proposed Rule 15c2-12 event
item is intended to be consistent with the Form 8-K, Item 1.03
provisions applicable to entities subject to the reporting
requirements of the Exchange Act.
    \112\ See, e.g., Letter from Karrie McMillan, General Counsel,
ICI, to Florence E. Harmon, Secretary, Commission (September 22,
2008) (``ICI Letter'') (available at http://www.sec.gov/comments/s7-
21-08/s72108-12.pdf) (suggesting that disclosure information should
include information relating to bankruptcy and receivership);
National Federation of Municipal Analysts, Recommended Best
Practices in Disclosure for Land Secured Debt Transactions, June
2000 (available at http://data.memberclicks.com/site/nfma/
DG.BP.landsecuredpractices.doc.pdf) (recommending best practice
disclosures, including disclosures of bankruptcy).
    \113\ The Commission is aware that bonds are often secured by
letters of credit, bond insurance, and other forms of credit
enhancement that some have argued could reduce the importance of the
creditworthiness of an issuer or obligated person. However, the
Commission has long been of the view that information regarding
obligated persons generally is material to investors in credit
enhanced offerings. See 1989 Adopting Release, supra note 3, 54 FR
at 28812 (``The presence of credit enhancements generally would not
be a substitute for material disclosure concerning the primary
obligor on municipal bonds.''). See also Regulation AB, 17 CFR
229.1100 et seq.
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    Under current Rule 15c2-12(b)(5)(i)(C)(2), notice of a material
``non-payment related default'' is to be provided to the MSRB pursuant
to a continuing disclosure agreement. The Commission understands that
the governing documents for some municipal securities include
bankruptcy, insolvency, receivership or similar events involving an
issuer or obligated person as a ``non-payment related default.'' \114\
However, the Commission further understands that this may not be
uniformly the case. The proposed amendment would help improve the
availability of notice of bankruptcy, insolvency, receivership, or
similar events to all investors. The proposed Note, as described above,
is intended to clarify the scope of the event item contained in new
subparagraph (b)(5)(i)(C)(12) of the Rule. Moreover, because of the
importance of such events to investors and their possible impact on the
value of the security, a materiality condition would not be added to
proposed subparagraph (b)(5)(i)(C)(12).
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    \114\ See National Association of Bond Lawyers (NABL) Form
Indenture, dated June 1, 2002 (``NABL Form Indenture'').
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    The Commission requests comment regarding all aspects of the
proposed addition of the event relating to bankruptcy, insolvency,
receivership or similar proceeding of the issuer or other obligated
person in the Rule. In particular, the Commission requests comment
regarding whether there are other similar events or proceedings
affecting the financial condition of issuers or other obligated persons
that should be included as events requiring notice. The Commission
seeks input regarding whether commenters believe that the items
contained in proposed subparagraph (b)(5)(i)(C)(12) of the Rule are
already addressed by current subparagraph (b)(5)(i)(C)(2) of the Rule
and thus whether it is unnecessary to revise the Rule in this regard.
The Commission also seeks comment on whether it is appropriate to
exclude a materiality determination from this proposed event item.
3. Merger, Consolidation, Acquisition, and Sale of All or Substantially
All Assets
    The Commission proposes to add subparagraph (b)(5)(i)(C)(13) to the
Rule, which would require a Participating Underwriter reasonably to
determine that the continuing disclosure agreement provides for the
submission of notice to the MSRB \115\ of any of the following events
with respect to the securities being offered: the consummation of a
merger, consolidation, or acquisition involving an obligated person or
the sale of all or substantially all of the assets of the obligated
person, other than in the ordinary course of business, the entry into a
definitive agreement to undertake such an action or the termination of
a definitive agreement relating to any such actions, other than
pursuant to its terms, if material.\116\ Although mergers,

consolidations, acquisitions, and substantial asset sales are events
believed to be rare among governmental issuers,\117\ they are not
uncommon for obligated persons such as health care institutions, other
non-profit entities, and for-profit businesses.\118\ Currently, Rule
15c2-12 does not require Participating Underwriters to reasonably
determine that continuing disclosure agreements provide for notice of a
merger, consolidation, acquisition and substantial asset sales
involving such obligated persons, if material.\119\ Investors often are
not readily able to obtain information about such actions by obligated
persons.
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    \115\ See supra note 11 and accompanying text.
    \116\ Although the Commission's disclosure rules that are
applicable to reporting companies do not apply to municipal
securities, the Commission notes that reporting companies are
required to make disclosures upon the occurrence of similar events.
See Items 1.01 and 2.01 of Form 8-K relating to entry into a
material definitive agreement and completion of the acquisition or
disposition of assets, respectively, which require entities subject
to Exchange Act reporting requirements to disclose specified
information within four business days of the occurrence of such
events. 17 CFR 249.308. Item 1.01 of Form 8-K requires the
registrant to provide specified items of disclosure on Form 8-K if
the registrant has entered into a material definitive agreement not
made in the ordinary course of business of the registrant, or into
any amendment of such agreement that is material to the registrant.
For purposes of Item 1.01, a ``material definitive agreement'' means
an agreement that provides for obligations that are material to and
enforceable against the registrant, or rights that are material to
the registrant and enforceable by the registrant against one or more
parties to the agreement, in each case whether or not subject to
conditions. Item 2.01 of Form 8-K requires the registrant to provide
specified items of disclosure on Form 8-K if the registrant or any
of its majority-owned subsidiaries has completed the acquisition or
disposition of a significant amount of assets, other than in the
ordinary course of business.
    \117\ But see Illinois Finance Authority, which was created on
January 1, 2004 following the consolidation of seven existing state
authorities. See Illinois Finance Authority, Illinois Finance
Authority Bond Program Handbook, November 1, 2004 (available at
http://www.il-fa.com/policies/BondHandbook11-1-04.pdf).
    \118\ For example, according to the American Hospital
Association, more than 680 hospital mergers were announced from
1998-2006. See American Hospital Association, TRENDWATCH CHARTBOOK
2008--Trends in the Overall Health Care Market, Chart 2.10:
Announced Hospital Mergers and Acquisitions, 1998-2006 (available at
http://www.aha.org/aha/trendwatch/chartbook/2008/08chart2-10.pdf).
    \119\ The materiality of the consummation of a merger,
consolidation, or acquisition involving an obligated person or the
sale of all or substantially all of the assets of the obligated
person, other than in the ordinary course of business, the entry
into a definitive agreement to undertake such an action or the
termination of a definitive agreement relating to any such actions
must be determined through a review of the particular facts and
circumstances of such event. Although in a number of instances such
events may be determined to be material, it is possible for such an
event to be so sufficiently insignificant that an event notice would
not be required. For example, a merger or acquisition of a small
entity by one of substantial size may not be material to investors
in bonds for which the larger entity is the obligated person, absent
other circumstances. On the other hand, such a merger or acquisition
may be material to investors in bonds for which the small entity is
the obligated person.
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    The Commission believes that notice of the consummation of a
merger, consolidation, or acquisition involving an obligated person or
the sale of all or substantially all of the assets of the obligated
person, other than in the ordinary course of business, the entry into a
definitive agreement to undertake such an action or the termination of
a definitive agreement relating to any such actions, other than
pursuant to its terms, if material, is important information for
investors and market participants.\120\ The foregoing events may signal
that a significant change in the obligated person's corporate structure
could occur or has occurred. In the case of such event, investors may
want to have information about the identity and financial stability of
the obligated person that would be responsible, following such event,
for payment of a municipal security. Further, municipal security
holders generally may wish to know about the obligated person's
creditworthiness, particularly its ability to support payment of the
security following such event when they assess whether to buy, sell or
hold a municipal security. A notice regarding such an event, if
material, would help further the availability of relevant information
to bondholders, market professionals, and the public generally.
Accordingly, the Commission believes that it is appropriate to include
in the Rule the proposed event item relating to the consummation of a
merger, consolidation, or acquisition involving an obligated person or
the sale of all or substantially all of the assets of the obligated
person, other than in the ordinary course of business, the entry into a
definitive agreement to undertake such an action or the termination of
a definitive agreement relating to any such actions other than pursuant
to its terms, if material. The Commission does not believe that all
mergers are necessarily of sufficient importance that information on
mergers needs to be made available in all instances. For example, a
merger could involve the combination of a shell corporation or other
small entity into a very large healthcare organization that is a
conduit borrower. Such a merger generally would not have a significant
impact on the business or financial condition of the larger corporation
and, under all of the applicable facts and circumstances, would not be
important to investors.
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    \120\ See ICI Letter, supra note 112 (suggesting that disclosure
information should include information relating to material
acquisitions and dispositions).
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    The Commission requests comment regarding all aspects of the
proposed addition to the Rule with respect to the consummation or entry
into or termination of a definitive agreement involving a merger,
consolidation, acquisition, or the sale of all or substantially all of
the assets of the obligated person. The Commission requests comment
regarding the frequency of such events, and whether this information
would be meaningful to investors. The Commission further requests
comment on whether a determination of materiality for such events is an
appropriate condition to add to this proposed provision. The Commission
also requests comments regarding the benefits and drawbacks of this
proposed event item.
4. Successor, Additional, or Change in Trustee
    Finally, the Commission proposes to add subparagraph
(b)(5)(i)(C)(14) to the Rule to require Participating Underwriters to
reasonably determine that the issuer or other obligated person has
contractually agreed to submit notice to the MSRB \121\ when there is
an appointment of a successor or additional trustee, or a change of
name of a trustee, if material.\122\ The proposed amendment reflects
the Commission's belief in the importance of an investor's ability to
learn of a material change in the trustee's identity, given the
significant function and role of the trustee for the holders of the
municipal security. The trustee makes critical decisions that impact
investors and has a duty to represent the interests of bondholders. For
example, the trustee often must determine whether: Proposed amendments
to the governing documents of the municipal security are permissible
without bondholder consent; parity obligations could be issued;
security could be released; or an event of default has occurred.\123\
In addition, a trustee is responsible for sending payments to investors