occurrence will have the effect of establishing a definitive time frame
for the submission of event notices. This provision will supplement the
``in a timely manner'' language that existed in the Rule prior to these
amendments, which allowed for the possibility of event notices being
submitted to the MSRB at inconsistent times for similar events, because
each issuer could decide for itself what constitutes ``in a timely
manner.''

Because the Rule did not contain a specific time frame for submission
of event notices, investors could not be certain whether or not an
event had occurred over an indefinite period in the past. This
amendment still requires Participating Underwriters to reasonably
determine that a continuing disclosure agreement provides for timely
disclosure, but sets an outside time frame of ten business days after
the event's occurrence for submission of an event notice. To the extent
that issuers provide disclosure within ten business days, consistent
with their continuing disclosure agreements, there likely will be more
certainty for investors concerning when they will receive information
concerning such events and, on the whole, more timely information to
investors and the municipal securities market generally. More up-to-
date information about municipal securities can serve to protect
investors from fraud facilitated by inadequate disclosure and assist
investors in determining whether the price of a municipal security is
appropriate.
    The amendment to remove the ``materiality'' condition for six
specified events in paragraph (b)(5)(i)(C) of the Rule will have the
effect of increasing the disclosure of such events to investors and the
municipal securities market generally.\553\ In addition, issuers and
obligated persons no longer will have to separately analyze whether
each occurrence of such events is material.
---------------------------------------------------------------------------

    \553\ These events are: (1) Principal and interest payment
delinquencies; (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.
---------------------------------------------------------------------------

    In addition, the amendment to modify paragraph (b)(5)(i)(C)(6) of
the Rule, which relates to a Participating Underwriter's obligation to
reasonably determine that the issuer or obligated person has undertaken
in a continuing disclosure agreement to provide notice to the MSRB of
certain tax events, will have the effect of enhancing the disclosure of
events that are important to investors in determining whether the tax
status of their municipal securities is at risk.
    The amendment to modify paragraph (b)(5)(i)(C) of the Rule adds
four new event items to be disclosed to investors.\554\ The disclosure
of these events will provide investors and the market with important
information regarding municipal securities.
---------------------------------------------------------------------------

    \554\ These events are: (1) Tender offers; (2) bankruptcy,
insolvency, receivership or similar event of the obligated person;
(3) 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 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.
---------------------------------------------------------------------------

    These amendments are intended to help improve the availability of
timely and important information to investors and other market
participants regarding municipal securities, including demand
securities, so that investors can make more knowledgeable investment
decisions, effectively manage and monitor their investments, and help
reduce the likelihood of fraud facilitated by inadequate disclosure. In
addition, the amendments are intended to help brokers, dealers, and
municipal securities dealers to satisfy their obligation to have a
reasonable basis on which to recommend a municipal security.
    The Commission is sensitive to the costs and benefits that result
from its rules. In the Proposing Release, the Commission identified
certain costs and benefits of the amendments as proposed and requested
comment on all aspects of its cost-benefit analysis, including the
identification and assessment of any cost and benefits not discussed in
the analysis. The Commission sought comment on the value of the
benefits identified and the accuracy of its cost estimates. The
Commission also encouraged commenters to provide relevant data. The
Commission received some comments relating to the Commission's cost-
benefit analysis. For the reasons discussed below, the Commission
continues to believe that its estimates of the benefits and costs of
the amendments to the Rule 15c2-12, as set forth in the Proposing
Release, are appropriate.

B. Benefits

    The Commission discusses below the benefits of the Rule for each
amendment to the Rule.
1. Increased Disclosure Relating to Demand Securities
    The Commission is modifying the Rule's exemption for primary
offerings of demand securities (including any remarketing that is a
primary offering) to narrow the Rule's prior exemption, which will
result in the greater availability of information about these
securities to investors, broker-dealers, municipal securities analysts,
and the securities markets generally. In addition, under this
amendment, a broker, dealer or municipal securities dealer that
recommends the purchase or sale of demand securities will need to have
procedures in place that provide reasonable assurance that it will
receive prompt notice of event notices and failure to file
notices.\555\
---------------------------------------------------------------------------

    \555\ See 17 CFR 240.15c2-12(c).
---------------------------------------------------------------------------

    The greater availability of information regarding demand securities
should increase the efficiency of markets in allocating capital at
appropriate prices that reflect the creditworthiness of issuers and
increase the efficiency of prices in the secondary market, benefiting
issuers and investors alike, and should also benefit investors by
allowing them to make more informed decisions whether to buy, sell or
hold these securities. This greater availability of information is also
likely to benefit brokers, dealers, or municipal securities dealers by
reducing their costs in forming a reasonable basis for recommending
demand securities. Specifically, these market participants will have
more information about these securities to draw upon when they are
deciding whether or not to recommend demand securities to investors.
Greater availability of information also will benefit broker-dealers
and municipal securities dealers by reducing their costs in
establishing secondary market quotations for demand securities. In
addition, greater transparency in the market due to the applicability
of the continuing disclosure requirements to demand securities should
reduce the likelihood that investors will be subject to fraud
facilitated by inadequate disclosure, resulting in potentially reduced
costs associated with such fraud.
    By 2009, the outstanding amount of VRDOs was estimated to be
approximately $400 billion, which is a significant percentage of the
municipal securities market.\556\ The Commission recognizes that some
issuers of demand securities voluntarily provide continuing disclosure
documents, notwithstanding the exemption for demand securities that
existed prior to the amendments. Therefore, the above-referenced
benefits will result primarily from the additional disclosure that is
provided by issuers of demand securities that did not previously
provide continuing disclosure documents.
---------------------------------------------------------------------------

    \556\ See Andrew Ackerman, ``Concerns Raised on VRDOs,'' The
Bond Buyer, June 9, 2009.
---------------------------------------------------------------------------

    A number of commenters were supportive of applying the continuing
disclosure to demand securities.\557\

Several commenters agreed that the amendments relating to demand
securities are critical to assist investors in making informed
investment decisions.\558\ One commenter noted that the market for
demand securities was among the sectors most affected by the recent
market turmoil and, consequently, stated its view that there is
``little justification for exempting VRDOs from continuing disclosure
requirements.'' \559\ Similarly, another commenter stated that, during
the recent market downturn, investors in demand securities were well
served by those issuers or obligated persons who voluntarily provided
continuing disclosures about these securities, despite the Rule's
exemption.\560\ Another commenter believed that, because many VRDO
issuers already are subject to requirements for continuing disclosure
and the submission of material event notices for their fixed rate debt,
the submission of information with respect to their VRDOs will not be a
significant burden and will provide access to information about these
securities to a much broader segment of the market.\561\
---------------------------------------------------------------------------

    \557\ See California Letter at 1, CHEFA Letter at 2, Connecticut
Letter at 1, DAC Letter at 3, e-certus Letter I at 11, Fidelity
Letter at 3, Folts Letter at 1, ICI Letter at 2, NFMA Letter at 1,
RBDA Letter at 2, and SIFMA Letter at 2.
    \558\ See, e.g., ICI Letter at 5, SIFMA Letter at 2, and RBDA
Letter at 2.
    \559\ See RBDA Letter at 2.
    \560\ See CHEFA Letter at 2.
    \561\ See NMFA Letter at 1.
---------------------------------------------------------------------------

2. More Timely Disclosure
    Establishing an outside timeframe of ten business days after the
occurrence of the specified event to submit an event notice will help
improve the timeliness of the dissemination of the information to
investors and the market. The more timely availability of event notices
will help improve the efficient pricing of municipal securities and
will benefit investors by allowing them to make more informed
investment decisions and to do so with greater certainty as to the
timeliness of available information. The more timely availability of
event notices also will contribute to the speedier dissemination of
event notices to the market, which may, in turn, trigger important
contractual rights that may have otherwise been delayed. In addition,
the increased availability of up-to-date information about municipal
securities is likely to improve the transparency in the market; should
increase the efficiency of markets in allocating capital at appropriate
prices that reflect the creditworthiness of issuers, which benefits
issuers and investors alike; and should reduce the likelihood that
investors will be subject to fraud facilitated by inadequate
disclosure.
    Four commenters supported the proposal to establish a ten business-
day timeframe for the submission of event notices pursuant to a
continuing disclosure agreement.\562\ Two of these commenters indicated
that the benefits of the proposed amendment include more timely and
efficient access to comprehensive and accurate information about
municipal securities, which is critical to investors.\563\ These
commenters also noted that the establishment of a definitive timeframe
by which event notices are to be submitted better informs the market
that an event has occurred, which assists in the efficient pricing of
their municipal securities.\564\ Two commenters also noted that the
definitive time frame provides more timely information to pricing
evaluation services and relieves investors of dependence on bondholders
to disclose information to these services.\565\
---------------------------------------------------------------------------

    \562\ See NFMA Letter at 1-2, SIFMA Letter at 3, ICI Letter at
6-7, and Fidelity Letter at 3-4.
    \563\ See ICI Letter at 1 and Fidelity at 2.
    \564\ Id.
    \565\ Id.
---------------------------------------------------------------------------

3. Increased Disclosure Due to the Deletion of the Materiality
Condition for Six Events
    The Commission is adopting the proposal to delete the ``if
material'' condition with respect to notice for six of the Rule's
disclosure events.\566\ The deletion of the materiality condition for
these six events will benefit issuers by eliminating the costs
presently incurred by an issuer in making such a determination.
Further, because issuers will not need to make a materiality
determination, this Rule revision is likely to help speed the
disclosure of these six events to investors and other market
participants and help improve the efficient pricing of municipal
securities. Greater certainty that information about these events will
be disclosed pursuant to continuing disclosure agreements also is
likely to help improve the transparency of the municipal security's
pricing. The greater availability of information regarding events that
have an immediate effect on the valuation of the security will help
reduce the likelihood of fraud facilitated by inadequate disclosure,
and in return will help reduce costs associated with such fraud.
---------------------------------------------------------------------------

    \566\ See supra note 553 describing the events.
---------------------------------------------------------------------------

    A number of commenters supported the deletion of the ``if
material'' qualification for these six events and believed that this
change would be beneficial.\567\ For example, one commenter believed
that notice of these events should always be provided because their
occurrence is always important to investors and other market
participants. The commenter also noted that, in all probability, the
amendment will not result in many changes to current practice.\568\ Two
other commenters also agreed that these events are important to
investors, and generally should be known immediately to issuers.\569\
Another two commenters concurred that many disclosure events are of
such high consequence and relevance to investors in informing their
investment decisions that they should be disclosed as a matter of
course.\570\ These commenters also supported the unqualified disclosure
of two events, i.e., bond calls and non-payment related defaults, for
which a materiality condition is retained.\571\
---------------------------------------------------------------------------

    \567\ See California Letter at 2, San Diego Letter at 2, SIFMA
Letter at 3, ICI Letter at 7-8, and Fidelity Letter at 3.
    \568\ See SIFMA Letter at 3.
    \569\ See California Letter at 2 and San Diego Letter at 2.
    \570\ See ICI Letter at 7-8 and Fidelity Letter at 3.
    \571\ Id.
---------------------------------------------------------------------------

4. Increased Disclosure of Tax-Related Events
    The amendments also require a Participating Underwriter to
reasonably determine that the issuer or obligated person has undertaken
in a continuing disclosure agreement to provide notice to the MSRB of
adverse tax opinions, the issuance by the Internal Revenue Service 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 status of the security, or other material
events affecting the tax status of the security. The improved
disclosure of the tax status of municipal securities will benefit
investors by helping to ensure that the information about the tax
status of the municipal security is reflected in the price of the
security in a timely manner.
    Two commenters agreed that the amendment will benefit investors and
the market. One commenter stated that the tax status of tax-exempt debt
is of critical concern to many municipal investors, particularly
municipal mutual funds, and that an adverse tax opinion likely will
substantially decrease the market value and liquidity of a
security.\572\ Thus, the subsequent sale of the affected security could
have a significant financial impact on

investors.\573\ A second commenter believed that investors have a
strong interest in being informed of actions taken by the IRS that
present a material risk to the tax-exempt status of their
holdings.\574\
---------------------------------------------------------------------------

    \572\ See NFMA Letter at 2.
    \573\ Id.
    \574\ See SIFMA Letter at 3.
---------------------------------------------------------------------------

5. Increased Disclosure of Additional Events
    The amendments also add four new event items to Rule 15c2-12. The
amendments add the disclosure of tender offers to the provision of the
Rule that currently applies only to bond calls.\575\ Information
regarding a tender offer, which necessitates that an investor decide
whether or not to tender within the prescribed time period, will
improve the ability of issuers and other obligated persons to
communicate tender offers to bondholders effectively and of bondholders
to respond within the tender offer period. In addition, the amendment
should help reduce the possibility of investor confusion regarding
whether a certain municipal security is the subject of a tender offer.
---------------------------------------------------------------------------

    \575\ See supra Section III.E.1.
---------------------------------------------------------------------------

    The amendments also add the disclosure of bankruptcy, insolvency,
receivership or similar event of the obligated person.\576\ While these
events are uncommon in the municipal market, their improved disclosure
can have a significant effect on the price of the municipal securities.
---------------------------------------------------------------------------

    \576\ See supra Section III.E.2.
---------------------------------------------------------------------------

    In addition, the amendments add the disclosure 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.\577\ As with bankruptcy,
insolvency, receivership or similar event of the obligated person, the
improved disclosure of the consummation of a material merger,
consolidation, or acquisition or the sale of all or substantially all
of the assets of the obligated person can have a significant effect on
the price of the municipal securities. This amendment is likely to help
improve investors' and other market participants' ability to obtain
knowledge of the identity of the entity that will have responsibility
for municipal security repayment obligations after the transaction is
consummated. In addition, investors and other market participants will
have the opportunity to review the creditworthiness and other aspects
of the acquiring entity that support repayment of the security
following the transaction.
---------------------------------------------------------------------------

    \577\ See supra Section III.E.3.
---------------------------------------------------------------------------

    The addition of these new disclosure events to the Rule will help
improve the informativeness of the municipal security prices with
respect to these events, which will benefit investors, issuers, broker-
dealers, municipal securities analysts and other market participants.
In addition, greater transparency should reduce the likelihood of fraud
facilitated by inadequate disclosure, and in return will help reduce
costs associated with such fraud.
    Under the amendments, the appointment of a successor or additional
trustee or the change of name of a trustee, if material, is added to
the list of events contained in the Rule. As discussed earlier, the
trustee of a municipal security performs important functions for
investors in that security, including providing information to
bondholders.\578\ This amendment is likely to benefit investors by
helping reduce the costs associated with determining the identity of
and contact information for the most current trustee and that of any
new trustee.
---------------------------------------------------------------------------

    \578\ See supra Section III.E.4.
---------------------------------------------------------------------------

    Several commenters supported the addition of the new event items to
the Rule.\579\ For example, two commenters believed that disclosure of
trustee-related events will provide meaningful insights and information
regarding a particular bond.\580\ One of these commenters particularly
noted that it was critical that investors are informed of trustee name
changes since bondholders' rights are generally exercised through the
actions of the trustee.\581\ Another commenter noted that disclosure of
trustee-related events will likely always be of importance to both
retail and institutional investors.\582\
---------------------------------------------------------------------------

    \579\ See ICI Letter at 8, Fidelity Letter at 2-3, Connecticut
Letter at 2, NFMA Letter at 2, and SIFMA Letter at 4.
    \580\ See ICI Letter at 8 and Fidelity Letter at 2.
    \581\ See Fidelity Letter at 3.
    \582\ See NFMA Letter at 2.
---------------------------------------------------------------------------

B. Costs

    The Commission discusses below the costs of the amendments to the
Rule for various market participants.
1. Broker-Dealers
    Broker-dealers are not likely to incur significant additional
recurring external or internal costs in connection with the
implementation of the Rule, as amended, because the amendments will not
significantly alter the Rule's existing requirements for broker-
dealers. As discussed above, broker-dealers acting as Participating
Underwriters have an existing obligation to reasonably determine that
issuers or obligated persons have undertaken in their continuing
disclosure agreements to provide notice to the MSRB of specified
events. The Commission does not expect that the addition of several new
disclosure events to the Rule and a provision establishing the time
frame for submission of such notices are likely to significantly alter
broker-dealers' obligations under the Rule and thus their costs. As a
practical matter, broker-dealers' obligations affected by the
amendments involve verifying that the continuing disclosure agreement
contains an undertaking by the issuer or obligated person to provide
notice to the MSRB of the events that are listed in the Rule, including
the new events, within ten business days after the event's occurrence.
Moreover, because continuing disclosure documents generally are form
documents, a broker-dealer simply will need to make sure that the
continuing disclosure agreement reflects the amendments to the Rule.
    The amendments also modify the Rule's exemption for demand
securities. This change applies to any initial offering and remarketing
that is a primary offering of demand securities occurring on or after
the compliance date of the amendments and does not apply to
remarketings of demand securities that are outstanding in the form of
demand securities on the day preceding the compliance date and that
continuously have remained outstanding in the form of demand securities
(i.e., the limited grandfather provision).
    Although the amendments relating to demand securities are not
likely to result in external recurring costs for broker-dealers,
broker-dealers may incur an increase in internal recurring costs
because the proposals will increase the number of municipal securities
offerings subject to the Rule's disclosure requirements. As noted
above, the Commission estimates that the modification of the exemption
for demand securities will increase the number of issuers with
municipal securities offerings subject to the Rule by 20%.\583\ The
Commission estimates

that the annual information collection burden for each broker-dealer
under this amendment will be 1.20 hours (1 hour and 12 minutes).\584\
Accordingly, the Commission estimates that it will cost each broker-
dealer $349 annually to comply with the Rule, which represents a cost
increase of $79 annually over each broker-dealer's current annual
cost.\585\
---------------------------------------------------------------------------

    \583\ See supra Section V.D.2.a. As noted above, adoption of the
limited grandfather provision will not materially affect the
Commission's estimate of the number of demand securities issuers
that will be affected by the amendments. Therefore, the Commission
is retaining its estimate that there will be a 20% increase in the
number of issuers affected by the amended Rule.
    \584\ Id.
    \585\ 1.20 hours (estimated annual information collection burden
for each broker-dealer) x $291 (hourly cost for a broker-dealer's
internal compliance attorney) = $349. The hourly rate for the
compliance attorney is from SIFMA's Management & Professional
Earnings in the Securities Industry 2009, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. Cost increase for Broker-Dealers under the
amendments: $349 (annual cost under amendments) - $270 (previous
annual cost) = $79. This estimated cost for broker-dealers also
accounts for their review of continuing disclosure agreements in
connection with remarketings of demand securities that are primary
offerings. The Commission has slightly revised this cost estimate
upward from the estimate contained in the Proposing Release to
reflect updated hourly rate information from SIFMA for 2009.
---------------------------------------------------------------------------

    In addition, the Commission estimates that a broker-dealer may have
a one-time internal cost associated with having an in-house compliance
attorney prepare and issue a memorandum advising the broker-dealer's
employees about the final revisions to Rule 15c2-12. The Commission
estimates that it will take internal counsel approximately 30 minutes
to prepare this memorandum,\586\ for a cost of approximately $146.\587\
The Commission further believes that the ongoing obligations of broker-
dealers under the Rule will be handled internally because compliance
with these obligations is consistent with the type of work that a
broker-dealer typically handles in-house.
---------------------------------------------------------------------------

    \586\ See supra Section V.D.1.c.
    \587\ .5 hours (estimated annual information collection burden
for each broker-dealer) x $291 (hourly cost for a broker-dealer's
internal compliance attorney) = $146. The hourly rate for the
compliance attorney is from SIFMA's Management & Professional
Earnings in the Securities Industry 2009, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead. The Commission has slightly revised this cost
estimate upward from the estimate contained in the Proposing Release
to reflect updated hourly rate information from SIFMA for 2009.
---------------------------------------------------------------------------

    The Commission included these specific cost estimates in the
Proposing Release and received no comments on them.\588\
---------------------------------------------------------------------------

    \588\ These cost estimates correspond with the burden estimates
set forth in Section V.D.1., above. Therefore, to the extent the
Commission received comments that generally relate to broker-
dealers' costs under the Rule, they are discussed above, and the
responses to those comments are incorporated herein by reference.
The Commission does not believe that these comments affect these
cost estimates.
---------------------------------------------------------------------------

2. Issuers
a. Current Issuers
    Some current issuers are likely to be subject to some internal and
external costs associated with the amendments. The costs for current
issuers will result from the amendments relating to the new and
modified event notice provisions and the elimination of the materiality
determination for certain of the Rule's events.\589\ Current issuers
will incur internal costs associated with the preparation of the
additional event notices that may result from these changes to the
Rule. Current issuers also will incur costs if they issue demand
obligations, as discussed in the next sub-section. As noted above, the
revisions to the Rule regarding the ten business day time frame for
submission of event notices and the elimination of the materiality
condition for many of the Rule's disclosure events will not change the
substance of an event notice, the method for filing an event notice, or
the location to which an event notice will be submitted. Consequently,
issuers may not incur costs associated with the new ten business day
time frame for submission of event notices. As discussed above, some
issuers, including small issuers, may need to submit event notices more
promptly than they do now and may need to monitor events not within
their direct control, such as a rating change, that will prompt
submission of an event notice.
---------------------------------------------------------------------------

    \589\ The amendments include a materiality condition for two of
the new disclosure events. A materiality determination may result in
costs to investors, market professionals and others to the extent
that the issuer or obligated person determines that the event is not
material and thus does not submit a notice to the MSRB. If
investors, market professionals and others would consider the
information important and have access to it, they may reach a
different investment decision.
---------------------------------------------------------------------------

    The Commission also believes that current issuers may incur some
internal labor costs associated with the preparation and submission of
additional event notices. As discussed above,\590\ the Commission
estimates that a current issuer will submit a maximum of one additional
event notice annually.\591\ Thus, the Commission estimates that the
maximum annual labor cost to prepare and submit the additional event
notice is approximately $44 per current issuer.\592\
---------------------------------------------------------------------------

    \590\ See supra Section V.E.2.a.
    \591\ This estimate includes additional event notices that may
be submitted as a result of the modification of the materiality
condition in paragraph (b)(5)(i)(C) of the Rule.
    \592\ 1 (maximum estimated number of additional material event
notices submitted per year per issuer) x $59 (hourly wage for a
compliance clerk) x .75 hours (45 minutes) (estimated time for
compliance clerk to prepare and submit a material event notice) =
$44.25 (rounded to $44). The $59 per hour estimate for a compliance
clerk is from SIFMA's Office Salaries in the Securities Industry
2009, modified by the Commission's staff to account for an 1800-hour
work-year and multiplied by 2.93 to account for bonuses, firm size,
employee benefits and overhead. The Commission has slightly revised
this cost estimate downward from the estimate contained in the
Proposing Release to reflect updated hourly rate information from
SIFMA for 2009. To provide an estimate of total costs for issuers
that will not be under-inclusive, the Commission elected to use the
higher end of the estimate of annual submissions of continuing
disclosure documents.
---------------------------------------------------------------------------

    For current issuers that convert their annual filings, event
notices and/or failure to file notices into the MSRB's prescribed
electronic format through a third party, there will be costs associated
with any additional submissions of event notices and failure to file
notices. As noted above, the Commission estimates that each current
issuer will submit one additional event notice annually as a result of
the amendments.\593\ If a current issuer uses a third-party vendor to
scan the additional event notice into an electronic format for
submission to the MSRB, the Commission estimates that such issuer will
have an additional annual cost of $8 per notice.\594\ For current
issuers that convert their annual filings, event notices and/or failure
to file notices into the MSRB's prescribed electronic format internally
there will be no additional external costs associated with such
conversion. Further, some current issuers may incur a one-time cost of
$100 associated with a revision to the template for continuing
disclosure agreements.\595\
---------------------------------------------------------------------------

    \593\ See supra Section V.E.2.a. These cost estimates correspond
with the burden estimates set forth in Section V.D.2., above.
Therefore, to the extent the Commission received comments that
generally relate to issuers' costs under the Rule, they are
discussed above, and the responses to those comments are
incorporated herein by reference. The Commission does not believe
that these comments affect these cost estimates.
    \594\ Id.
    \595\ Id. The Commission estimates that there is an approximate
cost of $100 associated with revising the issuer's continuing
disclosure agreement by the current issuer's outside counsel to
conform the agreement to the amendments. Thus, the total cost for
revising continuing disclosure agreements for all current issuers by
the current issuers' outside counsel will be approximately
$1,000,000.
---------------------------------------------------------------------------

    The Commission included these specific cost estimates in the
Proposing Release and received no comments on them.\596\
---------------------------------------------------------------------------

    \596\ The Commission has slightly revised these cost estimates
upward from the estimates contained in the Proposing Release to
reflect updated hourly rate information from SIFMA for 2009.

---------------------------------------------------------------------------

b. Demand Securities Issuers
    As discussed above, the Commission estimates that the modification
of the Rule's exemption for demand securities will increase the number
of issuers affected by the Rule by approximately 20% or 2,000
issuers.\597\ These demand securities issuers are likely to have some
costs associated with the preparation and submission of continuing
disclosure documents. Also as discussed in the PRA section above, the
Commission estimates that each demand securities issuer may have a one-
time external cost of $600 associated with preparing into a continuing
disclosure agreement.\598\
---------------------------------------------------------------------------

    \597\ See supra Section V.C.
    \598\ See supra Section V.E.2.b. The Commission estimated that
there is an approximate cost of $600 associated with drafting a
continuing disclosure agreement by the demand securities issuer's
outside counsel. Thus, the total cost for preparing continuing
disclosure documents for all demand securities issuers by the demand
securities issuers' outside counsel will be approximately
$1,200,000.
---------------------------------------------------------------------------

    Other external costs for demand securities issuers are likely to be
the costs associated with converting continuing disclosure documents
into an electronic format to submit to the MSRB. As noted in the PRA
section above, the Commission believes that many issuers of municipal
securities currently have the computer equipment and software necessary
to convert paper copies of continuing disclosure documents to
electronic copies and to electronically transmit the documents to the
MSRB.\599\ Demand securities issuers that presently do not have the
ability to prepare their annual filings, event notices and/or failure
to file notices in an electronic format may incur some costs to obtain
electronic copies of such documents if they are prepared by a third
party (e.g., accountant or attorney) or, alternatively, to have a paper
copy converted into an electronic format. These costs will vary
depending on how the demand securities issuer elects to convert its
continuing disclosure documents into an electronic format. An issuer
may elect to have a third-party vendor transfer its paper continuing
disclosure documents into the appropriate electronic format. An issuer
also may decide to undertake the work internally, and its costs will
vary depending on the issuer's current technological resources. An
issuer also may use the services of a designated agent to submit its
continuing disclosure documents to the MSRB. In the Proposing Release,
the Commission noted that approximately 30% of municipal issuers rely
on the services of a designated agent to submit continuing disclosure
documents for them.\600\ Generally, when issuers utilize the services
of a designated agent, they enter into a contract with the agent for a
package of services, including the submission of continuing disclosure
documents, for a single fee. The Commission estimates that the annual
fees for designated agents range from $100 to $500 per issuer, for a
total maximum annual cost of $300,000 for all demand securities
issuers.\601\
---------------------------------------------------------------------------

    \599\ Id.
    \600\ See Proposing Release, supra note 2, 74 FR at 36862.
    \601\ See supra Section V.E.2.b.
---------------------------------------------------------------------------

    The Commission estimates that some demand securities issuers may
have to convert continuing disclosure documents into an electronic
format to submit to the MSRB. The costs associated with this conversion
may include: (i) Approximately $8 per notice to use a third-party
vendor to scan a event notice or failure to file notice, and
approximately $64 to use a third-party vendor to scan an average-sized
annual financial statement; (ii) approximately $750 to $4,300 to
acquire technological resources to convert continuing disclosure
documents into an electronic format; (iii) approximately $50 to $300
solely to upgrade or acquire the software to submit documents in an
electronic format; and (iv) approximately $50 per month to establish
Internet access.\602\
---------------------------------------------------------------------------

    \602\ Id.
---------------------------------------------------------------------------

    Based on the PRA section above, the Commission estimates that
Category 1 demand securities issuers will incur a total maximum
external cost of $776 per year.\603\ The Commission estimates that
Category 2 demand securities issuers will incur a total maximum
external cost of $4,900 for the first year and $600 per year
thereafter.\604\ As noted above, the Commission estimates that any
demand securities issuer that incurs costs associated with converting
continuing disclosure documents into the MSRB's prescribed electronic
format will choose the more expensive Category 2 option.\605\ The
Commission estimates that approximately 400 demand securities issuers
will incur costs associated with acquiring technological resources to
convert continuing disclosure documents into an electronic format.\606\
In addition, the Commission estimates that the maximum annual costs for
those demand securities issuers that need to acquire technological
resources to submit documents to the MSRB will be approximately
$1,960,000 for the first year after the adoption of the amendments and
approximately $240,000 for each year thereafter.\607\
---------------------------------------------------------------------------

    \603\ A Category 1 demand securities issuer is one that does not
have Internet access and needs to have a third party convert
continuing disclosure documents into an electronic format. See supra
Section V.E.2.b.
    \604\ A Category 2 demand securities issuer is one that does not
have Internet access and elects to acquire the technological
resources to convert continuing disclosure documents into an
electronic internally. See supra Section V.E.2.b.
    \605\ Id.
    \606\ 2,000 demand securities issuers x 20% = 400 demand
securities issuers.
    \607\ See supra Section V.E.2.b.
---------------------------------------------------------------------------

    The Commission included these specific cost estimates in the
Proposing Release and received no comments on them.\608\
---------------------------------------------------------------------------

    \608\ These cost estimates correspond with the burden estimates
set forth in supra Section V.D.2. Therefore, to the extent the
Commission received comments that generally relate to issuers' costs
under the Rule, they are discussed above, and the responses to those
comments are incorporated herein by reference. The Commission does
not believe that these comments affect these cost estimates.
---------------------------------------------------------------------------

c. Current Issuers and Demand Securities Issuers
    Lastly, as discussed in the PRA section above, some current issuers
and some demand securities issuers are likely to incur external costs
associated with the amendment to revise the timing for submitting event
notices from ``in a timely manner'' to ``in a timely manner not to
exceed ten business days after the occurrence of the event.'' \609\ In
particular, some current issuers and some demand securities issuers may
incur external costs associated with monitoring the appointment of a
new trustee or a change in the trustee's name. One way an issuer may
monitor such a change would be for its counsel to add a notice
provision to the issuer's trust indenture that requires the trustee to
provide the issuer with notice of the appointment of a new trustee or
any change in the trustee's name. The Commission estimates that the
approximate cost of adding this notice provision to an issuer's trust
indenture will be approximately $100 per issuer,\610\ for a one-time
annual cost of $1,200,000 \611\ for all issuers. The Commission
included these specific cost estimates in the Proposing Release and
received no comments on them.\612\
---------------------------------------------------------------------------

    \609\ See supra Section V.E.2.c.
    \610\ Id.
    \611\ Id.
    \612\ Id. These cost estimates correspond with the burden
estimates set forth in supra Section V.D.2. Therefore, to the extent
the Commission received comments that generally relate to issuers'
costs under the Rule, they are discussed above, and the responses to
those comments are incorporated herein by reference. The Commission
does not believe that these comments affect these cost estimates.

---------------------------------------------------------------------------

    In addition to the burdens and costs discussed in the PRA section
above, the Commission received several comments relating to other costs
and burdens associated with the proposed amendments. Several commenters
expressed general concerns about the burdens and costs associated with
the establishment of a maximum ten business day time frame for the
submission of event notices. Some of these concerns included the
impracticability of meeting the time frame because of limited staff and
resources, especially for smaller issuers,\613\ and the increased
burdens and costs in connection with the additional monitoring and
compliance necessary to submit notices within ten business days.\614\
Other commenters expressed concerns relating to the submission of event
notices for information that the issuer does not control (e.g., rating
changes, changes to the trustee, and changes to the tax status of bonds
as a result of an IRS audit) within the ten business day time
frame.\615\ In particular, many of these commenters expressed concerns
regarding the costs associated with the reporting of rating changes
within the ten business day time frame. These commenters noted that
rating changes are not within the issuer's control and that rating
organizations do not directly notify issuers of rating changes.\616\ As
a result, these commenters believed that it would be difficult for most
issuers to meet the proposed ten business day time frame without
incurring substantial costs associated with monitoring for rating
changes,\617\ such as devoting more staff to the task of monitoring for
rating changes and/or subscribing to a service that will provide
issuers notice of rating changes.
---------------------------------------------------------------------------

    \613\ See CRRC Letter, WCRRC Letter, Portland Letter at 2,
NAHEFFA Letter at 2-4, Metro Water Letter at 1-2, CHEFA Letter at 2,
and NABL Letter at 5-6.
    \614\ See Halgren Letter, Los Angeles Letter at 1, CRRC Letter,
WCRRC Letter, NAHEFFA Letter at 2-4, CHEFA Letter at 2, and NABL
Letter at 5-6.
    \615\ See Halgren Letter, Los Angeles Letter at 1-2, NAHEFFA
Letter at 2-4, San Diego Letter at 1-2, California Letter at 1-2,
NABL Letter at 8, and GFOA Letter at 3-4.
    \616\ Id.
    \617\ See, e.g., Halgren Letter at 1.
---------------------------------------------------------------------------

    The foregoing comments chiefly relate to concerns regarding
submission of notices for events outside of the issuer's control. In
this regard, the Rule currently contains a disclosure event relating to
rating changes and so the concerns raised by these commenters are
inherent in the Rule as it existed prior to the amendments, except that
the amendments provide for event notices to be submitted within ten
business days of the event's occurrence. In addition, for some event
items, including rating changes, a materiality condition no longer will
be a part of the Rule. Ratings for municipal issuers are available on
the Internet Web sites of the rating agencies and thus issuers should
be able to ascertain readily whether a rating change has occurred. In
addition, issuers may be able to subscribe to a service that provides
them with prompt rating updates for their securities. The Commission
notes, however, that some issuers may have to monitor for these events
more frequently than in the past. However, as discussed above, the
Commission believes that its estimate of the time that issuers will
spend, on average, to prepare and submit notices of events, including
rating changes, is appropriate. With respect to the concern that some
issuers will have to pay a vendor to provide them with notice of rating
changes, the Commission reiterates that information regarding rating
changes is available for free on the Internet Web sites of the rating
agencies.
    Several commenters also expressed general concerns about the costs
of the amendment that eliminates the materiality condition from certain
events. For example, one commenter believed that removal of the ``if
material'' condition from some events creates a risk of dividing events
into two disclosure categories that could cause confusion.\618\ Two
commenters believed that there are circumstances when an event, such as
delinquent payments, are beyond an issuer's control and do not
represent a financial failure on the issuer's part.\619\ According to
these commenters, in the past they would have treated such events as
immaterial.\620\ These commenters believed that if issuers have to file
notice in such circumstances, it could create an unwarranted
implication that the issuer has suffered financial adversity.\621\ Some
commenters believed that the materiality qualification should be
retained or included for certain specified events to prevent a large
volume of notices that are irrelevant to investors' decision to buy,
sell or hold municipal securities.\622\
---------------------------------------------------------------------------

    \618\ See Connecticut Letter at 2.
    \619\ See California Letter at 2 and San Diego Letter at 2.
    \620\ Id.
    \621\ Id.
    \622\ See NABL Letter at 8 and Kutak Letter at 4.
---------------------------------------------------------------------------

    In addition, several commenters expressed concerns about the costs
associated with the revised disclosure item regarding adverse tax
events. For example, one commenter stated that the Rule should not be
expanded to include notice of routine reviews and random audits because
they would unnecessarily alarm investors.\623\ Some commenters believed
that disclosure of potential taxability determinations could limit
issuers' options to negotiate settlements with the IRS in ways that do
not present material risk to bondholders\624\ and could affect market
perceptions of municipal issuers' securities, which would impose
increased interest rates and other costs to issuers, and would limit
future market access.\625\ Some of these commenters believed that the
proposal would lead to a flood of information about preliminary
taxability actions \626\ that could confuse and mislead investors \627\
or desensitize investors regarding adverse tax event
determinations.\628\ One of these commenters suggested that event
notices regarding adverse tax events should include a materiality
condition.\629\
---------------------------------------------------------------------------

    \623\ See Connecticut Letter at 2.
    \624\ See Metro Letter at 2, Kutak Letter at 5, and NABL Letter
7.
    \625\ See Metro Letter at 2 and Kutak Letter at 5.
    \626\ See Kutak Letter at 6.
    \627\ See Kutak Letter at 6, NABL Letter at 7, and GFOA Letter
at 4.
    \628\ See Kutak Letter at 6.
    \629\ See NABL Letter at 7.
---------------------------------------------------------------------------

    Furthermore, as discussed in Section III.A. above, several
commenters expressed general concerns about the costs of the proposal
relating to the modification of the exemption for demand securities.
For example, one commenter noted that the elimination of the Rule's
exemption for demand securities from the Rule would impose such
insurmountable administrative costs that small issuers and non-profit
organizations would refuse to enter continuing disclosure
agreements.\630\ Similarly, some commenters also believed that the
elimination of the exemption for demand securities would hinder or
prevent many issuers, particularly small issuers and non-profits, from
using LOC-backed demand securities to access the tax-exempt
markets.\631\ They opined that local communities would be hurt as a
result of the proposed amendment to delete the exemption for demand
securities because small issuers and obligated persons that rely on the
exemption will have to pass along to users of their service any
increased costs that they

may incur.\632\ One of the commenters remarked that many non-
governmental conduit borrowers \633\ have no previous undertakings to
provide continuing disclosure information and, for such persons,
complying with paragraph (b)(5) of the Rule would not merely be an
extension of pre-existing obligations but a new and significant
burden.\634\
---------------------------------------------------------------------------

    \630\ See SIFMA Letter at 2-3.
    \631\ See CRRC Letter at 3-5, NABL Letter A-9--A-12, and WCRRC
Letter at 1.
    \632\ See CRRC Letter at 3-5 and WCRRC Letter at 1.
    \633\ See NABL Letter at A-2, n. 1.
    \634\ Id.
---------------------------------------------------------------------------

    Moreover, two commenters stated that many obligated persons of LOC-
backed demand securities do not prepare annual filings, such as audited
financial statements, in the ordinary course of their business.\635\ As
discussed in the PRA section above, one of these commenters believed
that they would incur $30,000-$40,000 per year to prepare audited or
consolidated financial statements.\636\ The commenters therefore
believed that eliminating the exemption for demand securities would
impose administrative costs and burdens that could potentially force
some conduit borrowers of LOC-backed demand securities to withdraw from
the tax-exempt bond market.\637\
---------------------------------------------------------------------------

    \635\ See CRRC Letter at 5 and NABL Letter at A-2.
    \636\ See CRRC Letter at 5. See also supra note 539 and
accompanying text.
    \637\ See CRRC Letter at 5 and NABL Letter at A-10. Two
commenters also expressed concern that, in complying with the
revised Rule, smaller and not-for-profit obligated persons could
encounter similar administrative costs and burdens. See NABL Letter
at A-2 (noting that many small businesses and non-profit
organizations utilize LOC-backed demand securities in accessing the
tax-exempt debt markets) and SIFMA Letter at 2-3.
---------------------------------------------------------------------------

    As discussed in Section III.A. above, the Commission has considered
the comments concerning the costs and burden on demand securities
issuers and obligated persons. In response to commenters' concerns, the
Commission has revised the proposal relating to demand securities to
include a limited grandfather provision. The Commission notes that a
number of demand securities issuers and obligated persons, including
some small issuers and non-profit organizations, do voluntarily enter
into continuing disclosure agreements.\638\ Further, many demand
securities issuers and obligated persons are likely also to have
outstanding fixed rate securities \639\ that are subject to continuing
disclosure agreements. Because any such existing continuing disclosure
agreement would obligate an issuer or an obligated person to provide
annual filings, event notices, or failure to file notices with respect
to these fixed rate securities, providing disclosures with respect to
demand securities should not be a significant additional burden for
issuers and obligated persons that already have outstanding fixed rate
securities.
---------------------------------------------------------------------------

    \638\ Id.
    \639\ See Proposing Release, supra note 2, 74 FR at 36837.
---------------------------------------------------------------------------

    Regarding the concern that any new disclosure burdens may induce
some obligated persons to withdraw from the tax-exempt municipal market
because they do not prepare annual filings in the ordinary course of
their business, the Commission notes that, for purposes of the Rule,
annual filings are required only to the extent provided in the final
official statements.\640\ Further, pursuant to paragraph (b)(5)(i)(B)
of the Rule, audited financial statements need to be submitted,
pursuant to the issuer's and obligated person's undertaking in a
continuing disclosure agreement, only ``when and if available.'' \641\
This limitation, which is consistent with the Commission's position in
the 1994 Amendments Adopting Release, should mitigate some concerns of
those obligated persons that do not prepare audited financial
statements in the ordinary course of their business.\642\ Further,
although not all issuers or obligated persons, in the ordinary course
of their business, prepare audited financial statements or other
financial and operating information of the type included in annual
filings, a number of issuers and obligated persons do.\643\
---------------------------------------------------------------------------

    \640\ See supra Section III.A. for additional discussion
concerning the provision of annual filings and audited financial
statements.
    \641\ 17 CFR 240.15c2-12(b)(5)(i)(B). See also supra Section
III.A.
    \642\ As discussed in the 1994 Amendments Adopting Release, the
1994 Amendments ``[do] not adopt the proposal to mandate audited
financial statements on an annual basis with respect to each issuer
and significant obligor. Instead, the amendments require annual
financial information, which may be unaudited, and may, where
appropriate and consistent with the presentation in the final
official statement, be other than full financial statements. * * *
However, if audited financial statements are prepared, then when and
if available, such audited financial statements will be subject to
the undertaking and must be submitted to the repositories. Thus * *
* the undertaking must include audited financial statements only in
those cases where they otherwise are prepared.'' See 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
    \643\ See http://www.emma.msrb.org for audited financial
statements or other financial and operating information submitted to
EMMA.
---------------------------------------------------------------------------

    The Commission acknowledges that issuers or obligated persons of
demand obligations that assemble financial and operating data for the
first time in response to their undertakings in a continuing disclosure
agreement may incur incremental costs beyond those costs incurred by
those issuers or obligated persons that already assemble this
information.\644\ Also, smaller issuers or obligated persons may have
relatively greater burdens than larger issuers or obligated persons.
However, the overall burdens for these demand securities issuers or
obligated persons in preparing financial information are expected to be
commensurate with those of issuers or obligated persons that already
are preparing financial information as part of their continuing
disclosure undertakings.\645\ The Commission believes that the burdens
that will be incurred in the aggregate by issuers or obligated persons,
as a result of the amendments with respect to demand securities, may
not be significant and, in any event, are justified by the benefits to
investors of enhanced disclosure.\646\
---------------------------------------------------------------------------

    \644\ The Commission, however, believes that the operations of
an issuer or obligated person generally entail the preparation and
maintenance of at least some financial and operating data.
    \645\ Further, issuers or obligated persons that assemble
financial and operating data for the first time may face a greater
burden than those issuers or obligated persons that already assemble
this information. The amendments therefore initially may have a
disparate impact on those issuers or obligated persons, including
small entities, entering into a continuing disclosure agreement for
the first time, as compared with those that already have outstanding
continuing disclosure agreements.
    \646\ See supra Section V.D. As discussed therein, some
commenters believed that the amendment could force some small
entities to withdraw from the tax-exempt market because: (1)
Disclosure of small issuers' or obligated persons' financial
information would provide their large, national competitors with
information about these small issuers or obligated persons, which
they believed could result in a competitive disadvantage to them;
and (2) small issuers or obligated persons would have to prepare
costly audited financial statements. See, e.g., CRRC Letter at 3-4
and WCRRC Letter at 1. As discussed above, the undertakings
contemplated by the amendments (and Rule 15c2-12 in general) require
annual financial information only to the extent provided in the
final official statement, and audited financial statements only when
and if available.
---------------------------------------------------------------------------

3. MSRB
    Since the number of continuing disclosure documents submitted will
increase as a result of the amendments, the MSRB may incur costs
associated with the amendments. The Commission estimates that these
costs for the MSRB may include: (i) The cost to hire additional
clerical personnel at an estimated annual cost of $119,770 to process
the additional submissions associated with the amendments; \647\

and (ii) the cost to update its EMMA system to accommodate indexing
information in connection with the changes to the Rule's disclosure
events. Based on information provided to the Commission staff by the
MSRB staff in a telephone conversation on November 7, 2008, the MSRB
staff estimated that the MSRB's costs to update its EMMA system to
accommodate the final changes to the disclosure events would be
approximately $10,000.\648\ Therefore, in connection with the
amendments, the MSRB would incur a one-time cost of approximately
$10,000 as well as a recurring annual cost of approximately
$119,770.\649\
---------------------------------------------------------------------------

    \647\ 2,030 hours (estimated additional annual number of hours
worked by a compliance clerk) x $59 (hourly wage for a compliance
clerk) = $119,770 (annual salary for compliance clerk). The $59 per
hour estimate for a compliance clerk is from SIFMA's Office Salaries
in the Securities Industry 2009, modified by the Commission's staff
to account for an 1800-hour work-year and multiplied by 2.93 to
account for bonuses, firm size, employee benefits and overhead. The
estimate for additional annual hours worked by a compliance clerk is
the estimated additional hourly burden the MSRB will incur on an
annual basis under the amendments. The Commission has slightly
revised this cost estimate downward from the estimate contained in
the Proposing Release to reflect updated hourly rate information
from SIFMA for 2009. See supra Section V.D.3.
    \648\ See Proposing Release, supra note 2, 74 FR at 36855, n.
205. Telephone conversation between Harold Johnson, Deputy General
Counsel, MSRB, and Martha M. Haines, Assistant Director and Chief,
Office of Municipal Securities, Division, Commission, November 7,
2008.
    \649\ See supra notes 487 through 490.
---------------------------------------------------------------------------

    The Commission received a comment letter from the MSRB relating to
its costs associated with the proposed amendments.\650\ The MSRB stated
that, in determining whether to approve or modify the proposed
amendments, the Commission should note that changes to the manner of
providing disclosures under the Rule or to the parties expected to make
submissions, i.e., if third parties were to submit event notices rather
than issuers or obligated persons, may have an impact on the design and
timing of necessary EMMA system changes to implement the revised
continuing disclosure provisions.\651\ The MSRB also stated that the
Commission should verify that any such revisions can reasonably be
implemented; that the revisions would improve the efficiency,
timeliness and public access process; and that no direct charges would
be imposed on the MSRB for revisions such as third-party
submissions.\652\ Further, the MSRB noted that certain revisions would
likely result in a longer planning, development and implementation time
frame and could result in greater development and operational
costs.\653\
---------------------------------------------------------------------------

    \650\ See MSRB Letter at 2.
    \651\ Id.
    \652\ Id.
    \653\ Id.
---------------------------------------------------------------------------

C. Limited Grandfather Provision Relating to Modification of Exemption
for Demand Securities

    As discussed in Section III.A. above, the Commission is revising
the amendment relating to demand securities from that proposed in the
Proposing Release to include a limited grandfather provision, so that
paragraphs (b)(5) and (c) will not apply to demand securities
outstanding as of November 30, 2010. The Commission believes that the
limited grandfather provision strikes an appropriate balance between
the need to improve disclosure available to investors and the
recognition that the practical effects of applying paragraphs (b)(5)
and (c) of the Rule to outstanding issues of demand securities could
unduly burden issuers and obligated persons and thus may adversely
impact the market. As the Commission noted in Section III.A. above,
there would be benefits to making outstanding demand obligations
subject to paragraphs (b)(5) and (c) of the Rule because greater
information about these securities would be available to investors on a
timely basis. However, demand securities, such as VRDOs, generally are
long-term securities. If an outstanding demand security became subject
to paragraph (b)(5)(i)(C) of the Rule, a Participating Underwriter, in
the first remarketing of the VRDO following the compliance date of the
amendments, would have to reasonably determine that an issuer or an
obligated person has executed a continuing disclosure agreement to
provide annual financial information for each obligated person for whom
financial information or operating data is presented in the final
official statement.
    For an outstanding issue of demand securities, however, referring
back to information included in the final official statement may be
problematic, if not impossible, because the official statement may be
years old. Thus, its information would be out-of date, thereby
increasing the underwriter's cost of complying with Rule 15c2-12
substantially. In addition, the official statement may be difficult to
obtain if the remarketing agent was not the underwriter of the original
offering. Further, absent the limited grandfathering provision, the
issuer or the obligated person of such security, pursuant to its
continuing disclosure undertaking, would have needed to update annual
financial information that may no longer be prepared or available,
which may also be a potentially costly undertaking. In addition,
application of the amendments to remarketings of demand securities
occurring on or after the compliance date would necessitate a large
number of issuers or obligated persons of demand securities entering
into continuing disclosure agreements in a very short time period,
which could delay remarketings and temporarily disrupt the markets for
demand securities. The Commission believes that the benefits of
applying paragraphs (b)(5) and (c) of the Rule to demand securities
outstanding prior to the compliance date would not justify the high
cost of such change to both Participating Underwriters and issuers or
obligated persons of such securities and therefore is adopting the
limited grandfather provision. The Commission further notes that some
issuers or obligated persons of demand securities also have issued
fixed rate municipal securities and, in that case, continuing
disclosures about those issuers or obligated persons should be
available to investors.

VII. Consideration of Burden and Promotion of Efficiency, Competition,
and Capital Formation

    Section 3(f) of the Exchange Act \654\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action would promote efficiency, competition, and capital
formation. In addition, Section 23(a)(2) of the Exchange Act \655\
requires the Commission, when adopting rules under the Exchange Act, to
consider the impact such rules would have on competition. Section
23(a)(2) of the Exchange Act also prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.
---------------------------------------------------------------------------

    \654\ 15 U.S.C. 78c(f).
    \655\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The municipal securities market is comprised of approximately
51,000 issuers that are states and local governments or their agencies
and instrumentalities. As discussed in more detail above, there are
approximately $400 billion of new issuances of municipal securities
annually and approximately $2.8 trillion of municipal securities are
outstanding.\656\ There are two primary types of municipal securities:
general obligation bonds and revenue bonds. General obligation bonds
are backed by the full faith and credit of the issuer and are also
usually secured by specific tax levies. In contrast, revenue bonds are
generally secured by a pledge of specific revenues of the issuer, which
are typically

derived from the facility financed by the bonds (for example, water
rates may be used to pay principal and interest on the bonds issued to
pay for construction of a water system). Revenue bonds are further
divided into two general types: Governmental and private purpose.
Governmental bonds are issued to finance the needs of the states or
local governments, their agencies and instrumentalities. Private
purpose bonds (often referred to as conduit bonds), however, are issued
to provide the benefit of a tax-exempt interest rate to a private
entity as permitted by various provisions of the Internal Revenue Code.
The obligation to pay conduit bonds rests entirely on the private
borrower, such as 501(c)(3) hospitals, colleges and universities, the
owners of low and moderate income housing projects and of small
industrial facilities.
---------------------------------------------------------------------------

    \656\ See supra Section II.
---------------------------------------------------------------------------

    As described above, because of the diversity of disclosure
practices, the Commission believes that the informational efficiency of
the municipal bond market could be improved. As a result, the
Commission believes that the amendments are appropriate to enhance the
efficiency of the municipal securities market, particularly in the
sense of informational efficiency. Informational efficiency helps
investors efficiently allocate capital, since it helps to ensure that a
security's price accurately reflects important information. When
accurate information is available, the municipal security's price
serves to convey aggregate information to investors, further
facilitating investment decisions. The amendments encourage disclosure
of information that, in the Commission's view, reasonable investors
consider important in their transaction decisions. The amendments
strengthen the municipal disclosure process because of the new events
being added to paragraph (b)(5)(i)(C) of the Rule. In addition,
inclusion of the provision that submissions of event notices to the
MSRB be made in a timely manner not in excess of ten business days of
the event's occurrence, and the deletion of the exemption for demand
securities (other than those demand securities that qualify for the
limited grandfather provision), also is expected to promote the
efficiency of the municipal securities market, as described above
including in the cost-benefit section. Currently, the Rule does not
contain a specific time frame within which event notices must be
provided to the MSRB pursuant to a continuing disclosure agreement.
Thus, the Commission believes that the revision relating to the time
frame for submission of event notices will help individuals and others
to obtain greater information about municipal securities within ten
business days of the event's occurrence. In addition, certain events
regarding municipal securities that may be important to investors, such
as certain tender offers or 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, are now included as event items in
the Rule. Further, certain events listed in paragraph (b)(5)(i)(C) of
the Rule will now be disclosed without the issuer first having to make
a materiality determination.
    Moreover, the Rule's exemption for demand securities has been
narrowed, although a limited grandfather provision is in place for many
pre-existing demand obligations.\657\ As a consequence of the
amendments, in some cases, greater information about municipal
securities and their issuers will be more readily accessible on a more
timely basis to broker-dealers, mutual funds analysts and other market
professionals, institutional and retail investors, and the public
generally. Thus, these individuals and entities are expected to have
access to important information about municipal securities within a
specific ten business day time frame, which could aid them in making
better informed and more efficient investment decisions and should help
reduce the likelihood of fraud facilitated by inadequate disclosure. To
the extent that greater information efficiency ultimately allows for
better allocation of investments in the municipal securities market,
the amendments are expected to promote allocative efficiency as well.
---------------------------------------------------------------------------

    \657\ As discussed above, although it may be optimal for all
outstanding demand obligations to be subject to paragraph (b)(5) and
(c) of the Rule, the application of the continuing disclosure
requirements of the Rule to all outstanding demand securities issued
prior to the compliance date may be burdensome for issuers and
Participating Underwriters because they would need to enter into a
continuing disclosure agreement for any remarketing that is a
primary offering that occurs on or after the compliance date, which,
potentially, could temporarily disrupt the market for demand
securities.
---------------------------------------------------------------------------

    The Commission considers the existing state of the municipal
securities market to be a competitive one, given the large number and
diversity of issuers, and the volume of municipal securities regularly
issued and remarketed, as noted above, despite certain characteristics
of municipal bonds, discussed below, that lead to a certain degree of
non-fungibility and market segmentation. The size of the municipal
securities market--with approximately 51,000 issuers, $400 billion of
new issuances annually, and approximately $2.8 trillion in securities
outstanding--suggests that the market for issuance and purchase of
municipal securities may be highly competitive. Additionally, investors
can substitute to some degree their portfolios between municipal
securities and other securities, particularly fixed-income securities
of comparable credit quality. Depending on the municipality, these may
include U.S. Treasury obligations, corporate bonds, and, more recently,
taxable bonds known as Build America Bonds. Such substitutability
implies that municipal issuers must currently compete not only with
each other but also with other comparable opportunities available to
investors. Relative to this existing competitive benchmark, the
Commission believes that the amendments promote competition in the
purchase and sale of municipal securities, as described below.
    Because of the limited grandfather provision and the transition
aspects of the amendments discussed in Section IV above, a number of
issuers will have differing disclosure undertakings. In this regard,
some issuers of demand securities will qualify for the limited
grandfather provision. In addition, the Commission recognizes that by
not applying the amendments to continuing disclosure agreements entered
into prior to the amendments' compliance date, for a period of time
there will be municipal securities that are subject to differing
disclosure. This circumstance may cause some confusion and thus could
lead to some inefficiency with respect to investors and broker-dealers
who otherwise would prefer uniform disclosure. Because of the nature of
the market for demand securities, the Commission does not believe that
it is appropriate to impose requirements that would mandate revisions
to existing continuing disclosure agreements.
    The Commission believes that the amendments will promote
competition in the purchase and sale of municipal securities due to the
greater availability and timeliness of information as a result of the
amendments. Competition is generally more robust when many willing
buyers and many willing sellers transact with full information.
Competition in the municipal securities market is generally based on
the premise that investors are informed of

the various attributes of the investment instruments, and issuers are
competing for investors. Even with multiple sellers and buyers, if
there are high search costs (that is, if investors have to incur high
costs to gather relevant information), these costs can be a barrier to
effective competition. The Commission believes that its amendments will
tend to remove this barrier. As a result, more investors may be
attracted to this market sector and broker-dealers and municipal
issuers can compete for their business.
    The amendments are designed to encourage improvement in the
completeness and timeliness of issuer disclosures and thus foster
additional interest in municipal securities by retail and institutional
customers. In addition, the greater availability of information about
municipal securities will be beneficial to vendors of municipal
securities information as they develop their value-added products.
Thus, the amendments will promote competition among those vendors of
municipal securities information that utilize the information provided
to the MSRB pursuant to continuing disclosure agreements and compete
with each other in creating and offering for sale value-added products
relating to municipal securities. As discussed above,\658\ the
amendments may result in some additional cost and hourly burdens for
broker-dealers, issuers and the MSRB.
---------------------------------------------------------------------------

    \658\ See supra Sections V.E.1. and V.E.2.
---------------------------------------------------------------------------

    By providing more timely disclosure of important information to an
important segment of the capital markets as a whole, the Commission
believes that these amendments also will improve the allocative
efficiency of capital formation both within the municipal segment of
the fixed income market and within the municipal bond market, in
particular. Allocative efficiency of capital is enhanced when investors
are able to make better-informed investment decisions since capital
should flow to its most efficient use. The amendments will provide
investors and other municipal market participants with notice of
additional events, to be provided in a timely manner not in excess of
ten business days of the event's occurrence, and the Commission has
provided a limited grandfathering provision. The Commission believes
that the limited grandfather provision strikes an appropriate balance
between the need to improve disclosure available to investors and the
recognition that the practical effects of applying paragraphs (b)(5)
and (c) of the Rule to outstanding issues of demand securities could
unduly burden issuers and obligated persons and thus may adversely
impact the market. In addition, the amendments will help to provide
investors and other municipal market participants with access to
important information about demand securities that previously were not
subject to the Rule's disclosure provisions. To assess the effect of
the amended Rule on capital formation, the Commission has evaluated the
benefits of enhanced disclosure on the allocative efficiency of the
capital market.
    In the Proposing Release, the Commission considered the proposed
amendments in light of the standards set forth in the above-noted
Exchange Act provisions. The Commission solicited comment on whether,
if adopted, the proposal would result in any anti-competitive effects
or would promote efficiency, competition or capital formation. The
Commission asked commenters to provide empirical data or other facts to
support their views on any anti-competitive effects or any burdens on
efficiency, competition or capital formation that might result from the
proposed amendments. The Commission received some comments about the
competitive effects of the proposed amendments.
    As discussed above,\659\ some commenters believed that the
elimination of the Rule's exemption for demand securities would force
some issuers, particularly small issuers and non-profit organizations,
to choose between accepting the burdens of complying with the
continuing disclosure provisions of the Rule and withdrawing from the
tax-exempt market.\660\ Two of these commenters argued that the
proposed amendment would have a chilling effect on competition for
small issuers and obligated persons because it would favor their large
national competitors that are either already reporting companies or
have superior financial and employee resources to comply with the
Rule.\661\ In their view, the proposed amendment would force small and
local businesses that rely on the exemption for demand securities to
choose between giving up their proprietary financial information and
accessing tax-exempt financing. Revelation of this financial
information, in their view, would favor competitors, relative to the
status quo.\662\ They opined that there could be a negative impact on
capital formation if these businesses decided to forego tax exempt
financing and were unable to obtain other sources of lending and if
investors were not afforded the opportunity to acquire the securities
that these businesses otherwise would have issued.\663\
---------------------------------------------------------------------------

    \659\ See supra Section III.A.
    \660\ See NABL Letter A-9-A-12, CRRC Letter at 3-5, and WCRRC
Letter at 1.
    \661\ See CRRC Letter at 3-5, and WCRRC Letter at 1.
    \662\ Id.
    \663\ See CRRC Letter at 3-5, and WCRRC Letter at 1.
---------------------------------------------------------------------------

    The Commission acknowledges that for those primary offerings of
demand securities that no longer will be exempt from the Rule and for
which the issuer is not currently submitting continuing disclosure
documents to the MSRB, the practice will be different than it was prior
to the amendments. In such cases, Participating Underwriters will need
to reasonably determine that the issuer or obligated person has
undertaken, in a continuing disclosure agreement, to provide continuing
disclosure documents to the MSRB. This change applies to any initial
offering and remarketing that is a primary offering of demand
securities unless the limited grandfather provision applies. Those
issuers that have not previously issued securities covered by the Rule
will be entering into a continuing disclosure agreement for the first
time and thereby will incur some costs to provide continuing disclosure
documents to the MSRB. Although the Commission recognizes that, if some
small entities elected to forego tax-exempt financing because of the
impact of the amendments, the amendments could have an adverse impact
on those entities; however, it believes that any additional burden on
issuers and obligated persons is, on balance, justified by the improved
availability of information with respect to demand securities. This
conclusion, moreover, is supported by a number of commenters.\664\
Therefore, while the Commission is mindful of the additional burdens
that may befall certain competitors in the market, based on its
analysis as well as other comments submitted, the Commission continues
to believe the overall result of the amendments will be to promote
competition in the municipal securities market.
---------------------------------------------------------------------------

    \664\ See, e.g., CHEFA Letter at 2, Connecticut Letter at 1, e-
certus Letter I at 11, Folt Letter at 1, ICI Letter at 5, NFMA
Letter at 1, RBDA Letter at 2, and SIFMA Letter at 2.
---------------------------------------------------------------------------

    In addition, as the Commission previously noted, a number of
issuers and obligated persons of demand securities are likely to have
outstanding fixed rate securities. Some of these securities, in turn,
likely would be subject to continuing disclosure agreements under the
Rule. Because any

existing continuing disclosure agreement would obligate an issuer or an
obligated person to provide annual filings, event notices, or failure
to file notices with respect to these fixed rate securities, providing
disclosures with respect to demand securities is not expected to be a
significant additional burden for these issuers and obligated persons.
    Regarding the concern that any new disclosure burdens may induce
some obligated persons to withdraw from the tax-exempt municipal market
because they do not prepare annual filings in the ordinary course of
their business, the Commission notes that, for purposes of the Rule,
annual filings are required only to the extent provided in the final
official statement.\665\ Further, pursuant to paragraph (b)(5)(i)(B) of
the Rule, audited financial statements need to be submitted, pursuant
to the issuer's and obligated person's undertaking in a continuing
disclosure agreement only ``when and if available.'' \666\ This
limitation, which is consistent with the Commission's position in the
1994 Amendments Adopting Release, should mitigate some concerns of
those obligated persons that do not prepare audited financial
statements in the ordinary course of their business.\667\ Further,
although not all issuers or obligated persons, in the ordinary course
of their business, prepare audited financial statements or other
financial and operating information of the type included in annual
filings, a number of issuers and obligated persons do.\668\
---------------------------------------------------------------------------

    \665\ See supra Section III.A. for additional discussion
concerning the provision of annual filings and audited financial
statements.
    \666\ 17 CFR 240.15c2-12(b)(5)(i)(B). See also supra Section
III.A. concerning audited financial statements and 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
    \667\ As discussed in the 1994 Amendments Adopting Release, the
1994 Amendments ``[do] not adopt the proposal to mandate audited
financial statements on an annual basis with respect to each issuer
and significant obligor. Instead, the amendments require annual
financial information, which may be unaudited, and may, where
appropriate and consistent with the presentation in the final
official statement, be other than full financial statements. * * *
However, if audited financial statements are prepared, then when and
if available, such audited financial statements will be subject to
the undertaking and must be submitted to the repositories. Thus * *
* the undertaking must include audited financial statements only in
those cases where they otherwise are prepared.'' See 1994 Amendments
Adopting Release, supra note 8, 59 FR at 59599.
    \668\ See http://www.emma.msrb.org for audited financial
statements or other financial and operating information submitted to
EMMA.
---------------------------------------------------------------------------

    The Commission acknowledges that issuers or obligated persons of
demand obligations that assemble financial and operating data for the
first time in response to their undertakings in a continuing disclosure
agreement may incur incremental costs beyond those costs incurred by
those issuers or obligated persons that already assemble this
information.\669\ Also, smaller issuers or obligated persons may have
relatively greater burdens than larger issuers or obligated persons.
However, the overall burdens for these demand securities issuers or
obligated persons in preparing financial information are expected to be
commensurate with those of issuers or obligated persons that already
are preparing financial information as part of their continuing
disclosure undertakings.\670\ The Commission believes that the burdens
that will be incurred in the aggregate by issuers or obligated persons,
as a result of the amendments with respect to demand securities, may
not be significant and, in any event, are justified by the benefits to
investors of enhanced disclosure.\671\
---------------------------------------------------------------------------

    \669\ The Commission, however, believes that the operations of
an issuer or obligated person generally entail the preparation and
maintenance of at least some financial and operating data.
    \670\ Further, issuers or obligated persons that assemble
financial and operating data for the first time may face a greater
burden than those issuers or obligated persons that already assemble
this information. The amendments therefore initially may have a
disparate impact on those issuers or obligated persons, including
small entities, entering into a continuing disclosure agreement for
the first time, as compared with those that already have outstanding
continuing disclosure agreements.
    \671\ See supra Section V.D. As discussed therein, some
commenters believed that the amendment could force some small
entities to withdraw from the tax-exempt market because: (1)
Disclosure of small issuers' or obligated persons' financial
information would provide their large, national competitors with
information about these small issuers or obligated persons, which
they believed could result in a competitive disadvantage to them;
and (2) small issuers or obligated persons would have to prepare
costly audited financial statements. See, e.g., CRRC Letter at 3-4
and WCRRC Letter at 1. As discussed above, the undertakings
contemplated by the amendments (and Rule 15c2-12 in general) require
annual financial information only to the extent provided in the
final official statement, and audited financial statements only when
and if available.
---------------------------------------------------------------------------

    Two commenters viewed the addition of the event item for mergers,
acquisitions, and substantial asset sales as ``anti-competitive,''
because they believed that disclosure of such events by closely held
companies prior to public announcement would allow competitors to
interfere with the transaction.\672\ However, the Commission believes
that competition in the market for corporate control would be enhanced,
not reduced, by the possibility of disclosure creating more open
conditions for the sale of privately held-companies. The Commission
further notes that parties to mergers and acquisition agreements
generally may, subject to legal obligations, include remedies in such
agreements that are designed to balance the conflicting interests of
the buyer and the seller.
---------------------------------------------------------------------------

    \672\ Id.
---------------------------------------------------------------------------

    For the foregoing reasons, pursuant to Section 3(f) of the Exchange
Act, the Commission has considered the amendments to the Rule and
believes that they, on balance, should promote efficiency and capital
formation and increase competition. In addition, pursuant to Section
23(a)(2) of Exchange Act, the Commission does not believe that they
impose a burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Exchange Act.

VIII. Final Regulatory Flexibility Analysis

    This Final Regulatory Flexibility Analysis (``FRFA'') has been
prepared in accordance with the provisions of the Regulatory
Flexibility Act (``RFA'').\673\ It relates to amendments to Rule 15c2-
12 \674\ under the Exchange Act.\675\ The amendments revise 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 beneficial holders of the
issuer's municipal securities, to provide, and revise an exemption from
the rule. Specifically, the amendments: (1) Require a Participating
Underwriter to reasonably determine that an issuer or obligated person
has agreed to provide notice of specified events in a timely manner not
in excess of ten business days of the occurrence of the event; and (2)
modify the list of events for which notices are to be provided. In
addition, the amendments modify the condition that event notices are to
be submitted to the MSRB ``if material,'' for some, but not all, of the
Rule's specified events. Further, the amendments revise an exemption
from the Rule for demand securities, by making the offering of those
securities subject to the continuing disclosure obligations set forth
in the Rule. This change applies to any initial offering and
remarketing that is a primary offering of demand securities occurring
on or after the compliance date of the amendments.\676\ However, to
address commenters' concerns about the impact of the

amendments on existing demand securities, the amendment does not apply
to remarketings of demand securities that are outstanding in the form
of demand securities on the day preceding the amendments' compliance
date and that continuously have remained outstanding in the form of
demand securities.
---------------------------------------------------------------------------

    \673\ 5 U.S.C. 604(a).
    \674\ 17 CFR 240.15c2-12.
    \675\ 15 U.S.C. 78a et seq. See also Proposing Release, supra
note 2, 74 FR at 36836.
    \676\ As noted above, the compliance date of the amendments to
the Rule is December 1, 2010.
---------------------------------------------------------------------------

A. Need for Amendments to Rule 15c2-12

    The main purpose of the amendments is to improve the availability
of significant and timely information to the municipal securities
markets and to help deter fraud and manipulation in the municipal
securities market by prohibiting the underwriting of, and subsequent
recommendation of transactions in, municipal securities for which
adequate information is not available on an ongoing basis.
    The amendments modify paragraphs (b)(5)(i)(C) and (d)(2)(ii)(B) of
Rule 15c2-12 to require a Participating Underwriter to reasonably
determine that the issuer or obligated person has agreed in its
continuing disclosure agreement to provide event notices to the MSRB in
an electronic format as prescribed by the MSRB, in a timely manner not
in excess of ten business days after the occurrence of any such event.
Previously, the Rule stated that event notices were to be provided ``in
a timely manner.'' In 1994, the Commission adopted amendments to Rule
15c2-12 and noted at that time that it had not established a specific
time frame with respect to ``timely'' because of the wide variety of
events and issuer circumstances.\677\ However, 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.\678\ It has been
reported that there have been some instances in which event notices
were not submitted until months after the events occurred.\679\ The
Commission believes that such delays can deny investors important
information that they need to make informed decisions regarding whether
to buy, sell, or hold municipal securities. Moreover, notice of
important events can aid investors in determining whether the price
that they pay or receive for their municipal security transactions is
appropriate.\680\
---------------------------------------------------------------------------

    \677\ See 1994 Amendments, supra note 7, 59 FR at 59601
    \678\ Id.
    \679\ See Proposing Release, supra note 2, 74 FR at 36837.
    \680\ Id.
---------------------------------------------------------------------------

    The Commission believes that codifying in the Rule a specific time
within which event notices are to be provided to the MSRB, in
accordance with the continuing disclosure agreement, should result in
these notices being made available more promptly than at present.
Accordingly, the amendments require a broker, dealer, or municipal
securities dealer (i.e., a Participating Underwriter) to reasonably
determine that an issuer or obligated person has agreed, in a
continuing disclosure agreement, to provide notice of the Rule's
specified events in a timely manner not in excess of ten business days
after the event's occurrence. The Commission believes that this change
will help promote more timely disclosure of this important information
to municipal security investors.
    Paragraph (b)(5)(i)(C)(6) of the Rule currently 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.'' The Commission is adopting, with
certain modifications from that proposed, an amendment to paragraph
(b)(5)(i)(C)(6) of the Rule to require that Participating Underwriters
reasonably determine that the issuer or obligated person has entered
into a continuing disclosure agreement to submit a notice for
``[a]dverse tax opinions, the issuance by the Internal Revenue Service
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 status of the security, or other material
events affecting the tax status of the security.'' A determination by
the IRS that interest on a municipal security may, in fact, be taxable
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.\681\ The tax-exempt status of a municipal
security is also important to many mutual funds whose governing
documents, with certain exceptions, limit their investments to tax-
exempt municipal securities.\682\ Therefore, retail and institutional
investors alike are very interested in events that could adversely
affect the tax-exempt status of the municipal securities that they own
or may wish to purchase.\683\
---------------------------------------------------------------------------

    \681\ See Proposing Release, supra note 2, 74 FR at 36840-41.
    \682\ Id.
    \683\ Id.
---------------------------------------------------------------------------

    Under the Rule, as amended, a materiality determination is no
longer necessary for the following six existing 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.\684\ The Commission believes that these events are
of such importance to investors that notice of their occurrence should
always be provided pursuant to a continuing disclosure agreement.
Furthermore, the Commission believes that eliminating the necessity to
make a materiality decision upon the occurrence of these events will
simplify issuer compliance with the terms of their continuing
disclosure agreements and will help to make such filings available more
promptly to investors and others.
---------------------------------------------------------------------------

    \684\ See Proposing Release, supra note 2, 74 FR at 36839-40.
---------------------------------------------------------------------------

    The amendments also add the following events, for which disclosure
notices are to be provided pursuant to a continuing disclosure
agreement: (i) Tender offers (paragraph (b)(5)(i)(C)(8) of the Rule);
\685\ (ii) bankruptcy, insolvency, receivership or similar event of the
obligated person (paragraph (b)(5)(i)(C)(12) of the Rule); \686\ (iii)
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 (paragraph
(b)(5)(i)(C)(13) of the Rule); \687\ and (iv) appointment of a
successor or additional trustee, or the change of name of a trustee
(paragraph (b)(5)(i)(C)(14) of the Rule), if material.\688\ The
Commission believes that there is a need to make available to all
investors this important information because it can affect their
investment decisions and the value of their municipal securities. The
Commission further believes that the addition of these four events
disclosure items to the Rule will substantially improve the

availability of important information in the municipal securities
market.
---------------------------------------------------------------------------

    \685\ See Proposing Release, supra note 2, 74 FR at 36842-46.
    \686\ Id.
    \687\ Id.
    \688\ Id.
---------------------------------------------------------------------------

    Finally, the amendments modify the Rule's exemption for demand
securities by eliminating paragraph (d)(1)(iii) to Rule 15c2-12 and
adding new paragraph (d)(5) to the Rule. The Commission's experience
with the operation of the Rule and changes in the municipal securities
market suggest a need to increase the availability of information to
investors regarding demand securities.\689\ Furthermore, the recent
period of turmoil in the market for municipal auction rate securities
and demand securities also suggests that the Rule's exemption for
demand securities is no longer appropriate and that the exemption
should be modified to apply paragraphs (b)(5) and (c) of the Rule,
relating to the submission of continuing disclosure documents and
recommendations by brokers, dealers, and municipal securities dealers,
respectively, to primary offerings of demand securities.\690\
---------------------------------------------------------------------------

    \689\ See Proposing Release, supra note 2, 74 FR at 36835-37.
    \690\ Id.
---------------------------------------------------------------------------

B. Objectives

    The purpose of the amendments is to achieve more efficient,
effective, and wider availability of municipal securities information
to broker-dealers, mutual funds, analysts and other market
professionals, institutional and retail investors, and the public
generally, and to help prevent, fraudulent, deceptive, or manipulative
acts or practices in the municipal securities market.

C. Significant Issues Raised by Public Comment

    In the Proposing Release, the Commission requested comment on
matters discussed in the IRFA.\691\ No commenter suggested that the
Rule would have a significant impact on smaller broker-dealers, who are
not entities directly subject to the Rule. As discussed in greater
detail above, several commenters raised concerns regarding the impact
of the proposed amendments on small issuers, although they are not
directly subject to the rule.\692\
---------------------------------------------------------------------------

    \691\ See Proposing Release, supra note 2, 74 FR at 36867.
    \692\ See CRRC Letter, WCRRC Letter, Kutak Letter, CHEFA Letter,
NAHEFFA Letter, Connecticut Letter, SIFMA Letter, NABL Letter, and
GFOA Letter. See supra Sections III.B., III.E., and V.D.
---------------------------------------------------------------------------

D. Small Entities Subject to the Rule

    The amendments apply directly to any broker, dealer, or municipal
securities dealer that acts as a Participating Underwriter in a primary
offering of municipal securities with an aggregate principal amount of
$1,000,000 or more and indirectly issuers of such securities.
    The RFA defines ``small entity'' to mean ``small business,''
``small organization,'' or ``small government jurisdiction.'' \693\ The
Commission's rules define ``small business'' and ``small organization''
for purposes of the RFA for each of the types of entities the
Commission regulates.
---------------------------------------------------------------------------

    \693\ 5 U.S.C. 601(6).
---------------------------------------------------------------------------

    A broker-dealer is a small business if its total capital (net worth
plus subordinated liabilities) on the last day of its most recent
fiscal year was $500,000 or less, and is not affiliated with any entity
that is not a ``small business.'' \694\
---------------------------------------------------------------------------

    \694\ 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    A municipal securities dealer that is a bank (including a
separately identifiable department or division of a bank) is a small
business if it has total assets of less than $10 million at all times
during the preceding fiscal year; had an average monthly volume of
municipal securities transactions in the preceding fiscal year of less
than $100,000; and is not affiliated with any entity that is not a
``small business.'' \695\
---------------------------------------------------------------------------

    \695\ 17 CFR 240.0-10(f).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking, an issuer or person, other
than an investment company, is a ``small business'' or ``small
organization'' if its ``total assets on the last day of its most recent
fiscal year were $5 million or less.'' \696\
---------------------------------------------------------------------------

    \696\ 17 CFR 230.157. See also 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    Based on information obtained by the Commission's staff, the
Commission estimates that 250 broker-dealers, including municipal
securities dealers, would be Participating Underwriters within the
meaning of Rule 15c2-12.\697\ Based on a recent review of industry
sources, the Commission does not believe that any Participating
Underwriters would be small broker-dealers or municipal securities
dealers.\698\ The Commission did not receive any comments on this
issue.
---------------------------------------------------------------------------

    \697\ See supra Section V.C.
    \698\ See Proposing Release, supra note 2, 74 FR at 36866.
---------------------------------------------------------------------------

    A ``small governmental jurisdiction'' is defined by the RFA to
include ``governments of cities, counties, towns, townships, villages,
school districts, or special districts, with a population of less than
fifty thousand.'' \699\ Currently, there are approximately 51,000 state
and local issuers of municipal securities \700\ that are subject to the
amendments. The Commission estimates that approximately 40,000 state
and local issuers are ``small'' entities for purposes of the RFA.
However, the Commission believes that most issuers of municipal
securities qualify for the limited exemption in paragraph (d)(2) of the
Rule.\701\ In the 2008 Amendments Adopting Release, the Commission
estimated that 10,000 issuers would enter into continuing disclosure
agreements that provide for their submitting continuing disclosure
documents to the MSRB.\702\ Under the amendment to narrow the Rule's
exemption for demand securities, the number of affected issuers is
estimated to increase to 12,000 issuers.\703\ Some of these issuers may
be small issuers.
---------------------------------------------------------------------------

    \699\ 5 U.S.C. 601(5).
    \700\ See Securities Exchange Act Release No. 33741 (March 9,
1994), 59 FR 12748 (March 17, 1994).
    \701\ Specifically, Rule 15c2-12(d)(2) provides an exemption
from the application of paragraph (b)(5) of the Rule (Rule's
provision regarding Participating Underwriters obligations with
respect to continuing disclosure agreements) with respect to primary
offerings if, among other things, the issuer or obligated person has
agreed to a limited disclosure obligation, including sending certain
material event notices to the MSRB. See 17 CFR 240.15c2-12(d)(2).
    \702\ See 2008 Adopting Release, supra note 7, 73 FR at 76121.
    \703\ See Proposing Release, supra note 2, 74 FR at 36850.
---------------------------------------------------------------------------

    In the Proposing Release, the Commission requested comment on the
above estimates. The Commission received no comments responding to
these estimates and continues to believe that they are appropriate.

E. Reporting, Recordkeeping and Other Compliance Requirements

    The amendments apply to all small entities that are currently
subject to Rule 15c2-12. Because small entities already may submit
notices to the MSRB to disclose events already covered by the Rule,
these entities should be able to prepare notices for events that are
incorporated into the Rule by the amendments. The Commission expects
that adding the new disclosure events will increase costs incurred by
small entities, to the extent that their primary offerings of municipal
securities are covered by the Rule, because they potentially will have
to provide a greater number of event notices than they do currently.

F. Action To Minimize Effect on Small Entities and Consideration of
Alternatives

    In connection with the final revisions to the Rule, the Commission
considered the above comments and the following alternatives:
    (1) Establishing differing compliance or reporting requirements or
timetables

which take into account the resources available to smaller entities;
    (2) Exempting smaller entities from coverage of the disclosure
requirements, or any part thereof;
    (3) The clarification, consolidation, or simplification of
disclosure for small entities; and
    (4) Use of performance standards rather than design standards.
    As noted above, breaker-dealers who are the entities directly
subject to the Rule are not likely to be significantly affected by the
amendments. The Commission notes, however, that it has adopted a
delayed compliance date of December 1, 2010, to allow broker-dealers,
and other entities indirectly affected by the Rule, additional time to
familiarize themselves with the amendments and to give the MSRB time to
make the necessary system changes to its EMMA system. As for issuers
who are not directly subject to the Rule, the Commission notes that
Rule 15c2-12 currently provides differing compliance criteria for
larger and smaller issuers because most small issuers of municipal
securities are eligible for the limited exemption currently contained
in paragraph (d)(2) of the Rule. The exemption in Rule 15c2-12(d)(2)
provides that paragraph (b)(5) of the Rule, which relates to the
submission of continuing disclosure documents, does not apply to a
primary offering if the conditions contained therein are met.\704\ This
limited exemption from the Rule is intended to assist small
governmental jurisdictions that issue municipal securities. In the case
of primary offerings by small governmental jurisdictions that are not
covered by the exemption, the Commission notes that the amendments
balance the informational needs of investors and others with regard to
municipal securities issued by small governmental jurisdictions with
the impact effects of the amendments on such small issuers.\705\
---------------------------------------------------------------------------

    \704\ See 17 CFR 240.15c2-12(d)(2).
    \705\ The Commission also notes that the Rule's exemption for
primary offerings of municipal securities that have an aggregate
principal amount of less than $1,000,000 may also apply to small
issuers and small governmental jurisdictions. See 17 CFR 240.15c2-
12(a).
---------------------------------------------------------------------------

    Further, the Commission believes that, in the case of those issuers
that do not qualify for the exemption in paragraph (d)(2) of the Rule
and that issue securities after the amendments compliance date, there
should be comparable standards for municipal securities disclosure
events. The Commission nevertheless recognizes that by not applying the
amendments to continuing disclosure requirements entered into prior to
the amendments' compliance date, for a period of time there will be
municipal securities that are subject to differing disclosure. The
Commission is mindful of the potential difficulties presented by
revising continuing disclosure agreements that reflect contractual
commitments entered into by the municipal issuer at the time of the
security's issuance. These differences in disclosure that will result
from applying the amendments to new issuances and not to municipal
securities outstanding prior to the compliance date will, however,
diminish over time. With respect to the clarification, consolidation,
or simplification of disclosure for small entities, the Commission
notes that, although the amendments are uniform for large and small
issuers, they are largely based on existing requirements.

IX. Statutory Authority

    Pursuant to the Exchange Act, and particularly Sections 2, 3(b),
10, 15(c), 15B, 17 and 23(a)(1) thereof, 15 U.S.C. 78b, 78c(b), 78j,
78o(c), 78o-4, 78q and 78w(a)(1), the Commission is adopting amendments
to Sec.  240.15c2-12 of Title 17 of the Code of Federal Regulations in
the manner set forth below.

Text of Rule Amendments

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

0
For the reasons set out in the preamble, Title 17, Chapter II, of the
Code of Federal Regulations is amended as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934

0
1. The authority citation for part 240 continues to read in part as
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *

0
2. Section 240.15c2-12 is amended by the following:
0
A. Revise the introductory text of paragraph (b)(5)(i)(C), and
paragraphs (b)(5)(i)(C)(2), (b)(5)(i)(C)(6), (b)(5)(i)(C)(7),
(b)(5)(i)(C)(8), (b)(5)(i)(C)(10), and (b)(5)(i)(C)(11);
0
B. Add new paragraphs (b)(5)(i)(C)(12), (13) and (14);
0
C. Revise paragraph (d)(1)(ii);
0
D. Remove paragraph (d)(1)(iii);
0
E. Revise paragraph (d)(2)(ii)(B); and
0
F. Add new paragraph (d)(5).
    The additions and revisions read as follows.

Sec.  240.15c2-12  Municipal securities disclosure.

* * * * *
    (b) * * *
    (5)(i) * * *
    (C) In a timely manner not in excess of ten business days after the
occurrence of the event, notice of any of the following events with
respect to the securities being offered in the Offering:
* * * * *
    (2) Non-payment related defaults, if material;
* * * * *
    (6) Adverse tax opinions, the issuance by the Internal Revenue
Service 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 status of the security, or other
material events affecting the tax status of the security;
    (7) Modifications to rights of security holders, if material;
    (8) Bond calls, if material, and tender offers;
* * * * *
    (10) Release, substitution, or sale of property securing repayment
of the securities, if material;
    (11) Rating changes;
    (12) Bankruptcy, insolvency, receivership or similar event of the
obligated person;

    Note to paragraph (b)(5)(i)(C)(12): For the purposes of the
event identified in paragraph (b)(5)(i)(C)(12) of this section, the
event is 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 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 of 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.

    (13) 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;
    (14) Appointment of a successor or additional trustee or the change
of name of a trustee, if material; and
* * * * *
    (d) * * *
    (1) * * *
    (ii) Have a maturity of nine months or less.
* * * * *
    (2) * * *
    (ii) * * *
    (B) In a timely manner not in excess of ten business days after the
occurrence of the event, notice of events specified in paragraph
(b)(5)(i)(C) of this section with respect to the securities that are
the subject of the Offering; and
* * * * *
    (5) With the exception of paragraphs (b)(1) through (b)(4), this
section shall apply to a primary offering of municipal securities in
authorized denominations of $100,000 or more if such securities may, at
the option of the holder thereof, 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; provided, however, that paragraphs (b)(5) and (c) of
this section shall not apply to such securities outstanding on November
30, 2010, for so long as they continuously remain in authorized
denominations of $100,000 or more and may, at the option of the holder
thereof, 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.
* * * * *

PART 241--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES
EXCHANGE ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
3. Part 241 is amended by adding Release No. 34-62184A and the release
date of May 26, 2010, to the list of interpretative releases.

    By the Commission.

    Dated: May 26, 2010.
Elizabeth M. Murphy,
Secretary.

    Note: Exhibit A to the Preamble will not appear in the Code of
Federal Regulations

Exhibit A

Key to Comment Letters Cited in Adopting Release Amendment to
Municipal Securities Disclosure (File No. S7-15-09)

    1. Letter from Bill Boatwright, Wealth Advisor, UBS Financial
Services, Inc., to Elizabeth M. Murphy, Secretary, Commission, dated
July 16, 2009 (``Boatwright Letter'').
    2. Letter from James R. Folts, Investor, to Elizabeth M. Murphy,
Secretary, Commission, dated August 4, 2009 (``Folts Letter'').
    3. Letter from Leonard Becker, Investor, to Elizabeth M. Murphy,
Secretary, Commission, dated August 12, 2009 (``Becker Letter'').
    4. Letter from Charles Halgren, Financial Analyst, to Elizabeth
M. Murphy, Secretary, Commission, dated August 18, 2009 (``Halgren
Letter'').
    5. Letter from Philip A. Shalanca, Retired School Business
Administrator, to Elizabeth M. Murphy, Secretary, Commission, dated
August 30, 2009 (``Shalanca Letter'').
    6. Letter from Glenn Byers, Assistant Treasurer and Tax
Collector, County of Los Angeles, to Mary Schapiro, Chairman,
Commission, dated August 31, 2009 (``Los Angeles Letter'').
    7. Letter from Kenneth L. Rust, Chief Administrative Officer,
City of Portland, Oregon (``Portland''), and Eric H. Johansen, Debt
Manager, Portland, to Elizabeth M. Murphy, Secretary, Commission,
dated September 1, 2009 (``Portland Letter'').
    8. Letter from Jerry Moffatt, State President, California Refuse
Recycling Council (``CRRC''), and Doug Button, North District
President, CRRC, to Elizabeth M. Murphy, Secretary, Commission,
dated September 2, 2009 (``CRRC Letter'').
    9. Letter from Lisa S. Good, Executive Director, National
Federation of Municipal Analysts (``NFMA''), to Elizabeth M. Murphy,
Secretary, Commission, dated September 2, 2009 (``NFMA Letter'').
    10. Letter from Connecticut Health and Educational Facilities
Authority (``CHEFA''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 4, 2009 (``CHEFA Letter'').
    11. Letter from Robert Donovan, Executive Director, Rhode Island
Health and Educational Building Corporation, on behalf of the
National Association of Health and Education Facilities Finance
Authorities (``NAHEFFA''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 4, 2009 (``NAHEFFA Letter'').
    12. Letter from Brian G. Thomas, Assistant General Manager/Chief
Financial Officer, The Metropolitan Water District of Southern
California (``Metro Water''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 4, 2009 (``Metro Water Letter'').
    13. Letter from Trish Roath, Executive Director, CRRC, Kristan
Mitchell, Executive Director, Oregon Refuse & Recycling Association,
and Brad Lovas, Executive Director, Washington Refuse & Recycling
Association, on behalf of West Coast Refuse & Recycling Coalition
(``WCRRC''), to Elizabeth M. Murphy, Secretary, Commission, dated
September 7, 2009 (``WCRRC Letter'').
    14. Letter from Ronald A. Stack, Chair, Municipal Securities
Rulemaking Board (``MSRB''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``MSRB Letter I'').
    15. Letter from Richard T. McNamar, President, e-certus, Inc.
(``e-certus''), to Elizabeth M. Murphy, Chairman, Commission, dated
September 8, 2009 (``e-certus Letter I'').
    16. Letter from Leon J. Bijou, Managing Director and Associate
General Counsel, Securities Industry and Financial Markets
Association (``SIFMA''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``SIFMA Letter'').
    17. Letter from Michael Decker, Co-Chief Executive Officer,
Regional Bond Dealers Association (``RBDA''), and Mike Nicholas, Co-
Chief Executive Officer, RBDA, to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``RBDA Letter'').
    18. Letter from Denise L. Nappier, Treasurer, State of
Connecticut, to Elizabeth M. Murphy, Secretary, Commission, dated
September 8, 2009 (``Connecticut Letter'').
    19. Letter from Daniel C. Lynch, Kutak Rock LLP, to Elizabeth M.
Murphy, Secretary, Commission, dated September 8, 2009 (``Kutak
Letter'').
    20. Letter from Tom Sanzillo, Consultant, T.R. Rose Associates,
Mark Kresowick, Corporate Accountability Representative, Sierra
Club, and Lisa Anne Hamilton, Counsel, to Elizabeth M. Murphy, dated
September 8, 2009 (``T.R. Rose and Sierra Letter'').
    21. Letter from Paula Stuart, Chief Executive Officer, Digital
Assurance Certification, LLC (``DAC''), to Elizabeth M. Murphy,
Secretary, Commission, dated September 8, 2009 (``DAC Letter'').
    22. Letter from Karrie McMillan, General Counsel, Investment
Company Institute (``ICI''), to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``ICI Letter'').
    23. Letter from Mark Paxson, General Counsel, Office of
California State Treasurer, to Elizabeth M. Murphy, Secretary,
Commission, dated September 8, 2009 (``California Letter'').
    24. Letter from Donald F. Steuer, Chief Financial Officer,
County of San Diego, to Elizabeth M. Murphy, Secretary, Commission,
dated September 8, 2009 (``San Diego Letter'').
    25. Letter from Scott C. Goebel, Senior Vice President and
General Counsel, FMR Co., Fidelity Investments (``Fidelity''), to
Elizabeth M. Murphy, Secretary, Commission, dated September 11, 2009
(``Fidelity Letter'').
    26. Letter from William A. Holby, President, National
Association of Bond Lawyers (``NABL''), to Elizabeth M. Murphy,
Secretary, Commission, dated September 23, 2009 (``NABL Letter'').
    27. Letter from Frank R. Hoadley, Chairman, Governmental Debt
Management Committee, Government Finance Officers Association
(``GFOA''), to Elizabeth M. Murphy, Secretary, Commission, dated
September 24, 2009 (``GFOA Letter'').
    28. Letter from Richard T. McNamar, President, e-certus, Inc.
(``e-certus''), to

Elizabeth M. Murphy, Secretary, Commission, dated October 14, 2009
(``e-certus Letter II'').