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The Disclosure Dilemma for VRDOs Secured by a Letter of Credit

This article discusses whether disclosure on the underlying obligor is necessary when variable rate demand obligations (“VRDOs”) are secured by a letter of credit, and explores the reasons why the answer to this question is unclear even after the SECs amendments to Rule 15c2-12 were effective in December 2010. The article analyzes the structure of the 2010 amendments, the SEC’s offered rationale for removal of the exemption, and the basic credit substitution theory behind VRDOs secured by letters of credit in an attempt to provide practical approaches to reconciling the disclosure responsibilities of market participants with the risk protection and expectations of investors in VRDOs.