SEC DISCLOSURE ISSUES

Transcription

1 WORDPERFECT 5.1 DOCUMENT -- Release 3/9/92 Created on a L & W LASERJET 4 Printer END OF FORMAT CODES -- DO NOT ENTER TEXT ABOVE THIS POINT. Use bond paper for printing. Letterhead will be computer generated. City Attorneys Department League of California Cities Annual Conference October 1996 Patricia T. Sinclair Partner, SEC DISCLOSURE ISSUES I. Background of Municipal Securities Regulation A. Early Exemptions B. Anti-Fraud Provisions SEC DISCLOSURE ISSUES OUTLINE Patricia T. Sinclair 633 West Fifth Street Suite 4000 Los Angeles, CA (213) II. Recent Disclosure Rules A. Primary Disclosure 1. Original Rule 15c The S.E.C. Interpretive Release B. Continuing Disclosure

2 1. The Advent of Amended Rule 15c Basic Continuing Disclosure Requirements 3. Exemptions from Continuing Disclosure III. SEC Enforcement Actions A. Actions against Industry Professionals B. Actions against Issuers Appendix A: Full Text of S.E.C. Rule 15c2-12 SEC DISCLOSURE ISSUES Over the past few years, municipal securities have been subjected to heightened scrutiny by the Securities and Exchange Commission ("S.E.C."), the financial and national news media, and the voting public. The S.E.C.'s inquiries into municipal securities sold by Orange County and Nevada County, California may be the most widely known, but by no means the only, evidence of a new level of federal regulatory activity in the municipal markets. Issuers can no longer put themselves in the hands of experienced market professionals at the outset of a bond transaction and upon bond closing, be finished with their responsibilities. Rather, the S.E.C. has made clear its intention to require issuers to take responsibility, both at the outset and on a continuing basis, for their municipal securities activities. I. The Background of Municipal Securities Regulation A. Early Exemptions The basic federal securities regulations are found in the Securities Act of 1933 and the Securities Exchange Act of When enacted, these laws were directed toward the corporate securities market in the wake of the great Depression. The municipal securities market received special exemptions from the vast majority of these regulations, in light of federal and state comity concerns, the absence of perceived abuses and the institutional nature of the typical municipal securities investor at the time. See Securities Act of 1933 Section 3(a)(2); Securities Exchange Act of 1934 Section 3(a)(12) and 3(a)(29). See also Testimony of Paul S. Maco, Director, S.E.C. Office of Municipal Securities, before the Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises, Committee on Banking and Financial Services, U.S. House of Representatives, July 26, 1995 (hereinafter, "Maco Testimony"), Appendix B at page 59. As discussed below, however, the anti-fraud provisions of the federal securities laws have always applied to municipal securities. These provisions provide the foundation for the S.E.C.'s current municipal securities regulatory activity. In 1975, after New York's municipal bond default, Congress passed The Securities Act Amendments of 1975, Pub. Law No , 89 Stat. 131 (1975). These amendments to the Securities Exchange Act of 1934 included provisions requiring the mandatory registration of municipal securities brokers and dealers. The amendments also created the Municipal Securities Rulemaking Board ("M.S.R.B."), an industry self-regulating body with power to enact rules subject to S.E.C. approval. See Securities Exchange Act of B(b). Through the Tower Amendment adopted as part of The Securities Act Amendments of 1975, however, Congress continued to protect municipal issuers from S.E.C. registration of their securities and from M.S.R.B.-mandated disclosure. See Securities Exchange Act of B(d). This somewhat odd situation, in which municipal securities brokers and dealers are regulated, but issuers are basically unregulated, provides the underpinning for the underwriter-driven nature of the disclosure rules currently confronting issuers. B. Anti-Fraud Provisions Although exempt from registration and most other federal securities rules, municipal securities are governed by the fundamental anti-fraud provisions of federal law. See Securities Act of ; Securities Exchange Act of , 14(e); Exchange Act Rule 10b-5. These principals are articulated in Rule 10b-5, which has and continues to apply to municipal securities: Rule 10b-5. It shall be unlawful for any person, directly or indirectly, by use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange, (1) to employ any device, scheme or artifice to defraud, (2) to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security. Rule 10b-5 has been interpreted as setting an objective standard of materiality. At its most basic, an omitted fact is material if there is "a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of a reasonable [investor]. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly 2

3 altered the total mix of information made available." Securities and Exchange Act Release No (March 9, 1994), 59 Fed. Reg , (citing TSC Industries Inc. v. Northway Inc., 426 U.S. 438, 449 (1976)). II. Recent Disclosure Requirements A. Primary Disclosure 1. Original Rule 15c2-12 In 1989, another step to regulate the municipal securities industry was taken, with the enactment of Rule 15c2-12. The stated purpose of Rule 15c2-12 is to prevent fraudulent, deceptive or manipulative acts or practices in the sale of municipal securities. Rule 15c2-12(a). At the time of original enactment, Rule 15c2-12 made it unlawful for a municipal securities broker or dealer to act as an underwriter in a primary offering, unless the underwriter first obtains and reviews an official statement for the offering which has been "deemed final" by an issuer. Only the omission of certain terms that are typically set at a pricing, such as offering prices, interest rates, aggregate principal amounts, delivery dates and selling compensation, is permitted. Rule 15c2-12(b)(1). The Rule also sets time limits for an underwriter to receive copies of the official statement and make them available to securities purchasers. See Rule 15c2-12(b)(2), (3), (4). Rule 15c2-12 was initially adopted to address what the S.E.C. perceived was a consistently slow dissemination of information to the municipal securities market. See Maco Testimony, Appendix B at page 61. In keeping with the technical requirements of the Tower Amendment, Rule 15c2-12 regulated brokers and dealers of municipal securities and did not directly regulate issuers. As a practical matter, however, issuers are regulated by the Rule, since a licensed broker or dealer is involved in the overwhelming majority of municipal securities transactions, and that person could not participate in a transaction that would violate the Rule. 2. The S.E.C. Interpretive Release In 1993, after Rule 15c2-12 had been in effect in its original form for a few years, the S.E.C.'s Division of Market Regulation conducted a comprehensive review of the municipal securities markets. The S.E.C. decided that further action to improve municipal securities disclosure was warranted. In March 1994, the S.E.C. issued its Interpretive Release, which was intended to remind participants in the municipal securities markets of their disclosure obligations under existing law. See Securities Exchange Act Release No (March 9, 1994) 59 Fed. Reg (the "Interpretive Release"). In the Interpretive Release, the S.E.C. reminded municipal securities issuers and other market participants of the anti-fraud provisions and called for improved disclosure in the municipal securities markets. The Interpretive Release suggested that issuers should voluntarily implement the disclosure guidelines proposed by the Government Finance Officer's Association in See Interpretive Release at 59 Fed. Reg Among other things, the GFOA Guidelines call for descriptions of: The securities being offered, including the purposes of the offering, the plan of financing, the security and sources of repayment, and the priority of the securities. The governmental issuer or enterprise, including its range or level of service, capacity and demographic factors. If the obligation is a limited obligation (such as a revenue or conduit financing), the limitations should be described, along with the revenuegenerating entity's or the conduit's structure, results of operations and operating plan. The issuer's other outstanding debt, including its authority to incur debt, debt limits and debt burden. The basic securities documents, such as the indenture or trust agreement and other key agreements. Financial information, including financial practices and results of operations and audited financial statements prepared in accordance with generally accepted accounting principles. Legal matters, such as pending judicial proceedings and tax issues. See Government Finance Officers Association, Disclosure Guidelines for State and Local Government Securities (1991). Although the Interpretive Release suggested that issuers should follow the GFOA Guidelines, to date, the S.E.C. has not promulgated specific rules on the exact contents and form of municipal securities disclosure documents. Unlike corporate securities issuers which are subject to rigid standards, municipal securities issuers enjoy a fair amount of flexibility in crafting their disclosure documents. At bottom, however, all municipal issuers must comply with the obligations set forth in federal anti-fraud provisions. B. Continuing Disclosure 1. The Advent of Amended Rule 15c2-12 Concurrent with the publication of the Interpretive Release, the S.E.C. took its first steps toward mandatory continuing disclosure with respect to municipal securities. In March 1994, the S.E.C. published proposed amendments to Rule 15c2-12 and requested industry comments. The proposed amendments dealt with ongoing, post-closing disclosure by issuers of municipal securities, in an attempt to provide thorough, accessible information to purchasers of municipal securities in the secondary market. See Securities Exchange Act Release No (March 9, 1994), 59 Fed. Reg Prior to that time, to the extent the S.E.C. had focused on municipal securities, its efforts were directed toward primary offerings. Over 390 comment letters were received in response to the S.E.C.'s proposed continuing disclosure rules. See Securities Exchange Act Release No (Nov. 10, 1994), 59 Fed. Reg at In November 1994, the S.E.C. promulgated final continuing disclosure regulations, effective in July See Id. These continuing disclosure regulations have been the source of considerable interest among issuers, since they constitute the first continuing disclosure requirements legally imposed on issuers. 2. Basic Continuing Disclosure Requirements Like original Rule 15c2-12, the amendments to Rule 15c2-12 regulate the brokers and dealers of municipal securities, not the issuers. Like the original Rule, the amended Rule also regulates issuers as a practical matter, by prohibiting brokers and dealers from underwriting municipal securities unless the underwriter has ascertained compliance with the Rule. The Rule requires that the issuer or another obligated person undertake, in a written agreement for the benefit of the securities holders, to provide required continuing disclosure information. Rule 15c2-12(b)5(i). The first noteworthy feature of the Rule is that it calls for an undertaking by the issuer or another "obligated person for whom financial or operating date is presented in the final official statement" to provide the required disclosure. Rule 15c2-12(b)(5)(i). An obligated person is defined in the Rule as the person or entity that is "either generally or through an enterprise, fund, or account of such person committed by contract or other arrangement to support 3

4 payment of all, or part of the obligations on the municipal securities," other than bond insurers and providers of letters of credit and liquidity support. Rule 15c2-12(f)(10). As a practical matter, in a general obligation transaction, the issuer will be responsible for the continuing disclosure. In conduit financings, such as hospital, education and industrial development deals, the obligated person will frequently be the private business conduit borrower. In land-secured transactions, such as Mello-Roos and Assessment Act transactions, the continuing disclosure situation is extremely complex. In mature districts, issuers are typically responsible for continuing disclosure. In some new development districts with single landowners, however, issuers have imposed some information requirements on major landowners, at least in the early years of a development. With respect to the information itself, the Rule requires annual updating of the financial information or operating data presented in the final official statement. The S.E.C. has made clear that it is the numerical and statistical data in the official statement which must be updated. See Securities Exchange Act Release No (Nov. 10, 1994), 59 Fed. Reg. at In addition, the Rule requires the provision of audited financial statements of each obligated person on an annual basis, when and if available. Rule 15c2-12(b)(5)(B). The Rule also requires timely notice of the occurrence of eleven listed events, if material. This notice is required on a timely basis even if the listed events occur between regularly scheduled annual filings. The specific events listed in the Rule are: Principal and interest payment delinquencies; Non-payment related defaults; Unscheduled draws on reserves reflecting financial difficulties; Unscheduled draws on credit enhancements reflecting financial difficulties; Substitution of credit or liquidity providers or their failure to perform; Adverse tax opinions or events affecting the tax-exempt status of the security; Modification to rights of security holders; Bond calls; Defeasances; Release, substitution or sale of property securing repayment of securities; and Rating changes. Rule 15c2-12(b)(5)(C). In addition, timely reporting of an issuer's or obligated person's failure to comply with its continuing disclosure obligations is required. Rule 15c2-12(b)(5)(D). As a practical matter, California issuers have met their continuing disclosure obligations by entering into (or, in the case of conduit transactions, by requiring the conduit borrowers to enter into), continuing disclosure contracts at the time of closing the securities. These contracts typically require the issuer to provide the required notices to a disclosure trustee, which then disseminates the notices to the marketplace. The disclosure trustee is frequently also the indenture trustee, thereby simplifying the continuing disclosure process. 3. Exemptions from Continuing Disclosure Not all municipal securities transactions are subject to continuing disclosure requirements. First, by its terms, the Amended Rule only governs transactions for which a purchase contract was signed on or after July 3, Rule 15c2-12(h). Accordingly, outstanding securities issued prior to July 1995 are not governed by the Rule. Trading in such securities may be affected by disclosures under the Rule, however, if continuing disclosure is provided for new securities issued by the same issuer and relying on the same revenue flows. In addition, the Rule contains exemptions for securities of less than $1 million in principal amount, for private placements in denominations of $100,000 or more and for short term securities of nine months or less maturity or which may be tendered at the holder's option within nine months and offered in denominations of $100,000 or more. Limited disclosure is required for securities with a maturity of eighteen months or less or when each obligated person on the securities is obligated with respect to $10 million or less. III. S.E.C. Enforcement Actions A. Actions against Industry Professionals In addition to promulgating new rules, the S.E.C. has recently engaged in well-publicized activities regarding municipal securities industry professionals. These actions have sometimes rested in the conflict of interest arena. The S.E.C. made its interest in this subject clear in the Interpretive Release. In the Interpretive Release, the S.E.C. urged disclosure of contingency fees, undisclosed payments to obtain underwriting assignments, fee splitting and the selection of market professionals. See Interpretive Release, 59 Fed. Reg. at In addition, enforcement actions have been taken against market professionals when bond proceeds were applied to purposes that were not disclosed. Public enforcement action has occurred when the transactions that were not disclosed could affect the tax-exempt nature of the bonds. See, e.g., In the Matter of Thorn, Alvis Welch Inc., et al., SEC Administrative Proceeding File No B. Actions against Issuers In addition to actions against market professionals, the S.E.C. has also recently taken public action against municipal securities issuers. In the wake of the Orange County bankruptcy, the S.E.C. took injunctive action against former governmental staffers and issued a cease and desist order against certain issuers. See In the Matter of County of Orange et al., Securities Act of 1933 Release No. 7260, Securities Exchange Act of 1934 Release No (Jan. 24, 1996). In addition, the S.E.C. issued a Section 21(a) Release regarding the situation in Orange County generally. In its public statements, the S.E.C. has reprimanded the Orange County Board of Supervisors for the material omissions in Orange County's disclosure documents for eleven municipal securities issuances that occurred between July 1, 1993 and September 28, The S.E.C. determined that the elected officials should have known that there were material omissions in the disclosure documents approved by them, and should have required more complete disclosure prior to authorizing the municipal bond sales. The S.E.C. took the position that the elected officials should have familiarized themselves with the disclosure documents and questioned staff and municipal professionals more closely. The S.E.C. has used the Orange County situation to emphasize the role of elected officials in municipal securities transactions and to remind elected officials that they are ultimately responsible for the issuer's disclosure. See S.E.C. Litigation Release No (Jan. 24, 1996). 4

5 More recently, the S.E.C. investigated a failed land-based financing in Nevada County, California. In that matter, the S.E.C. has taken the position that it was not enough for an issuer to follow the advice and recommendations of municipal securities professionals. Rather, the S.E.C. believes that issuers have fundamental responsibility for their own disclosure documents. The S.E.C. has made clear its belief that an issuer cannot protect itself from securities law violations simply by relying upon market experts. See, e.g., Curtis, "The S.E.C. and Nevada County, Calif.: The County's Side of the Story," The Bond Buyer, Jan. 23, 1996 at 31. In addition to the new rules and heightened regulatory activity, various S.E.C. officials have been touring the country addressing municipal market participants on the disclosure obligations facing them. S.E.C. Chairman Arthur Levitt has made his focus on the municipal securities industry quite clear, and has expanded the number of S.E.C. personnel working in this area. These activities, coupled with many recent S.E.C. formal and informal pronouncements, indicate that S.E.C. scrutiny of municipal securities disclosure will remain high for the immediate future. Issuers will be well-advised to take their federal disclosure obligations extremely seriously, since the S.E.C. is clearly doing so. WORDPERFECT 5.1 DOCUMENT -- Release 3/9/92 Created on a L & W LASERJET 4 Printer END OF FORMAT CODES -- DO NOT ENTER TEXT ABOVE THIS POINT. APPENDIX A FULL TEXT OF S.E.C. RULE 15c2-12 New continuing disclosure regulations shown in bold face type c2-12 Municipal securities disclosure. Preliminary Note: For a discussion of disclosure obligations relating to municipal securities, issuers, brokers, dealers, and municipal securities dealers should refer to Securities Act Release No. 7049, Securities Exchange Act Release No ; FR-42 (March 9, 1994). For a discussion of the obligations of underwriters to have a reasonable basis for recommending municipal securities, brokers, dealers, and municipal securities dealers should refer to Securities Exchange Act Release No (Sept. 22, 1988) and Securities Exchange Act Release No (June 28, 1989). I. General. As a means reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices, it shall be unlawful for any broker, dealer, or municipal securities dealer (a "Participating Underwriter" when used in connection with an Offering) to act as an underwriter in a primary offering of municipal securities with an aggregate principal amount of $1,000,000 or more (an "Offering") unless the Participating Underwriter complies with the requirements of this section or is exempted from the provisions of this section. A. Requirements. Prior to the time the Participating Underwriter bids for, purchases, offers, or sells municipal securities in an Offering, the Participating Underwriter shall obtain and review an official statement that an issuer of such securities deems final as of its date, except for the omission of no more than the following information: The offering price(s), interest rate(s), selling compensation, aggregate principal amount, principal amount per maturity, delivery dates, any other terms or provisions required by an issuer of such securities to be specified in a competitive bid, ratings, other terms or the securities depending on such matters, and the identity of the underwriter(s). A. Except in competitively bid offerings, from the time the Participating Underwriter has reached an understanding with an issuer of municipal securities that it will become a Participating Underwriter in an Offering until a final official statement is available, the Participating Underwriter shall send no later than the next business day, by first-class mail or other equally prompt means, to any potential customer, on request, a single copy of the most recent preliminary official statement, if any. A. The Participating Underwriter shall contract with an issuer of municipal securities or its designated agent to receive, within seven business days after any final agreement to purchase, offer, or sell the municipal securities in an Offering and in sufficient time to accompany any confirmation that requests payment from any customer, copies of a final official statement in sufficient quantity to comply with paragraph (b)(4) of this rule and the rules of the Municipal Securities Rulemaking Board. A. From the time the final official statement becomes available until the earlier of Ninety days from the end of the underwriting period or 1. The time when the official statement is available to any person from a nationally recognized municipal securities information repository, but in no case less than twenty-five days following the end of the underwriting period, the Participating Underwriter in an Offering shall send no later than the next business day, by first-class mail or other equally prompt means, to any potential customer, on request, a single copy of the final official statement. 1. A Participating Underwriter shall not purchase or sell municipal securities in connection with an Offering unless the Participating Underwriter has reasonably determined that an issuer of municipal securities, or an obligated person for whom financial or operating data is presented in the final official statement has undertaken, either individually or in combination with other issuers of such municipal securities or obligated persons, in a written agreement or contract for the benefit of holders of such securities, or provide, either directly or indirectly through an indenture trustee or a designated agent: a) To each nationally recognized municipal securities information repository and to the appropriate state information depository, if any, annual financial information for each obligated person for whom financial information or operating data is presented in the final official statement, or, for each obligated person meeting the objective criteria specified in the undertaking and used to select the obligated persons for whom financial information or operating data is presented in the final official statement, except that, in the case of pooled obligations, the undertaking shall specify such objective criteria; a) If not submitted as part of the annual financial information, then when and if available, to each nationally recognized municipal securities information repository and to the appropriate state information depository, audited financial statements for each obligated person covered by paragraph (b)(5)(i)(a) of this section; a) In a timely manner, to each nationally recognized municipal securities information repository or to the Municipal Securities Rulemaking Board, and to the appropriate state information depository, if any, notice of any of the following events with respect to the securities being offered in the Offering, if material: (1) Principal and interest payment delinquencies; 5

6 (1) Non-payment related defaults; (1) Unscheduled draws on debt service reserves reflecting financial difficulties; (1) Unscheduled draws on credit enhancements reflecting financial difficulties; (1) Substitution of credit or liquidity providers, or their failure to perform; (1) Adverse tax opinions or events affecting the tax-exempt status of the security; (1) Modifications to rights of security holders; (1) Bond calls; (1) Defeasances; (1) Release, substitution, or sale of property securing repayment of the securities; (1) Rating changes; and a) In a timely manner, to each nationally recognized municipal securities information repository or to the Municipal Securities Rulemaking Board, and to the appropriate state information depository, if any, notice of a failure of any person specified in paragraph (b)(5)(i)(a) of this section to provide required annual financial information, on or before the date specified in the written agreement or contract. 1. The written agreement or contract for the benefit of holders of such securities also shall identify each person for whom annual financial information and notices of material events will be provided, either by name or by the objective criteria used to select such persons, and, for each such person shall: a) Specify, in reasonable detail, the type of financial information and operating data to be provided as part of annual financial information; a) Specify, in reasonable detail, the accounting principles pursuant to which financial statements will be prepared, and whether the financial statements will be audited; and a) Specify the date on which the annual financial information for the preceding fiscal year will be provided, and to whom it will be provided. 1. Such written agreement or contract for the benefit of holders of such securities also may provide that the continuing obligation to provide annual financial information and notices of events may be terminated with respect to any obligated person, if and when such obligated person no longer remains an obligated person with respect to such municipal securities. I. Recommendations. As a means reasonably designed to prevent fraudulent, deceptive, or manipulative acts or practices, it shall be unlawful for any broker, dealer, or municipal securities dealer to recommend the purchase or sale of a municipal security unless such broker, dealer, or municipal securities dealer has procedures in place that provide reasonable assurance that it will receive prompt notice of any event disclosed pursuant to paragraph (b)(5)(i)(c), paragraph (b)(5)(i)(d), and paragraph (d)(2)(ii)(b) of this section with respect to that security. A. Exemptions. This section shall not apply to a primary offering of municipal securities in authorized denominations of $100,000 or more, if such securities: 1. Are sole to no more than thirty-five persons each of whom the Participating Underwriter reasonably believes: a) Has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the prospective investment; and a) Is not purchasing for more than one account or with a view to distributing the securities; or 1. Have a maturity of nine months or less; or 1. At the option of the holder thereof may be tendered to an issuer of such securities or its designated agent for redemption or purchase at par value to more at least as frequently as every nine months until maturity, earlier redemption, or purchase by an issuer or its designated agent. A. Paragraph (b)(5) of this section shall not apply to an Offering of municipal securities if, at such time as an issuer of such municipal securities delivers the securities to the Participating Underwriters: 1. No obligated person will be an obligated person with respect to more than $10,000,000 in aggregate amount of outstanding municipal securities, including the offered securities and excluding municipal securities that were offered in a transaction exempt from this section pursuant to paragraph (d)(1) or this section. 1. An issuer of municipal securities or obligated person has undertaken, either individually or in combination with other issuers of municipal securities or obligated persons, in a written agreement or contract for the benefit of holders of such municipal securities, to provide: a) Upon request to any person or at least annually to the appropriate state information depository, if any, financial information or operating data regarding each obligated person for which financial information or operating data is presented in the final official statement, as specified in the undertaking, which financial information and operating data shall include, at a minimum, that financial information and operating data which is customarily prepared by such obligated person and is publicly available; and

7 a) In a timely manner, to each nationally recognized municipal securities information repository or to the Municipal Securities Rulemaking Board, and to the appropriate state information depository, if any, notice of events specified in paragraph (b)(5)(i)(c) of this section with respect to the securities that are the subject of the Offering, if material; and 1. The final official statement identifies by name, address, and telephone number the persons from which the foregoing information, data, and notices can be obtained. A. The provisions of paragraph (b)(5) of this section, other than paragraph (b)(5)(i)(c) of this section, shall not apply to an Offering of municipal securities, if such municipal securities have a stated maturity of 18 months or less. A. The provisions of paragraph (c) of this section shall not apply to municipal securities; 1. Sold in an Offering to which paragraph (b)(5) of this section did not apply, other than Offerings exempt under paragraph (d)(2)(ii) of this section; or 1. Sold in an Offering exempt from this section under paragraph (d)(1) of this section. I. Exemptive Authority. The Commission, upon written request, or upon its own motion, may exempt any broker, dealer, or municipal securities dealer, whether acting in the capacity of a Participating Underwriter or otherwise, that is a participant in a transaction or class of transactions from any requirement of this section, either unconditionally or on specified terms and conditions, if the Commission determines that such an exemption is consistent with the public interest and the protection of investors. A. Definitions. For the purposes of this rule-- The term "authorized denominations of $100,000 ore more" means municipal securities with a principal amount of $100,000 or more and with restrictions that prevent the sale or transfer of such securities in principal amounts of less than $100,000 other than through a primary offering except that, for municipal securities with an original issue discount of 10 percent or more, the term means municipal securities with a minimum purchase price of $100,000 or more and with restrictions that prevent the sale or transfer of such securities, in principal amounts that are less than the original principal amount at the time of the primary offering, other than through a primary offering. A. The term "end of the underwriting period" means the later of such time as 1. the issuer of municipal securities delivers the securities to the Participating Underwriters or 1. the Participating Underwriter does not retain, directly or as a member of an underwriting syndicate, an unsold balance of the securities for sale to the public. A. The term "final official statement" means a document or set of documents prepared by an issuer of municipal securities or its representatives that is complete as of the date delivered to the Participating Underwriter(s) and that sets forth information concerning the terms of the proposed issue of securities; information, including financial information or operating data, concerning such issuers of municipal securities and those other entities, enterprises, funds, accounts, and other persons material to an evaluation of the Offering; and a description of the undertakings to be provided pursuant to paragraph (b)(5)(i), paragraph (d)(2)(ii), and paragraph (d)(2)(iii) of this section, if applicable, and of any instances in the previous five years in which each person specified pursuant to paragraph (b)(5)(ii) of this section failed to comply, in all material respects, with any previous undertakings in a written contract or agreement specified in paragraph (b)(5)(i) of this section. Financial information or operating data may be set forth in the document or set of documents, or may be included by specific reference to documents previously provided to each nationally recognized municipal securities information repository, and to a state information depository, if any, or filed with the Commission. If the document is a final official statement, it must be available from the Municipal Securities Rulemaking Board. A. The term "issuer of municipal securities" means the governmental issuer specified in section 3(a)(29) of the Act and the issuer of any separate security, including a separate security as defined in rule 3b-5(a) under the Act. 1. The term "potential customer" means Any person contacted by the Participating Underwriter concerning the purchase of municipal securities that are intended to be offered or have been sold in an offering, Any person who has expressed an interest to the Participating Underwriter in possibly purchasing such municipal securities, and Any person who has a customer account with the Participating Underwriter. A. The term "preliminary official statement" means an official statement prepared by or for an issuer of municipal securities for dissemination to potential customers prior to the availability of the final official statement. A. The term "primary offering" means an offering of municipal securities directly or indirectly by or behalf of an issuer of such securities, including any remarketing of municipal securities. 1. That is accompanied by a change in the authorized denomination of such securities from $100,000 or more to less than $100,000, or 1. That is accompanied by a change in the period during which such securities may be tendered to an issuer of such securities or its designated agent for redemption or purchase from a period of nine months or less to a period of more than nine months. A. The term "underwriter" means any person who has purchased from an issuer of municipal securities with a view to, or offers or sells for an issuer of municipal securities in connection with, the offering of any municipal security, or participates or has a direct or indirect participation in any such undertaking, or participates or has a participation in the direct or indirect underwriting of any such undertaking except, that such term shall not include a person whose interest is limited to a commission, concession, or allowance from an underwriter, broker, dealer, or municipal securities dealer not in excess of the usual and customary distributors' or sellers' commission, concession, or allowance. A. The term "annual financial information" means financial information or operating data, provided at least annually, of the type included in the final official statement with respect to an obligated person, or in the case where no financial information or operating data was provided in the final official statement with respect to such obligated person, of the type included in the final official statement with respect to those obligated persons that meet the objective criteria applied to select the persons for which financial information or operating data will be provided on an annual basis. Financial information or operating data may be set forth in the document or set of documents, or may be included by specific reference to documents previously provided to each nationally recognized municipal securities information repository, and to a state information depository, if any, or filed with the Commission. If the document is a final official statement, it must be available from the Municipal Securities Rulemaking Board. A. The term "obligated person" means any person, including an issuer of municipal securities, who is either generally or through an enterprise, fund, or account of such person committed by contract or other arrangement to support payment of all, or part of the

8 obligations on the municipal securities to be sold in the Offering (other than providers of municipal bond insurance, letters of credit, or other liquidity facilities). I. Transitional Provision. If on July 28, 1989, a Participating Underwriter was contractually committed to set as underwriter in an Offering of municipal securities originally issued before July 29, 1989, the requirements of paragraphs (b)(3) and (b)(4) shall not apply to the Participating Underwriter in connection with such an Offering. I. Transitional Provision. Paragraph (b)(5) of this section shall not apply to a Participating Underwriter that has contractually committed to act as an underwriter in an Offering of municipal securities before July 3, 1995; except that paragraph (b)(5)(i)(a) and paragraph (b)(5)(i)(b) shall not apply with respect to fiscal years ending prior to January 1, Paragraph (c) shall become effective on January 1, Paragraph (d)(2)(ii) and paragraph (d)(2)(iii) of this section shall not apply to an Offering of municipal securities commencing prior to January 1, 1996.