Interpretive Release Statement of the Commission Regarding Disclosure Obligations of Municipal Securities Issuers and Others 33-7049, 34-33741, FR-42

Thursday
March 17, 1994
Part V
Securities and
Exchange
Commission
17 CFR Parts 211, 231, and 241
Municipal Securities Issuers and Others;
Statement of the Commission Regarding
Disclosure Obligations; Final Rule
17 CFR Part 240
Municipal Securities Disclosure and
Confirmation of Transactions; Proposed
Rules
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12748 	Federal Register I Vol. 59, No. 52 I Thursday, March 17, 1994 I Rules and Regulations
SECURITIES AND EXCHANGE
COMMISSION
11 CFR Parts 211, 231, and 241
(Release No. 33-7049; 34-33741; FR-42;
FILE NO. $7-4-94]
Statement of the Commission
Regarding Disclosure Obligations of
Municipal Securities Issuers and
Others
AGENCY: Securities noel Exchange
C.ommissiun.
ACTION: lntcrprolatinn; Solicitation of
COIIlllllliiiS.
SUMMARY: Tho Sncuritics and Exchange
Commission ("Commission") is
publishing its views with respect In the
disdosuro obligatiuns .,f participants in
tlw municipal socuritios markets unckr
thn untirraud pruvisions of the fcdP.ral
sm:urilics laws. hoth in r.onnection with
primary offurings and on a continuing
basis with mspcd to the st1condory
murkot. This inturprutivo guidance is
intendmlto assist munic:ipal securities
issunrs. brokers, dealers and municipal
sm:uritios dealers in mucting their
obligations undor tho antifraud
provisions. Tho Commission is seeking
comnumt on isstws discussed in this
wleasn and possible futurn ugoncy
action.
OATES: This lntnrpmtation is nffective
March !l, 1!l!l4.
C:umnwnls should 1m mc:nivod on or
lmfnm July 15. J!l!J4.
ADDRESSES: Comnwnts should bn
t>uhmitltHI in lriplil:ntu toJunnthnn G.
Kutz. :loc:rutary. :lm:uritins nnd Exc:hango
Connnissinn. 450 Fifth Strout. NW .. Stop
li-!1. Wnshingtun. DC 2054!). C:urnm1mt
Iutters should rnfnr tu Filn Nu. 57-4-94.
All t:umnwnts rm:oivcd will hu nvnilnblu
fur public inspnc:tiun and copying ut the
C:mnmissiun's l'uhlil: Rofnrunce Room,
450 Fifth Strout. NW .. Wushington. DC
2054!1.
FOR FURTHER INFORMATION CONTACT: Ann
D. Wnllucn 1(202} 272-72112). Amv
Mullzur Storr ((202) 272-3654}, Vincont
W. Mrlhis ((202} 272-:I!JHII). Division of
C:urpnrutinn Finum:n; Jnnot W. Russull
l-luntor (with rnspe~:t to Sc~ctions lli.C.U.
unci V.) ((202) 504-2411l), Division of
Mnrknl Rugulntion. U.S. Sncuritios an•'
l~xc:hnngu Commission. 450 Fifllt Stnmt.
NW .• Wushingtun, DC 20549.
SUPPLEMENTARY INFORMATION· In 11
1:ompanion release, the C.ommission is
propnsing ruin amundmcmts that
prohibit a broker. dealer or municipal
sm:uritius denlor from underwriting a
munidpnl issununlcss tho issunr agrcos
tu dissmninntn information tnt he
sncondnry markntnnd from
recommending the purchase of a
municipal security without reviewing
such information.
I. Executive Summar]'
The recent high volume of municipal
securities offerings, ns well as the
growing ownership of municipal
securities by individual investors, has
highlighted the need for improved
disclosure practices in the municipal
securities markt:t, particularly in the
secondary market. To encourage and
expedite the ongoing efforts by market
participants to improve disclosure
practices. and to assist market
participants in meeting their obligations
under the antifraud provisions, tho
Commission is publishing its views
with respect to disclosures under the
federal securities laws in tho municipal
market.
This interpretive release addresses the
following:
(1) With respect to prim.1ry 01Tering
disclosure. despite the significant
improvcmunt in disclosure prac:ices in
recent years usn result of voluntury
initiativos. increased attention needs to
bo diroctecl nt
• Dist:losur•· of poh•ntial conflicts of
interest nnd tllalnrh,I111H111dnl rc1ntions!tips
nmong issuers. advisers nnd underwriters.
including thus,, !Irisin~: from politi(:al
(:ontrihutions:
• Disclosure regarding the terms and risks
of sucuriti"s huing uffercd:
• Disc:losurn of 1!10 issuer's or obligor's
finnncinl couditinn. rusults of upemlions. and
n1sh nows. This infnrmnlion should indudn
nuditml finnnt:inl stuhmu>nts (or clisdosure
thnl tlw finnnt:inl stnlnnmnts wcrn not subject
In mulit)uml nu uxplnnuliun of lhu
m:cnunlinl( prindplt>s fullowud in tim
pmpnmtion of lim finnndul stntmnnnts.
unluss tho slnlmmmls wure prepnrcd in
nr:cordaneu with gmwrnlly accepted
m:counling principlns ("CAAP") or
m:companit>d by n (111antified ex pin nation of
nny eluvial inn from GAAP:
• Disclosure of tho issuer's pions l'l.'l(nrding
lhn provision of informnlion lo lht> s01:ondnry
mnrkut: nnd
• Timely dolivury of preliminary officio I
stnlumtmls to undt•rwrilurs nnd potential
invusturs.
(2) Tho C,ommissiun is renuwin~: ils
n!(:ommunclntion fur llll(islnlion to rupenlthu
uxemplion for corporulo obligations
underlying curtnin t:onduit securities frrm
the n.-gistrnlion nnd reporting requirume•Jts of
thn focluml sucurities lows.
(3) l'nrth:ulnrly bemuse of thoir publi1:
nnturo, issuers in the municipal market
routinely make public statements and issue
reports lhnt can affect tho market for their
securities: without a mechanism for
providin~: ongoing disclosures lo investors.
lhest< di!u:losuros may r.nuse the Issuer 10
violate the nnlifrnud provisions.
Basic: mechanisms to address potential
nntifrnuclllnhility inc:lude:
• Publication of financial information.
including audited financial statements and
olher financial and operating information. on
at least an annual basis:
• Timely reporting of material events
reflecting upon the creditworthiness of the
is•uer or the obligor and Ihe terms of Its
securities, including material defaults. draws
on reserves. adverse rating changes and
receipt of an adverse tax opinion: and
• Submission of such information to an
information repository.
(4) Undenvriters and municipal securities
dealers are key players in maintaining the
quality of disclosure in the municipal
securities markets. The underwriter has a
duty to review the issuer's disclosure
documents berore offering, selling or bidding
ror the securities and to have a reasonable
basis for its belier as to the accuracy and
completeness of the representations in the
documents. Municipal dealers must have a
reasonable basis for rec.>mmending the
purchase of securities.
In a companion release.• lhe Commission
is proposing ror comment two related rule
amendments. the firs! proposing to prohibit
a broker. dealer or municipal securities
dealer from underwriting a municipal issue
unless the issuer makes a commitment to
provide annual and event-related secondary
market information to a designated
repository; and the second proposing to
prohibit n broker. dealer. or municipal
securities dealer from recommending
pmchnscs of such issues in the secondary
mnrkel if it does nol review such
infnrJnntion.
II. Introduction
A. The Municipal Securities Market
/1s detailed in tho recent Staff Report
on tho Municipal Securities Market, the
market for municipal securities 1S
characterized by groat diversity and
high volume. Issuers, estimated to
number approximately 50,000, include
state governments, cities, towns.
counties, and special subdivisions. such
as special purpose districts and public
authorities. It is estimated that thoro
currently arc 1.3 million municipal
issues outstanding. representing
approximately $1.2 trillion in
securities.2Jn1993, a record level of
over $335 billion in municipal
securities was sold. representing over
17,000 issues. This record financing was
heavily influenced by refundings.
Nevertheless, tho level of long term new
money financings, representing 49% of
financings for the year, reflected
continued growth. In 1993, there were
$142 billion of new money long term
r Exchange Act Release No._33742 (March 9. 1994)
i"Cornpnnion Rctcasc").
:Sec Division of Mfltkct Regulation, Socuritics
nnd lc:xt:hunge Commission. Staff Rrport on lim
Municipal Socurilirs Markd ("Siaff Rcport .. ltS,pl.
HJ93)all.
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Federal Register I Vol. 59, No. 52 I Thursday. March 17. 1994 I Rules and Regulations 	12749
financing::. compared w $81 billion in
1988, a 75% increase.~
In recent years, the forms of sec-urities
used to meet the financing needs of
theso issuers have become increasingly
diverse and complex. For example.
conduit bonds, certificates of
participation, and a variety of derivative
produw; have joined traditional general
obligation and revenue bonds as
prevalent forms of munit:ipal financing.~
In addition, there has been a change
in tho invostor profile in the municipal
securities market. By 1992, individual
investors, including those holding
through mutual funds. hold 75% of the
municipal debt outstanding. compared
to 44% in 1983.~
Along with the changing investor
profile, there has been a change in
Investor strategy. Traditionally,
municipal bondholders have bmm huy
and hold investors; however, this 	·
strategy has changed significantly with
tho growth und development of
municioal bond funds. Many of these
funds at:lively trade their portfolio
securities to take advantage of mar~ 1
conditions or to meet redemption needs.
B. SEC Oversinht of the Municipal
Securities Market
As the agency chargnd with
administering the federal securitins laws
and overseeing this nation's snc:urities
markets, the Commission has an
obligation to protect invrstors in the
municipal markots from fraud,
including misleading disclosures. As
the New York City report stated nonrly
two dccados ago:
lly virtuu of the lorgu dollar volumu uf
munic:ipal sm:urilios issued and outstundinp:
tmch yuor. suc:h sm:urilies nm n rnnjor fm:tor
in tho Notion's et:onomv .,. I tho nntionnl
sec:uritlos morkels. In ligl: 	1 the nnlinnnl
sc:opo of tho munidpol st,..urities morkuts,
there is an overriding federal interest In
assuring that thoro is adequate disclnsul1! of
ell motorial information hy issuers of
municipal socuritlns.
Although municipalitius havtH:ertnin
unlcJUe otlributos by virtue olthoir politic:ol
nature. insofar us thcv aro issuers of
St!C:urlties. they oro stihject to the prus<:ription
against false ond misleading disc:losun!s.~
The burgeoning volume and
complexity of municip::! securities
offerings, as well as the retail nature of
tho market. heighten the need for marknt
participants to seck to prevent fraud
through the timely provision of material
'"J\ Uccado of Muhicipol fin•m:e;'1J,•flrmt/
llllJW flan. li. 1!194) nt 24.
•Stoff Rr.port HI 1-2.
"11u'" lluntl ""l't•r 199.1 rt•orlxJ01 t•·ofmrl Buvr.r
1993 Yearhook .. iut Gl-lil. 	·
..Sluff Rroport m1 Trowmclions in Stv·uritiN of tllr
C:it_v of M•tt• York (.. NY City R.•port .. l (J\ug. 1977)
Chnplo!tlll. nt 1-2.
information concerning municipal
issuers and securities.
While Congress exempted offerings of
municipal securities from the
registration requirements and civil
Jiabih.y provisions of the Securities Act
of 1933,7 and a mandated system of
periodic reporting under the Securities
Excnange Act or 1934,R it did not
exempt transactions in municipal
securities from tho coverage ofthe
antifraud provisions of section 17(a) of
tho Securities Act,9 section tO (b) of the
Exchange Act, and Rule 1Ob-5
promulgated thereunder.1o These
antifraud provisions prohibit any
person, including munlcipul issuers and
brokers, dealers and municipal
securities dealers, from making a false
or misleading statement of material fact,
or rmitting any material facts necessary
to n;akl' statement~; made by that person
not misleading, in connection with the
offer, purchase or sale of any security.
In addition, brokers, dealers and
municipal securities dealers are subject
to regulations adopted by tho
Commission, including those
regulations adopted to define and
prevont fraud." Municipal securities
denlors 11re also subject to rules
promulgated by the Municipal
Securities Rulcmnking Board
("MSRB"},I2
C. Disclosure Practices and Cu/Js for
Enhanced Disclosure
In the absence of a statutory sr.:heme
for municipal securitins rtlgistration and
reporting, disclosuro by municipal
issuors has boon governed by tho
de munds of market participants and
untifraud strictures. Spurrnd by the New
York City fiscal crisis in 1975 nnd the
Washington Public Power Supply
System defaults.•• participants in tho
municipal securities market have
developed extensive guidanco to
improve the level and quality of
disdo'<ure in primary offerings of
municipal securities, and to a mora
T Soo suction J(a)(2) of the Socuritios J\r.t (15
ll.S.C. 77clnll2)~
•St.., "'"1ion J(a)[29) u[ tho l::xr.hange J\r.t tl5
11.s.c: 78r.lall29ll.
• tsu.s.c: 77ql•~
'"151J.S.c: 7Bj{bl: i7 CI'R 240.10b-5.
"Sm:tion• 15(c) (I) and (Z) of tho l::xchangn J\ct
I1511.S.C'. 7Bo(r.) (1)and (211.
o: s,., MSRII Manual (C:Ol).
1 • Sec Socurilios and Exchange CommiMion,
Rf'J'Ofl of rlw Sccurilir.s and ExcllangP. Commi•sion
"" UPJ:ulolion of Munit:ipa/ Srcurities (1988);
Sr.r.uritiM end l::xchange Commission. Sluff Ur.pnrt
"" rh" lnvr.<ligalion in th" Maltr.t of Transactions
inllu• Wushin~:lon Public PottT.t Supply Syst~m
s,.:urilir.s (1988}: Securities J\r.t Relr.ase No. 6021,
Final Ur.fxlrl in thr• Mtlllt•t of Transaclion< in tlw
s,.·nrili~< nf t/uo Cit.v of Nr.w l'ork (feb. s. 1979):
NY C:ity Rt!JHift.
limited extent, continuing disclosure in
the secondary market.
In 1989, the Commission adopted
Rule 15c2-12 under the Exchange Act 14
to enhance the quality and timeliness of
disclosure to investors In municipal
securities.l5 The rule requires that
underwriters (both bank and non-bank)
of primary offerings of municipal
securities with an aggregate principal
amount of $1,000,000 or mme obtain
and distribute to their customers tho
issuers' official statements for the
offerings. This mechanism provides
underwriters an opportunity to review
the issuer's disclosure documents before
commencing sales to investors.t6
There is a consensus that, over the
last two decades, these market and
regulatory efforts have improved
significantly the quality t)( primary
offering disclosure in the municipal
securities markets." Nonetheless, there
continue to be concerns with the
adequacy of municipal offering
disclosure, particularly with respect to
offerings of non-general obligation
bonds and smaller issues.ts
Secondary market disclosure practices
present greater concerns. Recent highly
publicized defaults 19 and refundings, 20
"17 CFR 240.15c2-12:sec Municipal Sccuriti"'
Di~closuro, Securities Exchango Act Rclaasu No.
26100 !Sept. 28, 1988), 53 FR 37778 ("Proposing
Release"); Municipal Securities Dlsclosuro,
Socurilico Exchange J\ct Release No. 26985 {July 10,
1989). 54 FR 28799 ("J\dopllng Release .. ).
"Proposing Roleosc, 53 FRat 37779-37782: Staff
Reporl at 25.
•• J\dopllng Release, 54 FRat 26800.
"N•tionnl Fedemtion of Munlclpnl J\nalysrs,
Mrmbcrship Sunry nrsulls FaJ/1992 Disclosure
Surwy ("Nt MJ\ Survey"); Public Socuriti""
J\osor.intion. Municipal Socuritlos Olsclosuro T.1sk
Force. Ur.port: Initio/ Analysis of Curmnl Disclosure
Praclicr>Sin the Municipal Securilies Market (Juno
11188) ("PSJ\ Survey ..) (content and complotoneas of
primary disclosure documents and Sbfficiency of
financial information rated satisfactory to axc•Bent
by !14% end 113% o[ firms responding. respocll vely).
•• Sao Leiter to Cheil'lll8n Levin from Chari""
Mlros, J\llstalelnsurance Compony (Nov. 4. 1993.
os updated Jan. 19. 11194) ("J\IIstoto Letter")
(primary markot dlsclo•ure by condulls found
inadoquato in 43.8% or rated issues rovlowcd):
NFMJ\ &urvey (local housing. spoclel district,
hospitals, long term hoolthcare and Industrial
dovolopmont i.. uos were found to provide the least
disclosure}: PSJ\ Survey (smalllssuo~ndustrial
dovolopment bonds received a low rating; issues of
$10 million or less recelvnd a low rating).
'"Examples Include the defaults onRendcrod by
the failures of Mutual Benefit Life. Executive Lifo
and Tucson Electric Pownr, and tho bankruptcl~
arising out of the Colorado Spacial Districts. Seu,
f'.g., Hinden. "Mutual Bonclit Lifo's Collapse Shows
!':agility of Bond Guarantees," ThB Woshlnglon
Post (Jul. 22, 1991)et F 27; Levinson, "No Coverage
Against Junk," Newswrek(Apr. 22. 1991)at 48:
Stamas. "Rep. Dingell J\sks SEC to Investigate
Defaulls by Spoclat 1\.ss.cssment Di$1rlcto In
C.olorado:· Thr./JQnd Buyer (fan. 25; 199t)et 1.
~·see C.a•porlno, .. Balandr.g Budgets Through
Lea•e Dnals May Pose Credit Risks, Raling Agency
Warns:· Thr>Bond Bu.wr!lan. 25, 1993) at I:
C.untinurni
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:t:z.7SQ 	. Federal :R~s,f~tl Vol. 59, No. 52 I Thursday. Match 17. 1994 I Rules and Regttliltions
as well as the tremendous lcvci of
Issuances durll'lg fhc past tl.vo years,
ba\'ebclgbliin.:!d interest ht municipal
sccondaty market disclosure.'' The PSA
hils fcmificd that today '\wcondary
market itt!onrnnfon is difficult to come
by cv.cn for ptl:lfcssional municipal
cicdlt tmalysu, 10 ny nothing or retail
fnv6S'Ion:• ·:2 Sumtantral fssul!f'
jnfu.rtfilltlott, in tho form CJf offittol
illnti:lmatus. tnatn·requlred reports. and
otbor public documunts, Is ~vallnble
from tho approximntcly 20% of
munt:tlpal f!Jsunr~that come to market
fruquontly. account1ng for 80% or tho
datl11r VoiUntU O( munldpiiJSCCutiUils
fm~ued. 2~ However. tho remaining
Ucnuan, "MunlniJ)Bio\l<~nd lloldcu: Walth Out lor
•r..all' Shoe!.," Thn Wall Strt!i'lfauma/IJ\ng. 29.
1Otl2)8t Ch llumo, "Ocolcr thmatcfl~ Sull Over
l 1 tilpoi~d Call lor escrowed llonds," 11u•/1and
lJU)'t?dNuv. 8, lll'J3) at•: Uurnc, "h•uet In
Louloltms Mil)' Nun Atoui nll.llw II ll•etowcd
tlondslltc C!lltid Noxl Mtmlh." 11•<' Bond /Ju}-r.t
(Apt. 22. IO!l3!ot1: llumc. "KiM! In Ko·Hclundlng•
nl ll~~erowod llonda tlkoly to Gain Allr.nllon ~I
Tr<!!~oury, Sa:'~"111t1 numlllu)"'t!May 12. 1!1921
at 1.
JJ Sed Rilncrnlly, Tcothn•.ny ntloffruy S. Cro~n.
Glnntnl Ccun~<ul.l'urt Authority Lf Now York and
Nt!W JchioY on bollilll Ill Clovt,rumunt ~·lnnllttl
C)fnceu AKKnclatlot•.lrolnru tho Sulx:onunlttL'<l on
'fcl<u:mnmunk.<~tlon• nntll'lnanr.u.llnusn
Cmnmlllmt unl!norRY nnd r.ummurco, Or.l. 7. 1U!l3
("GI'OA Toatlmuuy") nl 7-0: ltnlllrtrl.ls by r.. Hlt:haul
l.ulnnnun,l'rn~hlont, llomllm·u•lnr• A••odnllnn
llnl<lru thu U.S. llnu•u of Hcllrc•unlotlvu•
Suhcununlttnu un *l'ulcr.c:ntwJunfcnllmul nnd J.'ltt111lt:U
Conr.nrnlng tho Munlr.ll~•l !ir.&nrltlos Mnrkot, Oct. 7,
11103 ("l••lnnunn Tu•tlmony"!nt ~-5: To•thnony of
AudMw lt.l\lntxhtNIIf, 11rosldont·lilom. Nntlouul
"'I\OcltUion ulllond l.<~wyors,llllfoJM tho
Subcommlthw on 'fulucumnHmle~~llona Allll
l'lunnr.u, I lou .., C'.nmmlllutl on f:nursy fltul
Gonunun:n. Oct. 7, Hilla I"NAill.1't1Sihnnny"J ntll
2!t: 1'tlfiiiiiiOIIY or ll~rvoy licknrt, Clutlnnnn or thu
llluo Rlhlx111 C:ommiiiUtl on Sut.1mdnry Mnrknt
IJII!Cllllmttt onllnbnlf of tho NrttlonniAIMII:Inllon ur
Stnlu AudllmH, Comptrullurg nnd 1'runsururalluforn
tho Rnhcommlttno on 1'olncomnmnlcotlona nnd
finn nco. tlnnsu Commlltou 011 Enorgy nnd
C'.ommorco, Oct. 7, 11103("NASAC:I' •ruallmony"l nt
:1-11; 1'ualltnnny HulnllnR to tho Munlcllllll Stmurlllna
Mnrknt alvun by tho Nnllonnl11odorntlon of
Munlc:ltmll\nnlyeiR, 1\nthorlno Dutnmnn,
f.!Ulii'JII!flnn,tu tho Subcommlttco on
Tolucommunlelltlona nnd f•'lnnuce. Oct. 7, 111!13
t"Nl:MA ,'lltltlmuny"l ot 1-?tlltntumunl nrcltlrnld
Mcllrldo. Chnlrnwn, Munlclplll Socurltlua Division,
11ubllo Socurltllltll\lllOOinllon, Dofom tlmlluuao
Commltton onllnorgy nud Cnmm<ll'tllt,
Tulooonmmnlr.ntlona tmtlllluatiOO Subconunlttoo.
Oct. 7, 10tl3 ("l'SI\ Tostlmony"l nt tl-71 NI\SI\C'r.
$1altl O!ld Lot.•tll Gcmmummt.'l<.'Curillos Atorklll~ ami
St>COI!dar,• Markal V/sc/oturo (Oct. 1003) nlll:
Stnmna, "lsauura'lntontlons on Socondnry Marko!
PIIICloauro nru Slnrllng to Appoor In Official
6tntonuutte," Tim Uvnd lltl)~lr(Ouc. H, 1002) nl 1:
-5tlll1dllrd APoor''• "In Supjtofl or Sucontlney
"'lllrli.ot D!Miosum," Cmdll Vook Munlclim/(Mnr.
111,1tlll2~
»JISt. T011thnonyntll. llnualao Lohmann
Toatlmnnv nt4: Ni\SI\C'l' Toatlmony ot3: Numtlll.
"IUYU!ilnfi• Sun• leo SIUlta In to Jllll Void In ltoaltltal
DatA D!Jttloaun1," Modem lhmlthcaro t•'ub. 3, 1002)
al40: Quint. "Crud!I Mnrkota; 1\lmlnR for Moro llatu
About Munlclpallluuda," Tim Nt>w \'ork 7lml!s
IIuno :!8, 10tl3) nt U5: Schlrrln. "llullo, Suckur,"
forlw (l'oh. 1, 1ooa) nt 40.
~1 NASAC'l', RctHlr1 oflh11 11/uv lllblHllt Committw
em Scl:cnulmy Morkvl Dl~c/usuro-lmpnwlng
issu~rs. representing 20% in dtdlar
volume but 80% in number. which
tome to iha matkt:t much Jess
frequently. provido substantially tess
continuing infortrtalion. Man)• of these
issues are het~lth care issues. housing
issues, industrial development bonds,
and othllr conduit financlngs, :.
financing sectors which have had the
grMttl.o;t htcldonce of defaults. both
monetary and technical. zs In addition,
Information often is unavailablc for
511\aiJilr issUes of St!CUritics Of gencta)
purpose units o£ government and the
securities or special purpose districts
and authorities. 26
In rnsponsc to n request by
Comml!!slon Chalrtrtttn Arthur Levitt for
a recommended "rnatkct·participant
sponsored solutlon"lo the disclosure
Issues In tho municipal securities
mnrket, otl Deromber 20, 1!193, 12
groups and associations representing n
brond rnnyo of mnrkct pnrtlclpnnts
submitted to tho Commission n Joint
Statcrnont on lmprovomonts In
Mun.fcipal Securities Mntkot Disclosure
(tho "Joint Statomcnt").2' Tho Joint
Stntcmont sots forth "n framework for
Improving tho nvnilnbility of
lnformullon In tho mnrkotplnco" thnt
culls for both continued mnrket
inltlntivos to improve Issuer disclo:mro
nnd "support from tho SEC nnd tho
Municipal Securllios Rulomnklng Donrtl
(MSRDJ," ~K Among othor things, its
pnrticlpnnls rocommond tho adoption of
n rulo or lntorprollvu guidnnco
rostrlcllng undorwrlllng of nnmlclpnl
lssuosunloss continuing information
covnnnntsnro provided by tho Issuer.
Sucomlnl)• Mnrknl D/sclosuro (Aug. 10!13)
I"IMSAC'I' llhto Ribbon Cnmmlttuo Rnpurl") ut 1
2.
l•llt!O lcl.ut 1. Sun abo 1\llatnto Loll or.
»suo llnnd lliiYI't 19113 Yonrbonl: nt3-5:
Munlcltmlllaml!Jcfaulls- Tlw 1980't: n Dccndoln
llwhlw IJ,J, Kunnv Q~,lnc. \1103){"1\onny Dofuult
Rnport"l: t•ubllc Nlcllrltlo~ i\Moclntlou, Au
llxam/notlon ofNan·llattld Alunlr.lpol Dllfaults
10811-1901 (Jun.n. 1003)("t'SA llufnnlt Ruport"l:
Stnlf Ruporl, i\ppundlx D.
:t>Soo ~:\SAC:'!' Dluo Ribbon Commllloo Hoporl at
1-2.
llJnlnt Stntomonl on llntlrnvomonts In Munlcllllll
Socurllloa Mnrkot Dlsclosuro ("Joint Statomont"l
(Uoo. 20, 10113) at 1.1'htt )oint Stntomunl wna
ftU!Mnlttod by tho 1\mortcnn Unul:ora Aasoclatlon'a
<'.ot'lmrnto Trnat Commlttoo,l\mortcnn l'ubltc l'owor
t\asm:lntlon, Asaoclallon of Local Houalng Flnnncn
ARoncloa. Council of lnfrnalructuro Flnnnclng
1\uthorltloa, Covorumont Flnnncn Officora
1\uoclntlon. NatiOillll Association or llond LoWYi1111·
Nntlonnll\ssoctntlon or Countlos, Notional
AllSOclullon or Sin to Auditors. Comptrollora nnd
1'rnMuru..,, Nnllonnll\a.'IOclnllon of Stnto
1'ronsurura, Nntlonnl Ccuucll or Stnlo Houalng
Agnnclos. Nnllonnl Fodurollon of Municipal
Analysts, nnd l'ubllc Sccurllloa 1\ssoclotlon.
:tthl.
In. Primary OfferingDiSclosure
A. Application of the Antifraud
Prot'isirms_
The antifraud provisions of the
fcdernlsccurlties laws prohibit
fraudulent or deropth'C practices in the
offer and sale of municipal securlties.l9
Disclosure documents used by
munlcq,al issuers. su'Cb as official
statements. are subject to the
prohibition against false or misleading
statements of material facts, including
tho omission of material facts nece$$8.ry
to make tho statements made. in light of
the circumstances in which they are
made. not misleading. The adequacy o£
the disclosure provided in municipal
security offering materials is tested
against an obfectlve standard: an
omitted fact is material if there is a
substanllalllkelihood that, under ull the
clrcutnstanccs, tho omitted fact would
hnvc assumed nctunl significance in the
deliberations of the reasonable
(investor). Put another way, there must
be a substantial likelihood that tho
disclosure oftho omitted fact would
have been viewed by tho reasonable
investor ns having significantly alturod
tho "total mix" of information made
availnble,;oo
D. Voluntary Guidelines
In tho primary offering of municipal
socurillos, tho oxtonsivo voluntary
gu!dollnos issued by the Govornmotll
Finan co Officers Association ("GFOA ")
havo received widespread nccoptanco
and, nmong a number of llngor issuers,
hnvo boon viewed as "in ossonco
obllgntory rulos." ·'t Other groups.
Including tho Nntlonnl Fodorntion of
Munlcipnl Analysts ("NFMA"), have
publlshod voluntary disclosure
gu!dallnos covering industry specific
sectors, including nmong others,
housing, student loans, transportation
and health cnro.)lln connection with
tho offering of nmnicipnl securities, tho
GFOA Guidelines cnll for: 3..'
:w Suo In rr> ll'ashlnstonl'ubllc l'oll't'r Supply
S~oslom SccuritlCIS Utlgation, 023 F. Supp. 1466,
1476 (W.O. Wush. 1085), Sco also Rro1171 v. City of
C0\'11181011, 605 F.2d \266, 127a (Gth Ctr. 1986).
)I) TSC lndustrlos. Inc. v. Northll'dy, Inc.. 426 U.S.
438,440 (1076).
M Loltur from Hnrlan E. Doylos, Tronsuror of North
Quolhmto SEC Cltnlnnon Lovitt. Q4lod lJtlC(Imbor
7. 1!1{13.. Soo ('J()\'Omtnont Finn nco om cora
t\asuclntlon, Dlsclosnto Guldollnoa tor Statu and
Local GoYOtnlllOill Soc:urlUa& (Jun. 1001) ("Gl10A
Guld<~llnoa").
~ Soo Nl'MA, Dlsclo.•ure llandbook for Municipal
Securities 1992 Update (Nov. \902) ("NFMi\
Handbook"). Soo elsa Gowmmont Accounting
Standards Don!d. Codificotioll of GO\oentmllllt
Accounllll8 and FilwnclaJ:nr.portlng Standards (2d
od, 1087): PSA, nccommend.atlonsfora Consistent
Pmsonfntlon of Basic Band,Pn:i\'1$/oM in Official
Statcments(Doc. 1980).
"-'GFOA Culdollnos at xv-xt-c (summnl')•).
15:12Mnt10,t90ol VorDnto02-MAR-94 Jktt502S7 POOOOOO Frm00004 Fmt4701 Slmt4700 E:\FRIFM\Pt7MRO.PT2 r17pt2

Federal :ltt:Siste.r I VoL 59, No. 52 I Thursday. Match 17. 1994 I Rules and Regi]tntimis 	12751
• An introduction to scn•e ~the guide to
lhe official stalmtumt:
• Adelletlpiion oF the s:ccuriliC$ being
offered. !llduding complcto infonnatlon
tcgardillg the purpbses of the olfcrillg. the
plan of financing. the ~ccurity and sources of
rcpaymc11t. and tho priority of the securliie!,
ns wc111'1s ~tttlctllrol chnNJCtcrlsllcs. such as
call provlsiorts, tender options. origi11nl i!suo
ot dccJl dllleo\Jnt, vnrinblo rnrcs. ond lease
J!Urt:huw ogroomonts:
• Information rcgntdillg the nat urn ond
6Xlcnt of ony credit enhancement ond
finnnclalond business Information obouttho
b~llot or the enhancement:
• A tlosctlptlon of the government Issuer
or cmorpriJc, lntluding Information about
tho iuuur's rongo or level of ,;ervice. copncily
und dcrtmgraphlc factors ond.ln the case of
revenue 111pportud offering.,, lnformallon on
tho cnhlTiltl!t!'s orgonl7~tl()n, mnnugcmont.
revenue structurl!. results of opcrotlons ond
oporollng pion:
• With rcspncl to obllgollons of priVaiC
profit making and nonprofit conduit Issuers,
infomlntlon rcgortllng tho buslnoss or other
ncllvlty, Including thu ontorpriso's form of
orgnnl7.nllon nnd monogmnonl. roto·moklng
or pricing pollcios, oml hlstorlcol operations
nnd plnn of upcrollon:
• A description of tho Issuer's outstanding
dobt, Including tho nuthorlly to Incur dohl,
limllnllons on doh!, and tho prospccllvo debt
hurdon ml<l roto of Its rotlroment:
• A doscrlpllon of tho bnslc
documontntlon. such ns lndcnturos, tn1st
ngroomonts anclnlsolullons authorizing tho
lsnunncu und ustnhllshlng tho rights of tho
pnrlloa:
• l~lnmu:lnllnformnllon, Including
summnry lnformnllon rugntdlng tho Issuer's
or obligor's flnnm:lnl prncllcos ond results or
opurntlons, ond flnnnclnl slnlomunts,
prupnn)(lln confonnlly with gmwrolly
m:t:optoclut:t:ounllng prhu:l/llus and nudltud
In nt:c:ordnnt:o wllh gonurol y nr.coptod
mulltlng stnndnrds:
• A diHcusslon of lognlmnllors, sm:h ns
pondlng judlclnl, ndmlnlstrnllvo, or
rugulntory procouclln~ta thntmny significantly
offoct tho socurltlos offurod, lognl opinions,
nnd tux consldorotlons: nnd
• A discussion of mlscollnncous mollonl,
lncludlngrollllgS nnd tholr duscrlptlon nnd
rnoonlngs, undnrwrltlng nrrongomonts,
orrongomonts wllh flnnnclnl advisors,
lntorosts otnnmod oxports, pondh1g
loglslntlon, nnd tho uvnllnblllty ornddlllonnl
lnfonnntlon nnd documuntntlon.
Tho guidollnos propnrod by tho GFOA
and tho NFMA provldo ngonerally
comprohonslvo roadmup for dlsclosuro
in offorlng stntomonts for municipal
socurltlos offerings, Thoro aro, however,
nroas thnt nood further improvement in
bolh tho context of nogollatod and
compotlllvoly bid undorwrltlngs. In
addition, lmplomontallon oftheso
guidollnos noods to be oxtondod to tho
wholo mnrkot. For oxamplo, while largo
repent gonornl obligation issuers usually
havo comprohonslvo disclosure
documents, smnlllssuors and conduit
issuers, pnrtir.ulnrly In tho health care,
housing and industrial development
areas, do not always preYide the same
quality of disclosure.:<4
C. Areas Where Improvement Is Needed
1. Conflicts of Interest IUld Other
Relationships or Practices
Information concerning financial and
business relationships and arrangements
among the parties involved in the
Issuance of municipal securities may be
critlcnl to an evaluation ofan offering,ls
Rcoont revelations about practices used
in tho municipal securities offering
procass have highlighted the potential
materiality of information concerning
financial and business relationships,
arrangements or practices, including
politico! contributions, that could
influence municipal securities offerings.
For example, such Information could
Indicate tho existence of octual or
potential conflicts of interest. broaches
of duty, or loss than arm 's·length
tronsactlons. Similarly,thesc mnttors
may reflect upon tho qualificotions,
level of diligence, and disinterestedness
of financialadviscrs, unrlorwritors,
exports nnd other pnrtlcipnnts in nn
offering. Failure to disclose material
Information concerning such
relntlonships, nrrnngomonts or practices
mny render misleading stalomonts modo
In connection with tho process,
Including stntomonts In tho official
statement about tho uso of proceeds,
undorwrilors' compensation and other
oxponsos of tho offering. In addition,
lnvo~tors ronsonnhly expect participants
in munlclpul socurltlos offerings to
follow standards nnd procedures
ostnbllshed by such participants, or
olhor governing authorities, to snfoguurd
tho lnlogrlty of tho offering process;
nccordlngly, mntorinl dovintions from
those procedures wnrront disclosure.
Existing rules nnd voluntary
guidelines call for curtain specific
dlsclosuros by offering participnnts.
GFOA guldel!nos call for offering
stntomont disclosure to investors of
contingency foes to named exports,
Including counsol, and any other
intorost or connection those parties huve
""Suo NASACT Dhto Ribbon Commllloo Roport nt
1-2: StuIfRoport ot 211, Industry Jlllrllclpnnts
gonornlly ogrood In tlllltlmony boforo tho Houao or
Ror.roaontnllvus Subconuulttoo on
To ocommunlcutlona nnd Finance on Oclobor 7,
11103, thnt both tho gruutost dlacloauro probloma and
tho g!OCltoat risk or dot'nult woro with Ullrtltod
hospital, houalng, &JlOCiol district and Industrial
dovolopmont rovonll\1 honda.
"Suo SECv. Wa$hlnston County Utllity District.
1176 F.2d 218, 222 (Oth Clr, 11182) ("Flagrant
vlolotlons" or onttrruud provisions or!slng l'rom
falluru to dlllcloao U80 of procooda to putchnso
options on prot>Orly hold by lsauor's mnnagor and
nunnclnl nrrnngomonts botwoon tho manager and
tho undorwrltor).
\\ith other transaction p:uti.cipant£.:.>6
MSI$ rules call fot dealer disclosure to
issuets and investors of any finllllcial
advisory relationship between an issuer
and a broker, dealer, or municipal
securities dealer, under certain
circumstances.~, MSRB rules also call
for dealer disclosure to investors of,
among other things, certain fees and
expenses in ne~otiated t.ransactions.Jll
Beyond existmg specific disclosure
requirements and guidelines, the range
of finllllclal and business relationships,
arro.ngernents and practices that need to
be disclosed depends on the particular
facts and circumstances of each case. lf,
for example, the issuer (or any parson
acting on its behalO iielects an
underwriter, syndicate or selling group
member, expert, counsel or other party
who has a direct or indirect (for
example, through a consultant) financial
or business relationship or arrangement
with persons connected with the
offering process, that relationship or
nrrangement may be mnterial.~9 Areas of
particular concern are undisclosed
payments to obtain underwriting
assignments ar.d undisclosed
ngroomonts or arrangements, including
fee splitting, between finllllcial advisers
nnd undorwritors ..w If the adviser is
hirod to assist the issuer, such
rolntlonships, financial or otherwise,
may divide loyalties. Similnrly,
affiliations botweon sollors of property
to bo used in a financed project and
conduit borrowers raise questions
regarding, among other things, the
dotormination of fair market value of the
property nnd solC·doallng.
2. Terms and Risks of Securities
Evolution in tho finnncial markets has
lod to increasingly complex und
sophisticated derivative IUld othor
municipnl products. While these new
><~Sect ton XtLD. of tho GFOA Guldollnos.
).I MSRD rule G-2S.
"'MSRD rulo G-32. Soo Section 15D(c}{1) or tho
llxclumgo Act (15 U.S.C. 71lo-l(c)(t)l (roqulrlng
compllnnco with MSRD rules); MSRD rule G-17.
:wQtspnrlno, "Tho Tluublo \vllh Consullanta",
TlloBond Buycr(Nov. 16, 111l)3) at t.ln hla
tostllllony boforo tho Subconmlltteo on
Tolocornmunlcallons and Finance, Andrew
Klntzlugor, on behnlf or tho Nnllonal Association or
Bond Lawyora ("NADL"),alated: "IMiombors oftho
nmnlclpat financo bar should work with luuora to
dovolop procuromont procodurea tor •tato and local
govommonltlto onsuro that all matorlal firumclal
nrronsomonltl botweon undorwrllora within the
~yndlcoto and botwoon undotwrlters and fillllnclal
advlsora and possible conntcta or tnterost botween
luuora and mombora or tho underwriting syndicate
or other pnrllclpants he ac:curatf!IY docunientcd and
disclosed or.lhpproprla\Q; prohibited." N,o\BL
Tostlmony at 28. Soo Join\' Shllilnlent at 2..
""Gaspatlno, "Sovora!Jsauors·Slartto Scrutinize
Ties Borwoon J\dvtaers,'l!~ilkl>ta;'' T?ie!lond·B~yer
(Doc. 27, 1093}tlt 1. SeeSifct\Dil.'~!I.C. ortheGFOA
Guldollnl>ll: rule G-23 otllioMSRD.
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1~752 	Federal .:Register I Vol. 59, No. 52 I Tt.ursday, March 17, 1994 I Rules. ~d ·:RE!gulations
products offer investors a wide range of
investment alternatives, in choosing
nrnong the alternatives, investors need a
dear understanding of the terms and the
Jintlicular risks arising from the nature
<>f1ho products."•
!n pnrtfcular. investors need to be
informed about the nnture and effects of
uach significant term of the debt,
including crodit cnhancenmnts and risk
modlllors, such as lnvorso floaterS and
dotacltablo call tights. Investors In those
securities should be aware oflhelr
t~xposuro to lnterest rato volaUilty,
under nil possible sccnnrlos. In
nddltlon, any legal risk concerning tho
Issuer's authority to issue securities
with unconventional features needs to
bo disclosed. Tho PSA recently has
Identified disclosure that should be
provldcclln connection with the offer of
finnnclallnstrumonts that includo such
features as auction and swap-based
Inverse floaters and embedded cap
bonds,42
Credit enhancements nrc used with
increasing frequency In tho municipal
market. According to published
information, over 37% of the dollar
volume of now long term issues carry
some form of credit enhancement. 43 The
oxlstonco of bond insurance or other
credit enhancement crootos tho need for
disclosure concerning tho provider of
the credit onhancomont ond the terms of
tho enhuncoment44 to ovoid misleading
investors concerning tho value of tho
cnhnncomonts provided and the party's
ability to fund the enhancement. Tho
GFOA recommends that appropriate
flnnnclnllnformutlon about tho assets,
rovenuos, rosorvos nnd results of
oporntlons of credit enhancers bo
provided ln tho official statement. In
ilotomllning the extent of disclosure,
consldorollon should bo given to tho
•• 1\a tho Ni\DL Testimony lndlcntoa: "D1trh•atlvna
mu wphlallc.1tod aocurlllua products dOJiguod l'nr
~ophlsllr.atud lnvlllltoraumlshould not bu aold to
rotnlllnvlllltnra gonontlly And 1~1rlnlnly nut without
comprohomlvo dlscloauro. tr lssunra ohnoso tn
umlortuko thu nnnnclnl bonontaur thOJO
sophlsllallod und compllr.ntud trotiMCtlons. thoy
cnn nssumu tho nnnnclol costa or providing • • •
ln£on1111llon." Ni\UL Tosllmony ot n.
.uJ'Si\, RllCOmnwndntlon 011 D/ssnmlnatlon of
l'roduct-Spr.clflc nmns f'or Municipal Dcrlval/vr:
l'rodUCII {111113~
•li'Si\, Municipal M<Jrkct Dw11/apmr.nts {1\ug.
1!193) nt6.
o.tSr:<t Rpvlalonsto Rulos Rllgulollng Money
Mnl!kot Funds. Socltrlllllll 1\ct Rut. No. 703!1. 56 FR
011585, 66$86 trootnolo .omlllod) ("Monoy Mnrkot
Fund RolOOllll"l: Socttrltloa ond Exchnngo
Commlulon, n11pa11 by~lw Unllcd Stoics Sacurilics
nnd E.'cc/ttmgc Commission on tl•e l'inanclal
Guarantco Markct: 11w IIIlO ofthe E:compllonln
Scr;liou 3(n/(2} of tho Securities t\cl of 1933 far
Securities Guaraniend by Danks and the Ulitl of
lunumnr.o Pollclcslo Guaranloo Dahl Sr.curltlcs
(Aug. 28,11187) ("SEC Finnnciol Gunrnntou Rnport")
nt 112: Adopting Rolouso, 54 IIH nt 28812.
amount ofthe enhancement relative to
the income and cash flows of the issuer
or obligor, conditions precedent to
application of the enhancement,
duration of the enhancement, and other
factors indicating a material relationship
between the enhancement and the
investor's anticipated rctum.
In a trend that has become
inctcllsingly common, municipal bond
insurers are including in indentures
provisions that appear to delegate to the
bond insurer tho ability to modify terrtts
of the indenture, prior to default,
without the consent of, or even prior
notification to, bondholders•u There
should be clear disclosure of any such
provision that may have a material
impact on the rights of bondholders or
tho obligations of the issuer, including
tho specific material rights of the
bondholder that could bo so altered.
3. Financial Information
a. Financial Accounting. Sound
financial statements arc critical to tho
Integrity of tho primary and secondary
markets for municipal securities, just as
they nrc for corporate socurities,-16 The
key to tho reliability and relevancy of
tho information contained in tho
financial statements of a municipal
issuer is tho uso of u comprehensive
body of accounting principles
consistently applied by tho issuor,47
Although thoro continuos to bo some
diversity in tho financial reporting
practices used in preparing finnnclnl
statoments of govommontnlissuors,
practice in tho municipal market is
evolving rupidly to reliance on generally
nccoptod accounting principles
("GAAP") as detem1inod by tho
Govommont Accounting Standards
Boord ("GASB"), 4a Only two years after
GASB was founded in 1984, financial
statements prcpnrod In accordance with
GAAP, as promulgated by GASB, were
required by 75.2% of cities, 78.3% of
counties and 69% of school districts
responding to a research survey,49 Forty·
six states currently require, or ore in the
process of establishing u requirement,
that state government financial
statements be presented in accordance
''Soc 1\llatato Lottor.
... Soc NY City Roportet Ch. II p. 02,
•' Soc GFOi\ Guldollnca at SO.
""TI•e fil)tlnclal alntomonts or corporato obligors
backing conduit Sl!Cilrtllos should £t~llow GAI\P ror
such onlitius, u ostnbllshod by tho Fhumclnl
1\ccounllng Stnndar<b Dontd nnd other bodies.
.., lngmm &. Robblllll. Financial neportins
l'ractiCilS of l.ocal Govcmnlcnls, Govomment
1\ccounllng Standard! Board {1087) at 12 (Tho
au1 ,•oy results woro bawd on ln£onnatlon rocclvod
rrom 507 !OllpDIIdonts tO 0 survoy quosllonnalro
mallud to 1101 govornmont unit•).
with GAAP~ so In addition, local as well
as state govenunents·that receive
signifiCS:Jll amounts of federal aid must
prepare financi~l slatements in
accordance lllith. GAAP or provide
information concerning variance from
GAAP,$1
the GFOA Guidelines call for
financial statements that are either
prepare(Uh-~ccordanO! with GAAP or
accomp!¢ied:by a q\\antified (if
ptacticableltiJ<planation of the
differences. s.t To avoid
misurtdersllil:lding> investors need to be
informed oHhe basis for financial
statement preSentation. Accordingly.
when a municipal issuer neither uses
GAAP nor provides a quantified
explanation of materiali deviations from
GAAP, investors need a full explanation
of the accoul}ling principles followed.
b. Audits. In\!estors in the public
securities markets have a reasonable
expectalion that annual financial
statements contained in offering
documents or periodic reports are
subJect toaudlh$3 In the·cose of
municlpaHssuers, these financial
statement audits nrc typically conducted
by either an independent certified
public accountant or a state auditor.
Although the·frequoncy and timeliness
of audits vary. every state requires some
periodic audit verification of
govermnent financial statements.'~ A
prudent investor needs to be able to
evaluate the extent to which he or she
can rely on the second look an auditor
provides.
Accordingly, the offering statement
should state whether tho financial
statements it contains were audited in
accordance with genertilly accepted
auditing st~mdatds (''GAAS"), as
established by the American Institute of
Certified 'Public Accom\.tants.
c. Othertinancial a_i1:d Operating
hlformat!on. Financiallnform!ltion
beyond th~t conlait;li'ld ln the financial
statements-provided in tabular and
"''Siato Cilq.P..IioU~.rs: Technical llclivllies one/
Functions (lllll2,1!dltlon).
$1 Whoro at~tooeri\lloCl\l gqvornmonts progmnu
that nro aubjliclto tho f9dornl "Single 1\udlt 1\ct or
1084," Public l,cjw ·960-502 et seq. ptcparo financial
stntomontaQI).·abQa.l~:othor thnn Ci\AP, "tho audit
roport ahould•ate.le·lho nature or tho variances
thororrom anc\ rolliiW pra£oaslonal guldonco for
reporting on Unilntlill al.elomonts which hnvo not
baon proparad Ina~nco with GAI\P." Offico or
Monagomonltmd·DI\~~ot. "Questions and Allswon
on tho SinglE! Audit Pl'OC'OSS of OMD Circular A
128, 'SinglltAudlta 9JShtte a.nd Local
Govommonta.'" 52 RRat437t6 (Nov. 13, 1987),
quostton 35; 	.
» GFtlA"Gi\idollntl$ ~~ -.s.
»See GDJ!))!I:or•Airii'J~i!dOff..:lal's Guide to
l\udlting(W9~)iit-vlta-riltxl.
s.Stnte qli)\pJi_(iiJ.~t;.~i'c~b:ntcol 1\ctivilios and
Functll>ns:<!ii.M~CJ:Mf.tii)Jciji!JI·Ta$}:Forcelieport
(11190ll"NASII.CT'1Jl90Tii$\;Fcitco Report") at12.
15:12Mar16,19S4 Ver0ote02-MAR-!J.4 Jkt 150257 POOOOOO FrmOOOOO Fmt.;701 Sfont4'700 E:IFRiFM\Pt7MRO,ffit!·· r:11~;

F-eder_al ltegister I Vol. 59, No. 52 I Thursday, March 17, 19~4 I Rules and R,egulations 	12'753
narratlvc format, footnotes,
supplemental tables, schedules and
discussions of operations and financial
position-Is essential to the fair
presentation of an issuer's financial
performance and position. As reflected
In industry guidelines,~' tho type of
lnfom1atlon needed (e.g., tax revenue
base, budget, demographics, project
revenues and operations) varies
depending on tho typo of Issuer, tho
typo of security sold, and tho sources for
repayment of the bond obligations.
Thoro nrc a number of areas In which
grcllter care needs to be taken to provido
Investors with adequate information. In
n poolod financing structure, such as
that used by bond banks, In addition to
providing financial information
concornlng tho Issuing authority or
program In tho aggregate, it may bo
necessary to provide lnformntlon on
}Jartlcipnling obligors. This will depend
on dlversfficntloll nnd risk
concentration factors, such us the
signlflcnnco of any single obligor tu tho
overall financing.
Conduit bond Issuers nood to provide
oporotlonol information concerning tho
acti vltlos of the prl vote ontorpriso that
wfll provide tho cosh flows to service
tho debt-for example, financial
reporting, lognl proceedings, changes in
indebtedness, do faults and other
significant dovelopments rolatlng to the
underlying corpora to obligor. Whore tho
issuing authority in a conduit financing
has no remaining obligation for tho
ropeymont of tho indobtodnoss, In
providing flnnncinllnformnlion about
tho Issuing entity (us com porod to tho
obligor on tho bonds), cnro must bo
tnkon to ovoid mlslondlng lnvosto~'>~
rogurdlng the sources of ropnymont.~
Munlclpnllssuors also must consider
disclosure Issues arising from their
actlvltlos ns end users of dorlvnlivo
products. For example, tho usn of non·
oxchnngo traded dorivntivos to alter
Interest rule risk oxposos tho Issuer to
countorpnrty crodll risk. Dlsclosuro
documents nood to discuss tho mnrkot
risks to which Issuers nrc exposed, the
slrutoglos usod to alter such risks nnd
tho exposure to both market risk and
credit risk resulting from risk altorntlon
strnloglos. Tho NFMA has publlshod
sactor ~poclflc secondary market
d lsclosuro guidelines calling for a
dincusslon of tho Issuer's use or
dorlvaUvo products, ospoclally intorost
rnto swnps.~7
"'Soo gnnomlly, GFOA Guldollnos: NFMA
Handbook. Sco also /nfm n. 84.
"'Son Lull or or John Murphy, Exucullvo Diroctur
or 1\IISoclnllon orLocnl HouNing l'inanco 1\gonclos
Ia Chnirmnn Luvlu (Doc. 20, 1 093).
"NfMI\ Handbook.
Moreover, in addition to f"mancial and
operating data, the official statement
may need to include a narrative
explanation to avoid misunderstanding
and assist tho reader in understanding
tltc financial presentation. A numerical
presentation alone may not be sufficient
to permit an investor to judge financial
nnd opersting condition of the issuer or
obllgor.s• For example, It may be
necessary to explain the presentation of
budget information and tho relationship
or the budget figures to the financial
statements.
In addition, Issuers must assess
whether tho future impact of currently
known facts mandate disclo.mro. The
GF'OA Guidelines call for a description
of known facts that would significantly
affect the financial infonnntion
presented or future financial operation
of tho Issuer, ns well as a discussion of
Its projected operntions.~9 For example.
in n hospital financing, a steadily
declining population in tho surrounding
community that, in tho futuro, would
not support tho sfzo of facility to be
built would bo important to investors.
Disclosure of such currently known
conditions and their futuro impact is
critical tn informed decisionmnking.
d. Tim ali ness of Financial Statements.
Tho timeliness of finnnc!nl information
is n major factor in its usefulness. To
avoid providing investors with n stale,
nnd theroforo potentiolly misloading,
picture of financial condition nml
results of opornllons, lssuurs nnd
obligors noocl to roloaso lholr nnnunl
flnnnclnl statements ns soon ns proclicnl.
After nxtons!vo discussion with mnrkot
participants, It appears that, for tho most
port, audited financial stntomonts of
munlclpnl issuers for tho most recently
completed fiscal year are nvnilnble
within six: months after fiscal yonr end.
Tho six month limo period is consistent
with tho rocommondntions of
NASAar's Bluo Ribbon Committoo
Roporl/"l Unaudited flnonclnl
stntmuents should bo provided when
avullablo prior to tho complollon of tho
audit.
"'Soc Munugemont'a Diacusolon and AMlysia of
Flnunclnl Condition nnd Rn.!ults of Opomlloll!!:
Cortnln lnvoslmnnt Company Dlscloaum,
Socurltloa 1\cl Rolonso No. 6835 (Mny 2>1, 1989), 54
FR 22427; Socnrltlus Act Rolonso No. 6711 (April
24, 1987), 52 FR 13715.
MGFOA Guldellnus at 55,
"'Soo N/\SI\CI' Dluo Ribbon Commllloo Report at
17. Whllo duo dntus for nudltod Onanclalatatomonta
or govormnont unlta difror, n aigniOcnnt maJority of
statos currently rnqulro nudllod nnanclal stntomonta
for govommontunltsto bo nlod within six months
oOor tho Osall year ond. NI\SACT 1900 1'1\sk forco
Roport at 12-22.
4. Availability of Continuing
Information
An investor's ability to monitor future
developments affecting the issuer, as
well as the likely liquidity of a security,
are important to an investnr's evaluation
of an offering. The official statement
should state clearly whether ongoing
disclosure concatning the issuer or
obligor will be provided, including the
type. timing, and method of providing
such information.~">• In deciding whether
to purchase the securities or to continue
to hold them, investors need to know
whether tho issuer has committed to
provide information on an ongoing
basis.62 Tho absence ot such a
commitment can adversely affect the
secondary market fat the securities and
increases the risks of the investment.
As discussed above, the Joint
Statement mcommcnds that the
Commission adopt a rule prohibiting a
municipal securities dcalet from
underwriting securities absent a
commitment to provide ongoing
information. In the Companion Release,
tho Commission is proposing such n
rule for comment. In order to fully
inform investors, on issuer ncods to
include in the official statement a
description oftho scope ofits
continuing disclosure commitment, the
typo of information that would be
provided, the repositories to which tho
information would be sent, when
nnnunl and other periodic Information
would be available, and the
consequences of the issuer's failure to
abide by tho requirements of tho
covenant.
5. Clarity and Conciseness
Like other disclosure doc::umonts,
official statements need to be cle<lr and
concise to avoid misleading investors
through confusion and obfuscation. The
expanded level of disclosure in official
statements and increasod sophistication
of municipal securiUes instruments
have, in many cases, resulted in longor
"'Soo fnll1902 NFMA Survoy, &lo 11lao
1\morlcnn &nkura Association, Corpora to Trust
Commlttoo, four Point Public 1991 Disclosuro
GuldollnM for Corpomto Trustooa I"ADA 1091
Guldollnoa") at2: Stnnw, "lssuors' lntonllons on
Socondnry Disclosure O.!'O Starting 10 Apponr In
Official Statomenta," Tho Bond Buycr(Doc. 14.
1U92)at1.
~ Soo MSRD,Ilcpon of the Municipal Securities
llulcmaklng Board onllcgulallon ofthe Municipal
Sccurille$ Marl."CI {Sop!. 1993) ot G-7 {lloatd
nnnouncod plnn that would Include rnqulr!ng
undorwrltors to rocommohd to lasuors that tboy
provldo continuing dlsclosuro to the mork.et and
roqutrlng municipal $0C\Itlllos donlora to disclose to
tbolr customers lh$ n~~tlve Impact that the lack of
socondniy mnrlloHnformat!on may havn on tho
valuonnd liquidity or thosccurltlll$ and whether
tho Issuer hns agroodolo voluntarily provide auch
discloauros).
15:12 Mar 16, 1994 VerOnle 02·MAR·94 Jktl50257 PO 00000 Frm 00007 Fmt 4701 Sfml4700 E:\FR\FM\P17MRO.PT2 rl7~

12154 	Federal Register /Vol. 59, No. 52 I Thursday, March 17, 1994 I Rules and R¢gulaUons
and more complex disclosure
documents. with the corresponding
danger of overly detailed, legalistic, and
possibly obtuse dlsclosuro.h~
The locallon, emphasis. and context
ofthc disclosure can affect the ability of
a rcasonablo Investor to understand tho
relationship between. and cumulative
crrect of, thll dlsclosuro.M As the u.s.
Court of Appeals for the Second Circuit
has stated:
!Ollsclonures In a prospectus must stC(!r a
middle coursu, nailhcr submorglng o motorial
fuct In 11 flood of col1ator11l dnto. nor slighting
It~ Importance through seemingly cavollcr
treatment. Thll lnljlOrt or the lnfomiOtlon
conveyed must bo nolthcr ovorsuhtlu nor
overplayed, Its monnlng uccurolo, yut
lll:ctJ5slblo."-'
Approprlntu disclosuru "is measured
not by lltoral truth, but by tho nblllty of
tho mntorlnl to nccurotoly Inform ruther
than mislead" lnvostors.<"• As tho
Commission has indicated In other
contexts, legnllstlc, ovorly complex
prosontntlons nnd lnnttentlon to
understandability cnn render the
disclosure lncomprehensihlo nnd
consequently mlslond!ng.C•7
6. Doli very ofOfficiul Stntomentn
Ono of tho concerns lending to tho
adoption of Rule 15c2-1Z wns thnt
undorwr!tors wore not receiving officio!
l:ilntoments within tlmo periods that
would nllow thom to examine the
nccurncy of tho dlsclosure.<oll Tho
Commission noted In proposing tho rulo
thut n thorough, profnsslonnl roviuw by
undorwrltors of munlclpul offering
do(:umonts could oncourngo appropriate
dlsclosnro of forosoonblo risks nncl
nccurnto doscrlptlons of complex put
nnd cull fonturos, os woll ns novel
finnnc!ng structures now employed in
muny munlcipnl offerings. In addition,
wlth tho incrouse in novo) or complex
finonclngs, thoro mny be grouter value In
having investors rocolvo rlisclosuro
documonls describing fundnmentol
UNpecls or their lnvostment. Yot,
undorwrllemnro unable to porform this
function offoctlvoly when offering
<1.1Soo GI•'OI\ TllsthUIIIIY nl 0. S!lflalh'O 1\llalnlo
Lllllur.
"'l~'quillc v. MidtlltiSolllll UIJJ/1/ns, 847 1'.2d 160,
201 (5th Clr.J, cerl. cluuiud, 408 U.S. 02a (1088); 1\a&
v. Financial Gmmml nankslmm11. Inc .. 1>1 a/.. 700
11.211 non, 511l(U.C. <!lr. 1U81l): KollluKlyv. 7'n/laut,
710 J1,2d 111, 720 (11th Clr. 1083).
"'}llt]llilll, 047 1'.2d nl202.
...,McMaiJanli' Company.111. al. v. Wlti!I'IIIJauro
rullr.nalmnnlll. Juc .. ll!JO F.2d 570. 570 t2d Clr.
lUOU),
"'Srul, "-8·• Llmllod l'nrtnorshlt> Roorsnnlr.allon•
nnd l'ubllc O!Torlnga or Llmlltllll'nrtuorshlp
lntomats, SucurllltlS 1\r.t Roluasu No. 0080 (Juno 25,
111UI] 66 FR 28070, 2ROUO ("Llmltod Pnrlnorshlp
llulnmm"),
""l'rO(IUKIIIS Rohmso, 53 FR nt 3778t.
statements are not provided to them on
a timely basis.69
To address this concern, the rule
requires any underwriter, including lead
underwriters, syndicate members, and
soiling group members that receive in
excess of the usual seller's commission,
to obtain and review nn official
statement-that Is deemed final as of its
date by the issuer. except for the
omission or certain information, before
bidding for, purchasing, offering, or
selling municipal securities in a primary
offering.
Since the adoption of Rule t5c2-12,
however, there have been continued
problems with the timeliness of receipt
by underwriters oftho "near final"
official statement required by the Rule.7o
In addition to compromising the ability
of an underwriter to make a reasonable
investigation or tho issuer, this problem
olso may limit the ability of potential
customers to make informed investment
decisions. In a recent NFMA survey,
59% of those responding rated the
doli very of preliminary official
statements in competitive solos ns either
not very good or poor, nnd 50% rated
tho dolivory of preliminary orficial
stntomonts in nogotintod snlos us either
not vory good or poor.71
Ono cuuso of do lay hns I!Con
confusion ns to tho point nt which the
undn•writor must huve ohtninod and
revlowod the nonr finn I officio!
stutoment In n negolintod offering. Tho
term "offer" trndilionully hns boon
dofinod broadly under tho foderol
sucurilios lows nnd, for \>urposos of Rulo
15c2-12, oncompussos 1 te distribution
of u prellmlnury officlul stntomont by
the undorwrltor. os well us ornl
"'l'roposlns Rolruao, 53 I'R al 37782.
"'/\~ n prnctlr.alnmttur. noor nnnl officlnl
•tntumonta dlstrlhulod to undorwrltot11 to Mtlsfy
Ruln15c2-12(b}(l) uru olton tho Mmo documont na
tlmprullmlnory ofnclnlstntomnnt dlstrlbutod to
putonllnl cuatomurs \llli'IIUnnt to Rulu t5c2-t2[b){2).
Sou Mudi!O Rclllo Gultrln 1\lmomdnr II< Furndon
{1\prll ~. lUUIJ) ("Mmlgo Ro1111"l lro)ocllng tho
Ull!lllllont thut Inn nogutlntod olforlng, tho
ldontlflcollon ofu crodll onlmncor nnd rulntud
lnfornmtlcm nbout tho crodll \mhnncor moy bo
omltlod on tho auumptlon thnt lho·lnrormotlon
doponds ou pricing). Soo nlao Flpplngor II< •'ltlmun,
Dl!<Ciosum Oblfsallbus of Undunl'liloi'S of Muulclpa/
Socurillos, 47 lluslno6S Lawyer 127, 140 (Nov.
10\lt).ln addlllon.uudorwrllors nru roctulrod to
dollVIll' to IKllontlnl cuatomora. U(Kln roquo81, CO(llllll
or lhu finn ornclnt Jlotomont for n spoctnud tlmo
porlod. Rulo 15c2-t2(b)(4).
11 NFMI\ Survey. Soo also Lllllor from Jo!Troy M.
llnkor, Chnlrporson, NFMI\ Industry l'tnctlcoa end
Procoduroa Conunllloo and Richard 1\. Clccorono.
Pnst Chnlrporson, NFMJ\ Industry Pmctlcoa and
Pr...:c1duros Commlltoo to 1\rthur Lllvltt, Chairman,
Sucurillos and llxchnngo CommiSlllon, Chrtstophor
1\. Tnylor,ll.~ocutlw Plroctor, MSRD and Josoph R.
Hnrdlnmn. l'r081deut nnd Chief Exocullvo Officer.
Nntlonuii\!!Soclntlon or Socurltlos Doolors, Inc.
[Oct. 10, 1003] (regarding tho tlmollnoss or rocoipt
or llllllf finn I and prollmlnnry officlolslolemonts).
solicitations of indications of interest.
Thus, prior to the time that the
unden'>'riter distributes the preliminary
offiCial statement to potential investors,
or othenvise begins orally soliciting
investors, tho rule requires it to have
obtained and reviewed a near tmal
official statement. Ifno offers are made,
the undenvriter is required to obtain
and review a near final official
statement by the earlier of the time the
undcnvriter agrees (whether in
principle or by sighing the bond
purchase agreement) to purchase the
bonds, or the first sale of bonds to
lnvestors.72
The Commission has acknowledged
that the rule would require greater
planning and discipline by some
issuers. 7;l The Commission anticipated
that, in order to allow underwritem to
meet their obligation to have a
reasonable bnsis for recommending any
municipal securities, issuers would
hove to begin drafting disclosure
documents earlier, and perhaps with
greater care than In the past."' This ·
result ennblos underwriters to receive,
nnd if necessary influence the content
of, the finn! official statement before
committing themselves to nn offering.'s
Moroover, placing an obligation on the
issuer to prepare the official statement
nt nn curlier stage is appropriate,
because it is the issuer's obligation to
ensure that there is timely
dissemination of disclosure documents
In connection with the offer and sale of
tho issuer's securities. 76
D. Conduit Flnnncings
When financing involves a third party
ns tho source of repayment, investom
need information on that underlying
borrower. The GFOA Guidelines call for
description of conduit obligom, which
nro defined by Ute GFOA Guidelines to
include both private profit-making and
nonprofit ontities.n The suggested
>l Soo Mudgo Roso.
>l 1\doptlns Rolonso, 54 FR nt 288!H. Tho
CommiBSlon also noted lhnllho requiromonlll or
Rulo 1Sc2-l2(b)[t) could oo mot through U1o Ul!O of
multlplo documonts. For oxnmplo, a froq11ont Issuer
might bo ablo to supply a rocomt ornctalatatomont,
togolhor with aupplomontary Information
conlnlnlngtho term• of tho current ofrorlng. as woll
na any motorial chnnsos fron1 tho pruvloua o!Torlng
mntorlals.
•• Proposing Rolonso, 53 FRat 37700.
"'ld.
••Soo 1\doptlng Roloes<>. 54 FRat 28811 N. 84
(ornctalstatnmont Is Issuer's documont).
,, GFOA Guldollnoa al2G.In a roccmt policy
stalomont. tho GFOA reflliTCd to "conduit bonds" as
"munlclpalaocurltloa tss\lll<l'by a stat& or local
govommont (or tho oonol.li of a private corporation
or otbor entity thut Is u)t\inJiloly:obllsatod to pay
such bonds • • •." GFQJ\, Con\lilltltlll·on
Govornmontal DobtandFisCill Polity.
lmprovcmonta In Munlelpal·Socurlilos' Markot
15:12Mat 16,199-4 VerOateD2-MAR-!l4 Jk1150257 POOOOOO frmOOOOB Fml4701 Sfmt4700 E:IFRIFM\Pt7MRO.PT2 rt7pl2

information includes the nature and
development of the business or other
activity to be undcrtakeil by the conduit
obligor (Including its form of
organization and management), location
of princlpill facilities and service area,
ratomaklng or pricing policies and
historical operations and plan of
operations.
1'o address disclosure Issues
involving colldult flnanclngs in n
comprohcnslvo fashion. however.
loglslot!tm addressing tho exempt status
of condull securities under the federal
socutltlos laws Is necessary. Bonds usod
to finance a ptoject to bo used In tho
trade or business of n private
cotporntlon oro, frotn on Investment
stnndpolnt, equivalent to corporate debt
securities issued directly by tho
underlying corporate obligor. 111
Pnymon Is on thestltypus of conduit
securities uro derived solely from
revenues roc:civod by tho governmental
entlly under tho terms of n contructunl
ngrem1umt, typically o lcnso oro note,
from u private enterprise, rnthor than
from the gcnornl credit ond taxing
power of tho govornmentnl issuer. Tho
tox-oxompl stutus of interest puymonts
duos not nltor tho fundnmontul nnulysis
thnt those uru private obligntions, in
whic:h tho investor looks, and con look,
only to u prlvnto entity for ropoymont.
Thn privnle nuluro of many conduit
ontorprlsos disllnguishos thom from
trndilionnlmunicipnl finuncings. Tho
lncldonco ofhond dofuult npponrs to be
lnvorsoly rolnlmlto tho dugroe n
finnnc:od projucl roprosunts un ossonllul
public: sorvlco.''l A study c:onductcd by
tho I'SA on non·rnlod issues thnt
tlofnultod found thut 75% wore issuod
by local uuthoritlos in tho orous of
houlth curo nnd industrlnl rclotod
soctors such us onorgy, chemical.
pollution control and industrlol
devolopmont,111 1
Given tho ossonllolly prlvutc nnturo of
non·govornmontnllndustrlul
dovolopmont finnnolngs,lnvostors noocl
tho sumo disclosure rogordlng tho
undorlylng non-munlclpnl corporate
obligor ns they would rccolvo regarding
tmy corporate obligor. und thu sumo
rcgulutoty ond liability schomc should
upply. Accordingly, the Commission hus
.conslstontly supported loglslntlvo
proposals to nmond Section 3(n)(2) of
· Placloauro (lo'u!J. 1, 1004) ("GFOA Dhw.loauro Polley
Stnhmumt").
""Suo Molloy Mnrkotl'und Rolonsu, !IIII'R nt
(1!151111 (propomtlto auhjuct tnx oxompt monoy
mnrkot fund lnvu8tmont• In condullaucurlllosto
roatrlr.tlons ~lmllnr lo thoau npplicii!Jlt•lo $ucurilluo
of Cotnpnrnblo obligors olforod to tnxnblo funds).
"'Kunny Dofnull Roport nl 2.
"'I'SA Pufnnll Ro110t1 nt 12.
15:t2Mar 16,1994 Ver.-alo02-MAR-94 Jkt 150257
the Securities Act sr and section
3(a)(29)S2 oflhe Exchange Act to
remove the registration exemption for
the corporate credit underlying
municipal conduit securities involving
non-govemmental industtial
development (private activity)
financings.sl The Commission today
renews thntlegislativo recommendation.
Pending amendment to the securities
Jaws to eliminate the registration
exemption, the disclosure provided by
such non·govcmmentol conduit
borrowers should be substantially the
same as tr such conduit borrower were
sublect to the Information requirements
or tho federal securities lows applicable
to the pnrticulnr conduit borrower. For
example, financial stotomelits prepared
In nccordonco with generally accepted
accounting principles prescribed by the
Finonciol Accounting Standurcls Bonrd
should bo provided.
IV. Disclosure in the Secondary Market
for Municipal Securities
While significant progress has boon
made in primary market disclosure
prnclices in recent yours. tho same
development hns not taken ploco with
respect to sccondnry mnrket disclosure.
Tho GFOA issued separate socondnry
murkct disclosure guidelines in 1979,
hut thoy huve not yeluchiovcd tho brood
ncccptnnco accorded its primary offering
guidnnco. In tho lust fivo years, tho
NFMA, tho Nnlionul Council of Stnto
Housing Agencies, nncl the Association
of Locul Housing Authorities hnvo
•• t5 tJ.S.C~ 77r.{n)(2).
•115 ll.S.C:. 7tk:(n)(2U).
><.'Suo llumnrka of Onvld S. Rudor. Chnlrmnn. SEC.
"IJioclu•un' In thu Munlr.lpnl Sur.ttrlllo.• Mnrkot~:·
Uoforo tho l'ullllc Sucurltlus Asauclutlnn (Oct. 23,
1!167) ut17-11t: Lnttnr from John S.R. Shad,
Chnlrmnn, SEC to Rnprmontnllvu Timothy E. Wirth,
Chalrmun, Houso Suhr.onnultloo on
1'ulocommunlcntlona, Con~mnor l'rotuctlon, nnd
l'lnnnco (Murch 12. 1085}; t2~ Cong. Roc. 21,630
(1fl7Hl {lultor from SllCChnlnnnn Harold M.
Wlllltmlato Sttnotor Harrison A. Wtlllnms). Thnru
woru two ulllalntroduCild, ono Itt 1075 und ono In
1078, thnl would huvo ropualud tho uxompllon rrom
tho rogl~trnllon roqulromunta of tho Sucurlllu.• Act
of 1!133. TI1o 11178 !Jilt would huvo au!J{octnd corloln
lnduslrlol dovolopmunl bonds to tho roglstmllon
IIKJUimmonta or tho Socurltlus Act or 1033, tho
RllnR orul quullRcnllon provisions ol tho Trust
lndonturo Acl ond tho llllrlodlc ruportlng
ruqulrmronts oflho Socurltlu.• Exr.hnngo Act or
1034. Noll hill' bill was onnctod. See a/~'0 "Municipal
Socurlllos Full DI5Cioauro 1\cl of 11176," 5, 296U,
ll4th C'.ong .. 2d. Soss.(Fob. 17, 1076].
Govurnmuutallmluatrlal dovolopmont finunclnga,
which would hnvo rotnlnod tholr exempt status
uudor prior proposals,lnclud<')hoao financlngs In
which tho !Jonda arc ropuld from tho gonoml
rovonuoa or tho govomn10ntol unit or tho projoct or
~tclllty to 0 public facility (or port or a public
facility) and ownod and opumtod by or on !John If
of tho govornmontul unit. TI1o prior proposal& to
roglstor con dull Olltlnclnga would not hova alfoctod
tho sopornto exemption for socurllloa lasuod by non•
pront clmrltnblo O'llllnlzulions In Section 3(n)(4) or
lho SllCurltlos Act (15 U.S. C. 77c(o)(4Jl.
published sector specific guidelines for
secondary market disclosure: the
National Advisory CoUncil of the
National Association; of State Auditors,
Compttollers and Treasurers
("NASACf") is in the process of
preparmg such guidel.ine"s for· adoption
by the $tates.s4 The GFOA's
longstanding Certificate of Achievement
prograttt recognizes issuers that have
prepared comprehensive annual
financial reports meetiJlg its guidelines.
The NFMA's Award of Recognition
Prograttt likewise recognizes issuers that
have committed to provide continuous
disclosure.
A. Application of Antifraud ProvisJ'ons
PartiCipants in tho municipal
securities market do not dispute the
need for ongoing disclosure following
on offering of securities, but municipal
issuers reportedly resist developing n
routine of ongoing disclosure to tho
investing market because of concerns
about the costs of generating. and
disseminating that information and
about potcntinlliobility relating to such
disclosure. These issuers ond obligors
nrc nt times odvisod by their
profossionnl advisors thnt there I& uo
duty under the federal securities lnws to
make disclosure following the
completion of the dlstribution.as At least
some municipal issuers thus appear to
boliovo that silence shields them from
liability for what may later be found to
bo false or misleading information. As a
practical mattor, h0wever, municipal
issuers do not have the option of
rcmnlnlng silent. Given the wide range
of information routinely released to the
public, formally ond lnforrtuilly, by
those issuors in their day-to-day
oporntions, the strenm of infomtation on
which tho market relies does not cease
with the close or 0 municipal offering.
In light of tho public nature of these
Issuers ond thoir accountability and
••Soo Aasoclntlon or Local 'l:loualos Finance
Agoncluo, Guidelines for lnfonnalicilt Disclosure to
1/w Secondary Market (1992H"I.oct\l Housing
Guldollnos"}; Nntlonnt Council l.tfSI.illo Housing
Agonclos, Quaricr/y llnporlinp Fom•atfor Stall>
f/ouslng Finance Agency Single Family Hou$h1Jl
Doud${11l89) and Mu/tl.foritily Disc/osu(e Fonnat
(1991) collocllvoly ("Stnto Housing Guldollnos"):
NFMA Handbook. See also Hoallhco:ro Financial
Manngorilonl Aasoclnllon, Slalelllelll of !>rinciplcs of
Public Dlsclosuro of Flnonclal and OpcmllllJl
Jnfonnatlou by Heal!hcam Provldcn (Exposuro
Dl'lln dated Aug. 1, 1993) (''Hoallhcaro Dlsclosuro
l'rlnclplos").
..,Suo Stll!lliiB. "muon' lriton\lon•.on Socondary
Markel Dllsclosure t\ro Statlli\g,io·AplJODf hl Official
Statomonts.'' Tho.11ond 11uft.t{ijtic. 14; 199~) at t~
Stamos. "Why the bsuo o 	~i;lecy.-MIJ,\Ic,qt
Disclosure Remolns on 	lt·B\lrrior: ltCiln ·Bo
Risky," The Bond B~tyer{ 	2lk'tiiill;);u(1>
Stamns. "Analysts Warn 	.:;AIJ<?iil'lflllllO
l.uwyen' Dlsclosuro Advice;" Thti:Dollcl:Duyet (Jan.
15,1991)nl1.
. ......... -..~·· ..,.. ~-
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1275.6 	Federal R,egister I Vol. 59, No.52l Thursday, March 17, 1994 /Rt,Iles and Regulations
governmental functions, a variety of
information about issuers of municipal
securities is collected by state and local
governmental bodies, and routinely
made publicly availablc.s& Municipal
officials also make frequent public
statements and issue press releases
concerning the entity's fiscal affairs.
A municipal issuer may not be subject
to tho tllllndnted continuous reporting
requirements of the Exchange Act, but
when it releases Information to the
public that is reasonably expected to
roach investors and tho trading markets,
those disclosures nrc subject to the
antifraud provisions.H7 The fact that
they arc not published for purposes of
Informing the securiUcs markets docs
not alter tho mandate that they not
violate antifraud proscriplions.HK Those
statements arc u principal source of
significont. current Information about
tho issuer of the security, and thus
reasonubly cnn be expected to reach
investors and the trading market. As the
U.S. Court of Appeals for the Second
Circuit bus said: "Tho securities markets
aru highly sensitive to press releases and
to in formation contained in all sorts of
publicly rolcosod ... documents, and
tho investor is foolish who would ignore
such reluuscs." H•J Since investors obtain
information concerning tho fiscul health
of u munir.ipnl issuer from its public
stulemonts concerning financinl nnd
other mutters, "ltlho no lure of those
stutemonls und tho assumptions upon
which they nrc bused must be cnrefully
nnd uccuratoly communicuted to tho
public, so tl111t polonllul investors may
he fully informud of ullmntoriul fncts
rolovuntto their Investment decision. "'1< 1
""Sitn NASACr Uluo Ribbon Commlllou Ruport nt
2, 24: NASACI' 19UO Tn>k l'orcn Roport ot 21.
., Sou l'ubllc Slnlomont• by Corpornlo
Ruprusnnlnllvllll, Socurltlus Ac:t Rol011sn No. 0504
Uun. 20, 1084)40 I'R 2408, 24611: In m A mrs Dept.
Stoms Inc. Stack Utlgt~tion, 09t F.2d US:!, Uli5-ll7
(2d Clr. tUD3llwllh root•ocl to corpornto
tnronnnllon).
.. Suo Flt•t•lngur. 1'/m Sccur/1lc$ taw of l'ub/ic
fl;umr.o (2d ud. 1003) nt 2Ut ("ll')TOII!I mlt•u•os,
convor!llltlona with onalysta,lnfonnat!ontnoo!lnga.
officio! connnonta on budgot nugutlntlona. mul ovon
nngry ronct!ona by public officials to mllng ogoncy
downgrndos" oro subtoct tu nntlfn1ud provisions).
"'Amr.s, DOt l'.2d at 003(corpomln Information).
'"'NY Clly Ro11ort nt Ch. Ill nt 2. 1110 roport round
that public atotomnnb by City officials worn
tnlshmdtng. since thoy worn chnrnclorlr.od by
unwnrrontod mna.•urnncoa as to tho SllUndnUlll and
ntlrncllvonollll of tho Clty'aiiOCurltiO!I, Including
alntumonts tlwt tho City's budgot problams. no
nmttor how l!lltlous. hod nothlna to do with tho
Clly'a ability to pay Us dobla. ld. nlllD-11 t.
MunlclpallasuoNJ should also bo llllnatlive to
wlwthor tholr official stntomonls contain forward
looking stntomonts. such aa proJnctlona or rnvonuO!I.
thnt romnln nllvo In tho market nnd mny roquirn
updntlng In light of subsoquonl ovonts. Guldtlll for
Plsclosuro or l'rofocllona of Futuro Economic
Porformnnco, Exchango Act Rot. No. 50!12 (Nov. 7,
10711), 43 Fit 53246. To tho oxtont thnttho officio!
the current process by which
municipal issuers and their officials
release information to market .
participants does not address th~ risk of
misleading investors, because there is
no mechanism Jor disseminating
information about the municipal issuer
to the market as a whole. To the
contrary. in the municipal market,
information released publicly frequently
is disseminated only to a narrow
segment of the marketplace. For
example, market participants who
request current information ftom
indenture trustees are often turned away
on the grounds that they are not current
holders of the sccurities.91 As a result,
investors purchasing municipal
securities in tho secondary market risk
doing so on the basis of incomplete and
outdated information.
Since access by market participants to
current and reliable information is
uneven and inefficient, municipal
issuers presently face a risk of
misleading investors through public
statements that may not be intended to
be the basis of investment decisions, but
nevertheless may reasonably be
expected to reach the securities markets.
As mnrkct participants have urged,92 in
order to minimize the risk of misleading
invostors, municipal issuers should
ostnblish practices and procedures to
identify and timely disclose. in a
manner designed to inform tho trading
market, material infonnalion reflecting
on tho croditworlhiness or tho issuer
and obligor and the terms of tho
socurily ,'l.'
slnlumuntln mnny cnsos romntns tho prlnclpnl (or
purhnps OVUII tho ~olo) sou reo of lnfomllltiun
r.oncumlng un outslnnding socurily, tho potonliol
for on obl!gnllun to updntn Is or partlculnr
lmporlnncu.
•• Under notice provt.lons of lndonturos. tho
lssuor nnd trusloo gonorotly nro roqulrod to provldo
nollco to existing bondholders of ovonta or do fault
nnd othor stgntncnnt tnatlora. such ns a drnw on
ro~~orvos, o fnlluro to ronew o Iotter of crod!t, or a
substitution of colin tum!. ADA 1001 Guldullnos ot
to. lndood, tntstoes ofion dony roquosts by mnrkot
lmrtlclflnnla Cor lnformnlion out or conC<Jrn for
lnhll!ty arising from oxcoudlng tho outhority IIIli
forth In tho lndonturu. Flppingor at 325. This
altuntlon lod tho Amoricon Dnnkora J\&soclotion
Corpornto Trust Commltloo, In cooporntlon wllh tho
Notional Association of Dond Lawyon. to devolop
ngrood upon guldollnll$ ror indonluro provisions
ponnlttlng tho truotoo to provide public nolico of
apoc!liod ovonta. Soo i\IJA lOOt Guldrllnoa.
•• Soo GFOA Guldollnoaat Ot-07: Joint
Statomont.
•> Notional Association or Dond t.awyon and
Socllon of Urban. Stoto and Locnl Government Law,
Amcr!con Dar Association, Disc/0$1lre Roles of
Counwl in Stole and Lvca/ Covernincnl Securities
Offerings nt135 (forthcoming 1094) (Pro
publicntlon Drnfil (" AUA Dlsclosu.ro Roles") (noting
that many munlclpnllssuors havo concluded lhnt
posl·issunnce disclosure In occordonco with GFOA
guidolinos cnn ba moro efficient and exposo them
to loss polonlioll!nbilily thnn ad hoc disclosures).
B. Secondary Market Disclosure
There is general recognition ofth!ii
need for disseminating comprehenslvt
information on an annual basis and, 01
a more timely basis, information l!bQJlf
material events that reflect on the cred
quality of the sccurity.<u
1. Annual Information
Investors need updated
comprehensive information sufficient
enable them to evaluate the financial
condition, results of operations and en
flows of the issuer or underlying
borrower. Although the issuance of
comprehensive annual information hit
not yet become prevailing practice, it i
recommended by industry disclt:>:;ure
guidelines, including those publi$hed
by the GFOA in connection with its
Comprehensive Annual Financial
Reports ("CAFRs") award program. .
NFMA, and the other industry specific
guidelines,95 and is an effective means
of providing the market updated
information about the issuer and the
issue. The GFOA Guidelines for
Continuing Disclosure call for, either i:
an ufllcial statement or comprehensive
annual report, a description of:
• The issuer and its structure, management
assets and operations:
• The issuer's debt structure (including
d10nges in indebtedness):
• The issuer's finances (including finnnchl
condition and results of operations and
financial prur.tices of the issuer or the
enterprise):
• Legal matters affet..ing the issuer;
including litigation and legislation:
• Ratings: nnd
• Interests of certain persons.
The GFOA Guidelines also specify.
additional information to be provided
by conduit borrowers. The eligibility
criteria for a Certificate of Achievcmen
from GFOA include audited financial
statements prepared in accordance wit
GAAP. reported upon by an
independent public auditor. Tho
guidelines for CAFRs include both a
financial section and a statistical
section.96
'<Sao GFOA Testimony: Mtrns, "An Investor's
Frnmowork for Examining Dlsclooura Iss liD$ and
Possible Solullora;• The Bond Duyur(Feb. 7, 199•
at 24: NASACI" Bluo Ribbon Comm!ltee Report at
7. See also PSA Testimony al6, suppor1ing ennua
financlnt atatoment filing raqulrnmonts and
aubtnlulon or lnfonnatlon regarding any material
fact for luuors who borrow $1 million or mora
annuatly. 	·
"'Soo ABA Disclosurn Roles at 134-136; i\IJA
1091 GuldoHnoa: 1\ssoclation or Local Housing
Gu!dollhOs: Hoaltbcaro Disclosure Principles. Tho
Disclosure Ta;lr. Force or tho Nalional Council of
&tatil Housing AsQnclos Is dovoloplng standarda f,
tlie!·i~:u~nce·orifutlltcd flnancleland nnnual
roports.
96Soo.GF.OA<::ertiflcnlo of Achiovcmont for
Exci!U~nco in Fim!ncial Reporting Program: GFO~
Guldolliiesat 64.
15:12Mar1G,1994 Ver0ate02-MAR·94 Jkt150257 POOOOOO Frm00010 Fmt4701 Stmt4700 E:\FR\FM.i't7MfiO:PT2 rHpl2

. fl!ileral Regist~r I Vol. 59,11Jo. 52/ T~ursday. Marchl7. 1994/ Rul~s andRegU.t~t~pJ1S_ 	1~757
Jlor frequent issuers, current
information can be dissemin:lled in
<lffitialstalemenls for new offerings,
and l11us is readily ovailab1o without thn
propntatlon of a separate annual
flnnncinl report. Regardless of tho form
of document relied upon to provido tho
markotplaca with Information
conccmlng tho finnnciul condition of
tho Issuer or obligor. to ntinhnizo risk of
misleading investors, issuers or obligors
should provide, as discussed above with
respect to primary offerings:
• fllnonclol ntotcments that oro oudltod In
ocr..ordonCiJ with GAAS (or disclosure of
tho ohsonc< of such on audit) a lid thot oro
cllhor proporod In ncL-ordnm:u with GAAP.
or occompoulcd by a qunntifiod
vxplnnntlou or muturiol duviutlons from
GAAP or 11 full uxplonotion uf thu
O<:counling principles usud:
• Other portiuunt nuonclui uud opurnliua
luformolion (dupunding on tlw typo of
Issuer und sucurlty sold). ns wullns tho
sou reus for ropnymonl-of coun;u, u vnrioly
of lnfonnntionmuy bu npproprlnlu fortlll
lssuor with n ntlli!O of outslnndinl!
socurlliuN with dilfurinl! churnclcrlsllcs.
fromgunurnl ohllgntlon to ruvonuo nnd
c:onduil bonds: nod
• A nnrrutivu dismission !hut nnuly1.0s tho
Issuer's or ohligor'R llunncinl condition.
und rnsulls of opumllons, uH woli ns fuels
llkuly lo hnvo nmulurinl impm:l on tho
lssuor or ohi igor.
Clurily und concisonoss oro equally
rolnvunt concorns with respect to
ongoing disclosures, ns with officinl
stolomonts.
As discussod ubovo with rospoctto
offering stutomonts, us u gonumlmuttor,
tho onnuul finmwlul informntlon mny
rousonubly bo oxpociod to bo modo
ovallublo wlihln six months of tho
issuer's fiscnl your ond.n7 For somo
conduit eutllles, ruu:•tnllnformnllon
mny not be surnciont and Investors mny
need more froquont periodic financinl
Information. Undor guldolinos
dovolopod by tho National Council of
Statu Housing Agoncios, for examplo.
current lnformntlon on loan portfolio
status is compiled and dlssominntod to
infomtnllon roposllorlos on o quartorly
bnsls.nn Slmllar ongoing disclosure on n
porlodlc bnals npponrs npprorrlato for
analogous conduit munlclpa finnncings
such as structured student loan
.programs. housing and honlth care
flnanclngs.
2. Evon! Dlsclosuro
In addition to periodic infonnntion, to
assure that purticlpnnts In tho secondary
mnrkot baso their lnvostmonl decisions
on currontlnfomtntlon, commentators
hnvo called for timely disclosure of
u1 Sun Suctloniii.C.J.d. nbovu.
""Shllo Housing Guldollnus.
events that materially tcflect on the
creditworthiness of municipal securities
issuers and obligors and the terms of
their securities. There is n general
consensus among participants in the
municipal securities market that
investors noed information about tho
following events, nmong others, where
material: oo
a. Principal and interest payment
delinquencies
h. Nonpayment·reloted defaults
c. Unscheduled draws on reserves
d. Unscheduled drews on credit
enhancements
o. Substitution of credit or liquidity
providers, or their failure to perform
f. Adverso tax opinions or events
affecting tho tax-oxompt status of tho
security
g. Modifications to rights of security
holders
h. Bond culls
i. Defensancos
j. Matters nffocling collnleral
k. Roling changes
3. Dissemination
As discussed abovo. tho municipal
market today locks on effvclive
mechanism for dissomi.lntion of
motorial information to investors and
tho mnrketploco. To bo offnctivo in
minimizing tho issuer's risk under tho
nnlifrnud provisions, tho annual
finuncinl informnlionnnd event
disdosuro should ho dissominntod In 11
monnor ronsonubly designed to inform
tho holders of tho issuor's sncurities and
tho mnrkut for ihosu securitins.
Trust nos cun survu ns cost offoclive
dlssumlnntors of informntion to tho
morkot duo to tho cnpnclly nnd duties of
trust cos under tho tonus of tho
lndonturos, which posillons them to
hnvo knowledge of tho events requiring
disclosure, ond the ability and authority
••lnlUUO, tho Amortcnn Dnnkurs Assoc:tntion
Cnrpnrnto Tn1Rt Commlttoo dmllod n proposnt
ltlunllfytng 10 fnc:tora thntll botlnvod woro
important for issuers to dhtclni<O to hondhohtors nucl
tho rnurkott•lncn. Amurlcnn Dnnkors Alllloclnllon
Corporntu 'l'rust C'.ommltloo, l'ropusrKI Disclosure
Gulclr.liuos for C'.orporoto 1'rustrms (ADA Droll for
Ptscul!lllon Purpoaos)!Juno 12, 11lll0) ["ADA IOUO
Gutdoilnos"). ~ pnbllshnd In nnnl fonn In
Soptombor of lOOI("ADA 1001 Cnlclullnoa"), tho
Gnldotlnos contained n nonoxcluslvo list of Dvo
typoa of ovont• thnt could bo dlaclosod by notlcnto
n roposllory, Numoroua tnnrkot parllclponta hnvo
mforunr.od tho ADA droll propDMI, or vnrlnllons of
thntprupoMt, os o starting point for tdonttrylng
•trolghtforwnrd, non)udgmuntnl, cotogorloi of
ovonta that call for t•rompl dtaclosuro. An
addondnm to tho Joint Stolomont provldud four
mumtplos of "significant lnfomt~~tlon" that tho
j>urllcitlllnts consldorod npproprlalo for dt.ctosuro.
Tho nonuxcluslvo oxamplos woro [1) nontbehnicol
dnfoults, [2) drnwa front o debt sorvlco toservo fund.
(3) fulluro to mako 11 rogullltly schodutod poymonl.
and (4) nny clrnws on any ctodlt onhancomont.}olnt
Stnlomont. Addondum. Tho list set forth abovo Is
drnwn from those proposals.
to communicate with:lJondhold.ers.too
The Commission encourages the
inclusil)n of provisions in trust
indentutos that authorize trustees to
transmit inforrtlation to the .market,
particularly in struct~tcd:finandngs
where the issuer's obligations genetnlly
ore delegated to various participants.
Trusllll)s also may ph:Wiae aservice to
other small issue.rs, by enabling thorn to
notify tho market in a timely matmer
and at a lower cost.
The common denominator for- current
proposals to impruvc·sccondary market
disclosure for municipal seturities is
the establishment artd designation of
one or more information roposilories to
serve ns a collection and access point for
annual and current information.iill Such
repositories would serve as
predetotmined sources for irtrormalion
concerning a particular iSs\ier. nllowing
participnnts to verify that they have tho
lnteF:l nvailable information concl'~ning
tho issuer be foro recommending,
purchnsing. or bidding for a security.
The repositories would supplement. not
subsiituto for. the existing access
bondholders m .. y have to issuers to
obtain curront in formation. tt•2
ln tho Companion Release, the
Commission is proposing an
nmendmentlo Rule t5c2-12 to prohibit,
ns suggested by tho joint Statcmollt,
underwriting of a municipal socurilios
lssuo unless tho issuer of the municipnl
security has covennntod to provide
nnnunl and ongoing disclosure to n
repository.
V. Interpretive Guidance With Respect
to Obligations of Municipal Securities
Deniers
In tho Proposing and Adopting
Releases for Rule 15c2-12, tho
wusuuADA 11191 Guidolinllllat 3.
'"' Con.•l~tont with tho rOCilnt rucommondatlon of
hlo Joint Stntomont,tho GFOI\ Gutdol!nos colt for
lodging socondnry mnrkot .I!St:ltlsuro with n
ruposltory, ns dtd tho ADA suttlolln.oa published in
1991. GFOA Guldoltnos,l'rocodurol Stnlontoltl No,
8: ADA llllll Guldotlnm at 3.
••• Tho Amotlr.on Dnnkora 1\s.""'lolion Corpornlo
Tntst Commlttoo and tho Nntlonnl Aaaoctntlon of
Dond Lnwyora, os woll os tho )oint SUttotnunt, hnvo
nxprossod concnm thatsocurlttoa doposttortoa end
thotr parllclr>anls do not rotronsmll nnttcos tboy
rocolvo fromtrustoos and tssuors to tho bonoficlal
ownora of tho Issuer's IIOCurltlos. Tho 1\ilA
Corporoto Trust Commllloo sought to nddrttP tho
probtom by cnlllng for almultnnoous dls&omlnatlon
of tho tnfonnntlon to tho morkotplaco through an
lnfomv1tlon topoaltory.Tho Nottormll\asoclntion of
Dond Lnwyora baa auggasllid that tho Commission
promulcnto o rulo numdattnc that aU doposltorle$
nnd tholr dtroct end Indirect patllclpants iJi'omptty
rotmnsmlt nollcos·rocotvoiHrom thilolssuor·or
lndonturo ti'UI\too. While the·ost~!>ilsbQllllll'bf
lnformntlun toposltorlos llil'Y.ifdoro~ tlio:pi'OI>Iom
to somo·oxtont, the CommiS!itonsi~(fln\oii&·lo
work with tho rolovnnt orgpnll!i\UO:ns. tO. a.ss\lre that
stops nro taken to provldo fot•C<inslsionl
rotmnamlsslon or tho lnfomiritlon.
15:12 Mar 16, IQ94 V.erDBte 02-IMR·94 Jkt 150257 PO 00000 fnn 00011 Fmt 4701 Slmt 4700 E:\FR\FMIP17MRO:PT2 r17pl2

12158 	Ff!detal }{egisler I Vol. 59, No. 52 I Thursday, M<!r~h 17~ 1994 / ~4lesand Regulations
Commission set forth its interpretation
of the obligation of municipal
underwriters under the antifraud
provisions of the federal securities laws.
The Interpretation discussed the duty of
underwriters to the investing public to
have a reasonable basis for
recommending any municipal
socurllles, and their responsibility, in
fulfilling that obligation, to review In a
professional manner tho accuracy of
statements made In connection with tho
offering. Tho Interpretation was sot out
In tho Proposing Roloaso, and modified
slightly in tho Adopting Reloase. Tho
Commission reaffirms Its Interpretation
with respect to undorwrltors'
responslbllillos under the antifraud
provisions of tho foucrol securities
lows.tn3
Furthermore, the C.ommlssion
boliovcs thnt It Is also upproprlnto to
emphasize tho responsibilities of
brokers nnd doulors in trucling
municipal securities in tho secondary
murkot. Tho Commission historically
hns token tho position thnt a brokor
denlor recommending securities to
investors Implies by its
rccommondnlion that it hns nn ndequato
hnsis for tho recommondnlion.w4 A
den lor, unlike un underwriter, ordinarily
is not obllgnlod to r.ontncttho issuer to
vorify informntlon. A denier must.
howovor, haven ronsonnblo busis for its
rocommondutlon.w5 If, based on
,.._,In light or tho nndorwrilur'• nl>lillJIIInn. liS
dllll!u~aod In tho prior rolon•os, In n!VInw tho offir.lnl
Hfnlomnul nnd lo huvn n rommnnhlo hnttls for Its
lmllnf In tho III~:UMIGY llllllt:omplotllllllllll uf tho
n!fidnl•tnh•mmtt'• kny ntprosnntutlnn•. dlsdnhnn111
hy mttlorwrllum nf "~'lmn•lblllly fur tho
ln!onno1llon provhlud •Y tho lssuur ur othor l~ll'lln•.
without furthur clnrtnc,.llun rugnrtllng tho
undorwrllor'• boliof ••tu uccurncy, und tho bnsls
thorn for, 01'0 mlsloodlng nlltl Fhoultlnot bo lnclutJotJ
In officlnlatntomonta.
""Son Donnld ·r. Sllcl<lon, Socurtllno Exchnngo
Act Rulooso No. 31475 (Nov. 18, 101!2): Ellzabctll
/Jmnlwl!l. Sccurlllns Kxclmngo Act Rnl!IIIAo Nn.
27072 (l'oll. 5, 1UOO): l'cllliii'Y v. SEC, 5114 1'.2d 260
(nth Clr. 11177): NnS>o'flr & Co., Socurltlns Exchnngo
A~t Rulunau No. lli347 (Nov. 22, 111711). Sco nlso
11rtlJlOBI11ll Rnlua!IU, 53 FR nt37787, 11.72-73.
,.., lllcltaniJ. Uuck & Co .. 43 SEC 11011 (1008), ofl'd
RUIItWIII.II11nlny v. SEC, 410 t'.2d 500 (2d Clr.
1000). S0110lso Tho Obllgollona of Untlorwrltora,
Urokurs ond Doolurs In Olatrlhutlng and 1'radlng
Sucurlllllll, l'urtlaularly of Now High Risk Vonturos,
Sucurltloa hd Rolonso No. 5275 (Aug. 0, 1072) 37
Fit 111011,10012-13: Itt Rn Blumenfeld. Sucurltlos
Kxchnncu Act RuiOOBO No. 111437 (Doc. 10, 11170]
(brokor-donlor clwgod unfair rn.>rk•UJll ond
rocommondod tnmancllonsln munlclpol aucurltlos
without a rooaouahlo bnsla): J.A. Winston & Co.,
luc., 42 S.ll.C. 02 ( 10041 (brokor·doolur
rucommondutltronsnctlona without a roasonnblo
bnals, nntl mudo ropi'OMlntntloll$ that woro Colao and
mlsl011dlng).
publicly available informatiort, a dealer
discovers any factors that indicate the
disclosure is inaccurate or incomplete,
or signal the need for further inquiry, a
municipal securities dealer ml!y need to
obtain additional infoimation, or seek to
verify existing information. loa
One of the rules proposed
simultaneously with the issuance or this
release would require a broket, dealer or
munlclpol securities dealer to review
current information provided by tho
issuer prior to recommending a
transaction in a municipal set:urity.In
the absence of such current information,
the denier could not recommend a
trnnsnr.lion In tho Issuer's securities.
Thnt rule, which would be applicable to
municipal securities issued subsequent
to tho effective date of the proposed
rule, would reinforce the obligations of
donlors under tho nnlifraud provisions
of tho federal securities lnws to have a
ronsonnblo basis for recommendations of
outstanding municipal securities.
The Joint Statement also culled for a
strengthening of tho suitability rules to
require disclosure of ratings nnd
whether tho Issuer has committed to
provide nnnunl finnncinl reports. Today,
tho Commission is proposing
amendments to its confirmation rules to
require disclosure of tho absence of a
rating in confirmations. The MSRB hns
indicated it hns under consideration n
plnn requiring municipal securities
deniers to disclose to their customers
tho importance of secondary mnrkot
informntlon nnd whether tho issuer hns
ugrood tu voluntnrily provide such
disclosuros.tn7 Tho Commission will
do for to tho MSRD's rooxnminatlon of its
""':;,,.,Morrill, L}1tclt. Piorre, l'tmncr & Smith,
SucurltiU$ Exchnngo Act Rolooso No. 14140 (Nov.ll.
1077) ("h rocomtnnndntlon by a brokur-doalcr Is
pnn:olvud by o cuotomor ns (nnd In fnctlt should
bultho product of an objnctlvu analysis (which! con
only oo nchlnvod whun tho scopu of an lnvoatlgatlon
Is oxtondod beyond tho company's managomorttl:
Jalmll. llrick, Sucurlllus Exchange Act Roloaso No.
117113 (Oct. Z4, 1075) ("tho profosslonnl ... ls not on
ltl8uor. llut ho Is undur n duty to lnvostlgato ontlsoo
thnl hla rocommondatlons lm\'n o roasonoblo
bosls"); M.G. Dttvl$ & Co .. 44 SliC 153, 157-58
(1 070) (brokor•doolor ruglstrotlon !tiVOkutJ OOcaUSO
"ropmontntlons and prodlctlons" modo nntl market
lottor rollotl on by n'lllstrnnl "woro without
roosonoblo bnats." nnd "roglstront could not
roosotmbly accept all of tho &tntomonta In the
(morkotlottorlwlthout furthor lnvMtlgatlon"J, ofl'd
8Ub nom. Lc'o'irtttV. SEC, 430 1'.2d 88 (2d Clr. 1071 ).
Soo also Morrl/1, Lynch, PiNr:C, Fennor &Smith,
Sncurltlos Exchango Act Rolooso No.l4149 (Nov. 9,
1077) (noting thntlf a brol:.er-doalor lacu sufficient
lnfommtlon to malta o rocommondntlon, tho lnck of
lnformntlon Is mutarlal and should bo dlsclosotl).
am Soo supm n. 02.
sttitability rules in implementing th'ose
aspects of the Joint Statement.
Vl; Request for Comments
The Commission intends to continue
to monitor developments in municipal
securities disclosure practices.
Col$lentis requested teg~ding the
disclosure items discussed in this
release, and in particular, items
warranting event disclosure. Cornnie.nt
also is requested regarding additional
action that should be taken with·respecl
to disclosure in the municipal seC\ltities
market by the Commission, the MSR.Il,
or Congress.
List of$ubjects in 17 CFR Parts ·211,
231 and241
Securities.
Amendiriiml ofthe Code of Federal
Regulations
For the reasons set out in the
preamble, title 17 chapter II of the Code
of Federol Regulations is amended as set
£orth below:
PART 211-l~~ERPRETATIQN~
RELATING· TO FINANCIAL REPORTING
MATTERS
1. Part 211, Subpart A, is amended by
adding Release No. FR-42 and tho
reltmse date ofMorch 9, 1994, to tho list
of intorproti ve releases.
PARJ 23,1~1NJERP!'\ETATIVE
RELEASES'RELATING TO·THE
SECURitiES:ACT·OF·1933AND
GENERAL Fll.it;ES·AND REGUlATIONS
THEREUNDER
2. Part 231 is amended by adding
Release No. 33~7049 and the release
date of March 9, 1994, to tho list or
lntetptet1ve releases.
i~~~ft~~li~~~~WoF 1934
~~&&&~7&~~~N~~~tf~ifen
3. Part 241 is amended by adding
Release No. 34-33741 and the release
date of Mutch 9,1994, to the list of
Interpretive releases.
By the Commission.
Dated: Match 9, 1994.
Margarei H. McFarland,
Deputy Secretary.
(FR Doc. 94-5922 Filed 3-16-94; 8:45am)
BllllHG,CODE 1101~1-P
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