Variable Rate Municipal Securities

April, 2012:

In our continued attempt to keep members of the general public abreast of current investment related news or issues, we are providing the following post. Please keep in mind that these posts are not designed to be complete in all material respects. They are being provided for educational purposes only. If you have any specific questions relative to the contents of any of these posts, you should consult a qualified expert.

MSRB REMINDS DEALERS OF LIMITS ON REDACTIONS
OF LIQUIDITY FACILITY DOCUMENTS

FOR VARIABLE RATE SECURITIES

In order to promote the availability of important information regarding municipal variable rate securities, the Municipal Securities Rulemaking Board (MSRB) recently reminded dealers of the limited circumstances in which they may redact documents submitted to the MSRB that contain key information about the securities. The notice said redactions on some documents do not comply with prior MSRB guidance and reminded dealers that they must not redact information that would be used by an investor in evaluating a municipal variable rate security.

This reminder addresses an existing requirement for dealers to provide, for public access on the Electronic Municipal Market Access (EMMA®) website, documents describing liquidity provisions for variable rate securities and auction procedures and interest rate setting mechanisms for auction rate securities. Liquidity facility documents include letters of credit, stand-by purchase agreements and other related documents, such as trust indentures, which establish an obligation to provide liquidity for investors.

Dealers must submit these documents to the MSRB, which operates the EMMA website, to provide investors and others with a centralized source of documents defining critical aspects of variable rate demand obligation (VRDO) liquidity provisions and auction procedures and interest rate setting mechanisms for auction rate securities (ARS). Since the MSRB began making these documents available in May 2011, investors have gained access to more than 61,400 key documents associated with thousands of individual variable rate securities.

These documents sometimes contain information that was not intended to be made public such as staff names and contact information or bank routing and account numbers. Dealers may redact this information but may not redact information critical to investors such as termination provisions about liquidity agreements, information about the length of time that may elapse between a holder of a VRDO tendering a position in the security and a liquidity provider purchasing the tendered security, information indicating the time period that principal held with the liquidity provider would be amortized, or other information that would reasonably be assumed to be used by an investor or other market participant in evaluating an ARS or VRDO.

“Investors have benefited enormously from the availability of these documents and we need to ensure that they have all the information they need to effectively evaluate variable rate securities,” said MSRB Executive Director Lynnette Kelly.

The MSRB’s notice said that submission of improperly redacted documents “has the potential to cause investor harm and negates the transparency in the ARS and VRDO markets” that MSRB regulations are designed to foster. The notice also said that if improperly redacted documents are brought to its attention, the MSRB will refer these incidents to the appropriate enforcement agency for resolution.