• Transparency Amendments: Dealers to Provide Additional ARS and VRDO Information and Documentation to SHORT System
  • May 23, 2011 | Author: Katherine A. Sebastiano
  • Law Firm: Thorp Reed & Armstrong, LLP - Pittsburgh Office
  • On August 20, 2010, the Securities and Exchange Commission (“SEC”) approved amendments which will increase the amount of information and documentation collected from certain brokers, dealers or municipal securities dealers (collectively “dealers”) on municipal Auction Rate Securities (“ARS”) and Variable Rate Demand Obligations (“VRDO”) by the Municipal Securities Rulemaking Board (“MSRB”) Short-term Obligation Rate Transparency (“SHORT”) System and made available to the public on the MSRB’s Electronic Municipal Market Access (“EMMA”) web site.[1]  The rule changes implemented under these amendments are threefold and will all go into effect on May 16, 2011.[2]

    First, the amendments modify MSRB Rule G-34(c)[3], entitled Variable Rate Security Market Information, to require an ARS Program Dealer or VRDO Remarking Agent (each a “Dealer”, collectively “Dealers”) to submit certain additional interest rate, bidding and descriptive information, as applicable, on an ARS or VRDO to the SHORT System through MSRB Gateway each time an ARS auction or VRDO interest rate reset occurs for that particular ARS or VRDO.[4]

    Specifically, beginning on May 16, 2011 the amendments to Rule G-34(c) will require VRDO Remarketing Agents, defined by Rule G-34(c) as all dealers acting as a remarketing agent to a VRDO, to submit the following specific information about such a VRDO applicable at the time of any interest rate reset and in addition to the information currently required:

    • Effective date...that the interest rate is applicable;
    • Identity of the liquidity provider [including those instances where the issuer is providing self liquidity];
    • Identity of the agent of the issuer to which bondholders may tender their security (“Tender Agent”); and
    • Aggregate par amount, if any, of the Variable Rate Demand Obligation held by a liquidity provider(s) (par amount held as “Bank Bonds”), and aggregate par amount, if any, of the Variable Rate Demand Obligation held by parties other than a liquidity provider(s), including the par amounts held by the Remarketing Agent and by investors.[5]

    Also, beginning on May 16, 2011 an ARS Program Dealer, defined by Rule G-34(c) as all dealers submitting an order directly to an Auction Agent (as defined in Rule G-34(c)) on its own behalf or on behalf of another to buy, hold or sell an ARS through the action process, will be required by Rule G-34(c) to submit the following additional[6] information about such ARS:

    • Aggregate par amount of orders to sell at any interest rate and aggregate par amount of such orders that were executed;
    • Interest rate(s) and aggregate part amount(s) of orders to hold at a specific interest rate and aggregate par amount of such orders that were successfully held;
    • Interest rate(s) and aggregate par amounts(s) of orders to buy and aggregate par amount of such orders that were executed;
    • Interest rate(s), aggregate par amount(s), and type of order - either buy, sell or hold - for a Program Dealer for its own account and aggregate par amounts of such orders, by type, that were executed; and
    • Interest rate(s), aggregate par amount(s), and type of order - either buy, sell or hold - for an issuer or conduit borrower for such Auction Rate Security.[7]

    Furthermore, the amendments to Rule G-34(c) also require each broker, dealer or municipal securities dealer, other than an ARS Program Dealer, that submits an order to an ARS Program Dealer on behalf of an issuer or conduit borrower disclose, at the time the order is submitted, that such order is on behalf of an issuer or conduit borrower.[8]  This requirement will allow ARS Program Dealers to properly supply the required additional information relating to such orders in those instances when they are not directly submitted to the ARS Program Dealer by the issuer or conduit borrower.[9]

    All of the aforementioned additional information, like the information currently required under Rule G-34(c), generally must be submitted by 6:30 P.M. Eastern Time on the day such ARS auction or VRDO interest rate reset occurs.[10]  Although it is the ultimate responsibility of appropriate Dealer, an ARS Auction Agent or an agent properly designated by a Dealer to make submissions on such Dealer’s behalf will also be permitted to submit the required information and documentation to the SHORT System through MSRB Gateway.[11]  To avoid duplication of information, the amendments limit the information required for ARSs when multiple ARS Program Dealers are involved in a single auction.[12]  Once the required information is submitted, it will become available to the public in real-time on the EMMA website.[13]

    Second, the amendments modify MSRB Rule G-8, regarding Books and Records, and Rule G-34(c) to require ARS Program Dealers and VRDO Remarketing Agents to provide certain documents to the SHORT System beginning May 16, 2011.  ARS Program Dealers will be required to submit all current documents in effect prior to May 16, 2011 which describe auction procedures and interest rate setting mechanisms on all outstanding ARS (“ARS Transition Documents”) for which it acts as an ARS Program Dealer.[14]  All such documents must be submitted on or before September 22, 2011, which is 90 business days after May 16, 2011.[15]  The amendments also provide that any new documents which describe such procedures or mechanisms or amendments to or new versions of such documents made or entered into after May 16, 2011 (“ARS New Documents”, together with ARS Transition Documents “ARS Documents”) must be submitted by the appropriate ARS Program Dealer no later than 5 business days after they are made available to such ARS Program Dealer.[16]

    VRDO Remarking Agents will be required to use and keep record of their best efforts to submit the current versions of the following documents for all outstanding VRDO in effect prior to May 16, 2011 for which it acts as VRDO Remarking Agent on or before September 22, 2011, which is 90 business days after May 16, 2011:

    • Stand-By Bond Purchase Agreement;
    • Letter of Credit Agreement; and
    • any other document that establishes an obligation to provide liquidity

    (collectively “VRDO Transition Documents”)[17]

    The amendments also provide that any new Stand-By Bond Purchase Agreements, Letter of Credit Agreement or document that establishes an obligation to provide liquidity with regard to a VRDO or any new versions or amendments to such documents created or entered into after May 16, 2011 (“VRDO New Documents”, together with the VRDO Transition Documents, “VRDO Documents”) must be submitted to the SHORT System by the appropriate VRDO Remarketing Agent no later than 5 business days after they are made available to such VRDO Remarketing Agent.  If any VRDO Document is unable to be obtained through the best efforts of the VRDO Remarking Agent charged with submitting it to the SHORT System, such Remarking Agent must submit notice to the SHORT System that such document was unable to be obtained through best efforts and must keep record of such best efforts for a period of at least three years.[18]

    All the ARS Documents and the VRDO Documents submitted to the SHORT System must be in portable document format (“PDF”) and, with the exception of ARS and VRDO Transition Documents, must be word-searchable.

    According to the MSRB, the purpose of this rule change is to increase transparency and provide investors with centralized access to documents which detail critical aspects of VRDO liquidity facilities and ARS auction procedures and interest rate setting mechanisms.[19]  The MSRB has taken the position that such critical aspects of VRDO Documents include, among other things, “‘termination provisions’ detailing circumstances when the obligation for a liquidity provider to provide liquidity is no longer applicable, the ‘notification period’ that details the length of time that may lapse between a holder of a VRDO tendering a position in the security and the liquidity provider purchasing the tendered security, and the ‘term out period’ showing, if any, the time period that principal held with the liquidity provider (as a “bank bond”) would be amortized”.[20]

    In MSRB Notice 2011-17 dated February 23, 2011 the MSRB addressed concerns that ARS and VRDO Documents contain certain information that was never intended to be publicized and has taken a position that, while this does not exempt a Dealer from publicizing the document, a certain amount of redacting will be permitted.  Certain information that is (1) confidential or (2) capable of being used fraudulently, such as VRDO liquidity facility bank routing or account numbers, can be redacted.[21]  Such confidential information is described by the MSRB as that “information that was intended to remain confidential to maintain internal security or confidentially of personal information” and the MSRB has expressly indicated that this may include “fees assessed by liquidity providers or ARS Program Dealers as well as staff names and contact information for making a request to use a VRDO liquidity facility”.[22]  The MSRB also indicates that all redacting should be kept to a minimum and should not include the critical aspects of those documents as defined above or any other information “that would reasonably be assumed to be used by an investor or other market participant in evaluating an ARS or VRDO”.[23]

    Third, and finally, the amendments modify the SHORT System to allow it to collect the additional information and documentation required in the rule amendments and the EMMA Short-term Obligation Rate Transparency Service so that such information and documentation can be made available on the EMMA website.  The modifications to these facilities will go into effect on May 16, 2011.

     


    [1] MSRB Notice 2010-31.

    [2] MSRB Notice 2011-17.

    [3] All citations to MSRB Rules herein are cited as amended and attached to MSRB Notice 2010-31.

    [4] See MSRB Rule G-34(c).

    [5] MSRB Rule 34(c)(ii)(A)(1); see also MSRB Notice 2010-31.

    [6] The amendments delete a provision contained in former Rule G-34(c)(i) which states that “[p]ar amount auctioned, not including hold orders effective at any rate” must be reported.

    [7] MSRB Rule 34(c)(i)(A)(1).

    [8] MSRB Rule 34(c)(i)(A)(6); see also MSRB Notice 2010-31.

    [9] MSRB Notice 2010-31.

    [10] See MSRB Rule 34(c).

    [11] MSRB Notice 2010-31.

    [12] See MSRB Rule 34(c)(i)(A)(4).

    [13] For a list of information currently required to be submitted please see MSRB Notice 2010-31, page 2.

    [14] MSRB Rule G-34(c)(i)(B).

    [15] MSRB Rule 34(c)(i)(B)(1); see also MSRB Notice 2011-17.

    [16] MSRB Rule 34(c)(i)(B)(1); see also MSRB Notice 2011-17.

    [17] MSRB Rule 34(c)(ii)(B); see also MSRB Notice 2011-17.

    [18] See MSRB Notice 2011-17.

    [19] See generally MSRB Notice 2011-17.

    [20] MSRB Notice 2011-17.

    [21] MSRB Notice 2011-17.

    [22] MSRB Notice 2011-17.

    [23] MSRB Notice 2011-17.