On May 16, 2011, amendments to the Municipal Securities Rulemaking Board's ("MSRB") Rule G-34(c) ("Amendments") went into effect that are designed to enhance the interest rate and descriptive information available to market participants with respect to Auction Rate Securities ("ARS") and Variable Rate Demand Obligations ("VRDOs").

The Amendments affect brokers, dealers and municipal securities dealers (collectively, "Dealers") and issuers and borrowers of the proceeds of municipal bonds by: (i) requiring a Dealer to report additional information to the MSRB when such Dealer submits an order directly to an auction agent for its own account or on behalf of another account to buy, hold or sell an ARS through the auction process ("Program Dealer"); (ii) requiring a Dealer acting as a remarketing agent ("Remarketing Agent") to submit additional information to the MSRB in connection with VRDOs at the time of any interest rate reset; and (iii) requiring Program Dealers and Remarketing Agents to submit certain transaction documents to the MSRB Short-term Obligation Rate Transparency System Facility ("SHORT System").

The Amendments required Dealers to submit documents setting forth auction procedures and interest rate setting mechanisms associated with ARS and stand-by bond purchase agreements, letter of credit agreements and any other documents that establish an obligation to provide liquidity associated with VRDOs (collectively, the "Covered Documents") in effect prior to May 16, 2011, to the SHORT System on or before September 22, 2011 ("Transition Period Documents"). Thereafter, Dealers are required to submit any new Covered Documents or amendments to existing Covered Documents within five (5) business days of receipt.

To assist in complying with the Amendments, Program Dealers and Remarketing Agents are now insisting that issuers and borrowers of bond proceeds agree to provide them with Covered Documents and amendments thereto in portable document format ("Pdf").

Expanded Disclosure Obligations

ARS Bidding Information. The Amendments require a Program Dealer, or Auction Agent on its behalf, to submit to the SHORT System the following information which is in addition to the information that Rule G-34 previously required to be submitted to the MSRB:

  • Aggregate par amount of orders to sell at any interest rate and aggregate par amount of such orders that were executed;
  • Interest rate(s) and aggregate par amount(s) of orders to hold at a specific interest rate and aggregate par amount(s) of such orders that were successfully held;
  • Interest rate(s) and aggregate par amount(s) of orders to buy and aggregate par amount(s) of such orders that were executed;
  • Interest rates(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 amount(s) 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.

Such additional information is required to be submitted at the same time (generally by 6:30 PM Eastern Time on the date on which an auction occurs) as the information previously required to be submitted under Rule G-34(c).

VRDO Information. The Amendments require a Remarketing Agent to submit to the SHORT System the following information which is in addition to the information that Rule G-34 previously required to be submitted to the MSRB:

  • Effective date . . . that the interest rate reset is applicable;
  • Identity of the issuer's agent to which bondholders may tender their security ("Tender Agent");
  • Identity of the liquidity provider(s) including an indication of those VRDOs for which an issuer provides "self liquidity" and the identity of the party providing such self-liquidity;
  • Aggregate par amount, if any, of the VRDOs held by a liquidity provider(s) (par amount held as "Bank Bonds"), and aggregate par amount, if any, of the VRDO held by parties other than a liquidity provider(s), including the par amounts held by the Remarketing Agent and by investors.

Such additional information is required to be submitted at the same time (generally by 6:30 PM Eastern Time on the date on which an interest rate reset occurs) as the information previously required to be submitted under Rule G-34(c).

ARS and VRDO Covered Documents.

The Amendments required ARS Program Dealers to submit to the SHORT System current versions of existing ARS documents setting forth auction procedures and interest rate setting mechanisms by September 22, 2011 and, thereafter, require any future, subsequently amended or new versions of such documents to be submitted to the SHORT System no later than five (5) business days after they are made available to the Program Dealer. The Amendments further require Remarketing Agents to use best efforts to obtain and submit to the SHORT System current versions of (a) Stand-By Bond Purchase Agreements; (b) Letter of Credit Agreements; and (c) any other document that establishes an obligation to provide liquidity, and thereafter any future, subsequently amended or new versions of such documents, no later than five (5) business days after they are made available to the Remarketing Agent. If a Remarketing Agent is not able to obtain through its best efforts such documents, the Remarketing Agent shall submit a notice to such effect to the SHORT System.

Submission to SHORT System

All documents submitted to the SHORT System must be submitted as Pdf files. Dealers must identify the CUSIP (Committee on Uniform Securities Identification Procedures) numbers to which the documents relate, the date the document was received and, for VRDOs, the type of liquidity facility to which the documents relates.

This alert summarizes the latest amendments to MSRB Rule G-34(c) that went into effect on May 16, 2011.