By Attorney Beth Grob
Securities and Exchange Commission ("SEC") Rule 15c2-12 (the "Rule") requires dealers, when underwriting certain types of municipal securities, to ensure that the state or local government issuing the bonds enters into an agreement to provide certain information to the Municipal Securities Rulemaking Board ("MSRB") about the securities on an ongoing basis. Currently, such continuing disclosure agreements require annual filing of the audit and specified financial information, and filing of a notice within 10 business days when one of 14 specified events occur (such as a bond call or defeasance, payment delinquencies, defaults, rating changes and mergers). These filings are made through the MSRB's Electronic Municipal Market Access (EMMA®) website.
On August 15, the SEC amended Rule 15c2-12 to create new disclosure obligations for municipal debt issuers who incur debt outside the traditional bond market (i.e., bank loans or private placements). The amendments to the Rule are intended to facilitate investors' and other market participants' access to important issuer financial information in a timely manner, enhance transparency in the bond market, and improve investor protection.
The amendments require a municipal issuer to include in the continuing disclosure agreement two (2) new events for which notice must be provided within ten (10) business days of occurrence:
- A financial obligation of the issuer or obligated person, if material, or agreement to covenants, events of default, remedies, priority rights, or other similar terms of a financial obligation of the municipal issuer or obligated person, any of which affect security holders, if material; and
- Default, event of acceleration, termination event, modification of terms, or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.
The SEC defined "financial obligation" to include:
- Debt obligation;
- Derivative instrument entered into in connection with, or pledged as security or a source of payment for, an existing or planned debt obligation; or
- A guarantee of 1 or 2.
A financial obligation does not include municipal securities for which a final official statement has been provided to the Municipal Securities Rulemaking Board, consistent with the Rule.
The SEC has defined "debt obligation" to "include short-term and long-term debt obligations of an issuer or obligated person under the terms of an indenture, loan agreement, lease, or similar contract." While the complete scope of this definition will be determined over time, this would include bank loans, SRF loans, USDA loans and anticipatory warrants issued through a local bank. Further, the SEC clarified that only those lease arrangements that "operate as vehicles to borrow money" (such as lease-purchase arrangements) are subject to disclosure.
The SEC failed to provide further guidance on the definition of "materiality" and also declined to provide a specific form the disclosure must take. The SEC did state the form of disclosure could include either the transaction documents or a summary of the material terms of the financial obligation. If a summary is used, the SEC provided examples of some material terms of a financial obligation which the municipal issuer will now need to disclose. These may include, but are not limited to, dates of incurrence, principal amount, maturity and amortization, interest rate, if fixed, method of computation, if variable, and default rates.
The compliance date for the amendments is 180 days after they are published in the Federal Register. Continuing disclosure agreements entered into on or after that date must contain the new disclosure provisions.
This is only a summary of the changes made by the amendments to SEC Rule 15c2-12. If you have questions about the impact of the amendments, or want advice generally on the disclosure responsibilities of your municipal entity, please contact an attorney in the Ahlers & Cooney Public Finance Practice Group.