The SEC's Proposed Changes To Rule 15c2-12 Could Have Far-Reaching Impact On Issuers And Obligors Of Municipal Securities

Introduction

On March 1, 2017, the Securities and Exchange Commission ("SEC") issued Release No. 34-80130 ( the "Release") proposing several amendments to its Rule 15c2-12 ( the "Rule") that would add two new events to the list of events that must be included in the continuing disclosure undertakings of municipal issuers or obligors of municipal bonds.

The first additional event, in general, is the incurrence of "financial obligations, if material, or agreeing to covenants or other provisions that affect security holders, if material," and The second reportable event is the occurrence of one or more of the following events under the terms of such a financial obligation: "default, event of acceleration, termination event, modification of terms or other similar events under the terms of a financial obligation of the obligated person," if the event reflects financial difficulties. The compliance date of the proposed amendments would be no earlier than three months after any final approval of the proposed amendments, should the SEC adopt the proposed amendments in final form.

Many participants in the municipal securities market have called for greater transparency surrounding issuer's or obligor's bank loans or direct purchases of municipal securities ("direct placements"), but the scope of the proposed amendments is far broader than simply requiring disclosure of such direct placements.

Under the Release, the term "financial obligation" is very broadly defined and includes, in addition to a debt obligation such as a direct placement-- leases, guarantees, derivatives or monetary obligations arising from a judicial, administrative or arbitration proceeding. Coupled with the qualifier "if material," which the SEC has not clarified in the context of the Rule, issuers and obligors may feel compelled to disclose a great deal of information. The use of the term "lease," which the Release defines as including both capital and operating leases, could open the door to reporting a significant number of obligations, especially in certain market sectors, as discussed below. Similarly, in the second proposed additional event, the use of the term "default" intentionally captures events earlier in time than when an "event of default" is declared and, if such default "reflects financial difficulties," the event must be disclosed and the context provided.

This Client Alert will provide background concerning the Rule and describe the terms and scope of the proposed amendments to the Rule. It then will examine some of the issues that these proposed amendments raise in the context of the municipal market. Lastly, it will suggest some strategies for participants in the municipal market to address the challenges posed by these proposed amendments. Note that the SEC will accept comments during a 60 day period that begins on the date of publication in the Federal Register, although comments on the underlying financial impacts are due to the Office of Management and Budget ("OMB") within 30 days. Given the breadth of the proposed amendments, as well as the potential for a significant amount of work created for issuers and obligors, comments to both the SEC and OMB are likely to be helpful.

Background

The SEC has indirectly regulated disclosure by issuers and obligors of municipal securities pursuant to the Rule by requiring that the broker-dealers underwriting an issue of bonds obtain a written undertaking from the issuer or obligor to provide certain annual financial data and timely notice of certain events that primarily relate to the offered securities to the Municipal Securities Rulemaking Board's ("MSRB") Electronic Municipal Market Access ("EMMA") website. In addition, in connection with the issuance of the municipal securities, an underwriting broker-dealer must reasonably determine that the issuer or obligor has complied with its prior continuing disclosure undertakings, or accurately disclosed in its Official Statement relating to such securities any failures to comply with such undertakings, within the past five years.

Since 2009, issuers and obligors have increasingly used direct placements as substitutes for...